Covenant Logistics Group Inc (CVLG) 2002 Q3 法說會逐字稿

Good morning. My name is Amy: and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Covenant Transport third quarter earnings conference call, posted by David Parker, President. And Joey Hogan, Chief Financial Officer. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Hogan, you may begin your conference. Mr. Hogan, sir, you may begin your Conference.

Are you there? Sir, can you hear me?

Yes, I can hear you.

You may begin your conference, sir.

Hello. We'd like to welcome everybody to the conference call. You know, David will begin with making some comments for the quarter. Regarding current economic situation, and how we feel things are going as we speak today. And I'll follow up with financial discussion regarding the quarter and our expectations for the fourth quarter in 2003. I'll state in advance during the call there will be forward looking statements within the Private Securities Litigation Reform Act in 1995. This information is in accordance with the current expectations and is subject to certain risk and uncertainties, and we'd encourage you to review those risks in the company's latest 10-K and the most recently filed second quarter 10-Q. With that, I turn it over to David.

Thanks, Joey. You know the quarter was a roller coaster emotionally. To get an idea, regarding freight volume, July was an incredible month, one of the best in the history of the company. Our utilization was up 6%. You know, folks, remember, 6% is basically 1999 numbers. And at Covenant, you know, there's tremendous leverage that's where a tremendous amount of our leverage is in the increases and as our rates increase, that's where the leverage of the EPS is at. You know this did not happen because of the robust economy. In my opinion, it happened because of the supply and demand factor that is going on in this trucking industry. But July was great. August was not good. Then I started to hear about all kinds of back to schools and, you know, the retail environment was not coming in on the lower -- the slower side of their same store sales and the back to school is not as good as what they wanted, then you started to seeing ISM numbers coming in that were not as healthy as what we'd like to see. But then September bounced back and it was okay. So you sit there and look at the three months, you know the question has to obviously be, you know, why, where are we at? You know, there's no question the economy, or better yet the consumer has slowed in the third quarter. We averaged 50 for the third quarter and after a 55 average in the second quarter. Housing starts have declined sequentially five in the last six months, and durable goods have been down two of the last three months. But a big question is where the consumer confidence at? So those are the negative sides. The other thing that we've got to think through the process and try to figure out is that what are some other things that we do know. We know there's been about 350,000 trucks taken out of the marketplace. And I am convinced that as long as ISM stays around 50, that we will continue to see the supply and demand pieces play out well for trucking. That's the reason why you're seeing, you know, other companies out there, starting to see utilization increases, you're starting to see rates going up and it's not because the economy is such a great environment right now. But there's no doubt in my mind, it's because it's supply and demand. Whether it happens today, tomorrow or next month, this industry is going to have the tightest supply of trucks that we've ever seen in the history of this industry. Just a matter of when are we going to fill that? I know we started to fill it in July without a doubt and then it kind of slowed down a little bit. But I know that at the end of the day, again, whether it's today or tomorrow, the next day, it absolutely is going to happen. A little bit of utilization. As you recall, the first quarter was the first up quarter in utilization in ten quarters. A after a slight improvement in the first quarter, we posted a 4.3% increase in utilization for the second quarter, followed by modest improvement of 1% in the third quarter. Our focus on improving our [lame density] continues to bear fruit and that we once again reduced our non revenue miles, our dead head by 11 bases points. It's fifth straight quarter of reduction. You know, also interesting to note is that the fourth quarter of 1998 was the last time our dead head percentage was as low as it was in the third quarter. And our haul was 300 miles longer. We continue to manage our team side aggressively and we operated in third quarter with about 175 fewer teams than we did in the third quarter of a year ago. As adjusted for the percentage of teams, on an Apple to apple basis, we view utilization t was up 4% in the third quarter. The area we're that we are most concerned about right now is the impact of the west coast port strike on our fourth quarter utilization, and let me just give you things that I know that what I'm starting to sense currently on the port. You know, the strike lasted about ten days. One thing we've learned through that strike is that there was inventory build-up at local warehouses and distributors out in the southern California for about ten days that had supplies that lasted about ten days because basically the whole time that the strike lasted, we did not fill it. We continued to load just the same way that we were proloading prior to the strike. The business environment out in southern California was very good and very strong. But after about ten days, we started feeling what impact the port was going to have upon us. And just to give you an idea, it was not devastating but we've been loading for about the last week because they have been off strike now for a bout a week. We have been loading about two-thirds of our trucks out there with one-third basically having to wait until the next day. Now, again, that has not hurt tremendously, but at the same time you have one third of your trucks in L.A. that were not able to get a complete turn. In other words, we did not load them out of L.A., come back to destination say in Atlanta, Georgia, and then be able to return them back to L.A. in about a five or six day period of time. We basically had to end up only getting one turn on one third of the trucks that were in Los Angeles for about a ten-day period of time. So that is something that has hurt, that part of it. What we're seeing now, some other facts that we know. We know that there's been about 200 boats out in the water that were there once the strike ended. We know that the boats have to up to 5,000 containers in them. We know that for every three containers there's two truck loads. So you can do the math and you can see that there's a tremendous amount of pent-up inventory or loads that are sitting there. I also know that as the strike was settled, they went back to work and they went on a slow down. I mean, we saw it noticeably. Product 25% to 30% slower than what it was prior to the strike. We also know and are seeing now as of yesterday that things are starting to get a little bit back to normal. We're starting to see -- I talked to one customer that was basically getting about 100 containers a day, got 200 containers and then actually yesterday got about 275 containers out of the port. So you're seeing the flow of goods starting to happen out there. And now we're starting to see it as of yesterday starting to come through on the trucking side. So the port is definitely for about ten days has affected us in that we were not able to turn the trucks the way we wanted to , about one third of them. But I think now that it's very close to getting back to normal. I want to say it's at least 80% back to normal effective today. Seattle, the port of Seattle, has been great. Number one, it's not as big as Long Beach, but at the same time, you did not see the slow down in Seattle. I mean, once it was settled within about a 24 hours the northwest was running very nicely and we have not seen any hiccups up there basically since it settled. It's going very, very good. I only know this. That whether again whether it happens today and we're starting the see it come around, but there's going to be a lot of freight in the port of Long Beach that is going to cause a tremendous amount of problems out there on capacity. There's not going to be enough trucks to get the capacity -- or get the volume of freight that's going to be there. A little bit about customers and rates. In the month of September, our top 100 accounts represented 74% of our total volume. During the quarter, our current top 100 was up 18%. 18 new accounts came in the top 100. Excluding new accounts, our remaining top 100 was up 7%. Last year's top 100 accounts are down about 13%. That's a number that 11, 12, 13 is a number that's been pretty solid for the last three or four months after it dropped down from being a negative 17, it's kind of settled to the last three or four months and this 11, 12, 13% number. We added about $10 million of annualized new business in the third quarter. To give you an idea of how our statements are broken out, transportation is 36% of our volume, retail is 12%, manufacturing is 11%, consumer goods, 9%. floor coverings, 7%, food and beverage, 8%, housing and paper product packaging is 5% each. Auto is 4%. Electronics is 3%. By continuing to add new business and holding the size of our tractor fleet, we have been able to continue to reduce our dependence on broker freight. 6% of our revenues in September was broker freight. And we've been able to pass on the rate increases also to our customers. That's 6% of broker freight is one of the lowest we have had -- I know in the last two or three years. So at the -- that's a very, very good number. With our length of haul flat, a year ago was 1150 miles per load, we were able to increase our loaded mile rate versus a year ago sequentially versus the second quarter by 1% to $1.22 per mile. Based on our ongoing yield management efforts and normal seasonal movement of freight, sequentially to the fourth quarter we expectorates to improve by at least another one cent per mile in the fourth quarter. Drivers. We continue to be in great shape from a driver perspective and that's excluding wrecked units, about 1% of the fleet is openand we are operating about1200 team trucks. Based upon the stated plan of constraining equipment growth until the profitability reached certain levels, we feel we will not have to raise the driver pay until about the second half of 2003 at the earliest. We continue with our improvement -- our cost continues improvement program. During the quarter we continue to find ways to reduce our after-tax operating costs. We identified 8.1 million dollars of annualized savings so far this year for our programs. The combination of the cost savings and management of our team fleet to maximize our profitability, we were able to reduce our after-tax costs by 2.2 cents per mile to $1.10.8. From $1.13 last year, and we will continue to be diligent in this area. I'm going to turn it now over to Joey and I'll be back in a little bit.

Joey B Hogan;Thanks, David. A few miscellaneous items before I comment on a few differences versus a year ago. Our fuel surcharge revenue was $3.6 million versus $5.4 million last year. Our other revenue was up $600,000 on practically less -- slightly less overall mile to 2.4 million from $1.8 million last year. All right. Then at the end of the quarter, we have $366 on the operators which compromised about 10% of the fleet and they also accounted for 10% of the miles, both this year and last year during the third quarter. As well as capital expenditures during the quarter were about five -- a net of $5.1 million. We're excited that we're able to reduce our balance sheet debt by $18 million during the quarter. Which reduced our debt to total capitalization ratio to 30%. Our total off balance sheet debt at the end of the quarter was $78 million versus $91 million at December 31st of 2001. Due to the majority of our 1999 model year trade package will take place during the fourth quarter, we expect our net capital expenditures to be $40 million to $45 million in the fourth quarter, ending the year around $75 million. Regarding expenses, it's pretty much the same trends that we have seen so far this year. There's four or five main areas and I'll just comment on those quickly. Salaries and wages were down 270 bases points versus a a year ago. You know, some of the positives that contributed to that, David has already mentioned we operate at 175 less teams than we did a year ago, as well as several items within our continuous improvement program helped us to lower that area. On the fuel side, we have several positive impacts. Fuel prices on the average for the quarter were down about four to five cents a gallon. We did have slightly better fuel economy this year than last year. On the negative side, we had $1.8 million less in fuel surcharge. We had a minimal negative impact by about $200,000versus a year ago related to our fuel hedges and purchase commitments. Overall, fuel net of surcharge and our hedge costs were slightly unfavorable to a year ago at about 19.3 cents per company mile versus 19 cents last year. That costs us about a penny a share versus a year ago. But again the program continues to operate as it's designed. We continue to operate it around 19 cents a company mile on the average from year to year. Operations and maintenance, you know, it was a negative for the quarter. We're continuing to suffer from an older fleet and then over the road maintenance expense increased about $700,000. But we did have some positive impact in that our fleet continues to be full and we did have reduced recruiting expense about $470,000 in the quarter versus last year. Depreciation and amortization. A lot of things going on in this area, obviously. Number one, we disclosed in January, we increased the depreciation on the 2001 model trucks that were not included in a new freight liner agreement. This impact was about a half a cent a mile. Number two, we've greatly reduced the number of trucks financed through operating leases since the third quarter of 2001. For example, we had about 995 trucks or 30% of our company operated fleet financed through operating leases in the third quarter of 2001, and we only have 636 or 19% of the company-owned operated fleet financed this year. So obviously, you have more trucks that you own versus lease and therefore you're going to have higher depreciation expense. Additionally, this area will go up by about another penny a mile beginning in the fourth quarter, mainly due to the majority of our 1999 model year trade package that will take place during the fourth quarter. As we also disclosed this past January, the replacement trucks higher cost combined with lower residuals result in higher depreciable costs. Also there will be a large amount of expense associated with preparing the 1999 model year trucks for trade during the fourth quarter. Regarding our expectations for the remainder of the year, obviously, one quarter to go, our fourth quarter, we intend to continue our mission of improving our profitability by constraining fleet growth. Focus on improving utilization, rates, lane density and obviously, lowering our costs. Based on the trends that David discussed the economy and the potential impact of the strike on the utilization, we expect fleet revenue to be up about 2% for the fourth quarter and earnings to be in the 20 cent to 23 cent per share range. 20 to 23 cents per share. We anticipated our after-tax cost per mile to go up about a penny a mile as we trade the bulk of the '99 model year trucks, and with a slight expected increase in our net cost of fuel. 2003. We assume that the economy will improve moderately in the first half. Not much improvement is our current expectations and begin to strengthen in the second half. We believe our rates will increase about 1% in the first half and 2% to 3% in the second half to around $1.15 average for the year. Utilization will improve around 1% in the first half and 1% to 2% in the second half to around 132,000 miles per truck per year. We expect to hold the fleet at its current size in first half and we may grow slightly in the second half. Capacity additions again depend on our profitability and the state of the economy. These expectations on capacity, rates and utilization produce trucking revenue for calendar year 2003 in the 570 to $580 million range. We expect the cost can go up a penny a mile due to the above mentioned truck costs and a possible driver pay increase in the second half of 2003. We expect the capital expenditures to be around $85 million for the year. Earnings per share will be in the range of $1.10 to $1.20 per share for the year. With the first quarter at 11 cents to 15 cents, and the remaining quarters in the 32 to 38 cent per share range that's $1.10, $1.15 per share. And the remaining quarter is 32 to 38 cents per share That's all our prepared comments. Operator:, we will open it up to questions at this time. Operator:, are you there?

Yes. At this time I would like to remind everyone in order to ask a question, please press star and then the number one on your telephone keypad. Your first question comes from John Burns.

Good morning. Can you give us an idea of the number of tractors you're taking in during the fourth quarter? And then can you give us an idea what the average age of the fleet will be at that point?

Joey Hogan; It's going to be six to 700 trucks that we'll be trading. Its not growth, just replacement of trucks. Six to 700 of the 900 that -- a little over 900 that our contract required for this calendar year. The average age once we're down with those should be around 24 months. 23 to 25 months by the time we're through with that.

Okay. And looking at the yield improvement you saw during the quarter and what you expect going forward, can you give us an idea how much of that is going to be pure rate and how much is going to be mix oriented? Either shorter length of haul or better freight or what have you?

Yeah. Most of it's going to be pure rate increase. If not close to 100% of it, John. I think that our lanes are pretty well defined where we're operating and we have been operating around the 1150 mile length of haul now for a good solid year, a little bit over that. And I can't see anything changing about that. So it's going to come strictly from rate increases.

Okay. And last thing and I'll turn it over, when you say moderate growth in '03, you know can you give us an idea what does that mean in terms of are you looking at a GDP number? Are you looking at an industrial production number? You know --

I'll tell you, John, we look at every economic data there is. I mean, we studied quite a bit of them a lot. You know the one that we look at more than anything is the ISM and as I said in my prepared statements, I am convinced that any time ISM is going to be over 50 that you are going to see the supply and demand situation be very, very great in the favor of the trucking companies. So we expect that there is some time between now and next year that there's going to be a very big supply and demand problem. And it's going to allow the utilization to increase and the rates to increase. As we have had stated goals for the last couple of years, That is we don't care if we have a truck until our operating ratio gets back down into the '93 number. Once it gets into the '93 and I know we're only a rate increase away basically from a 90 operating ratio then we'll start adding equipment as the market dictates us to do so. But we'll always be in a conservative manner.

Okay. Thanks, guys.

I guess, John, let me comment on that, too. I mean, we all have to have some type of assumptions to build a model or forecast for the coming period of time. What we're saying is what we see right now is, you know, a very moderate economic growth situation. Could it be greater than that, yeah, we all hope so and we all think it will be some day but for our planning purposes right now, that's why we said that we expect moderate, you know, some type of moderate growth in the first half and starting to build in the second half.

All right. Thanks so much.

Your next question comes from Chad Jones.

This is actually Dan Moore. Hi, guys.

Hello.

A couple of follow-up questions to start off with on the rate front. I was wondering if you can give us more color for what rates did as you moved through the quarter. Understanding it was a roller coaster effect to demand. I was wondering if rates follow a similar trend?

No. Our rates really started going up in about the middle of August. That's about when we started seeing -- you know, we started in June with increasing our rates and so we started seeing improvement in rates in June. But it was really about the middle of July, excuse me, Dan, about the middle of July that we really started seeing the rates being able to get into the tariffs

What percentage of the accounts you are you talking to right now as you look out over the next six to eight months? Can you quantify for us, David, you know, the type of increase we're going to see --

Dan, I think you know, if you assume what we are assuming out there right now, that is moderate growth and to me, you know, moderate growth is at 1% to 2% kind of GDP type number, ISM, 50 or above and kind of just hanging in those kind of numbers, the number that Joey is talking about and that 1% to 1.5% top of numbers next year is what we're plugging into the models. There is no doubt in the next six months, you know, I personally believe that there's some -- there's going to be a lot greater opportunities, and, Dan, whether this happens again, because I don't know, is it today, it is tomorrow, is it six months from now? The only thing I do know is that it is going to happen. And when that does happen, the supply and demand I personally think the whole industry will be looking at four, five, six percent kind of numbers. I mean, which are gigantic numbers. But it's a matter -- I mean, am I ready in October to sit here and say, you know, I think the economy is so great that it's going to do that, no, not in our model. But deep down, I believe that the industry is looking at those kind of numbers.

David, I don't want to make too much of this situation, but I want to probe maybe a little bit further. If I look at hunch results and I look at Werners result, two companies that recently reported earnings, I'm wondering if there are significant differences in the customer mix that's allowing them to get slightly better rate increases than you are able in the third quarter Coulr. you talk on that end a little bit, maybe?

Yeah. I think you've got a couple of things there, Dan. I think that -- that they have been very, very adamant, especially on the hunt guide for the last couple of years and very, very focused that we probably did not get on the table until the last 12 months on the same focus that pricing has got to be the answer to a lot of our major ills. I also looked at we -- we set there and went through our top ten accounts where we had six or seven of our top ten accounts in first quarter of this year that went out for bid. I doubt if the other carriers when you look at that our top ten accounts make up about 40% of our business, it's a big, big number that they make up, and we have two or three of those accounts that remain flat and those accounts come back up in the first quarter of next year with some of those, probably half of those accounts with already guaranteed price increases of 3 and 4% kind of numbers. I think personally, I think that you will see the ability of Covenant to increase pricing and of course that's utilization rates where our leverage is at. I personally think that that's what you'll see in the next couple of quarters.

Fair enough. Thanks, guys.

Your next question comes from Ed Wolf.

Hello. It seems like since last quarter, you've brought in consensus a little bit with your guidance now for fourth quarter. Can you talk to how much of that has to do with July started off so strong when we were talking to us last quarter, how much of that has to do with impact from the west coast ports, how much of that's being conservative? What's the sense with fourth quarter right now?

Well, you know, most people I think know me by now. I'd say yes to all three. I think you start -- you went down the list. I mean, July you have -- you know, the second quarter was a phenomenal quarter utilization in rates There's no question the economy was stabilizing and that's the key that we want. We like everybody to understand. We don't think this economy needs to be 3, 4, 5% 5% GDP before you are really going to see some interest things in utilization and rates.I just needs to be stable, stable can be 1% GDP like it was probably in first and second quarter once you take out inventory corrections and service sector impact in first quarter and all that. It was a stable situation combined with a stable and slightly growing ISM or new order situation. What we had in July was a little trickle effect of that coming off of the second quarter and then started falling again very, very quickly. The thing we have been concerned about, frankly, is a consumer and the consumer has gone into a little shell. We all know that, and we all read it and that happened to retail which trickles out to all manufacturing. So, yes, July was some excitement, but obviously reading the tea leaves coming out of July combined with what we're seeing through August and September, yes, we had to bring our expectations down. It hasn't changed our overall long-term view of what we think is going to happen to trucking, but relative to the expectations for the next quarter, yes, it has. We've tended -- we've needed to bring those down. There's no question.

And how about the ports? My sense of it has been that the West Coast ports offer truck load carriers like yourself probably offer more opportunity this quarter. I mean, short term, but it feels like we're going to have a long Christmas getting goods to the shelves before last minute as opposed to Petering out before Thanksgiving. Is that a fair assessment or are there just additional costs that are going to be hard to catch up on? David Parker;; I don't -- I don't disagree with that. You know? The thing that we do know sitting here on October 15th is that the effect that the strike had where about one-third of our trucks in L.A. could not turn around trips for the week for ten days. We know that and that affected a little bit of utilization about one-third. The rest of the economy, the rest of the country has been extremely strong, storage of equipment basically in every state, excluding Los Angeles. So I think that the freight environment very good other than that. I also believe what you said is true. I believe that once these containers start hitting and I get a sense that they're hitting now that there is going to be a major shortage of equipment in L.A. that will allow us to be able to make up some ground. But baseed upon the 15th of October, we're sitting here and saying, what do we know? We know the effect it's had on us right now, and hopefully it will have a neutral effect on us but I don't know it on October 15th

That's fair. If out look at the dead head reduction so far, how much do you think is related to equipment that you're getting paid to move empty to other parts of the country and how much is more just good freight around available?

Oh, its' two things. The first one, you know, dead head Invest very minimal . We do have some of that it will be big in Los Angeles, but thus far it has been very minimal. The second thing is it is a quality of the freight, added to the fact of what your brokerage percentage had done and is strictly concentration of density in certain traffic lanes.

One other kind of question like that. If you look at the new engine, its sounds like you're buying some at some point next year and let's assume it's around $4,000 thousand extra, Joey, can you was us throughhow that cost breaks down over the life of the truck? How would we see that in the financials?

Well, there's two places you would see it. You'd see it in higher depreciation. The $4,000 I think frankly the jury is out on what will be the residual value of that incremental $4,000 investment. So you recoup X percentage of that truck three, four, five years when you trade that truck. I think it's too early to say that. But I do know that we have $4,000 of higher depreciable cost day one that you'll have to depreciate over the life of that truck, whether it's three or four years. Number two, again, what's still unknown at this point is the fuel economy as well as maintenance. You don't -- we don't know those yet. Obviously fuel hits you in fuel and maintenance will be operations and maintenance. One last piece, the higher capital cost. You have to pay $4,000 more for the trucks or you're going to have arguably higher interest expense. And so I still think that, you know, it impacts us by about $50 a truck on capital and depreciation. Going forward for every truck we replace. It's an incremental $50,000 a month -- I mean, $50 a month in incremental depreciation and capital over the life of that truck. So I just don't know what the residual value of the engine will have.

That's very helpful, and that's assuming kind of about a 4,000 number is that a fair number?

That's correct.

One last thing, Joey, just a little question. The other income line in the model of a $738,000 negative number what is that? Joey B. Hogan;; That's a 133 interest rate hedge charge. We have two interest rate hedges or swaps that have options in them. If you look in the year ago period, it was $1 million. This year, $738,000. And so that is, frankly, about a penny a share impact to us in the quarter, versus what we had expected is that long-term rates just continue to come down throughout the quarter. These two hedges don't qualify for accounting hedges and you have to market to Mark them in every quarter so as yields come doen you have potentially a charge. So we had about a $700,000 hit this year, and it was frankly a less than1 million last year.

If yields stay where they are right now, is there any impact?

There will be positive impacts going forward and I don't know when. Right now, there's a 1.8 million dollar accrual sitting out there that's --again that charge $700,000 was non-cash that will come back into earning going forward as either yields will improve or actually improve. As yields go up or as time shrinks that that swap expires.

Thanks a lot, guys. That's great I appreciate it.

Okay.

Your next question comes from Donald Broughton.

Hello, gentlemen.

Hello, Don.

Great job on utilization, great job on rate, great quarter. Convince me though, I'm looking at a couple of things. One, driver -- looks like wages per mile. Is that all asset utilization? Is it-- have we had a change in the per diem program? Did we have a reduction in non-driver head count? Give me a little more granularity why it looks like you picked up a full penny a mile.

Yeah. I mean, it's basically, Donald, in third quarter continues what the second and little bit in first quarter showed was, number one, any time you can run, you can make service and operate with less teams, you're going to have less bearable cost and less salaries and wages. So one, we had 175 less teams third quarter this year versus last year. Slightly less in the second quarter. Number two, it's just cost savings. We have implemented over the last 18 months just various and sundry different programs for drivers. We have lowered our non-driver head count, and those drivers, again, we want to reiterate, we did not go to any existing employee and lower their pay. We gave drivers choices on alternative pay packages that they could choose their choice if they wanted -- to give them an opportunity to possibly make more money each week. And so it's a lot of those type of things combined with about a -- about a 60 to 70 non-driver head count reduction versus a year ago that kind of helps us lower that number.

All right. Insurance. And in the last six quarters, insurance has gone from 4 cents a mile to over 6.5 cents a mile. Convince me that it's not going to continue to go up.

Well, insurance is in the second quarter I think was around -- third quarter was around 6% of revenue. The second quarter I think was around 6% of revenue if I'm not mistaken. I think the first quarter was around 6% of revenue. Obviously , the point is --

It's still continuing to go up on a per mile basis though. 6.2 to 6.4 to 6.6 cents a mile. In first, second and third quarters sequentially based.

Right. Well the thing is in the third quarter, there's a slight impact is that the umbrella coverage was renewed July the 15th for about a 10% increase. It's only about 18% of the overall insurance costs, but it did go up about 10%. So there was a slight impact there. What we're seeing on our casualty program is basically it's starting to level off. Our primary coverage doesn't expire until March the 1st. We have no idea of what will happen there. We have some hopes and we have some desires and a lot of hard work going on to possibly -- I'm not going to say reduction, but we just have to wait and see. But it has -- in my opinion, leveled off. I don't think it's going to continue to go up. And much more, if it goes up at all.

So I should be safe at modeling it out at 6.6, 6.7 cents a mile throughout the next five or six quarters?

Yes.

Operations and maintenance, I wonder if you -- we're up a penny and a half a mile. Is it you're taking in a bunch of new trucks, has it gotten as bad as it's going to get? Is it going to keep getting worse or going to flatten or going to get better?

Again, on that one, we have seen the last four or five months, it kind of settled into that 8.5 cents a mile, you know, type number. Give or take two -- I mean, it's not continuing to go up dramatically as it was, you know, third quarter, fourth quarter, first quarter, second quarter, you know, type numbers versus a year ago. So we're seeing it start to flatten out, so I feel pretty good around that 8.5 cent a mile number. That's one of our big opportunities, frankly going forward from margin improvement if we ever do decide to go back to a three-year trade cycle, we do know that we can save substantial amounts of money by going forward. But we're not there yet on that decision.

And a lot of trucks are getting a lot of miles put on.

Sure. I understand. Just trying to figure out how to model it out for coming period. And then one last more of a housekeeping kind of thing. Average length of haul was 1169, third quarter of last year. What was it exactly this quarter?

1157.

1157. Thank you, gentlemen. I'll let someone else take --

Your next question comes from David Mack.

Hi, guys, It is Gary and David. How are you? Hi.

I want to come back to the issue of the estimate ranges for next year. I want to make clear, by and large, the -- almost all of the pullback in the range is a little bit more concern about the economy than three months ago is that right?

Yeah. I mean, it's a -- it's bad and then the ten days in the port. But it's those two things, Gary.

Okay.

What we said in the second quarter, I said -- or we said $1.15 to $1.25 next year. We have pulled that back obviously $1.10, $1.20, so we have pulled back. I think the majority of that is kind of the slow down of the economy, the uncertainty and, you know, in the world situation. I think as -- that's caused us some concern to pull it back a little bit.

Okay. Joey, can you review with us your fuel hedges and what you've got out there going forward?

Well, we've got very little next year. And we have next year as far as actual hedges for accounting purposes, we don't have anything. We have some purchase commitments with fuel vendors that has contributed -- that contributes to our program, you know, certain volume commitments, we get certain discounts, but as far as technical accounting hedges, we don't have anything for next year.

Okay.

So what percent of your fuel are you committed to purchasing at this point than your projections for utilization and miles and everything?

We're committed to about 75% of our overall fuel volume.

Caller: David, I want to come back to if you're right about the second half of next year, it's going to be very good time for your business.

Uh-huh.

How do you get comfortable that that kind of thing is sustainable? And what I'm asking specifically is that people don't just do what they historically have done which is when times are good, they buy a lot of trucks.

You know, I think, Gary, that the vast majority of the CEOs that I know, of all the large fleets, have absolutely got religion on this. And I think the two years of pain and suffering has allowed us to get religion on this. And that is is that somehow we're going to dictate at least individually with our companies capacity constraints. You know, all of us are to a size that we don't have to grow just to be growing. We're always invited to the same bit packages of all the major customers out there. We have gotten through all those kind of hurdles. So it ought to strictly come back to what are my returns, what are my earnings? And as we get happy with those earnings, then we will grow the company. But as we start sensing, I don't care, again, if it's the most toughest environment that they there is from a supply and demand, if there is not enough trucks, I believe starting with Covenant that the CEOs are going to manage correctly through it. This thing -- and, you know the same as our vendors are planning on doing, in my opinion. But this thing of having five great years and three terrible years, I mean, that's for the birds. I have no desire to operate in that kind of environment. I would rather, I know speaking from Covenant, we will balance this thing out. There's no doubt when it's bad environment it is -- you know, we're going to have to feel that. But we're not going to have this yo-yo effect of operating wonderfully and then having two years of terribleness. All because of capacity.

Well, will you let yourself lose some market share to preserve profitability?

Without a doubt. Without a doubt.

Okay. You've got anything else, David?

Yep. What percent of your business comes from the ports and how do you quantify that?

Well, you know, number one, I don't know. You know, I mean because we do so much transportation business, David, that I have no idea of two things. I have no idea of our freight sorters, our air freight companies, our LTL companies. I mean, they're running on set lanes. So I couldn't tell if they're 50% full or 100%, you know what I mean?

Yeah.

The second thing is I can't tell how much of their freight is coming from the ports. I can tell you when I get into our electronic, it's 3% of our business. You know, we all know that's coming from the ports. We know that retail is 12% of our business, and this 12% about 7% or 8% of that 12% is coming from the ports. You know, so I know those kind of numbers. But to define it down to the exact number, I don't know. I would simply be guessing. I mean, we put transcontinently, we put 400 trucks a week in Los Angeles, and I got to believe that about probably 70% of that is port-related. I'm just strictly guessing because I don't know what the air freight companies have got.

In terms of utilization, you guys had a good improvement this quarter, but wasn't what you had back in the second quarter. Was that -- what was that related to?

I think that it was truly related to a couple of things. I think it was truly related to coming off a great second quarter and coming off a great July. We did not have to bring on as much freight. It kind of goes back to the same question that Gary had about will you have the restraint to not add capacity? Well, we said in there in July and having a 6% increase in utilization, that's gigantic. You don't need to be promising something to customers that you can't deliver. So we were not having to be aggressively out of the marketplace trying to grab 50 more loads because the freight was truly starting to come to us in the month of -- for the second quarter and the month of July. Then we started seeing a slow down in our opinion in the economy evident by the ISM numbers and GDP numbers and slow retail numbers that started being produced in the second and -- I mean in August and September. And I think that's what it's directly related to. So it's one of two things that you combat. Either one, the economy has got to come back a little stronger to get back at least in the July numbers. Or you've got to increase more on getting more freight into the system. New freight. So it's a balancing act. If -- go ahead.

Some carriers and yourselves included in talking about rate --freight, I guess you started going out on the road was it the end of the second quarter?

Yes.

How many of the customers that you visited so far, you know, have accepted higher rates and, you know, how many more do you have to go to? I mean, how many more trips, you know I'm sure it's an ongoing process, but of thing original pool of clients, you know, what kind of success rates have you had?

We've had good success rates. You know, our major problem has been that out our top ten accounts which make up -- I don't have the number right in front of me but it's a big, big number of probably 40% of our total, and those accounts are not dealt with until the first three months of next year. So, you know, we -- you're sitting here going after existing pieces of business without those accounts that we were able to -- thus far, have been able to get very nice increases, but we've got to have the top ten accounts pull in the big shares of numbers. And that won't happen unit the first quarter. So personally, I think that the numbers that were sitting there in fourth quarter, I think you'll see a penny a mile increase, I think those things starting in March, April, May of next year, you've got a chance to see a greater number than that.

Caller: Thank you.

Okay.

Your next question comes from Tom Albrecht.

Good morning, guys. Some of my questions have been answered, but I wanted to bounce a few more things off you. Joey, can you refresh my memory, what is your deductible right now on your primary coverage? As you look ahead to March 1st, what are the odds that you may have to bump that up again in order to kind of mitigate some of the premium increase you might be looking at?

We're currently at $500,000 deductible. And, you know, I would anticipate us going higher. I don't know what the number is. I know that the numbers showed us this past March that it should be higher. But, you know, as you recall, we just started a large deductible self insurance program , in March of 2001. So we went from zero to $5,000 to $250,000. We went to half a million and we're trying to take it slowly as we build systems, claims managers and attorneys and things of that nature. So I think you will probably see us take it another 250. I hope not, but I think it's very possible that it will need to go up. Most in the industry, our size or higher, is, you know, $1 million. And I would expect us to go up. I just don't know what.

Okay. And then -- I know you alluded to the fact that as you prep the trucks to get ready for trades there will be some expenses there. Did you provide an approximately -- approximate dollar figure for that expense?

No, I didn't. It's always been in the --we take that expense in depreciation and amortization. We have always netted that preparation cost against getting less on selling the equipment. So that number will be in there. And, you know, it's a fairly sizable number.

Okay. And right now in '03, you're not scheduled for any more big replacements of trucks, correct? This was just a 2000 event, approximately 900 trucks, correct?

No. We'll have, you know, assuming we can get happy with an engine, we'll have --

Second half.

-- we'll -- we'll be trading the 2000 model trucks next year. We traded 1999 this year, of 2000. It's a little over 1,100 trucks.

Caller: Do you have an agreement though right now?

Yes, we do. The agreement we did last December was for the '99 and 2000 model year trucks.

Okay. And then on the -- let's see. The -- you have a sense with, you know, consolidated freight waste demise and some of your LTL partnerships, have you seen specifically a little bit of a pickup there for your team service with some of the LPL carriers?

Tom, I'll tell you, we have spoken to a lot of --because within a week or so after the notice, we spoke to a lot of our LTL companies and, you know, they really didn't think that they were going to see much activity or extra freight from that. They thought they'd see some, but they felt like the roadway and LBS would be the big beneficiaries of it. They felt that it would allow them to firm up pricing a little bit. So in lieu of that, that kind of what we expected, but we have also seen though those same companies, that their business is up for us. So, you know, I don't know if that's the third quarter is getting better, but we have seen an improvement in their busiess with us for whatever reasons.

Okay. That's what I would have anticipated even if back door --

Right. Got to filter down some.

Caller: I think that's it. Everything else had been answered earlier. Appreciate the time, guys.

Thanks, Tom.

Your next question comes from John Barnes.

One follow-up. David, did you incur any kind of repositioning costs or did you see -- you know, you saw this little bit of increase in revevenu during the quarter. Were you getting paid over and above your normal per mile rate by customers for repositioning equipment out to the west coast in preparation? I mean, we were out there, you know, Tuesday and Wednesday of last week, two weeks ago, and I mean, it was -- there was a tremendous amount of equipment staged out there. Getting ready for the ports to reopen.

Yeah. The numbers that you see there are negligible on any of that. Since the quarter has ended, the last few days of September and those kind of things we have had customers willing to pay us, but it's not in -- virtually none of it is in the numbers you're looking at, John.

So negligible in the third quarter, but you may see some in the fourth?

That's what I think, yes.

Okay. That's what I had. Thanks, guys.

Your next question comes from Donald Broughton.

One follow-up real quick, gentlemen. I know we talked right as the ports shut down was started. And you were looking at the possibility of a -- offering customers teams at a premium price, four or five cents a mile and passing that right on through to your drivers and then in the hope to motivate teams to work extra miles in the months here remaining -- weeks remaining. What's become of that? Did you do that?

You know, that a was accomplished on some. I can tell you that in my opinion, as the port straightens itself out, in my opinion, there will be more opportunities to be able to do some of that.

Have you offered drivers five cents a mile?

No, we have not offered the drivers any increase. That was predominantly customers -- here's what we believe is going to happen and the customers believe it too. I mean, the math tells you that it has to happen and here's what we believe. We believe there's going to be a severe shortage of capacity in Los Angeles. Here is what we think that we can do, and are you wanting to participate in that? And overwhelmingly the customers are going to want to participate in that. It's a matter though that we're waiting on the freight to really get off the docks and start producing itself.

So you have had customers agree to a five cent a mile -- at least for the quarter increase for access to your teams off the west coast?

Yeah. It won't be -- number one, yes, they have. And number two, it's not the quarter. It'sen a day to day, week the week basis.

Thank you.

You have a follow-up question from Tom Albrecht.

Everybody's discussion is so focused on the ports with all the carriers right now, but and you have alluded to maybe a little bit of spottiness with the economy, but could you walk us through geographically a little bit more what's going on in the Midwest, southwest, northeast? Some of that more traditional overview that wouldn't be as heavily impacted by the ports perhaps?

Yeah. You know, we saw -- we have seen thus far, Tom, the south -- there is not a weak area. The southeast is very strong. The east coast is overbooked. The Midwest is heavily overbooked. The southwest, it's okay. It's not gargantually overbooked. It's okay. We're kind of thumbing our way through the southwest which is predominantly Texas. And the northwest is in good shape. And once the port gets there, I mean, I think we'll be humming very nicely for the remainder of the quarter. Because of the other regions that are going very strong. So I don't see any letup in that. I did hear of a customer this week that said out in Texas that they couldn't get some of their products out of the port that was starting to affect their business out of Texas because of the raw goods. And my question is, eventually, you know, whether it's today or tomorrow, are they going to wait it out or shut the port down or air freight it? We have only had a couple of them tell us that, but I do think that the port is probably having a little bit of, you know, going on with some of the customers. But the regions of the country are very strong.

Okay. Then on your surcharge program for fuel, are you still set where basically every three cents a mile you get a half a cent, versus many carriers it's more like every six cent increase in fuel, you would get more like a penny a mile?

Yeah, our basic program is for every -- for every 2.5 cents a gallon that it goes up, it's half a penny. So every five cents is your penny up or down. And that's our basic program. We are out in the marketplace now talking to customers that are not under that program to get them under that program.

Do you have a sense, ballparkish, David, what percentage of your revenues are covered by the quote/unquote basic program?

Tom, I would say -- I would say that about 50 to 60% of our customers are under our basic program.

Caller: Okay. And the rest would be on more of a traditional --

That would be anywhere from the example you gave, it starts at $1.04, you don't get it until it gets tossed1.09 and it's one penny instead of a half a cent increment to the customers program, their own fuel surcharges that then we look at the rates that we're getting with that customer and determine if we're satisfied with that fuel surcharge.

Okay. And then lastly, the 400 trucks a week in L.A., that's sort of a normalized number. That's not a higher number because of the port situation, right? That would be kind of any given week --

Yeah. In L.A., we run to 400 to 500 trucks a week on any given week.

All right. Thanks again, guys.

You have a follow-up question from Ed Wolf.

Hello? It's actually Justin. How is it going?

Fine.

Just a quick question, I was wondering where the tax rate was going for next quarter and for '03. With the guide you guys are given, what would you expect?

I think what I said back in the second quarter is for every 100 bases points improvement in operating ratio, equates to around a 500 basis point reduction in the rate. So as you go from 94.5 to 93.5, you should see the effective rate come down, which I don't know if it was exactly 500, but it comes down. So that's the general rule of thumb, basically, but then next year depends on where each of you all individually set your o.r.s.

Okay. I'll adjust it accordingly. That's it. Thanks, guys.

At this time, there are no further questions.

Well, we want to thank everybody for joining us, and we'll be talking to you in January. Thank you very much.

This concludes today's conference call. you may now -hang up