Covenant Logistics Group Inc (CVLG) 2003 Q2 法說會逐字稿

Good morning. My name is Heather, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Covenant Transport second quarter earnings release. All lines have been placed on mute to prevent any background noise. After the speaker’s 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 questions, press the pound key.

Thank you. I will now turn the conference over to Mr. Joey Hogan, Chief Financial Officer.

Sir, you may begin.

Thanks. Good morning to everybody. I will begin with some financial statistics and our current expectations regarding the remainder of the year and David will follow up with his perspective of the quarter and the current freight environment.

I will state in advance that this call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as well as 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 other securities filings.

I will begin with some miscellaneous financial information that was not covered in our press release. First, fuel surcharge revenue was $6.5m in the quarter versus $3.2m last year. Additionally, other assessorial revenue was $2m this quarter versus $2.3m last year. We ended the quarter with 354 owner operators, which was 10% of the fleet, as well as 10% of the miles both this year and last year. Capital expenditures were only $2m during the quarter, and that’s on a net basis.

Regarding expenses, our after-tax cost per mileage was $1.2 cents per mile to $1.11 mile. The main item affecting our costs versus year ago is the insurance and claims area, a higher than anticipated accident rate, along with some adverse development and some older claims, combined with our desire to increase our reserves as a result of a higher deductible, that went into effect March 1, resulted in a 1.6 per mile increase. We continue to work diligently in this area from reevaluating our hiring practices, safety programs, and training programs. We fully expect that the amount of emphasis focus and decisions have been made in this area will produce results.

Diesel price is averaged $0.13 cents per gallon higher than the second quarter a year ago, resulting in fuel expense increasing $2.4m versus a year ago. We’re able to offset that increase with $3.3m in more fuel surcharge, while our purchasing commandments and hedge program produce no major differences versus a year ago. This produced a net cost of fuel per company mile of $18.4 cents versus $18.8 cents last year and positively impacted our earnings for the quarter by about $0.01 cent per share.

From a balance sheet perspective, we have several positive trends continuing. Our days of sales outstanding and receivables are at its lowest level since October of 1999. In addition, the $2m of net capital expenditures during the quarter, we were able to pay down about $20m in debt, producing a debt to total capitalization ratio of 20% as of June 30. Our off balance sheet debt, which is principally operating leases for tractors and trailers, increased slightly to $95m as of the end of the quarter. We expect our net capital expenditures to be $45 to $50m for the year.

Regarding our expectations for the remainder of 2003, we expect the following trends. 1) Our tractor count will work its way back to year-end 2002 levels by the end of the year; 2) utilization will be flat with a year ago; 3) rate per total mile will be up around 2%. On the cost side, due to higher truck acquisition cost and lower fuel economy due to the new engines, higher than anticipated insurance claims expense as well as we expect diesel prices to be at current levels, we expect our after-tax cost per mile to be up about $0.02 cents per mile in the second half versus the second half of last year. These assumptions produce quarterly freight revenue of 140 to $145m and earnings in the $0.24 to $0.28 cent per share range for each of the remaining quarters.

That’s the end of my comments, and I’ll turn over to David at this time.

Even though we’re disappointed in our performance this quarter, our operating ratio was not able to improve during the quarter, even though we did grow earnings about $0.01 cent over a year ago. We had a weak freight picture and higher [indiscernible] insurance costs, that Joey talked about earlier, that regardless of the freight picture, you know, we in our industry have got to continue to raise these rates and I think it is what we’re all seeing out there with all the care and attention now to get higher rate.

This quarter experienced some highs, then some lows, from a freight perspective. From a utilization standpoint, after a flat April – April just kind of okay. May was down versus a year ago about 6%, so we really got hit in the month of May and really saw a decrease in the trade environment. A very weak period. But June rebounded nicely. So if July continues on its current path, we will be flat from about a year ago, but do remember that June of July of last year were very good freight months. So we have seen a reversal of trends over the last six weeks. After about the first week of June, I’m very satisfied and very happy of what I’m seeing in the freight business for the remainder of June and also for all of July.

Due to the soft economic environment and due to comparing to a much better freight environment last year, our utilization and nonrevenue miles did suffer. Our utilization or miles per tractor for the quarter decreased 2.5%. Although the size of our team fleet has remained constant for the last four quarters, our utilization decrease was not as dramatic when you consider that we operated the second quarter with about 100 fewer teams than the second quarter of a year ago. Adjusted for the percentage of teams on our apple-to-apple basis, we view that utilization was about flat for the quarter as compared to a year ago. And definitely the freight environment combined with a 100-mile per load reduction in our length of hall resulted in our bedhead of nonrevenue miles goes up about 100-basis points to 8% from 7% last year.

For the quarter, our top 100 accounts representative 72% of total volume, and we grew them by about 21%. We have 20 new accounts in the top 100. Excluding new account, the remaining top 100 were up 5%.

For the quarter, transportation was 33% of our revenue. Retail continues to grow. It’s up about 17% of our business. Manufacturing is 13%. Consumer goods 8%. Floor coverings 8%. Food and beverage 8%. Housing and paper products and packing 4% each. Auto 3% and electronics 2%. The state of quarter marks the fifth straight quarter of our rates increasing over the comparable period a year ago with our rates increasing about $0.03 cents per mile or 2.3% over last year. As I stated earlier, our goal of growing our earnings will be less, our efforts to increase our yields. Raising our rates is our number one goal to restoring our profitability the way it used to be and I fully expect our rates will continue to increase.

Drivers a little bit. We continue to keep almost all of our trucks seated with driving. Excluding some wrecked trucks. We have about 70 unmanned trucks. Based on our stated plan of converting equipment growth until our profitability reaches third level, we do not expect a raise of driver pay during 2003. But as part of our safety evaluation, we are considering some type of compensation program improving our safety profile.

[Indiscernible] new engines. We’re running about over 257 new engines already started, and this will grow to 1600 by the end of the year. Ninety-nine percent of these are Detroit engines. We got a few commons, but the vast majority of them are Detroit engines and we are currently very pleased with the performance of these engines versus our expectations, and our expectations were pretty good shape going into it. These trucks are not breaking down on the side of the road. We’re thrilled with that. It’s not hampering our service at all. The only negative that we got is that we are still in a 3% field degradation. We’re not seeing any increase in maintenance calls. Nothing to speak about, although we do realize this is early in the process of these engines.

So I think the four things that you can probably take away from this right now is that the last seven weeks I’m happy with what I’m seeing in the business environment. That’s one. Two, rates are going up and rates are going to continue to go up. Number three, the driver situation is in good shape, even though there are some valleys that are we are visiting a little bit of a driver situation, I think, as the industry is sensitive there. We’re sensing that also, so we’re having to work harder to make sure we got the drivers, but, thus far, it is something that is very manageable. Number four, the new engines so far we’re very, very happy with the engines.

So we’ll go ahead now and open up to anybody that’s got any questions on this.

At this time, I would like remind everyone, in order to ask a question, please press star, then the number one, on your telephone keypad.

We’ll pause for just a moment to compile the q-and-a roster.

Your first question comes from Justin [Yergamin] [ph].

Just wanted to get your thoughts. Initially you guys were anticipating $80m in net capex for the year and what’s really kind of driven that assumption down so far?

A couple of things. One main issue has been the Volvo deal, which was, announced a couple of months ago. The financing of that transaction we have no 0 residual risk in that transaction and so versus a truck that you may buy or a truck that you may enter into an operating lease with that has a residual agreement trade back guarantee, if you will. Our Volvo deal does not. So basically we’re renting a truck from Volvo and that’s a significant difference on 500 pieces of equipment. So that is a big chunk of it, and another chunk of it is our Tiff transaction, which we disclosed in our 10-Q in the first quarter. We completed that also during the quarter and that’s for 3500 trailers that also has no residual obligation on our behalf. Again, those are trailers that we aren’t renting as well. So, Justin, when you put those principally in the hopper versus what we had expected in the beginning of the year, that’s a significant impact to our capital expenditure budget for the year.

Okay. I guess my next question is just on rates going forward. I mean, you guys along with most of the rest of your peers have had a pretty good improvement in terms of your rates for the last four or five quarters or so, and it’s been going strong, but I mean throughout most of that you saw utilization kind of gradually improving a little bit. How do you feel about that going forward in terms of utilization, kind of gets a little harder, you know, in terms of the leverage that you guys have from getting rates going forward?

Justin, you’re going to see rates increase, and I personally think, even though it’s not in our pledge or anything like, I think there’s a great opportunities from the pricing situation. I think that you got the whole industry – I think it was led by JB Hunt about two years ago and they started to seeing the fruition coming out of that, especially in the last four quarters, maybe even before that, but you’ve really seen some nice fruition coming out, with the discipline that they have really started, and I think that that has basically – I don’t know if the word is overwhelmed, but it’s allowed all of us to get some religion. I think you started seeing it from Covenant from a standpoint of this time last year saying, I am going to tell you, we will not grow. We have no desire to grow. We will not add no trucks until profitability gets to where we want to and that’s at least a 90 type of operating ratio. That’s where we’re going to operate this company at at least that number. So, therefore, the way in which to do that will have to be on the rate side. And so we got that last maybe fourth quarter last year and came to the conclusion that we’re going to hit these rates very, very hard, no matter if it meant we would have to go back a step, to go two steps forward, so be it. These rates are going up. And then really the last two months is really when we started deviling into all the aspects, and I think you saw it on our conference call last quarter when we talked about our strength and our weaknesses. Our strengths are in the long haul. Our strengths, from a rate standpoint, our rates are in my opinion on a scale of 1 to 10, they are a 9 on the long haul freight. As a matter fact, most of our competitors need to catch up with us from that standpoint of the long haul, but we got a lot of room on the short haul side of it. I think that our rates could be adjusting down $.10 cents a mile in the short haul and you would have to do the math to see what that equates to. That’s just what my gut tells me. And I think there’s that much opportunity to raise those rates, and we’re going to raise those rates. So on the short haul. So that’s a negative that I allowed to get that far behind as what I believe our competitors are, but the positive side of it is that there’s some great room for opportunity as we now have learned what our lessons are. So does that answer you?

Yes. Thank you. I’ll turn it over to somebody else. Thanks a lot, guys.

Your next question comes from Chaz Jones.

Good morning, David. Good morning, Joey. Just to get back to insurance. Joey, you mentioned a number of issues that are impacting that line item. Could you give any type of guidance of how we should expect that to trend the rest of the year? I mean, it came in at 7% of revenue during the quarter. Is that a number that we should see moving forward?

Yes. I think we’ll be disappointed if it stays at that but I know our goal is to improve that but for modeling purposes I can’t blame anybody to continue at 7% until we see the results of that – to see the results of our work. So I think it would be wise to keep it at that level for awhile.

Okay. So looking forward to, let’s say, third quarter. If accident experience was a little more favorable, could it come in on a 6.5% range?

Sure.

Okay. Another item I wanted to touch on quickly was driver pay. I know at the beginning of the year you mentioned it in the conference call as something that perhaps you might have to take out by the end of the year and I think in the second quarter you kind of retracted on that a little bit. Any update there in terms of potential driver pay increase in the second half of the year.

Chaz, as we speak right now, we do not believe that we will have to raise driver pay. That’s really pitiful – any industry is bragging that we don’t have to raise the driver pay. They all need a raise, but we got to be able to get it from our customers first before we give it to them, but we don’t believe that we’re going to have to raise driver pay. We are looking at the safety issues on the pay that will be a win-win is kind of what we’re looking at. Safety bonuses. If you meet a standard, then you’ll get some more money. But if you don’t, then you won’t get the money. So we don’t see that as a negative, but we probably will play with some stuff on that to encourage and to reward the ones that are doing the good jobs out there but it won’t be across the board raises, and we just don’t feel that we have to right now. I do believe that all the models are probably starting between now and sometime this time next year, there are going to have to be some driver pay increases. I just don’t think that in the next six months that we have to do that.

Okay. Shifting to equipment. With the replacements coming on in the second half of the year, can you just kind of refresh us in terms of DNA – I think it was a penny to a penny and a half or somewhere in that range that we’re going to see depreciation go up once those trucks came on. Could you just kind of refresh us there, Joey?

We said that the impact of the new engine to us would be about $0.02 to $0.025 cents a mile and you have to remember that it takes two to three years to turn your whole fleet to get all your fleet in the new engines. So the $0.02 to $0.025 cents a mile would be gradual – say, beginning with this year throughout next year and into early ’05. So in play of that or the spread of that, obviously, depends on your flow of your trades. And so what we said for this year is we felt that it would be close to a penny this year, a good another penny next year, and then the difference would fall into early ’05, and I haven’t changed that. That’s the first thing. The second thing is remember the 2 to 2.5 in total is comprised of fuel economy impact which was about 1.2 to 1.3 cents of the 2 to 2.5. The fuel was a good half of it. So you’re going to see the fuel expense all things equal, price per gallon, fuel economy, absent new engine, all things equal, you’ll see fuel expense go up by some amount – let’s say $1.2 cents a mild gradually again as we trade the fleet. The difference is between depreciation and interest expense to the extent that you buy the truck versus leasing it. So you’ve got three areas in the income statement that the new engine is impacting. Fuel, depreciation, and interest expense, and I think right now we’ve been at that roughly $0.095 to $0.105 cents a mile top number so far this year and it might trickle up depreciation specifically may move up a little bit in the second half, principally because a lot of the dollars that we have to spend to prepare all this equipment to trade it, and that’s where a lot of the dollars are increased, and our own internal expectation, we have our fuel expense going up beginning in the third quarter. Again, all things equal, running into next year.

Okay. And one last question, and I’ll turn it over to someone else. Could you maybe just talk about the trends you’re seeing in your dedicated and your refrigerated segments?

The refrigerated segment of our business continues to go very nicely. We’re very, very pleased with that. We’re actually putting some more refrigerative trailers into that segment as a mix, not total growth, but as a mix, because the results that are out there. So we’re very happy. We see those trends continue. We see some great opportunities out there on the refrigerated side better than we ever have. So we’re very, very pleased with that.

On the dedicated side of it, Chaz, we’re basically flat on the dedicated side. We lost a couple of accounts and we brought on a couple of accounts, and we actually have just remained flat. There’s two ways to look at that. We only got one salesperson that is fairly dedicated and we’re evaluating that whether that’s wise or not because it’s very profitable our dedicated. It’s operated very, very nicely and we probably need to grow that from a sales standpoint over the [indiscernible] because we’re just seeing where it’s taking – this year is just taking too long to get the contracts done and seems like the [indiscernible] are taking longer and longer period of times to make their decision up, but not only that there’s a lot more competition. Now every truckload carrier there is out there is going after that dedicated business. That’s one. And then B, our probability is very nice on that and maybe we’re trying to make too much money on the dedicated side. I’m not sure. We need to internally kind of – we’re starting to evaluate that to see. We’re happy with it but we just want it larger than what it is.

Okay. I appreciate the time David and Joey.

Your next question comes from [Tom Albrech] [ph].

Hi, guys. I wanted to just ask you a little about – I know it’s subtle differences, but your transportation partners as a percentage of your revenues has come down slightly over the last year or so. It used to be kind of 36 to 38%. This quarter it was 33. Is that a conscious decision by you to maybe downplay some of your traditional partners? Certainly retail used to be less than 10. Now it’s 17. Can you describe the opportunities between those two sectors, I guess?

Really what we’re doing, Tom, with flat fleet growth, we’re basically just looking at what segments of the business that we can see the best returns on, and the two segments right now that are at least getting equal now to the transportation side of it is our refrigerated business and then our retail business and so that is why you’ve seen some growth in those two areas, maybe even at the stake of the transportation side of the business. As well, keep in mind that we love that transportation side but it also has some logistics business in there that we’re very proud of, but some of that logistics in there is business that I don’t care if we lose or keep.

Okay. And when you say logistics, you mean brokerage?

No, no, because we do have – you know [indiscernible] that goes under broker, but let’s say it’s a tier mid-low logistics. They are really truly managing Hewlett Packard and they’re really managing it, we put that in our transportation side of our business because we look at them – I just as well mid low owe me as I will an LTL company or air freight company owe me money. We put them in that category because we’re proud to do business with them but some of the refrigerated and retail business is better than some of the logistics business. So that’s really what you see, just seeing a trade off of trying to realize and know where our most profitable yields are and attention to grow those areas.

Can we infer from that then – if you’re going to continue to grow your retail, then your trailer and tractor ratio should continue to inch up a little bit?

I would agree with that statement.

Okay. And then in terms of length to haul. I mean the reefer market historically has had a lot of longer haul situations. Retail has really gravitated towards the shorter, regional end. Too early to make a call there. I know you mentioned it’s down about a 100 miles but where’s it really going? If you really get excited about retail, then that would suggest that your teams are not going to grow for maybe many, many years.

I see a couple of things. Number one, our refrigerated side of our business is growing with length of haul. It is up by 100 miles. Keep in mind it’s only about whatever 14% of our business or something. But the refrigerated side of the business is growing on with the haul. A lot of it had to do with what you just said there. And then our team – we feel comfortable that we could add – and our goal right now is to add about 100 to 200 teams to our fleet as we speak. We’re in the process of starting down that road and we think that by the fourth quarter that you’ll start seeing some numbers on the team side continue to grow, because we are having more and more customers that want the teams, and so we believe that there’s some great opportunities out there.

The third part of that equation, though, Tom, is that as we’ve talked, I believe, on the last quarter, we talked about the [twinner] [ph] freight where Covenant has the opportunities at and we will do one of two things that you’re going to see. It’s one of the areas that I think has great opportunities for rate increases that you’ll start seeing in the coming months. Maybe by the rest of this year, is that we’re either going to be paid for this twinner or give me 0-500 mile length of haul for the singles. One or the other. I mean, our goal quite frankly is to produce a lot greater revenue on those trucks, on those single trucks, and we’re going to do that. And if that means they don’t want to pay us for the twinner. A twinner to me is somebody that wants to give you a load that’s 700-mile length of haul, and it’s a two-day trip, then they need to be paying me for two days and that is what we’re selling. I see that length of haul coming down unless they pay us, but if they don’t, then you’ll see it coming down as we continue to migrate and that’s what you’re seeing in the length of haul to the 0-500 mile length on that segment of our business. Did you understand what I said?

I do, and that’s a good explantation. Let me follow up then. When I think as team service, I think of two of the better traditional sales opportunities being in the near air freight market and expedited LTL. Are there some other market opportunities for team service that maybe we as investors are overlooking?

Tom, the third thing on that equation stated, Tom, is that imports, just tier truckload. Whether it’s electronics or paper products. Import of the West Coast are growing very, very nicely, and there is tremendous opportunity out there for our team drivers just in our regular parts of our retail and paper and packaging and reefers and all that kinds of stuff segment. So even though the first two team, team, team, air freight, LTL. We don’t need to ignore the power of what the southern California/Los Angeles area has.

Okay. Well that’s a good explantation. What is the value add there? Is it just that you’re a little faster than the rails because we also think of that as their big success story.

Oh, without question. Tom, we have numerous retail companies that we are their import “air freight” and the way they are looking at it, it is freight that would have gone on air, a one that’s questionable of whether they ought to put it on air, they are substituting our team service on dedicated equipment at rates that are equal to any other team freight. We’ve got numerous of those accounts.

Well, good. I appreciate that explantation, David, thanks.

Your next question comes from John Barnes.

Hey, guys.

Hey, John.

Just very quickly. I don’t think anybody is looking at rates have begun to go up and that’s a great thing. I think I’m looking for an answer for two questions. One, where do you think you'll begin to get any pushback at all on rate? And two, is there a major contract or piece of business coming up for bid in the near term that will give us an even better idea of industry-wide rate increases and the opportunity that you talked about?

John, the second question, I don’t know of any major contracts that are coming up at there. I mean, the Wal-Mart deal just got finished and I think that [indiscernible] that rates were definitely increased on the – I know that ours did. But anyway on the Wal-Mart side of it. I think this rate issue is virtually what you have seen on the JB Hunt world. I think it’s one animal at a time. I think it’s one step at a time and I think that you’ve got to be as concerned about the customer that gives you one load a day as the customer that gives you 20 loads a day and it’s a lot of baby steps and I think that’s the reason why you saw it. I keep saying Hunt because Hunt is the leader in this state and it’s the state that we’re all trying to follow. I think it’s the reason why you started hearing them say stuff really about – I know it was six months before they really started seeing it, and then when they started seeing it, you started seeing quarter after quarter for about seven or eight quarters producing phenomenal numbers because of all those baby steps that are happening. I can tell you that we are on the street dramatically as of this week doing that exact thing on this stuff that twinner and thus far – you know, today is Wednesday. We’ve been on it for three days. We’re very happy with what we’re hearing from our customers. As a matter of fact, we have one that would beat the crap out of us for two or three years, and I have more mad sessions with them than I have good session with them to be honest with you, and we had a meeting with them yesterday, and I found two things interesting. Number one, I didn’t have to explain what we were doing. They called us the JB Hunt of the east, which to me was a great compliment. So the groundwork was already laid at this particularly account, and number two, as we gave them an example – I’ll give you the example, a load from Arkansas to Chicago where our rate is $1.25 mile, it’s a twinner run. Over 500 miles, not quite 1000. It takes two days to get off. Our rate is a $1.25. We told them in our meeting that our rate was going to $1.70 a mile. They did not fall out of their chairs. They did not die. The only thing that they said there and what their concern was not what the rate was. They said, we may give you some more long-haul freight, which is fine with us. You may not take the Chicago freight if we can find another carrier, but what we want you to do is do not give us less capacity. That’s what they said. So we gave them the option. We said, listen, do you even want us to put this $1.70 rate in to Chicago and you just control where you’re going to send this to? They said, no, put the rate in to Chicago, but make sure that you’re going to continue to give us five trucks a day out of Arkansas. That’s an example of how we’re attacking it little step by little step.

Okay. My next question, I know you’ve talked about no net fleet additions to your business until you get to kind of a 90ish OR. The bonus depreciation that’s in effect given the new tax rules, does that change your mind in terms of accelerating fleet replacement to take advantage of that or is there anything like that you may look in taking advantage of?

No.

So no changes at all to take advantage of that?

No.

That’s what I got. Thanks, guys.

Thanks, John.

Again, in order to ask a question, please press star, one, on your telephone keypad.

Your next question comes from Michael Latronic.

Good morning, David. Good morning, Joey. Most of my questions have been answered, particularly as it relates to insurance. I did have one, though. One of your competitors on a recent conference call mentioned that they were starting to see what they thought was firming in the manufacturing section and that was coming from a client. With 13% of your business in the manufacturing sector, are you seeing that too, David?

Yes. We are seeing the manufacturing side of our business, at least they’re not dying. I mean, at least that’s not the conversation that we’re having that they’re wallowing in the mud all day long. We at least started to have some questions of opportunities on the manufacturing side. I guess the first thing that is going to happen is that they got to get over their depression before they start seeing any good stuff come, and I think that’s kind of where it’s at is that they see some hope now. It’s kind of like us seeing a big light at the end of the tunnel and now I think they have at least started to see a light in the tunnel. I think the next few months there some great opportunity on the manufacturing side is going to start pumping some.

Okay. But we’re not over the top there yet?

I don’t think manufacturing is over the top yet. I think the light is just now starting to shine into a dark tunnel form.

Okay. And, Joey, just some housekeeping items. Did I hear you right? You said owner operators were 354?

Yes, at the end of the quarter.

Okay. And length of haul is down about 100 miles. Do you know what the number is precisely?

It’s a little less than 1100 miles.

Okay. That’s what I thought. That’s it for me. Thanks.

Your next question comes from Donald Bruton.

Morning, guys.

Good morning, Donald Bruton.

Just don’t call me late for dinner.

There you go.

A couple of quick things. First question for David. David, can you give us a little color on your baby steps? As your getting increases in the loaded rate per mile, how much is that is I’m just going in and demanding to be paid? Was there any mix? Because what I’m hearing is that it was pretty much I’m demanding to be paid.

Well, what you have seen thus far. You have seen us the last couple of quarters producing whatever – 2.2, 2.3% kind of numbers, and those 2% kind of numbers in the last couple quarters, Donald, have really been numbers that we just went in and knowing that we had to get more, knowing that insurance, knowing that trucks, knowing that depreciation and doing the sales job that we’re supposed to do and not having the conviction of the “twinner” as we do today and that’s what you produced in the first and second quarter of just regular negotiation. What is going on now is that we’re going out to every customers that we have identified as “twinner freight” and we’re going and having discussions with those, no matter if we just raised their rates in April. They got 2% in April. We are having another discussion with them that we have to address the twinners. Now without trying to run off all their freight, because that’s not our goal. Our goal is to do one of two things, pay me for these twinners, even though you just gave me one three months ago, I need another one on these twinners, or take the twinners away from me and either give me short haul or long haul on length of haul that allow me produce revenue that I want to produce. That’s what you’re seeing starting this week and I can only say it’s only three days but I’m very happy. We have not gotten kicked out of any meetings. The shippers have been very good. I’m very pleased, but three days don’t make six months that I’ll be working on this either.

Oh, sure. And everyone in the industry is obviously pushing on rates as they have to just to keep margins even steady, given the kind of cost pressures that everybody in the industry see.

I agree with that. But it started with Covenant, Donald. The thing the whole industry has got to do, the ones that have received 2, 2.3, 2.4 – I mean thank god for it. I’m happy for it. I don’t want to sound negative, but us carriers that have received those kind of numbers have not done a good enough job. We have not identified what is hurting our industry on these twinners and us carriers, as we identify that, we need to do something about it, and when we do something about it, then in my humble opinion you’re going to start seeing 4 and 5% kind of numbers.

You would think that your drop in asset utilization was simply economic related or do you think that there may be some customers we pushed on rates and the short-term reaction was less loads?

No, I don’t think so. I really don’t. I mean – April was okay. We were pleased with April. I mean, when we looked at April we hit Joey’s budget and we were pretty happy with the month of April, at least from an expectation standpoint, but then we got into May and May did the opposite. I mean, it wasn’t the month that it should have been and I heard that from other carriers as the month was progressing that I started hearing from some of you all that have spoken to carriers that the month of May isn’t popping the way it should be popping and then I started hearing about some analyst report that – you know, retail numbers, inventory levels that gotten a little high, and then I started hearing all through the month of May that a lot of your retail companies were saying that our same store sales are going to be on the low end in the month of May and I started to add two and two together and thinking well that’s probably what we were missing. And then we started getting the tax cut, starting getting the paychecks, and I think that’s just started working through the system now because we started seeing about June 10. I can only say since June 10 until July 23, if the rest of the year is what we have set for the last six weeks, me and you both will be happy.

Because remember, Donald, we’ve been saying since last fall when we started talking about our expectations for this year. I can go back that far. I know – I’m not saying it’s an excuse, but we identified that the first half, particularly the second quarter, was going to be a difficult comparison utilization wise versus last year. And last year from April, end of March all the way up through July for us and our model was a very good shipping period. Now to your question, we said in our April call, which was pretty much what we said in October that second quarter utilization will be down 2-3% and it’s come in and we said – revised and said it was going to be down 3-4. The economic issue is the difference between down 2-3 and down 3-4. We expected it to be down back in the fall if the economy didn’t turn in any measurable way. And it hasn’t. [indiscernible]. There has been a measurable move from the April and May time period over the last six weeks. It has been a measurable difference and so is it turning? I don’t know. Only time will tell, but obviously the more weeks that add on to it we get more excited.

Fair enough. A little housekeeping. I know we’ve beat around insurance and claims a bit, and I know you increased the retention. I kind of have been expecting the insurance and claims to peak at this $0.07 cents on all miles kind of a rate and it was what 7.9 cents a mile this quarter. Should I be modeling, Joey, for it to be $0.07 or should I be looking for more of an $0.08 cents kind of range?

Well –

What are you budgeting?

I think it was Chaz that asked me – I’m looking back to my notes here. I don’t remember who it was.

I’m asking on a percentage basis.

I think that, and I’ll say again. We will be disappointed if we continue at our current levels. A prudent person would say, until we see a turn externally, that you got to expect it to continue at that level. I can tell you what our goals are but I don’t think that’s – I mean, our goal is to improve it. We haven’t said that we want to be at 7% by the fourth quarter, and 6.5% by the first half of next year. We haven’t done that. We just say we will and need to improve that number.

As you bring on more self-retention and really based on your experience –

That’s correct.

Not that the insurance market can get soft –

That’s correct. No, it’s not.

It’s really just your experience.

I’m not counting any of that.

Did I miss something or did you lease more equipment because the total DNA and equipment lease expense stayed about $0.15 cents mile but it shifted.

That’s correct.

DNA went down, you leased more equipment.

That’s correct. Our DNA went down almost dollar per dollar of what our revenue equipment rental expense line went up.

So if I just model about $0.05 cents a mile on equipment lease, it would bring DNA down to the corresponding amount and everything should balance out.

That’s correct.

On an ongoing basis. Great. Thanks, guys. I’ll let someone else ask a question.

Your next question is a followup question from Chaz Jones.

It’s actually Dan here.

Hey, Dan.

Just curious. If this is a question that you can’t answer, then that’s fine. I had heard that there was a change in management at the sales level, senior sales level. Is anything in the works there?

Yes, we made an announcement. That was back in December where we just had opportunity bring on more depth, and so you have got Mickey Miller, who is Executive Vice President of Sales and Marketing. I’ve known Mickey for about 30 years and he has been in trucking all of his life, and we had the opportunity to bring him on. We did that last December and made the announcement on that. [Ron Pope] [ph] is still vice president of sales and marketing but Mickey is the boss.

But nothing since then, I guess, David?

No. That was in December.

Okay. Thank you.

There are no further questions at this time.

We just want to thank everybody for joining us, and we look forward to talking to you next quarter. Thank you.

Thank you.

Thank you for your participation. You may now disconnect.