Covenant Logistics Group Inc (CVLG) 2003 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Covenant Transport third quarter conference call. All lines have been placed on mute to prevent any background noise.

After the speakers remarks there will be a question-and-answer period. If you would like to ask a question during this time simply press star, then 1 on your telephone keypad. If you would like to withdraw your question press the pound key. Thank you.

Mr. Hogan, you may begin your conference.

Thank you and good morning. I will begin as usual with some financial statistics and current expectations regarding the remainder of the year then turn it over the David for his perspective of the quarter and current freight environment.

I'll state in advance that this call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. And this information is in accordance with the company's current expectations and subject to certain risks and uncertainties and we encourage you to review those risks in the company's latest filings with the SEC.

I'd like to begin with some miscellaneous financial information that was not covered in our press release. First of all, fuel surcharge revenue was $6.2 million versus $3.5 million last year. Other accessorial revenues was $2.1 million versus $2.4 million last year. We ended the quarter with 414 owner / operators. They drove about 11% of the miles this quarter versus 10% of the miles last year.

Capital expenditures for the quarter were about $15 million. We ended the quarter with about 1200 teams which were about 70 more than the third quarter of last year. It was an increase of 50 teams sequentially for the second quarter of this year.

We had an unfavorable charge of approximately 3 cents per share related to the explosion of our Indianapolis terminal facility in August due to a gas leak on the property. This cost is reflected as additional Workers' Compensation expense in our salaries, wages, and benefits area. All of the investigation is still ongoing we believe we will prevail in recovering some portion of the expense. Also, as interest rates rose during the quarter we benefited by $248,000 or 1 cent per share related to the market value of certain interest rate derivatives.

Regarding expenses, our after-tax cost per mile increased eight-tenths of a cent per mile to $1.115 cents per mile, ( INAUDIBLE). To understand our costs in the quarter, you to have combine equipment rentals, depreciation and interest, of both leased and owned equipment, which we call our ownership lease costs. Ownership lease costs were up 1.5 cents per mile versus the third quarter of a year ago. This area is up due to additional costs of placing 461 new 2002 emission-compliant engines in service during the quarter.

As of the end of September we have 751 new 2002 emission-compliant engines in service. Also the additional costs for entering into walk-away lease transactions during the quarter for 730 (drive-in) trailers.

Lastly, due to our decision to increase the size of our trailer fleet in response to a shorter length of haul, we added 737 more trailers during the quarter versus a year ago. We've been talking about these issues for quite some time so it should not be a surprise.

Diesel prices averaged 8 cents per gallon higher than the third quarter a year ago resulting in fuel expense increasing $2.3 million. This includes an unfavorable swing of approximately $180,000 in our purchase commitment hedge program. We were able to offset the $2.3 million increase with $2.7 million in more fuel surcharge. This produced a net cost of fuel per company mile of 18.9 cents a mile verse 19.3 cents a mile last year.

The fact that we were able to decrease our net cost per mile of fuel at a time when fuel prices were higher and the fuel economy lower, due to the new engine, speaks to the emphasis we're placing on profitability issues.

Overall our operating ratio increased approximately 40 basis points compared to last year. Such increase reflects the movement to above the line lease expense from below the line interest expense as we leased more of our equipment.

And then obviously our net margin improved slightly. From a balance sheet perspective we're beginning to see the effects of our aggressive equipment plan. We added $15 million of net balance sheet capital expenditures during the quarter and were able to reduce balance sheet debt by $2 million to $45 million where our debt to total capitalization ratio was reduced to 19% as of September 30.

Our off-balance sheet commitments, which are principally operating leases for tractors and trailers, increased $15 million to $110 million as of the end of the quarter. We expect our net capital expenditures on balance sheet to be $40 to $45 million for the year.

Regarding our expectations for the fourth quarter we expect the following: As a work to complete our 2003 trade package the tractor count will grow by approximately 100 trucks during the quarter. Utilization will be up approximately 2%. Rate per total mile will be up 1 to 2%. And on the cost side, due to mainly higher truck acquisition costs and lower fuel economy due to the new engines, we expect our after-tax cost per mile to be up 1 to 2 cents per mile versus fourth quarter of last year. These assumptions produce freight revenue of $140 to $145 million and earnings in the 24 to 28 cent per share range.

That's all my prepared comments and now I'll turn it over to David.

Thanks, Joey.

Just getting started, I'm out of town, up in Baltimore, Maryland, and Joey is at the corporate office, so hopefully when we get into the questions we will be able to do it satisfactorily.

We're encouraged by the progress we made during the quarter, particularly in the last six weeks of the quarter. The freight market has improved to the point that our rates increases are beginning to accelerate to the extent that for the month of September our rates per loaded mile were up almost 3%. The strong freight market has continued on into October and we're anticipating a strong freight market for the rest of the year.

This quarter we experienced improving freight picture month to month, from a utilization standpoint, July was flat but if you remember last July was a very strong year. But this August and this September were up very nicely.

Regionally all the markets have been good to strong with the exception of the northeast which has been what I would call okay. It's good but it's nothing to write home about.

Utilization. After two quarters of decline in our utilization, on our miles per tractor, for the quarter it increased 2.8%. As Joey previously stated, our team count was up slightly that helped our utilization. Adjusting for team percentage, getting to apples to apples, we believe our miles per tractor are still up approximately 2%. Additionally, due to our approximate 100-mile per load reduction in our length of haul, it resulted our dead head or non revenue miles, were up about 80 basis points to 7.7% dead-head from 6.9% last year.

For the quarter, our top 100 accounts represented 75% of our total volume, and they grew 24%. We have 22 new accounts in the top 100, excluding the new accounts, the remaining top 100 were up 9%, which is a definite acceleration over the early part of this year. We're starting to see those accounts starting to come back.

For the quarter, as a percentage of revenue, transportation, customers, 33%. Retail, 20%. Manufacturing, 12%. Floor coverings, 8%. Consumer goods, 7%. Food and beverage, 7%. Paper and packaging, 6%. Housing materials, 3%. Electronics, 3%. And auto, 1%.

The third quarter marks the 6th straight quarter of our rates increasing over the comparable period of a year ago. With our rates increasing 2 cents per mile, or 1.9% over last year. This sounds like a broken record, but our goal of growing our earnings will be led by our efforts to increase our yields. Improving our rates continue to be our number one goal to restoring our profitability, and I fully expect our rates to continue to increase.

One area we will be tracking closely is what we are calling the tweener freight. These shipments are loads running between 510 and 800-mile length of hauls, and these are shipments that tie up a tractor and a driver for more than a day but do not fully compensate us for the lost productivity. In many instances the revenue we have generated in these lanes has been insufficient to generate the profitability we desire, based upon the amount of time that that individual tractor and trailer are committed to that load. Accordingly, we're examining each in-between movement and are negotiating with customers to raise those rates or obtain more favorable loads or cease hauling these in-between loads.

We're actually just going to the customer and saying, these lanes are unattractive to us. Either pay me for these lanes or put them into a shorter length of haul, say a 400 or 500-more length of haul, order or give me more long haul. Approximately 1/4 of our loads meet in these in-between movements and we believe these have been significantly less profitable than our longer lengths of haul. Based on initial results of these efforts, we believe we have significant opportunities to improve our profitability as we continue to focus on these in-between loads.

Drivers, you know, this issue is one that we always talk about this industry did back through the 1990s. With this driver situation is back, we currently have about 3% of the fleet that is unmanned. Recruiting to retain the safest drivers we can find is a major emphasis. Although nothing is specifically planned at this time, we will be coming out with some driver pay increases consider -- concerning January 4th and then sometime during the first quarter on pay increases. This driver pay has got to go up. It's something that we made some very strong efforts in, in the 1990s and we've got to get their pay up.

New engines. We currently have 751 new engines in service that will grow to approximately 1600 by the end of the year. Three-fourths of the engines are Detroit diesels, and we are currently very pleased with the performance of these engines versus our expectations. We are currently seeing approximately 1% fuel degradation on the Detroit's, and it's really too early to judge the Commons(ph). We've only had them in the system for about a month now. We may be feeling the decreased fuel mileage less than the other carriers because we did switch to a more aerodynamic cab than our old FLD 120's when we purchased the engines. We are also seeing no discernible difference in maintenance costs, although we recognize that it's still early in the evaluation process.

Now a little bit on the new hours of service rules. As everyone knows the DOT is implementing new hours of service rules that become effective on January 4th, 2003. We have been studying our freight base and determined that our team freight will not be impacted much at all.

Our single freight that has multiple stops and or long load or unload times is the freight that we are targeting for rate and or accessorial adjustments. We have communicated with our customer base that we will be coming to them in November regarding our action plans for this matter.

As far as driver education is concerned, we begin formal meeting with all our drivers in November and we're going to have people at all terminal locations to discuss and train them on the new rules. We know that our drivers will have to be compensated for this lost production, so that's the one on January 4th we'll definitely be coming out with something for our drivers. We have not yet finalized our plan up to this point, but we will expect to increase the revenue from the customers and to be able to give it to the drivers.

This wraps up my prepared comments, now we'll open it up for any questions.

At this time I would like to remind everyone, in order to ask a question please press star then 1 on your telephone keypad. We'll pause for just a moment to compile the Q and A roster.

Your first question comes from Justin Yeagerman.

Hey, guys, good afternoon.

How ya doing?

Fine. Wanted to follow up on the hours of service. When looking at that and talking to your customers and talking to your drivers, what are you seeing in terms of the most effective way to kind of make yourselves whole and then make your drivers whole?

Is this going to be an across the board kind of pay raise or is it gonna be more on an accessorial base and on the flip side leaning more towards driver pay increase or is it going to be kind of, you know, an as-needed base, or is it going to have to be both?

Justin, it's going to be, in my opinion, definitely going to be both. I mean, we have and we continue to study all of our customer base, and the thing that we're looking at, first of all, right off the top, the teams are not affected much by the hours of service. Very, very little.

They're going to be effective, so a great benefit to us come January 1st, is that 35% of our slate are not affected because these teams are not affected. So we're probably one of the better ones as it comes to this hour of services, January 4th, being negative on 35% of our business, it's going to be okay on.

So then we're studying the other 65% of the single drivers and the thing you've really got to look at is looking after those customers that are requiring multiple stops, multiple pick-ups, load or unload time being there, that you really have got to make sure that you understand how long they're sitting at the docks. And we have the capability, we're doing it now, for instance, as we have to really make sure that we're managing our assets well, and as you know, Covenant over the years has always been a carrier that has really looked at assets there to make sure that we're turning those assets.

That's one of the reasons why you've seen us increase the amount of trailers that we are purchasing, because this will definitely benefit us, but we'll not have to go to three to one ratio, we're going to have to go a little bit higher, and that's what we're doing at the present time.

But looking and discussing with the customers how long that truck sits to wait, to load, to unload, and again, as I say, we've already got a satellite, we're already getting this information, we know when they get to a facility, and we will take the shippers that are abusing, the thing we haven't determined yet, and we have to make the decision in the next couple of weeks, is are we going to give the customers 30 minutes free time or one hour free time? We've got to look at that, what is the fair thing to do, from a free time standpoint? If, in fact, there's any free time. And then we will determine how many hours they will be and come up with a per-hour basis of cost, and one of the things that is benefiting us, to give you some numbers, Justin, is that our load and our unload is approximately 10% of our business, actually less than 10%. So say 10% of our business right now is load and unload, so those customers will be affected, we'll go after them, then the multiple stops, multiple pickups, is about 20% of our business, so we will go after those 20% we've got them all identified. And they will be the first ones that will be hit.

So, you know, that's way in which we're looking at the hours of service, then we will be giving the drivers an increase on a, in my opinion, on a per-hour basis that says when you get to X Y Z customer and you're there for two hours, then you're going to make some number, either $25 an hour, $10 an hour, but we'll have to figure that out. So that's the way in which we will be attacking the hours of service.

I -- here's another thing on the hours of service, in my opinion, is that this is something that, in my opinion is going to be good for the industry. Because this is a rule that's affecting every carrier in the United States. And quite frankly, it's going to be very good that we're finally, even though it's mandated by the government, we're finally going to start getting paid for this sitting around, waiting on freight to get there, or waiting on airplanes to get there, or waiting on a shipper to load us or unload us, we're finally going to get pay, because every carrier in the United States will have to do this or they won't have no drivers, then they're going to go out of business, so there's not going to be no rebels over here not going along with the system.

There's a good point that this thing goes in January 4th. One is that the first couple of months is everybody knows is kind of a slow time in truckin', so it will allow us, the drivers and customers to, really get used to what is happening in their particular freight environment, so that's a good point, from that standpoint. I do think, though, it's going to take a couple of months, you know, for this thing to iron out, because you're going to have some customers that they don't believe that they're doing this, that haven't looked at their docks, and when we start presenting bills to them is the first time they're going to have an idea of how bad their situation is.

But we simply sent a letter out about three or four weeks ago to every customer we've got, to our top, I believe, 200 accounts, and we said here's what's happening, here's what we believe is going to be happening, and whether we're right or wrong we will be having charges in effect January 4th to the best of our ability of knowing what they are, and if we have to go in in March or April and increase them or decrease them, then we will, but we're not going to start January 4th and be naked with nothing. We will have something in, and then adjust as we've got to adjust. I know I rambled, but I hope I answered your question.

Absolutely. I think it's a good point that eventually it should help create some efficiencies.

It is, because everybody is going to have to do it. I'm going to tell you, we don't get this opportunity as an industry very often, folks, where the government -- I mean, definitely not since deregulation, the government came out and said, here's your rules, and every carrier has to go by it, and the thing that drives me crazy, always drove me crazy, you sit here, and the railroads have got this down pat. They take a railcar over to a customer, they drop it, and that customer has X amount of time to load it or they're going to charge them the merge time. They don't touch their freight, they don't load it, they don't unload it, and here us stupid truckers try to go over there and try to take the load away and unload and give the house away all on the backs of the driver. And those days are going to be over with. So I'm excited about that part.

On another topic, you mentioned the length of haul coming down, I think that's been a trend for a couple of quarters now.

Right.

Where did it end up for the quarter and how does that compare to a year ago and a quarter ago?

You've got to drop things down 100 miles.

Right at 100 miles. We ended up right at 1060.

It was 1160 last year for the quarter.

And what was it for the quarter last quarter?

The second quarter was around - I want to say it was 1050.

We've been at about 1050 about three or four quarters.

We're starting to wrap that period of time where I would expect fourth quarter is going to start leveling out.

Okay. And then you guys mentioned that you had a percentage of your tractors that were unmanned right now. What was that?

3%.

3%. Where is kind of a target goal to get that down to?

Our goal is to get it to 0, but the -- we've ran the company always for 1, 1.5 kind of numbers. You're going to have trucks that can't run.

Yes, that's reasonable.

And then I guess the last question was, you know, I mean, you guys posted some pretty impressive numbers on the utilization side this quarter, and I just wanted to get a sense for when you started seeing that really picking up in the quarter and basically, you know, you guided that it should be between 1 and 2% next quarter. What do you see falling off? Is it just more difficult comparison or what's going on there?

You know, I'm hoping I'm answering your question correctly. We saw July, July was on the top line, we were very happy with July because a year ago July was a strong month, and this year we equaled a very strong month. If you remember, last July a year ago it was the best July in the history of our company. And on a top line, we tied that number, so we were happy with that.

We had a cost situation as some of the things you know about on the insurance and some of the maintenance and those things that you're starting to see go down. And you're going to be seeing, in our opinion, those things going down in the next couple of quarters going forward, and it's part of our plan of reducing our costs. Then in August we saw business starting to pickup about the 15th of August, and it is just growing very nicely up to the current date.

( INAUDIBLE) The question is, we said 2%, we were 3% in the quarter. You know, as David said in his prepared comments, October is good, and so the volume is continuing. It's last year in the month of December was a very strong month for us, and so, you know, I don't think that -- we'd like to replicate that, but I don't think right now we're prepared to say we're going to replicate that. So it was kind of a little period of conservatism but recognizing that last December was very strong for us.

I'll turn it over to someone else. Thanks guys.

Your next question comes from Dan Moore.

Good morning, guys, great quarter.

Thanks, Dan.

Absolutely. Just a couple of questions here. First thing I want to focus on was the $700,000 in Workers' Comp expense. Joey, in order to adjust for this what kind of tax rate do we need to be applying to that?

39%.

On the tweener freight, you talked a little bit about that being a focus. Could you give us an idea of how much exposure you have to that type of business? How much of an opportunity you believe it is moving forward for you?

Dan, I think it, as we brought it up in our second quarter last July, when we really talked about the tweener, and this thing is being ran with Mickey Miller and Mike Miller really heading this tweener thing up and identifying tremendously. And as we have gotten more and more into this thing, as we grew the single haul, as I said in July, we grew our single side of our business, we were weak in that area. Not knowing exactly what was going on and having to learn our way through.

We're the number one guy long haul and I won't say it but y'all know that. So the single side we had to learn, and a lot of these customers allowed to us learn very nicely because they gave us all these tweener's, 510 to 800 mile length of haul, and we thought that was pretty good stuff until we started really looking at the cost side of this thing. And then what the revenue was really generating on those trucks and they were unsatisfactory revenue, and what we have done, and we said in July, I believe, that 30% of our business is that number. That tweener. 30% of our business.

So the greatest thing is, is that we know where it's at, and eventually we will have this tweener short haul exactly running the way we're running our long haul and have for years. It's going to be just as nice as the long haul for us, but we recognize who they are. I think after talking to customers and trying to figure out where we're at on the rates, I personally believe that our rates in that lanes and those segments are 10 cents a mile. Pretty cheap. That number may be 8 and it may be 15.

I'm telling that you I feel comfortable that it's 10 cents a mile, too cheap on 30% of our business. And I don't care to tell Wall Street that information because we're going to change it. Either we're going to one of two things and we've already started going to the customers and we have simply identified each account, what it is, who they are, these kind of things, and we go to them and say, this tweener freight is not good, it is hurting us, and we're going to do one of two things, either pay me for two days running, when it's a day and a half on a 600-mile length of haul, pay me for two days, I'm going to bill you for two days if you want me to handle it, or, B, give me a four or five hundred-mile length of haul, that's why you've seen the length of hauls starting to decrease, or give me more of your long haul.

Number one, that's the principle behind it, and it works. It's the same thing you've seen J. B. Hunt do now for three years, draw the line in the sand and say we're going to do this. We're drawing the line in the sand, it is going to happen. It is starting to happen, but I will tell you this, that kind of caught me off-guard, is a lot -- it is a longer process than I thought. I really be honest with you, I know Hunt's done it, it's taken three years to get their rates up, whatever, 15, 20 cents a mile during that time. I really felt like in two or three-quarters that we could hit it, but I'm going to tell you, doing one account, one account probably takes three weeks of intensive studying inside our company with computer ports like you wouldn't believe, then going to that account and then it takes another three or four meetings explaining to them, and them reviewing their numbers, I mean, it is. It is a big deal. But I want to tell you, there's more potential in that tweener for possibility for Covenant than anything I see.

Sounds like a great opportunity, a lot of low hanging fruit, and certainly sounds like the ball is rolling in the right direction.

It's rolling in the right direction. It's gonna keep rolling in the right direction.

Hours of service we've already discussed. Length of haul, Joey, I may have missed that, but did you provide that?

1060.

1060.

Gentlemen, I was hoping maybe we could focus on EPS expectations for the first quarter a little bit, if you're not comfortable with that, I completely understand, in light of the January 4th effect coming up on the industry. But looking at the Street's consensus right now, guys, Wall Street's got you at 14 cents versus the 6 cents reported this year.

Fuel was quite high, freight was weak, for a lot of the industry. Can you give us any sense for whether you're comfortable with that at this point, or is that something that you'd rather address once you report fourth quarter results?

Yeah, Dan, I mean, as you all know, typically on this call we give a sneak peek into next year, especially the first half, by quarter, and we're just not comfortable doing that right now. We've got a plan, David didn't share all of it, but we have a plan on what we plan on doing with our service. Again, I can reiterate the importance, and I think the positive's that David said, that it affect the entire industry at the exact same time, at the exact same way.

Absolutely.

And there's no wiggle room that anybody can have on it, but nevertheless, recognizing that it is January, February, being frank, it's the worst time that it could have been picked. You know, there's some hesitancy on our behalf to kind of -- to formally state what we expect at this point until we get a little bit better clarification on it, get through this November time period with our customers and drivers, we're a little hesitant to go out into that first quarter yet.

Certainly understandable.

Last question here. CAP EX for 2003 and 2004, could you just remind me what we should be looking for?

This year for the year, it will end up between 40 and 45 million, and it won't be any more than that next year. Probably -- should be less. Again, we don't have exact numbers yet.

I just know our equipment plan is going to be -- the tractor side is going to be much less than it was this year. So conservatively, in my mind, I've said another 40 to 45 million but it could be much less than that.

Once again, great quarter guys. Thanks for the time.

Thanks, Dan.

Your next question comes from David Mack.

Hi, guys. Very, very strong quarter.

Wanted to ask you about tweener freight and the hours of service and the shorter length of haul and the increased trailer purchases. If things are at least, for the next couple of months, fairly uncertain about what the implications of the new hours of service will be for some of those higher volume types of lanes, why continue pushing to that business?

Why not pull back and assess the situation and then reenter when the pricing is figured out, because, I mean, you're dealing first with the tweener pricing, then you're going to have to deal with the change in hours of service, and that affect on the pricing.

David, there's no price -- let me see -- there's no charge on these hours of service that is not going to be able to be recouped versus the amount of money this one -- the six and seven hundred mile trips are costing us on a two-day deal. Do you understand what I just said?

One that runs 650, 700-mile length of haul, that literally takes you 30 hours, in 30 hours, you're there, you're ready to unload, but they can't unload you for 48 hours. Okay? So on a best-case scenario, say you're sitting there from 30 to 48, absolutely doing nothing. 18 hours waiting on the people to take your delivery appointment.

I'm here to tell you, no matter how ugly the hours of service may or may not be, it's not 18 hours worth, and the more that we can increase the tweener's, or take it to the small -- the shorter length of haul, even with more issues on hours of service, it's not 18-hour-type numbers. It may be four, five, six-hour type numbers but the potential is much better in that, than it is ever in the tweener.

Are you thinking of increasing the pool of team setups?

We are increasing our teams. We've increased them, you know, this quarter I think by 50 or, so and we're going to continue to increase our teams. Our customers are asking us to increase teams, and we're going to continue as we have been doing this year.

What about the on the port business? I know that Intermodal and because of the grades to and from the ports is going to get hit pretty hard with the new hours of service. How do you see that for you guys?

From our standpoint the port business, you know, those guys have got the same, what do you call them? Problems or opportunities.

They start out being a problem and I think within a couple of months they become opportunities. They're going to have the same situation as us truckload guys and over the road guys, and they're going to have to deal with it in the ports and get paid or not going to be no truck. So at the end of the day they're going to get paid, and they're going to get it to the warehouse, and it's going to get on our trucks.

And it may, because of the difference of amount of time, because you take like Port of Long Beach, I don't know that they -- there's no more land out there. I don't know how much more they can make those truckers turn quicker. It's not like they can say, okay, let's go buy 5 more acres. They don't have the land to be able to do it. So they're going to end up to having to pay those guys for sitting around, waiting on them to get a container ready, and the longer it takes, the hotter that freight is going to become, and it's going to make the just-in-time service even more critical.

So in essence that's where you see the opportunities.

I see opportunities, yes, yes.

There've been a fair amount of changes in the L T L. If you see some carriers continuing to merge and get folded into others, do you think that creates more or less of an opportunity for you guys?

I think it creates more opportunity. In having discussions with a couple of my large L T L customers, in talking about the Roadway and Yellow Freight merger, which, as you know, is unionized, and they can't abide by their union contract, they can't subsidize any of this service, so they're not even a player with us. Those people see it as a great opportunity to increase their business, and they believe they have seen increases in some of that business. And as one of them said, you know, that's really a win-win for us, Covenant, because we're a major supplier of most of the L T L companies. And if they get the Roadway business that we're not handling today, eventually somehow they're going to have to add another truck on. So we said that is a great opportunities.

Finally, what about insurance? You know, I know that you guys have been pressing to improve your safety performance, notwithstanding the accident at the terminal, but has any progress been made? What was the safety record like on the road this quarter?

David, say that again. I'm sorry, I missed that question.

Basically, the safety record on the road this quarter, have you guys made any headway there, or is it about flat?

No, it's -- it is markedly better. We had a good third quarter, no question. It was slightly better than last year, which last year's third quarter was a good quarter.

You know, our first half is, as everybody knows, was a difficult period for us but we're very pleased with how the third quarter went. So far we're having a good October. But it was much better.

We believe we put a lot of things in place, David, starting about March/April time frame last year to drive some of the results that we're seeing today.

Have you guys -- and this is so far out that you probably can't do it -- but have you guys tried to put any numbers on the hours of service does what the DOT wants to the do, reducing accidents and so forth what, that could do to your insurance expense?

I think that --.

Go ahead, Joey.

Here's what we do know.

We do know that our primary carrier is very pleased with,"our performance in their layers this year." Which we all know, we have a $2 million deductible, it's public information, so we've had very little penetration into their layers. They're very pleased, and actually something we haven't heard in years we'll be talking to them about an early renewal at their request after Thanksgiving. So that's huge to us.

We've worked hard, as David said, we've put in several things this spring to help kind of turn the tide a little bit, and we're starting to see signs of that, there's no question. So we feel that our rate of increase is, I guess the right word is decelerating. We've seen that the last three years. 2001 was our big increase, 2002 was an increase but less, this March it was much less but still, nevertheless, an increase.

So, you know, will we have an increase in March? You know, I don't know. We're not interested in taking any more exposure. In fact, we'd like to lower it a little bit if we could, but we'll just look at everything combined. But I'm encouraged, very encouraged, very confident that we may be able to put something to bed a little early and if we're lucky, get a competitive situation going. So I'm very happy.

The excess market is still what I would call irrational, and that market is something, I can't tell you what it's going to do. We could have a couple more years of, you know, big increases on that side. But that's the smallest piece of the pie, only 20% of our overall insurance and claims expense anyway. So the biggest piece is your primary layer. So that's 80% of the cost. And we're hopeful for what we'll see next March, but I'm not willing to say what it will be.

Thank you very much, guys.

Okay, David.

Your next question comes from Tom Albrecht.

Hey, guys. I don't know whether it's good afternoon or morning, but either way, I'm hungry.

Hey, congrats as well. Nice to see some progress, especially on the bottom line.

David, I wanted to ask you a little bit more. I've been quietly excited about the development of retail. If you go back two-plus years, it was 3 to 5%, now it's 20%. Where do you want that to end up, and what do you see as the advantages of that over some of the other sectors you've served in recent years?

There's no doubt that the retail side of it does have a lot more of that 0 to 500-mile-length haul. It has a lot more of that attractive business, a lot more of being able to drop and hook, has a lot of those kind of advantages, so I don't have a number that says, hey, guys, let's, you know, Mickey Miller get retail up to 30 or 40%, something like that. But at the same time we're going after it very hard, and we're actually now having, you know, retail companies calling us about the short haul. And so, you know, I think that we're getting over that -- the word is not stigma, because I'm proud to be the best long-haul carrier there is, but we're getting over that, thinking that Covenant was only that, and now it is really starting to penetrate.

Hey, you mean Covenant will go 400 miles? They'll go 450 miles? We're starting to get a lot of inquiries, and a lot of that is in that retail segment, as well as food, non-produce, or non-reaper(ph) stuff. So I don't have no number but I think just as we evolve into that shorter length of haul on that side of the business that it's going to continue to increase.

Okay. And then that brings up sort of a spin-out question there. You know, of the retail exposure, would you say that maybe half of it is shorter, more regionally oriented, and the other is your more traditional team, longer haul service?

I'm strictly guessing right now, because I haven't really looked at it like that, Tom, but I would say that it's probably 60/40, maybe 70/30 still long haul, because we just do so much off the west coast on retail, that still a big, big, player.

Sure.

So if I was just going to guess, I think it's 70/30.

Okay. And then as you continue to develop some regional situations, will you ever move to more of a kind of a regional terminal network within your broader-based Covenant? You know what I'm talking about? You know, like Heartland carved out over the years.

Mike Miller is doing a deal now that, I don't know, it goes out now, doesn't it, Mike?

That's correct.

We're actually kicked off the first region this month in October, and we're aggressively looking for the second region being done in the next 30 days.

And the first region is, go ahead and tell them.

I didn't hear you.

Go ahead and tell them the first region is from basically Ohio to the East Coast.

That's correct.

We're running that northeast region from about the Columbus area over and our second area that I'm looking at real closely will be the 11 western regional states, and we think there's quite a bit of promise there, particular it in the driver recruiting segment, and that's one of the areas and one of the reasons that we're really looking at that strongly.

Okay. Yeah, that's --.

Comment still, though, it's still centralized. I don't think you want to think it's not.

We're still doing our thing from corporate office on loads and talking to customers but our Columbus, Ohio, and our New Jersey facility are going to become major players in that inter-region kind of deal.

Those trucks then, over time, will largely become dedicated to those regions?

Right, that's exactly correct.

What about, you know, accessorial fees? Seems like about two years ago it was maybe 1% of your revenues. Where do you stand today, roughly?

Repeat that, I'm sorry.

Accessorial fees. It was like 1 to 2% of your revenues two years ago. Where do you stand today?

Well, it was 2.1 million in the quarter.

I think it was 1.8 or something.

1.8 cents a mile, and it's been at about that 1.8 number, fluctuates between 1.7 and 2 cents a mile and has for probably a year. It was a little on the lower end. It's come up, kind of trickled back slightly but it's in that 1.7 to 2 cents per mile range. I think in the quarter it was 1.8 cents per mile.

Tom, the reason why it trickled up is more because we started charging for more stuff that they were already doing instead of adding more to it.

Yeah, I think that's the way to go.

Yeah, that's correct.

Okay.

And then, David, just hypothetically, is it realistic to think about really 0 time for a tractor, in terms of detention, or will one hour sort of become the new standard? I think it's close to two hours right now, but it depends on the customer.

Yeah, yeah.

I think that -- I think that you will see whatever it comes out at, whatever per hour, if it's 100 or 200 or some number, that we all decide is the per hour basis, I think that the biggest -- more than what is going to be per hour is going to be the customer trying to get as much free time and the carrier saying 0. If I'm guessing, I'd think that it's 30 minutes to one hour. Is kind of where I'm at now. (Lost audio transmission on the replay line)

Right on track with what you're looking at.

That's helpful. Lastly, Joey, you might have given this, but I missed it, if so. Owner / operators at the end of the quarter?

411 (owner-operators )

Tom, that free time would be a good question for you to ask every carrier you've got.

You better believe it. I have been some.

Make sure everybody knows it.

My sense is two weeks ago people were very vague on that thought, starting to fine-tune what they're thinking about.

That's right. But keep pushing that envelope.

Thanks, guys.

Your next question comes from Donald Broughton.

Good morning. You gave us information on accessorial fees at the beginning of the call, Joey. Can you give us some better granularity on that? Is that from multistop? How much of that is from trailer detention? What else is in that so we can get kind of an idea if you double or triple the -- that amount, how much that could offset any lost asset utilization?

The majority of it is load/unload charges and stop pay. That's the majority of it. We do have some detention amounts in there, and it's growing, but it's a small piece of it. So the majority is load/unload and stop pay and I don't have those split-outs with me but it's by far the lion's share of it and load/unload is the biggest piece of it.

There's some very good advantages that's going to happen on this hours of service again, as -- I haven't been in the office the last seven or eight days. And Mickey and Mike are having continuous meetings on this, but one of the advantages we're going to have, even on the customers that do not have multiple stops and multiple pickups, we're still going to come up with something that's going to be very religious for us and a system very much so in place, even on the customers that only have hour and a half of sitting there, that we're not billing, you know, any of the detention time now to that we're going to be able to bill in the future.

So, you know, it's not just going to be the people sitting around, loading and unloading, it's going to be -- it's going to be -- I mean, physically loading and unloading a truck. It's going to be also the pier detention, it's gonna be some great opportunities.

Sure, I understand, because I'm hearing pretty much from everybody out there that that's what they intend to do, is increase those charges and customers, I think, are resigned that they're going to have to pay it.

Yep.

Well, congratulations on getting above $4900 of revenue per tractor per weak. That's the first time since '99.

You're probably right.

Good job, guys. I'll let someone else ask a question.

Your next question comes from Maria Justice.

High, guys. Could you just repeat your revenue and EPS estimates for fourth quarter?

Revenue estimates for the fourth quarter? Was that your question?

Yes.

$140 to $145 million of freight revenue, not total revenue but freight revenue.

Okay. And what were your EPS estimates?

24 to 28.

Thank you.

Your next question comes from Michael Latronica.

Good morning Joey, good morning, David.

Hey, Michael.

Congratulations. I'll add my congratulations to a good quarter. Really great to see the utilization numbers start to come up.

Most of my questions were answered. I just have two. I know the fleet age is going around down to around 18 months and 42 months respectively for tractors and trailers by the end of the year according to the program you've got in place, Joey can you tell me what it was at the end of the third quarter?

The tractors -- hold on a second. I think the tractors were right at 25 months, 24 months -- I've got it here. Bear with me a minute.

The tractors were 24.5 months, and the trailers were right at 48 months. Yeah, 24.5 -- sorry, 24.5 and 49. At the end of the year last year, end of December, it was like 28 on the tractors and the trailers were --.

54, I believe.

Yeah, 54.

You've made good progress.

It's going to take a big jump down in the fourth quarter. Lot of activity going on in the fourth quarter.

I understand that.

Without trying to beat a dead horse on hours of service, but since it is such a big issue, David, some of your competitors have given numbers as far as how they expect productivity to be impacted, J B is saying 3 to 5%, I think Snyder is talking about 4 to 8% and your competitors across town gave a significantly higher number. Have you guys quantified productivity numbers from hours of service or is it still too premature?

The answer is no, we haven't. Have we discussed it, have we looked at -- tried to look at some numbers and trying to see these people that are the multiple -- 20% of multiple stops and the 10% that are loading and unloading, how much of the total amount of hours are these people, even -- you know, really tying us up, those are ones that are continuing to go on with numerous meetings, and we have not been able to -- we've got the numbers, we just have not quantified it totally yet.

I mean, one of ways that obviously seems to be a work-around on hours of service is to optimize your drivers with trailer swaps.

Right.

How much are you doing with trailer swaps now? Is that a big percentage of your business?

You know, we do quite a bit. More on the shorter length of haul than on the long haul because most of the long haul is true, just in time, you know, air freight that is sitting there waiting at the dock, waiting on you to get there. Besides air freight, the L T L side.

I mean, those guys are wanting those 200 shipments that you got in that trailer, they want them on their trucks in Los Angeles or Boston or somewhere. So we do not have to tie up that many assets on the long haul side of the business, which is good, and plus they're not abusing us because that transportation partnerships are waiting on that truck all the time.

So then it goes into the short haul, and that's why you have seen us continue to increase our ratio this year up to about, I think about 2.1 ratio, and, you know, a couple of years ago that number was 1.75 or so. So that's the way, yes.

There's going to be more drop and hook type situations and the thing that we've got to remember is that just because there's drop and hooks, and they're not paying detention, those more drop and hook's are going to cost you some more money. They help you over here because you're not sitting around but you're going to have to charge that customer more money because they're requiring more trailers. So we are looking at customer asset utilization. It's not just at load, unload, detention and all that stuff.

The second question is that, customers, we want two to three turns per week per trailer. If you don't have it, we are now starting to build in our contracts, we've got it now in with three or four major accounts that a minimum requirement on trailer turns or we bill them.

Right. Asset utilization.

It's critical.

Critical, yeah, that's right. Again, thank you very much, and great quarter, congratulations.

Thanks.

Your next question comes from Doug Col.

Good morning, guys. Been a long call, but I still want to congratulate you guys.

Just a few loose ends for me. On the March insurance renewal would your preference be towards, you know, lowering the $2 million deductible or possibly raising your coverage limit above the $20 million?

If I was picking between those two, I don't know, Joey, your thought process but if I was picking between those two I feel comfortable with the amount we've got. I would be for lowering the $2 million.

Absolutely.

And when you said you were going to move forward the renewal period, you're talking about December or January renewal?

Well, we'll just go ahead and negotiate the contract to be effective March the 1st.

So you're not out looking and they know you got them and they got you no matter what happened between December and March 1st is what it is, Doug.

Not waiting for February 28th.

Right. I understand.

One more thing on the 500 to 800-mile kind of freight. David, is it your experience so far that the customers you've approached so far lean one way or the other in terms of saying no to rate increases but giving you some more, you know, profitable 400 to 500-mile freight . So far is there a trade-off there that might help us gauge the capacity that's available in that length of haul?

Doug, this thing, the numbers thus far that we have, keep in mind we announced this in July and we really started the last week of July, first week of August, so we've got a couple of months into this thing, and as I said earlier this is literally three to four, to five meetings.

It's much greater than what I ever envisioned, one meeting leads to another meeting, leads to another meeting, internally as well as externally with our customers, and that's why it's such a long process. The opportunity is great, but it is a long process. Hopefully it's not three years like Hunt has gone through because they went through it during the most difficult environment you could. Hopefully it's a year and a half or something like that, so the numbers in the last couple of months have moved basically like 1% kind of numbers, more toward the shorter haul, the shorter haul being up and the tweener's being down, so we are putting the rates in to our customers, and so far the results we have seen is that they have increased the shorter haul a little bit.

Okay.

But it's so early, I just -- you know, at the end of the day we know we're going to get there but there's not even enough numbers right now to say that we are out attacking it.

That's very fair. The one customer category, whether it's electronics, paper, anything that stands out?

No. No, we let them all abuse us.

I understand.

I know over the past couple of years, Tony, he's done a good job on his reefer(ph) rates, moving them up slowly, and I don't mean slowly but it just takes time. Where do you think you stand in terms of getting those rates up? I know he's probably got them up 4 or 5% in the last two years. Yeah, yeah. Are they where they need to be, in your opinion?

What you just said really summed it up very nicely. Tony has done a great job down there. They have raised their rates very nicely, in the last, what, year and a half or so. They've raised them very nicely.

Tony still believes that there's some more opportunities down there on increasing pricing, and I do also. So, no, he's not where he wants to be. He does see there is some more opportunities out there on raising rates but he's done a great job but he realizes that he can do something else.

Okay. And his freight experience in the quarter, in October, pretty similar to yours?

Yeah, he's pretty happy with what he has seen thus far.

One more.

On the owner-operator you guys held it pretty constant, maybe up a little bit year-over-year. Has there been any change in the owner /operator pay in the last couple of quarters?

No.

Mileage pay is the same?

Yes.

All right. Well, congrats again and good luck to everybody in Baltimore, David.

Thank you.

You have one follow-up question from Justin Yeagerman.

Hey, guys. Just a quick question. Is dead-head permanently up right now? Is this something that -- are you ever going to see 7% numbers again or is it because of the length of haul shift?

It's the length of haul still.

But do you think it's going to -- I mean -- (INAUDIBLE) length of haul comes down?

Yeah, yeah, I think that -- I think, Justin, that that 7, 8, even%, those are fabulous numbers.

No, I'm not --.

No, I know you're not. I'm just saying I think that's where it's going to be fluctuating at.

So somewhere between the high 7's?

7.9.

You mean 9%? Somewhere in the 7.5 to 8% range?

I'm talking about in the next couple of years, Joey, as our length of haul decreases in the next couple of years, I see that dead-head will go 7.5 to 9%.

But in '04, then, what would be a kind of reasonable number to be looking at?

Probably a little higher than where it's at, if I was guessing.

So around 8%?

Yeah, that's probably what I would plug.

Okay.

Then last question, tractor ads in '04, do you guys have any idea? I know you talked about CAP EX being flat to slightly down. Anything in terms of kind of what your plans are right now? You're adding 100 this coming quarter. What do you expect in '04?

Let me back up on that 100.

Remember, that's just timing, as we've gone through this package. That 100 that we'll add in the fourth quarter will just get us back to where we ended 2002 at.

I'm just trying to figure out for model purposes.

Next year, -- long-term, we want to grow, but we said we're not interested in growing the fleet until our profitability gets better than it is now. We're talking about maybe a couple hundred trucks in the second half of next year but that just depends on our profitability. If we're not, you know, that 93 or less type range, we're not going to add -- we're not going to add equipment,

So probably nothing in the first half?

That's a good bet, I would say.

Certainly the first quarter, the service thing, so certainly not there, and I think it will be more than likely the second half unless something, you know, happens.

One thing, Justin, when we know this, our goal is to grow. When we are operating at a 93, and we're getting close to that number, when we're operating at a 93 and we know that we're only maybe a quarter away, which in theory is a nice rate increase, when we know that we're only maybe a quarter away from being at a 90 operating ratio, then we will start growing.

But that's what you guys have been saying.

There are no further questions at this time.

Folks, want to thank everybody for joining us and we'll be glad to talk to you in another three months. Thank you.

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