Covenant Logistics Group Inc (CVLG) 2002 Q4 法說會逐字稿

Good morning, my name is Deborah and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Covenant Transport fourth quarter earnings conference call with David Parker, President and CEO, and also 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 *, then the number 1, on your telephone keypad. If you would like to withdraw your question, please press the # key. Thank you.

Mr. Hogan, you may begin your conference.

Thanks, Deborah. Good morning, everybody. David will begin with some comments for the quarter, and I will follow up with a financial discussion regarding the fourth quarter, as well as our current expectations for the first quarter and fiscal 2003.

I'll state in advance that during this call, there may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This information is in accordance with the company's current expectations and is subject to certain risks and uncertainties. And we would encourage you to review those risks in the company's latest 10-K and third quarter 10-Q. With that, I'll turn it over to David.

Thanks, Joey. I hope everything goes well because Joey is in the corporate offices at Chattanooga; I'm out on the West Coast, so we'll get going here. But thanks, everybody, for joining us.

We were pleased to report continued progress in our plan to dramatically improve our profitability. Even though the economy is not robust, we continue to benefit from industry dynamics such as reduced capacity and our focus on our operating leverage. A little addition on the impact of the West Coast port strike that we had in the fourth quarter, and how it impacted the Christmas season, was the main challenge there in the quarter. And we were encouraged that the port situation finally reached a long-term agreement just in the last three or four weeks, so we're happy about that.

On utilization, we were pleased to achieve a 1.6 percent increase in utilization, or miles per tractor, for the quarter, and a 1.7 percent for the year. After a disappointing 2001, our fourth quarter of 2002 posted improvement versus 2001, but of course, there's still much room there for improvement.

Our utilization improvement was even more dramatic when you consider that we operated the fourth quarter with about 163 fewer teams than in the fourth quarter of a year ago. Adjusted for the percentage of teams on an apples-to-apples basis, we view that utilization was up about 4.9 percent for the quarter. Our goal for 2003, assuming the economy does not get much better or worse, will be to improve our utilization by another 1 to 2 percent. Over time, our goal is to achieve utilization at least 136,000 miles per tractor annually, or about another 4.7 percent increase based upon the current assumption that our single team ratio remains constant.

I am very pleased with our progress to improve our lane density also during the year. Our deadhead or our non-revenue miles were flat with a year ago at 7 percent for the quarter, but did improve by 34 basis points for the year. Of course, further improvement in this area will be difficult because it's already a very excellent number right now. Although the size of our team fleet is the same as it was in the third quarter, we will continue to manage the size of the team fleet relative to the market needs.

A little bit of information about customers and our rates. For the year, our top 100 accounts represented 71 percent of total volume and grew 19 percent. We have 25 new accounts in the top 100, and excluding the new accounts, the remaining top 100 were up 5 percent. We added $9m of annualized new business in the fourth quarter, bringing our total to $47m for the year.

Now, how the segments were broken down for the year. Transportation was 36 percent of our volume. Retail, 14 percent. Manufacturing, 11. Consumer goods, 8 percent. Floor coverings, 6 percent. Food and Beverage, 9 percent. Housing and Paper Packaging, 5 percent each. Auto, 3, and Electronics 3 percent. By continuing to add new business and holding the size of our tractor fleet, we have been able to reduce our dependence on broker freight 8 percent in 2002 versus 11 percent in 2001. And I've been able to pass on some rate increases to our customers.

With our length of haul flat with a year ago, at about 1150 miles per load, we were able to increase our load of mile rate versus the fourth quarter last year and sequentially versus the third quarter by 1 cent to $1.23 per mile, and finish the year slightly under $1.22. So our goal in 2003 will be to increase our load rate per mile by at least 2 percent.

But I will tell you, we are definitely asking, we're demanding, we are needing, more. And there's no doubt in my mind, that we know that there's been about 400,000 trucks taken out of this marketplace. We know there's been a lot of bankruptcy, and there's coming a day – whether it's today, tomorrow, or two months from now – but there's coming a day where we're going to [sense] [phonetic] the highest capacity crunch that this industry has ever, ever experienced. And I think that we'll be in an opportunity to be able to increase pricing very nicely, even greater than 2 percent.

A little bit about drivers. We continue to keep almost all of our trucks seated with drivers. Excluding wrecked units, we have about 40 unmanned trucks and we are running about 1200 team trucks. Based on our stated plan of constraining [our quarter] [phonetic] growth until our profitability reached certain levels, we do not expect to raise our driver pay scale until the second half of 2003 at the earliest.

Our continuous improvement program. You know, we've been on this for about three years now, but during the quarter, we continued to find ways to reduce our after-tax operating costs. We identified $7.3m of new analyzed savings during the year of 2002. With the combination of these cost savings with the management of our team fleet to focus on profitability, we were able to reduce our after-tax costs by 1 cent per mile to $1.12 from $1.13. And I tell you, we will continue to be very diligent in this area.

I'm going to turn it over to Joey now, for some financial information.

Thanks, David. A few miscellaneous items before I comment on a few differences versus a year ago. Our fuel surcharge revenue was $5.8m during the quarter, versus $2.6m last year. We did have other [assets over] [phonetic] revenue of $2.2m versus $2m last year.

We ended the quarter with 376 owner-operators, or about 10 percent of the fleet. They accounted for about 10 percent of the miles this year, versus about 9 percent of the miles last year.

Capital expenditures during the quarter. We netted -- our net capital expenditures -- were $23m for the quarter and ended up a net $56m for the year. Due to trading approximately 600 tractors during the fourth quarter, we increased our balance sheet debt by about $10m during the quarter, finishing the year with our debt to total capitalization ratio at 32 percent. Total off balance sheet debt at the end of the quarter was $93m, versus $91m at the end of 2001.

In the expense area, our salaries and wages were down 220 basis points versus a year ago, due primarily to having, on average, 163 fewer teams than a year ago, and various contributions from our continuous improvement program. On the fuel side, fuel expense was up $2.4m, based on diesel prices averaging 21 cents per gallon higher than the fourth quarter of a year ago. We were able to offset this increase with $3.2m more in fuel surcharge; we did have slightly better fuel economy in the quarter, and we did have a $1.6m positive swing in purchase commitment and hedge cost versus a year ago. This produced a net cost of fuel per company mile of 18.7 cents a mile versus 19.5 cents a mile last year.

In the depreciation and amortization area, there are several factors. We've discussed these all year, but I'll just kind of bring those to closure. During the fourth quarter, several factors continued to influence this area. One, as we disclosed back in January, we increased the depreciation on our 2001 model year trucks that were not included in the new freight liner agreement that we reached last year about this time. This was the impact of about a half a cent a mile.

Number two, additionally, depreciation was up another penny a mile, beginning in the fourth quarter of 2002, largely because the majority of the 1999 model year tractors were traded during the fourth quarter. As we also disclosed last January, the replacement trucks' higher cost combined with lower residuals result in higher depreciable costs.

Number three, we reduced the number of trucks financed through operating leases during the fourth quarter, or since the fourth quarter, of 2001. We had, for example, 963 trucks financed through operating leases last year, and we only about 891 this year. So more of the fleet is company-owned, which require depreciation.

Number four, loss and sale of equipment was up about $1.1m versus a year ago during the quarter to a $1.4m loss as we absorbed a large amount of expense as we prepared 600 trucks for trade in one quarter.

Regarding our expectations for 2003, we intend to continue on our mission of improving our profitability by constraining fleet growth, focusing on improving utilization, rates, lane density, and lowering our costs. In creating our expectations, we assumed that the economy will improve moderately in the first half of the year, and begin to strengthen in the second half, and that industry truck capacity will remain flat to declining slightly throughout the year.

Based on those assumptions, we anticipate the following. Number one, rates are expected to increase about 1 percent in the first half and 2 to 3 percent in the second half, to around $1.15 average for the year. Number two, utilization is expected to improve around 1 percent in the first half, and 1 to 2 percent in the second half, to around 132,000 miles per truck for the year. Three, the fleet is expected to remain at about its current size in the first half, and may grow slightly in the second half, with capacity additions depending solely on our profitability and the state of the economy.

Our expectations on capacity, rates, utilization, would be estimated to produce trucking revenue for the year in the $570m to $580m range. We expect that our costs could go up about a penny a mile due to the above-mentioned truck costs, a possible driver pay increase in the second half of 2003, and other miscellaneous small increases. We expect our capital expenditures to be $85m to $90m for the year.

Based on all these assumptions and expectations, we project earnings per share in the range of $1.10 to $1.20 per share for the year, with first quarter at 10 to 14 cents per share and the remaining quarters in the 32 to 36 cent per share range. This is a preliminary estimate that could be affected by various factors throughout the year, but is our best guess at this point in time.

Well, with that, Deborah, we'll open it up with any questions.

At this time, I would like to remind everyone, if you would like to ask a question, please press *, then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

Your first question comes from [Chaz] [phonetic] Jones.

Good morning, guys; Chaz and Dan both here on the line. Just had a question on the current freight environment, in terms of what you've seen so far in January?

Hey, Chaz. There is no doubt that the first couple of weeks of January were soft, as compared to January of last year. I think we have had a couple of things going on, because there's a separate scenario of what we sensed last year versus what we're sensing this year. Is that, I believe in January of last year, we had – first of all, we had a 5 percent GDP in the first quarter, but a lot of that, from a trucking standpoint, I believe, had a lot to do with increased inventory that started in the month of January, because we had a very, very solid non-typical month of January last year. And then it sort of – January got over with, the month of February really flattened out, and it stayed flat until about the 10th of March, and then starting around the 10th of March, we took off from there all the way through July, for about four and a half months. So that's last year.

This year, I believe that we came out of Christmas with too much inventory and you had the first few weeks, and maybe even now, you had people downsizing on the inventory side, which has made a flux of not enough business in the month of January. The first two weeks were not good, and then last week, we were actually up over last year for the same time period. So that has us encouraged. This week, so far, we're basically on scale. We're a little bit over last week. So maybe things are starting to turn around, but the first couple of weeks in January were slower than what we had hoped.

One other question here, shifting gears on the insurance front – kind of a two-part question. It seemed that although insurance was flat on a per-revenue basis, year over year, it came up some from the first three quarters of the year, and just curious if there were any added claims there. And then the second part of that is, I think your primary coverage is up for renewal March 1st '03, and just curious on any visibility there.

It is up a little bit versus year ago. We did have – we expensed all of the umbrella policy that we thought we had that's been disclosed on our third quarter 10-Q and press release and all that, so we pretty much expensed the remaining of all that in the fourth quarter. Which was an additional couple hundred thousand dollars. We're very comfortable with where we are, as far as our accrual. We continue to grow that program and grow our accrual throughout the year. So that continues to grow and we're extremely comfortable where we stand for that.

As far as the renewal, our renewal is – does renew March the 1st, so we're on the market as we speak. It's way too early now to determine where that's going to come out. We do have a quote in hand already, and we are working on receiving some other ones. So we're in the market where we expect to have something by March the 1st.

Okay.

Dan [No last name given]: Joey, Dan here. Good morning.

Hi, Dan.

Quick question, Dave, Joey, on the average age of the fleet. Could you update us as to what the average age of the fleet is currently? And what the projected cap ex is going to be spent on, in '03?

Dan, we're right at 24, 25 months, [I mean, in] [phonetic] our four-year trade cycle. You know, that's where you're going to be. So we're right at that number. The $85m to $90m that we disclosed is purely one-for-one replacements on about 1100 tractors. We hope to sell or trade 1,000 trailers; it's in that number. And we do have potentially about 100 company-owned trucks with no trades; a little bit of growth planned in the second half in that number as well. So it's principally just one-for-one trades and possibly a hundred trucks for growth in the second half.

You made mention of a possible driver pay increase at some point in '03. What do you think the timing of that increase would be, and could you give us a sense for what the current driver environment or market is? Are they easy to come by? Where are you seeing strength, where you're seeing weakness?

Dan, right now we're in good shape on drivers. This is something that we're monitoring on a weekly basis. We're just plugging in our numbers that we still like in the second half of the year that – I don't know if the word is we will "have" to increase driver pay -- number one, the whole industry should be increasing driver pay, but as soon as we can get it from our customers, then I think that one of the first things we've got to look at is to get the driver pay up.

Right as we speak right now, we're in good shape on drivers, and we've got - you know, plenty of them that are fulfilling the need -- you know, we've had so many bankrupt trucking companies out there, that it definitely has brought a flux of drivers into the industry. But that is something that we wanted to plug in because it's the right thing to do. If we can't do it, then we won't do it at that time.

And then, just lastly, could you give us a sense – and you may have mentioned this; I got on the line a little late – what the impact from the West Coast port walkout was on fourth quarter results, and more specifically, fourth quarter rates, if any?

Yes. There's no doubt, as we said on our third quarter conference call, on October 16th or whenever it was -- really, the impact that we felt was the first seven to ten days of the month of October, and it was strictly that we were not able to turn those trucks - you know, we run about 25 percent of our trucks to the West Coast. And all of a sudden, that one week they were shut down, we were not able to return those trucks during that week, so that has a whammy effect on us, not being able to get them back from the West to the East, to return them back to the West. So that's probably a couple of pennies on EPS for the fourth quarter, and then – so, that's from that standpoint. So, have you got anything else to add on that, Joey?

No, I don't, David.

That's it for me. Chaz, do you have any other questions?

That's it. Thanks, guys.

Appreciate that.

Your next question comes from Edward Wolf of Bear, Stearns.

Hey, David, hey, Joey.

Hey, Ed.

Just a couple follow-ups first. Joey, you made some comments, and I didn't hear the whole thing, about costs going up about a penny a mile in the year. Can you just repeat that? I apologize; I missed that.

Yes, we do expect our costs to potentially go up a penny a mile, we said due to truck costs. The trucks that we're bringing in, the replacement trucks, they cost us more and we do have residuals on them, but they're lower than what historically we've depreciated trucks at. So you have higher depreciable costs. So that's one. A possible, as David just mentioned, driver pay increase in the second half of 2003. And those are the two main things that could contribute to our costs going up.

Is there a plan to bring on any replacement post-October-1st trucks?

Yeah, all the trucks that we take this year will have new engines in them.

Okay, so that's part of the penny; and part of the penny is the depreciation?

That's correct.

Okay, and on the insurance, just as a follow-up question -- the bid that you have in hand, are you talking about taking up the retention?

We're looking at that. We have a million dollar limit now, but it's too early to - we're looking at all the possibilities right now.

And based on what you have in hand, and the way it's going, is your guess the premiums go up, or that some form of risk goes up and premiums stay relatively similar?

I don't think our insurance costs this year is going to go down that much at all, is really the way I want to answer that. It's too early to comment on what that's going to be, but it's not going to go down, I don't think.

Got it. David, you talked about not bringing on new trucks, but the actual truck count over the last quarter is up 109. I'm guessing some of that is new trucks coming in before old trucks go out, but can you talk to that a second?

Yes, that's exactly - you know, we did bring on a few more owner-operators in the fourth quarter. The rest of it was strictly a timing issue there, than with the owner-operators. We are looking -- because the way in which we're doing this, as you remember, is that when we fill out the two things, we get to a 93 OR -- and also as well, is that we know at 93 that we're only about a quarter or two quarters away from being at a 90 OR, and then we will grow the company when we reach those criteria. And you know, we see [tractor capacity] [phonetic], so we brought on a few owner-operators in the fourth quarter but those numbers will be readjusted that you'll see in the next couple of months.

Actually, we talked about that back in October, was that third quarter was a temporary dip, and we averaged 3,684 tractors in the fourth quarter; second quarter was about 3,687. We just had a period where we dipped down as we pull trades in advance of a bunch of trucks coming in, and so it was just purely timing.

What should the average tractor count look like in the first quarter?

We ended the year at 3,738 trucks. You know, we're not planning on growing that much in the first half, so it's a pretty good number for the first and second quarter.

Okay, but it's not going to go down, the average.

No, I don't think so, no.

Okay. David, you made comments about the OR in a couple quarters getting down towards 90. The guidance that you gave for the year, if you look at $1.10, $1.20, kind of in the middle of that, is somewhere between 93.5 and 94.

Yes, what I said is that we will start looking at growing the fleet again when we get to a 93 OR, and then we know that we're only one or two quarters away from being in the 90, which basically -- when capacity gets tied up, as you know, that it's just a matter of getting out on the street and raising rates to get you there, so that's what it's going to take.

Okay. So other than rates, you talked about utilization still has a bit to go, and empty miles at around 7 percent, I'm guessing, don't really have much more to go. Is that fair to say?

I agree with that.

And on the costs side, it feels like you're pretty lean and mean as well right now.

I agree with that. It is strictly to two things. Increase that utilization by 4.7 or 5 percent, tractor utilization, and then the rate issue is, we're plugging kind of a couple percent. But there's no doubt in my mind that when that day comes, I don't know if it's today or tomorrow or a month from now, but when the day comes, there's going to be some very nice rate increases, I my mind, to the tune of 4 or 5 percent kind of numbers. But I don't know when that's going to happen.

Is there any new experience with testing engines or do you have a feeling for one engine over the other and what the impact could be?

We've only got one engine that has done a wonderful job. We've absolutely had virtually zero problems with this engine. Now, there's no doubt that we're only up about 50,000 – 60,000 miles on this engine, but we have had virtually no problems with the engine; it's ran just as well as our old engine. But that's [how we want it] [phonetic]. From what I've heard in the marketplace, from being one of the guys that went up to Washington last spring, trying to get the thing [kicked off] [phonetic], of about the twenty trucks that I know of, people that have got engines out there running, there have not been many problems. So we're all very encouraged by that, so there haven't been that many problems.

What kind of engine is it that you're testing?

The [Detroit] [phonetic].

And besides being reliable, is there any degradation of fuel mileage or extra oil changes or any things like that on the cost front?

There's definitely going to be a decrease in fuel economy by about 5 percent. And we are seeing that. The folks at Detroit and the Freightliners of the world believe that if they go forward, they'll be able to tweak fuel economy and be able to improve fuel economy, but it's not something they're saying as a sales job. And I'll tell you that up front, that their desire is to continue to work on their engine, to be able to increase fuel economy. But it's definitely about 3/10ths on a per-mile basis that it's affecting you.

When do the new trucks start to come on in '03 for you?

Really, in a [numerable] way -- there's some coming on in April -- but in a numerable way it's June, July.

And what's the extra cost? And are you buying an extra warranty as well on that?

On the [indiscernible], warranty issues, our same warranty issues that we've had for a long time, to take care of, if any major problems exist out there, as well as some warranty issues that give us the ability to be able to go out and get some rental trucks and things like that, if we need to. If the truck was to have problems.

How about the average cost for the engine? How much more is it going to be?

They're all up in that $4500 to $4700 number.

And Joey, when you think about depreciating these engines, what kind of residual value are you thinking about?

Pretty much the same one that we have. So you know, I've taken the position -- I'm assuming there is no increased residual value in this engine. So I'm fully depreciating the additional cost over the life that we run this truck.

Okay, and what's your typical life that you depreciate over?

Five years to 18 percent.

Thank you very much. Thanks, both of you guys.

Your next question comes from John Barnes of Deutsche Bank.

Hey, good morning, guys.

Hey, John.

In looking at the fourth quarter numbers and the guidance that you gave, does that include some expectation that your insurance rates – I guess what I'm getting at, the bid you have in hand right now, since you're going to look for others, I would assume is not the best bid you think you're going to get. Have you kind of given us some guidance including what you think is going to be your either flat to higher interest cost for the year?

John, the only thing I'm saying right now is that we don't expect our insurance to go down. It's too early to say what it could do, and I think the possibilities could include higher retention; could include that. There are carriers much smaller than us that have much larger than $1m deductibles, and so that's on the table as something we're considering.

And so I don't think the impact will affect us significantly in the first quarter, if that's what you're asking. Whatever the impact is, it could – it's obviously going to impact us going forward, and we do have -- internally, we do have an expectation. But I think it's way too early for me to comment on that right now.

There's no doubt also, John, if you look at the last five years of our losses [indiscernible] – we could increase the exposure much greater than what it is today without having much effect on us from an exposure standpoint. If you look at history.

Okay.

So that's the way in which we will be looking at it. We went back five years and looked at our exposure.

Okay. In some conversations we've had with the OEM's on the truck manufacturing side, there seem to be a number of incentive programs out there, trying to push up sales of the vehicles. I'm curious if they come to you with a particular incentive program, is there anything right now that would turn your head in terms of maybe accelerating some truck additions, just to take advantage of good pricing?

Well, there's no doubt for the first time in two years, I feel like a customer again. And I haven't felt like that in two years. But we will listen to what they've got to say, and if two plus two equals four, then we'll do it.

I think, John, most of the incentive programs that we're all reading about, are not really targeted at the large fleets. They're targeted at the small to medium size trucking companies, owner-operators, those [indiscernible] that are out there and want to buy a new truck or lease or replace a used truck. That's really who it's targeted at. It's not really targeted at what I would call the medium to large fleets.

Okay, so I guess your feeling is, you're probably already getting pretty decent pricing because you're a larger customer, and therefore they're not likely to come off of that large customer type pricing? Is that the way to look at it?

Well, it's just that they're trying to move trucks. I mean, we're all reading about some of these new lease programs that Freightliner's moving out, but if you really dig down and examine what's behind that, it's - you know, people with several years of operating experience, whether they're with them or another financial institution. You know, even though it talks about low down payment, it is a down payment, and you do have to have some years of operating experience, with good credit history, and so it's - you know, the products are mainly targeted at those smaller fleets, or owner-operators that want to, and have the ability, to do something. That's really what it's all about.

Okay. Down payments – that's a unique concept, isn't it? The last question I have is, the Postal Service recently announced – and there's some comments out today – that they're trimming their air service – canceling, I guess, somewhere in the ballpark of $25m to $36m in airmail contracts on a regional basis, and switching over to truck. Have you seen any surge in that type of traffic in your fleet? Or do you expect to?

We are not. We've got good relationships with the Postal, based on our experience of the past, and it's something that we are in the process of really checking into. We still do some business for them, but not a whole lot. So it's something we're just checking into, but we're not thinking that's business that's going happen tomorrow.

Okay. Guys, I appreciate your time.

Okay.

Your next question comes from Donald [Browton] [phonetic] of A.G. Edwards.

Good morning, David, good morning, Joey.

Hey, Donald.

First of all, our condolences, David. Your dad was a legend in the industry and I know all of us send our heartfelt condolences.

Well, thank you, Donald.

Onto business. Operations and maintenance line. I noticed for the first time, I guess, in eight quarters, maintenance expense on a per-mile basis went down. What's behind that?

Well, it's basically, finally trading some trucks for some new trucks. And I think that what I said in the third quarter, and second, that what you saw is it moved up pretty quickly throughout '01 and started peaking in the first, second, third quarter and was basically traveled in a pretty tight range, throughout that period of time. And I think that, fortunately, we started trading trucks, and you see the impact of that pretty quickly. And I don't think it's going to go down much from where it is, and so that's what you're seeing, is finally getting some new trucks in here, and a bunch of them at one period of time.

So if we would have modeled out at, say, 9 cents per company mile, which is what it was per quarter – do you expect it to stay somewhere in that range for '03?

We don't expect it to go up much from where it is right now.

I was interested in the addition of owner-operators. Did you change what you're paying owner-operators? How are you attracting them? Where do they come from?

You know, it's just a matter of, for the last couple of years, we have just been flat on owner-operators, and it's designed like that, that we only wanted to hire whatever we lost on a weekly basis, and that's kind of what our game plan has been. But you know, we get a lot more phone calls, and we're going to get our share of owner-operators -- I mean, I don't know if that – when we start growing, I don't know if that's 1,000 or 2,000, but we won't stay at 365 or 70 forever. It's just a matter of deciding to go up above more than what we're actually losing. I mean, they're still difficult, so I don't want to sound like they're just sitting there. But we'll get our share of the owner-operator segment out there.

You haven't changed your payout to them?

No, no, no.

Were these drivers people in your company driver fleet that --

These are just all – these are not created owner-operators, they're just [indiscernible] and wanting to lease their truck to us.

Okay. One more thing, and then I'll let someone else have the floor. You said something – maybe I got the numbers transposed here; it confused me a bit – you said that off balance sheet debt at the end of the year was $93m; a year ago it was $91m, and that leased trucks had gone from 963 trucks to 891. Did I get that right?

Yes.

So off balance sheet debt went up slightly, but trucks leased went down. What's the missing component?

Trailers.

Ah. Trailers leased went from what to what?

Trailers went from a little over 2500 to about 2650.

Okay. Great. Thanks, gentlemen.

Your next question comes from David Max of Credit Suisse First Boston.

Hey, guys.

Hey, David.

In terms of cap ex guidance, Joey, was that number assuming all trucks and all cap ex - I'm sorry, all expenditures going through cap ex and none through leasing?

That's correct.

Okay. In terms of the new engine, we're hearing that the mileage you can put on it could be up to 20 percent lower than what the old engines were. How do you think about that in terms of framing a residual value? And also, in your own operations.

Well, we have not heard that. I mean, who knows if it's true? You know, that's all unknown out there, is that, are these million mile engines or are they 800,000 mile engines? We have not heard that Detroit or [Indiscernible] or anybody else is expecting these engines to be a less life engine. But in fact, they are -- I mean, we get rid of our trucks, even on four-year trade cycles, with a lot less miles than that. So from that standpoint, there's no doubt in our mind that the life of the engine is going to last much longer than what we would operate the truck at. It's just a matter of, does the truck run into difficulties at 500,000 or 600,000 miles? And we don't know, so we're just surrounding ourselves with warranty and ability to be able to go out and get leased trucks, and those kind of things, at their expense and not at ours.

But in terms of residual value, that might have some type of an effect, but we probably won't be able to tell for some time?

Well, we've got our contracts with Freightliner on our residuals that, in theory – in theory -- we'll give them back to them at that price, and then if they get hurt, they get hurt on it. I mean, our residuals are under contract, but that's not to say that two years ago, that everybody that had residuals weren't under contract, either, you know?

Right.

So, how strong is the contract? I don't know.

Right. When you look at your current freight mix, and you're talking about the moderate growth you're expecting in the first half and then the stronger growth in the second half, what specific areas are you looking for or targeting for that growth, in both the first and second halves?

You know, we continue to see increase on the transportation side. We also continue to see increase on the retail side. Even though Christmas was not very good, we'll continue to growth with new business on the retail side of it. You know, depending upon what month it is, one minute I'm optimistic and the next minute I'm pessimistic, on the manufacturing base. I have been optimistic on the manufacturing base, thinking that it reached all-time lows, that it couldn't go much lower, but hopefully we were correct on that, but we believe that there's some room on the manufacturing side to do some good.

In food and beverage, the [refer] [phonetic] side of the business is strong. I mean, we talk about overall, the month of January and the first two weeks being slow and those kinds of things – the refer side of the business has been – has had a very good January. I cannot complain at all about the refer side of the business. So I think that the food and beveraging side is going to continue to go very well. Housing – we don't see – we see the housing side still being strong; it may not be as great as it was for the last twelve months, but we still say that we've got a lot of room for growth in the housing side.

How have the rates been in the refer business?

Very good. The refer side, there's no doubt that what we're going to see in the industry as a whole, the refer side, in my opinion, has always started sensing that and filling that on capacity as well as on pricing.

Okay. And within the transportation side that you were mentioning, is that more brokerage, or is it more growth with freight forwarders?

Yes, it's going to be less the brokerage side; it's going to be more the freight forwarder and LTL's and stuff. Air freight, those kind of things.

Okay. In terms of the tax rate for, I guess, the first quarter and beyond – what should we be using, I guess, for the tax rate, and then for the per diems for the first quarter and beyond?

Well, the per diem is leveled out at about 7 cents a company mile. It's not going up much from there. It seems to have leveled out at about that number. On the tax side, what we talked about is for every hundred basis points of OR improvement, it translates to about, let's say, 5 or so basis points of improvement on the tax expense -- it's kind of a simple way to look at it. As you become more profitable, your effective rate goes down. And it's roughly 5 points for every 100 basis points of OR.

Did you say 5 basis points of improvement in tax?

We were 50-something, 53, 54 percent in the fourth quarter, with a 94-plus OR. For every hundred basis points that OR goes – say it goes down 100 basis points to 93.5, it means your effective rate will go from 53 to 48. And it goes down for every hundred basis points improvement about 5 percentage points, tax expense.

I see, okay.

That's rough – that's approximate.

Okay.

I know the per diem kind of messes that up.

You guys have done a nice job of bringing down the debt ratio. Is there anything expiring over the course of this year that you can pay down?

Is anything expiring?

Expiring or – what are you factoring into your model in terms of debt paid out?

What we're saying, we could have a slight usage of cash this year, of depending on where your earnings projections are, in that, let's say, $15m to $25m range, depending on $85m to $90m in cap ex. So it could go up. What could offset that – you know, could we improve our days outstanding and receivables? We've done a pretty job of reducing it a couple of days this year. We might could tweak that some more. But I think – in all likelihood, that will go up between now and the end of the year.

Okay. All right, thanks a lot.

Thank you, David.

Your next question comes from Tom Albright of BBT.

Thanks, guys. Good morning, by the way.

Hey, Tom.

A couple of different questions. A lot of my questions have been answered, but first off, David, where do you stand on the dedicated fleet kind of finishing the year in terms of number of trucks, approximate revenue run rate, etc.? And how fast can that part of your business grow in '03?

I don't know if Joey has the exact numbers there or not, but I mean, the thing continues to grow very nicely for us, and I'd say there's some great opportunities out there in '03, on the dedicated. I mean, we've got a couple of builds in the works right now that could be pretty nice builds if they come through. So it continues to grow very nicely. What is that number, Joey, about 450?

Yes, it's right at 450 trucks.

Yes, so we're about 450 trucks at this time, and it's probably producing – I think it's about $50m, maybe a little bit more, of revenue on that side. So I mean – probably about $60m of revenue. But so it's the same story – I see great opportunities on the dedicated, the same way we have in the last couple of years, and we'll continue to grow it.

Refresh my memory. A year ago, didn't you finish the year with less than a hundred trucks dedicated?

Well, the thing is going on three years old, I guess in May – so, we've been over, I guess, about two and a half years on the dedicated. It was more than that; I want to say that we finished at 450 this year, so the number was probably around – around 250 or so, something like that, Tom.

Okay. And then – just give us a little color, David, on your discussions with shippers. I mean, right now.

Here are the discussions. Shippers, right now, know that the industry is broke; they know that the industry has got dire needs; they know that there's coming a day of reckoning, not out of the carriers trying to take advantage of the customer, but out of something called total existence of the industry. And the shipper knows that. You can sit there and have a one-hour conversation and lovingly -- and I love my customers – but lovingly pat each other on the back, and say, "I know that this is the way it is, and blah, blah, blah, blah," but when you get down to saying, "Guys, I've got to have some help," then it's like a big wall goes up and they want to turn off the conversation.

At the end of the day, they will give you something; you will get increases, but there's just coming that day, Tom, that what you'll see the carriers doing is, you know, going in and getting 1 percent or 2 percent or 3 percent or 2.5 percent – those kind of numbers, and there's coming a day, one day, that we're going to sit there and say, "Okay, all of a sudden we get 4 percent," because we're going to go the marketplace, and we're going to demand it out of the customer, all in the saving the industry.

And so that's what you will see. You're going to see the carriers going to trip along and get what we can get, 2 percent, those kind of numbers, but then there's coming a day where you're going to grab a quarter, and you're going to see the quarterly results, and you're going to see some increases of 4, 5 percent. I just don't know when that will happen, but it's going to happen. You cannot take out 400,000 trucks.

And it continues - I mean, we're not getting any better – the industry is going to continue to lose trucks. So capacity is going to continue to dry up. It's going to just do nothing but make the day arrive that's going to make it a greater day for those of us that continue to exist.

Right. Joey, on the fuel side, your guidance during much of last year was most quarters' fuel on a per mile basis should be between 19 and 20 cents a mile; obviously, Q4 came in just a little bit better than that. But as I recall, a lot of your hedging sort of runs out here in the first quarter. So can you bring us up to speed on that? And then secondly, should we continue to model sort of between 19 and 20 cents?

Yeah, I mean – there's two components to our program, and I don't want to get into a technical accounting discussion, but we have purchase commitments with fuel vendors that allow us discounts based on volume, but it does have some ceilings and floor features, and it's dependent on how much fuel we buy, and dependent on where the overall cost of fuel is. And then we have hedges. Those hedges did expire at the end of 2002, technically; we do not have any hedges at this point forward. It's 100 percent purchase commitments. And so you know, I feel pretty good about our 19 cents a mile goal for this year, with what we have. Those, quote, "old hedges" did help us some, in the second half of the year; there's no question. It's not a huge number, but it did help us.

So I still feel good about the 19 cents overall, kind of average for a year. First quarter's a little higher, around that 20 cent number because you have less fuel economy, higher idle time; weather, things of that nature, and then it comes down pretty quickly into that kind of 18.5 to low 19 -- to average 19 for the year. So I wouldn't - I'm not - you know, and the reason I say that is again, that's a net number.

And the reason I say that is that it's something that's exceptionally important to us, is our fuel surcharge program – something we talk about all the time; we talk about it with our customers all the time, and the key success to that is our fuel surcharge program. And we always work to improve it. We don't recover 100 percent of our cost, and so – but that's the key that gives me comfort to be able to say I think that we'll stay around that 19 cents a company mile number throughout 2003.

Okay, good. Good guidance. And then on the purchase commitment side, you're at 100 percent for the year right now, or something less than that?

We're at about - we're 70 to 75 percent under some type of purchase commitment program.

And then either one of you, in your mentioning of the possibility of a little bit of second half capacity growth, my question is, would that probably be more in the team side or the solo side, and secondly, was the amount that I heard roughly 100 trucks?

Yes, it was 100 trucks, roughly, in the second half.

And I do believe that we'll be wanting to grow the team side some, Tom. If what we sense out there and what our customers are telling us is true; once we get past that, we will grow the team side because I think that's what they are asking us for.

Okay. Good. Guys, good quarter again; hang in there and can't wait for February/March right?

That's right. Get out of January.

Your next question comes from Michael [Ratanica] [phonetic] of Morgan Joseph.

Yes, hi, how are you doing? This is actually Richard Page calling in for Mike. Just two quick questions. The first thing, if you could give us the average length of haul for the fourth quarter and annual '02?

The length of haul in the quarter was right at 1150 miles, and we ended the year at about 1150 miles.

Great. And if you could just give the – I know you give the fourth quarter, but if you could give the annual fuel surcharge revenue for '02 versus '01?

The annual fuel surcharge revenue for the quarter was $5.8m for the quarter; it was $13.8m for the year.

Okay, and for '01?

It's $2.6m for the quarter, and $19.5m for the year.

Great. Thank you very much. That's all I need.

Your next question comes from Nick [Fallwell] [phonetic] of The [Arver] [phonetic] Group.

Dave and Joey, good morning.

Hey, Nick.

Just a couple of quick questions. David, you commented on the outlook. Are there any trends you could identify for us, either by region or industry, that provide you some perhaps insight into this unusual or difficult to predict first quarter? Either broker freight volume – whatever sort of factors you look at to measure the day to day magnitude?

Nick, really, we have seen – the South has been the worst of all the regions of the country. I mean, it's just like the South just kind of fell off the map. So the South has been very difficult. Really, other parts, other regions, of the country - I mean, Southern California has been very strong. Let's use the word "strong" instead of "very strong." It's been strong out in Southern California. The Southwest has been in pretty good shape out there. I mean, it's not been pathetic; it's been okay. The Midwest has been good. The East Coast has been good.

So it is really led by -- the South has been the worst part, that the trucks kind of just get all over the South and just kind of die for a couple of days. And I think that is really the main difference, because the rest of the country is moving just as good as it did last January. So again, we put a lot of trucks in the South, but the South has really been the main culprit of that. And it's not – it's really across whether it's manufacturing or transportation or housing, the South is just – has been slow. But that's really about the only place that I can sit here and say, we've had major problems in the month of January.

So loads going in and out of Southern California that may be going to the South just --

They just kind of die for a couple of days.

So then they have to sit there in Atlanta for three days, waiting for a load to get out.

That's correct.

I see. And you commented that in the third quarter, roughly 350,000 trucks were out of the industry and you commented in today's call that roughly 400,000 had departed or were sitting.

And I have seen even, by some analysts, even greater numbers than that. But there's no doubt in my mind that it's a minimum of 400,000 trucks that have been taken out of the market.

And do you think there's likely to be an acceleration now of licensing coming up here in the next month or so?

Yes. I will tell you that [indiscernible] even though it's turning all the survivors, and we're all going to feel it, there is no doubt that we kind of had a reprieve, a little bit, in the second half of last year with at least fuel getting down into the $1.20 to $1.23 range. And that the bankruptcies would continue but maybe not at a pace that they have for the last couple of years. But what I expect to see is, as this fuel is back up to $1.42's and 3's and 4's, and those kind of numbers, and licensing coming up in the next 60 days, that they're going to see another uptick, another round, of bankruptcies. And that's not good for the ones that are going through it, but the ones that survive it, it's just going to do more of a cleansing.

Joey, just a couple of clarifications. I'm not sure I totally understood, unfortunately, the surcharge? You indicated in the fourth quarter gross is was $5m to $8m?

That's correct. $5.8m in surcharge.

And then you said that your cost per mile was $18.7 versus $19.5?

That's correct.

Does that suggest, then, that your surcharge basically covered the incremental cost for fuel? Am I interpreting that correctly?

In the quarter.

Yes, that's all I'm talking about.

Plus you had the $1.6m favorable swing on our purchase commitment.

Oh, okay. That's what I missed. Okay, so the fact that you hedged was the reason you were able to keep costs roughly flat despite a rising fuel environment. Did I understand that correctly?

It definitely helped in the fourth quarter.

Okay. But without the hedging, it might have been closer to, say, I haven't figured this out, but closer to 19.5 cents for the same discussion.

Yes.

And then you also commented that the costs of the new truck were 1 cent per quarter for higher depreciation, due to lower residuals, and then was it an incremental 3/10ths of a cent for the lower fuel economy? Per mile? 3/10ths of a cent per mile?

No, actually, a 5 percent reduction in fuel economy per truck is closer to a penny a mile impact for that truck.

Okay.

You're not trading your whole fleet in one year.

Right.

I mean, those new engines come in over three years. So you're right to this year, assuming that your fleet's – a third, a third, a third - you know, it impacts you this year 3/10ths of a cent a mile.

Okay. So is that a gross-up number of 1.3 cents? In other words, 1 cent a quarter for depreciation and then 3/10ths of a cent per mile?

That's correct.

Okay, just so I understand. Thank you. I appreciate it.

Your next question comes from [Steven Lewis] [phonetic], of Lewis Capital Management.

Good morning. Could you please go over the operating cash flow minus the capital expenditures for 2002?

Okay. We generated $67m of cash from operating activities for the year. We had $56m of net capital expenditures for the year. And we paid down $11.2m indebtedness for the year. And we began the year with $400,000 cash, and we ended the year with no cash.

What made up the rest of the operating cash flow beyond the $8m of income and the $49m of depreciation? Was it deferred taxes, or what exactly?

You've got plusses and minuses all over the place. You've got receivables was a negative $2m; prepays were negative $2m; accounts payable and accrued expenses was positive $11m; I mean, it's plusses and minuses up and down the list.

Okay, so then when we go into 2003, what's your estimated depreciation?

I'll let the analysts do that. I really don't forecast line items other than revenue and earnings.

Well, you've got about $12m for the quarter, so are we talking about $50m, something like that?

Again, I'll let the analysts comment on those individual numbers.

Okay, and you did say that the range of operating cash flow would be $15m to $25m – well, let's take it this way. Usage of cash would be $15m to $25m more after the capital expenditures.

Correct.

So you're talking about, if you take the averages here, something like $70m in cash flow and $90m of capital expenditures. How do you fund the other $20m shortfall of cash?

We've got a $120m revolver with $30m outstanding on it at the end of December. We have plenty of borrowing capacity.

Okay, so what you're saying is you'll have more leverage at the end of the year.

[Indiscernible] more leverage; we may not have more debt to total capitalization, because our cash flow's improving as well.

I understand that. Well, from 67 to something like 70 here, you're talking about.

67?

That's what you said it was for 2002, operating cash flow. And so it's going to be up slightly, even though earnings will be up quite a bit more, reported earnings?

Could be. That's correct.

Okay. Thank you.

Your next question comes from Douglas [Kohl] [phonetic] of Morgan Keegan.

Morning, guys. Sorry it's been such a long call. Just a couple of quick things. Joey, on the trade program, you said it was 1100 tractors on a one-to-one basis. Are those 1100 to be traded, with what proportion of them being open market sales? I mean, are most of them covered in trade programs?

We can trade them all with Freightliner. We may choose to sell some of them. We have typically sold a few to a lot of trucks each year, and so I anticipate that we'll at least attempt to see what the market looks like, us selling our own. But we can trade all 1100 of them.

Okay. And one for David, as long as you're paying that long distance bill out there. In the transportation component of your customer base, I know there's a couple of big names in there, and they certainly are an educated shipper in terms of the issues facing truckers. But as you grow with these guys each year – and it's got to be more than half of their transportation bill for a couple of them – how are they in terms of receiving these rate increases? I know you can't talk too much about them specifically, but is it any better or worse? And is there a point where you just say no to more freight from those guys, even though they love your service?

They are very open, and they communicate with us very, very nicely, and actually a lot of our top accounts we've already got [finished] [phonetic] for some day in the future of enacting rate increases. So they treat us very nicely.

Okay. And Conway does do quite a bit of postal trucking, don't they? I mean, that was brought up earlier in the call? I mean, there could be some benefit there?

I'm not sure of that. I mean, used to, Emery used to do all of it, then lost it to Fed Ex, you know. And so it became a Fed Ex, which actually, you know, decreased the amount of over-the-road that Fed Ex was doing, because they were getting so much of the mail that they [indiscernible] run those planes more. So I don't know how that falls into this equation, Doug, but I'm not sure that Conway does – they may do a lot; I don't know.

Okay. Thank you.

There are no further questions.

Well, we just want to thank everybody for joining us, and we look forward to our next conference call. Thank you very much. Bye-bye.

Thank you for joining on today's Covenant Transport conference call. At this time, you may disconnect.