Covenant Logistics Group Inc (CVLG) 2003 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the Covenant Transport fourth-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. (OPERATOR INSTRUCTIONS).

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

Thank you, and good morning to everybody. I will begin with some financial statistics, as we usually do, for the quarter and our current expectations for 2004, and I'll have David follow up with his perspective for the quarter, comments regarding current freight environment and comments regarding the new hours of service rules.

I'll state in advance that this call will include 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 is subject to certain risks and uncertainties, and I would encourage you to review those risks in the Company's latest filings with the SEC.

I would like to begin with some miscellaneous information that was not covered in our press release. The breakout of fuel surcharge and other accessorial revenue -- fuel surcharge revenue for the quarter was 6.6 million, versus $5.8 million last year. Other accessorial revenue was $2.5 million this year versus $2.2 million last year.

We ended the quarter with 413 owner-operators. Owner-operators accounted for about 12 percent of the miles in the fourth quarter versus 10 percent of the miles last year's fourth quarter. Capital expenditures for the quarter -- we had net balance sheet capital expenditures were $14.6 million, with our net purchases for the year being $25.9 million.

We averaged for the quarter about 1,200 teams, which were about 85 more than the fourth quarter of 2002, and sequentially about the same as the third quarter. Regarding expenses, as we said in our release, our after-tax cost per mile increased 2.4 cents a mile to $1.14.4. To understand our costs in the quarter, pretty much the same story as the last couple of quarters. You have to combine equipment rentals, depreciation and interest of both leased and owned equipment, which we call ownership lease costs. Our ownership lease costs are up 3.7 cents per mile versus the fourth quarter of 2002. This area is up due to additional costs of placing 671 new tractors with 2002 emission-compliant engines in service during the fourth quarter, which brought the total for the year as of the end of December to 1,421 trucks.

Also due to our decision to increase the size of our trailer fleet, in response to a shorter length of haul, we had 1,770 more trailers during the quarter versus a year ago. The trailer fleet was temporarily inflated at year end, due to the timing of new and trade deliveries related to our tip (ph) transaction.

Several factors regarding our fuel program negatively impacted our results by about $860,000 or 4 cents per share in the fourth quarter versus the fourth quarter of a year ago. Diesel prices averaged 5 cents per gallon higher than the fourth quarter a year ago, resulting in fuel expense increasing $1.5 million versus a year ago. This includes an unfavorable swing of approximately $335,000 in our purchase commitment and hedge program, as well as, due to the growth of the 2002 engines as a percentage of the total fleet, our fuel economy was negatively impacted on average by 1/10 of a mile per gallon. We were able to offset a portion of the $1.5 million increase with $800,000 more in fuel surcharge. This produced a net cost of fuel per company mile of 19.5 cents per mile versus 18.7 cents per mile last year, which continues to be within our program design band of 18 to 20 cents per company mile.

Other areas, mainly salaries and wages and maintenance expense, were lower than a year ago. Although our operating margin increased 50 basis points, our pretax margin increased 75 basis points, compared to the fourth quarter of last year. The increase in the pretax margin reflects a movement to above-the-line lease expense from below-the-line interest expense, as we leased more of our equipment.

From a balance sheet perspective, our aggressive 2003 equipment plan, discussed in the release, continues to unfold with us financing a good portion under operating leases. For the quarter, we added $17 million in on-balance-sheet financing and $29 million in present value of off-balance-sheet financing. For the year, we reduce our balance sheet debt by $22 million to $62 million, but increased the present value of operating leases by approximately $47 million to $139 million at the end of the year. Our balance sheet debt-to-cap ratio ended the year at 24 percent, while our book value per share ended the year at slightly less than $13 a share. Also, our cash flow was helped for 2003 by reducing our days sales outstanding receivables from 42 days to a little over 39 days by year end 2003.

Regarding our expectations for the year, there's a lot of things in this next few paragraphs that we're going to talk about, but we expect the following.

First, we expect a continuing strong economic environment, at least as strong as the second half of 2003. That will provide a minimum of a stable freight market.

Number two, a negative of an improving economy is a difficult and tough driver market.

Three, we do not plan to grow the fleet in 2004, because we have yet to reach our profitability goals.

Number four, although early, we believe that in the long term, hours of service will be a net neutral to earnings, due primarily to increased accessorials and decreased utilization, but we continue to study the impact to us and the shipping community.

Number five, mainly due to that hours-of-service impact, utilization is anticipated to be flat to down 5 percent each quarter.

Number six, accessorial revenue from hours of service is expected to be up a couple of cents per mile to offset utilization losses and accessorial pay for our drivers.

Number seven, we have announced a driver pay increase, including our owner-operators, effective March the 15th, that we expect to net out to 3 cents per mile, in addition to the accessorial pay mentioned above, which we believe will greatly aided filling any unmanned trucks.

Number eight, in addition to accessorial charges, rates are expected to be up 3 to 4 cents per mile in the first quarter versus year ago, and accelerating to 5 to 6 cents per mile over year ago for the remaining quarters, basically to help pay for the March 15th driver pay increase.

Number nine, our after-tax cost per mile for each quarter is expected to be in the $1.16 to $1.17 per mile range, mainly being driven by the March 15th driver pay increase, higher ownership lease costs, but also lower maintenance expense.

Number 10, capital expenditures, including those purchased and those financed with leases, are expected to be around $35 million for the year.

Based on these expectations outlined, we believe revenue will increase around 5 percent each quarter, compared with the same quarter in 2003, and earnings will be in the $1.05 to $1.10 per share range for the year. Due to the effect of the higher ownership costs, the uncertain impact of hours of service and the March 15th driver pay increase, we expect earnings for the first quarter will be essentially flat with year ago. Beyond the first quarter, we anticipate second-quarter earnings will be 25 to 28 cents per share, third quarter will be 36 to 39 cents per share and fourth quarter will be 33 to 37 cents per share.

Now, I'll turn it over to David.

Thanks, Joey. Just an overview of the quarter -- freight during the fourth quarter was generally strong, with utilization up over a year ago very nicely, especially the month of October, and kind of flat in the month of November and December. The main issue that affected our utilization during the quarter was the impact of unmanned trucks. As we all know, the driver issue is back and alive, and as well for all the carriers. Today, we have about 5 percent of our fleet unmanned, and this is impacting our utilization pretty significantly.

With the first quarter being typically our best quarter for filling trucks, combined with the driver pay increase that we announced last week, we expect to reduce our open trucks over the next 90 days. I'm also very excited about the movement in our rates. Through the first nine months of 2003, we were 2 to 3 cents over the previous year's period, with the fourth quarter moving to 4 cents over the fourth quarter of 2002. The combination of the good freight market and what we perceive to be a general lack of new capacity coming to the marketplace, we expect to continue pressing the envelope on the rate side, as we strive to cover additional ownership lease and driver pay costs, and ultimately to achieve higher profits.

So far this quarter, we are experiencing what I would call a typical January. Freight has been stronger in all areas of the country versus a year ago, except for the West Coast and North Texas. I think the West Coast had a lot to do with the Chinese New Year that we can talk about a little bit later.

Utilization -- utilization for the quarter was up 1.3 percent. As I already stated, the main factor that limited utilization for the quarter was our open trucks. As Joey previously stated, our team count was up slightly, and that helped our utilization. Additionally, an approximately 100-mile-per-load reduction of in our average length of haul resulted in our deadhead or non-revenue miles increasing about 65 basis points, to 7.7 from 7.1 last year -- percent.

A little bit about customers and rates -- for the quarter, our top 100 accounts represented 78 percent of total volume, and they grew 17 percent. We have 16 new accounts in the top 100. Excluding the new accounts, the remaining top 100 were up 6 percent, which is an acceleration over the early part of this year. For the quarter, as a percentage of revenue, transportation 33 percent, retail 22 percent, food and beverage 9 percent, consumer goods 7 percent, manufacturing 7 percent, floor coverings 6 percent, paper packaging 6 percent, housing materials 4 percent, electronics 3 percent and auto 3 percent.

The fourth quarter marks the seventh straight quarter of our rates increasing over the comparable period of the prior year, with our rates increasing 4 cents per mile or 3.2 percent over last year. As we said earlier, we expect our rates to continue to expand throughout 2004.

A little bit on revenue equipment. We currently have 1,421 new emission-compliant engines in service, with about 80 percent of these, 79 percent of these, being Detroit diesels and the balance being Covenenant's (ph). We continue to be pleased with the performance of the engine versus our expectations. We are currently seeing approximately 4 percent fuel degradation versus the pre-EGR engines. As Joey stated, our current plans for 2004 are that we do not expect to grow our tractor fleet at all, but we will shrink our trailer fleet to about 8,600 trailers. Specifically, we will replace about 1,000 trucks, and we will take delivery of about 1,600 trailers and trade or sell about 2,300 trailers.

A little bit on the new HOS rules, hours of service. A lot has been written and said regarding the new rules. I participated in a conference call Thursday, January 15th, to discuss the progress on the topic from the carrier's point of view. To state in summary our progress, all drivers have been trained on the new rules. We have new accessorial changes in effect for all our major customers. We have been sending notification regarding (indiscernible) and billing new accessorials since the first week of January. And although we are very early in the process, preliminary numbers indicate that billed accessorials will offset lost productivity and increase accessorial pay for drivers.

This wraps up my prepared comments, and we will now open it up for any questions.

(OPERATOR INSTRUCTIONS). Chaz Jones.

A couple things here. One -- if I missed this, I apologize. But maybe you could comment on freight in January so far, and any impact you're seeing from winter weather?

Chaz, it's really == winter weather -- we feel better about the freight environment. Most regions of the country are stronger than they were last January. Now, January is January; we all know that. But the business environment on the vast majority of the regions of the country feels very good, pretty strong, excluding California, the NW, Washington and Oregon and North Texas. We are weak in those areas, so from a freight standpoint, I think that one of the things that's hampering Southern California especially is Chinese New Year. As you know, that thing is rotated depending upon the moon and those kind of things, as they celebrate their festivities over there, and it's never set on the same day of the year. What we have seen, over the years, is that it affects about 10 days prior to the day of Chinese New Year, and it affects about seven days after. You know, their celebrations last two weeks. And this year, Chinese New Year is February the 1st -- no, excuse me, January 22nd. Last year it was February the 1st; this year it's January 22nd. And we believe that that's really what we are sensing out of Southern California, because the first part of January in Southern California was very good, until about 10 days prior to Chinese New Year. So we do think that that in itself is there. We believe that that thing will start about, as we speak, the end of this week, the first of next week, we believe that we will start seeing Southern California loading the way it was prior to Chinese New Year. So that has definitely affected us.

And then, this week has not been good. The business environment is pretty strong, excluding Southern California, but we can't get to them. We have more trucks shut down this week than we've had, definitely, of course, since last year. But it's the South -- I mean, when the South struggles like it did in the Carolinas at the beginning of this week, it's like it's just paralyzed. Besides the ice they've got, they've only got to get a couple of inches of snow, and it really hurts us in the South. And it is just now starting to get back to normal in the Carolinas. So, so far this week, we've got very little production out of the Carolinas. And then, as you know, this morning it's done nothing but follow it up the entire East Coast. Those people, though, you would probably only be affected about a day; they do a good job about getting in and out. But today is definitely being affected up and down the East Coast. The Midwest has been very difficult, also this week. So the weather is hurting. The freight is not moving the way that I wish freight was moving, but I can tell you that, just in my gut, business is better this January than it was last January.

One other question I had was on the insurance. One, were there any adverse claims in the quarter? And then, two, I think you guys had talked about perhaps getting your insurance renewed early with your primary carrier. And I'm just -- I was curious if there was any progress on that front.

We did renew our excess coverage in December, early. It runs until March of '05. We were able to extend that to March of '05 with minimal increase, 1 to 2 percent increase on our excess coverage. Our primary policy renews March the 1st, so we are in the market as we speak. So it's too early to comment on that. We are confident, but it's just too early to comment on how that's going to work.

As far as claims in the fourth quarter, we had two real good months. October and December were real good; November was a tough month, but it wasn't anything unusual.

One more, and I'll turn it over to someone else. Could you maybe comment on the regional strategy and any inroads or progress that you're making there? I believe you kicked off your first region this past October, and were looking at opening a second one. Maybe any commentary you could add on that?

It's coming along very nicely. Our short-haul freight is starting to really pick up. It's one of the things that's helping, of course, the rate per mile, as well as the shorter length of haul that we experienced. Columbus has been up and running, really, since about October -- end of October, say 1st of November. And that has been full, 100 percent. And we are really just now are getting it, Chaz. We could really talk about it on the next conference call; it's just now started to do its thing. We are happy about what we are seeing in the short-haul marketplace.

Thanks, guys, and good quarter.

David Mack, CSFB.

Excellent quarter. I just wanted to ask you a little bit about the pay increase, about the reception that's going to get from your customers and how you arrived at that actual amount. And also, do you find more difficulty recruiting for teams versus singles? And kind of break down a little bit, in terms of where you are finding drivers and where you're not not.

David, first of all, being single, that kind of stuff -- getting drivers is difficult. I don't care what company you are; getting drivers is difficult in today's environment. And we saw it -- really, as the economy started turning around last July, we started seeing driver issues starting to develop. And, quite frankly, they got worse as the year progressed and as the economy got stronger. And I think that, from a driver standpoint, we're back into the 1990's, when it was the number-one issue facing us. I guess the positive side of that is that that in itself is going to control capacity constraints, so that part is a good part. But we've got to get the driver pay up. As we went and decided 3 cents a mile -- it was just coming off accessorial increases that we gave on January the 4th, and we believe that the accessorials is a couple of pennies. And of course, that's really just throwing darts at it, because right now, we don't know if it's 1 penny or 4 pennies that accessorials is paying, because we don't know exactly on the total fleet how much of the customers are making a fit (ph) and those kind of things; that will only be known as we go forward. But we do think it's probably a couple of pennies that that is costing us. And so, when we looked at that and then said, okay, what is an attractive pay package out here, and then we did comparisons to our competitors, and that's the way that we came up with the 3 cent a mile increase. That puts us in a very competitive pay structure with the top-notch carriers out there.

So really, that's the way. But in my opinion, also, David, again, 3 cents is not enough for none of us; I don't care who it is. We've got to get the driver pay up as this economy gets stronger.

In the guidance that Joey gave earlier -- are you factoring in 100 percent acceptance by the shippers? Are you going to go to them and say that we're raising pay 3 cents, so you need to pay us 3 cents more? Or was that guidance based on I'll give you 50 percent of that or something?

Joey can answer, but I think you are assuming that we get it.

Absolutely.

Yes, he's assuming that we get it.

Let me clarify one thing David said. The drivers' accessorial pay is to cover their lost productivity. So that's the whole purpose for going to our customers and working with them on receiving accessorial revenue, is to help cover our lost productivity and additional pay for our drivers.

On top of that, just to be clear, we're giving a 3 cent a mile -- to where it basically averages 3 cents a mile to our drivers for increased pay. So our drivers related to accessorials -- there's no change. The purpose of that was to get them their take-home pay the same. Pre hours of service and post hours of service, their take-home pay -- their goal is to be exactly the same; it's not to create a windfall for the drivers at all, at that point -- just to cover them, to make them whole. And this 3-cent-a-mile increase is really to increase pay, as David said, because they all need additional pay. But yes, in the guidance that includes us recovering all of it, because we need it.

Can you talk a little bit about, within your transportation types of customers, what types of business trends you are seeing there? For LTL or air, or --?

We have seen -- in the fourth quarter, really, most of the transportation folks, they were very strong with their business, because the thing to keep in mind, David, is that the vast majority of our transportation loads are on set runs, and they leave at 2:00 or 4:00 or 6:00 or whatever time they run. And the thing that we don't know with our LTL and our airfreight customers is if our trailers are 50 percent full or 100 percent full. So I can only tell you the sense that my customers told me; we did see some extra business there in the fourth quarter, of course, where some folks added on some more traffic lanes. And instead of having two runs a night, they had four runs a night and those kinds of things, which they backed off now in January. But most of those folks were very happy, and said that they were definitely seeing an improvement in the economy, and that their business levels were increasing. So maybe they took our trailers from being 80 percent loaded to 90 percent loaded.

On our conference call, where you were talking about hours of service, you mentioned that some of your third-party logistics partner/customers were not -- or /competitors were not being as aggressive with customers, explaining hours of service to them and really upcharging for the added cost. Has anything changed in the last couple of weeks? And have you clarified how you are going to approach them?

It has gotten better in the last couple of weeks. Like I said, I'm very disappointed with third parties, because I am a believer, as I have been in the past, there are some fine third-party companies out there then I'd rather them owe me money as much as anybody else owe me money. That's how much I feel confident in their business model, but I'm very disappointed in most of the major third-party guys that just did not want to go to the customer. I mean, we can call it anything we want to call it, but that's what it boils down to. In my opinion, they were running too much from the customer. And it wasn't fun; it's not fun going to the customer saying, I need this. I know they'd rather not see me coming and doing that and seeing our marketing folks. But I felt like that the third-party guys kind of left us hanging out there too much. And I was very disappointed in those folks. But I will tell you that, after pressing and pressuring and pressing and taking trucks away and those kind of things, then I would say that we've got about 90 percent I'm satisfied with them. The other 10 percent, quite frankly, we're not loading with them. And the thing that we've told the folks, as well as our customers that, again, as Joey said, our goal is to break even. I don't want this thing costing me money. I don't want to make a ton of money on it, but I definitely don't want this thing to lose me money. And as we went forward with those guys, they are now on the bandwagon, I believe, of coming through.

Edward Wolfe, Bear Stearns.

First of all, Joey, you said you're not bringing on any new equipment. I mean, you brought on 166 net additions in the quarter. So, going forward from here, we should kind of model zero, realizing some will go up, some will go down in the quarters, that kind of thing?

Yes. We said this summer that the fleet was temporarily low -- again, timing of new and replacements. If you go back end of year to end of year, 2002 to 2003, it's flat. And that's our goal for this year, flat. So throughout the year, there may be temporary timings of when we get trades in and news and all that. So it could move it up and down a little bit each quarter. But directionally, the fleet is flat.

Could we talk a little bit about leasing verses buying tractors? Obviously, you're moving the mix towards leasing and off-balance-sheet leases. I would think that that has a negative impact on your operating ratio, without changing your pretax margin, obviously. So if goal for OR has been 90 before you reinvest, with more of the leases so your interest expense is coming down, but your rental expense is going up, and more than your depreciation is going down, does maybe that goal become 91 or something else? Or is that 90 still the goal, even with the change in the mix of how you're looking at things?

That's a good question. Our philosophy on buy verses lease is what I would call opportunistic. When we begin a year, we don't know what we're going to buy and depreciate and what we're going to lease. It basically depends on what the financial markets are showing us. This year, the financial markets on the leased products were extremely aggressive, combined with our goal, as well as some OEMs were cooperative and worked with us on trying to enter into as many walkaway type transactions as possible. And so, obviously, with that strategy, or beginning to wade into that, obviously all that is leased business. The combination of those two really was a big influx of additional leased product versus buying.

Now, the result of that is exactly as you said; it moves around the income statement a little bit. And yes, you are right. Technically, that 90 OR that we ran in the 90's is probably a little higher today. We haven't just gone back in and sat to see where that is. We've just kind of directionally, internally, for our employees and our Board, we're focused on 90 OR. And when we get a lot closer to it, I'm sure that we will sit down and look at leased products in the 90's verses where it is today, and we may adjust that. But right now, it's 90 OR.

Directionally, when I look at salaries, wages and related expenses down 300 percentage points year over year in the quarter, some of that mix -- some of that is probably doing a better job. But as you start to take the driver pay up in March, I'm guessing that gap narrows -- you know, the percentage improvement goes down a little bit.

That's correct.

But directionally, the mix -- do you think this year, going forward, continue to lean more toward leased? Or is it too early to tell? In other words, does that salary, wage and related continue to expand? Or should it contract from year over year, or what's your thought process?

The lease decision doesn't affect salaries and wages. Now, the revenue equipment rentals and purchase transportation line on our income statement -- you're right, -- includes two factors. On our operator pay, which is 12 percent of the miles in the fourth quarter, it was 10 percent in the fourth quarter of 2002. The leased part of that, or rentals part of that, obviously isn't impacted or doesn't impact the salary line at all. The question on owner-operators is right now, we're budgeting our owner-operator fleet about flat for this year. We've been able to move it nicely throughout this year. It's kind of one of those things that we don't recognize growth until we get it, because it has been such a difficult market the last two or three years. So in our plan, we're continuing to anticipate around 11 to 13 percent of the miles throughout 2004. So the lease decision going forward doesn't affect salaries and wages at all. What will affect it is what you said in the March 15th driver pay increase.

On the owner-operator side, though, your sense is that kind of stays flat, which would lead toward just this probably being a similar spread in the first quarter, and then once the rate increase kicks in, the spread narrows?

That's correct.

You talked about the driver pay increase of 3 cents. What is the base average on that?

We had a per diem program, as everybody recalls. That's why our tax rate is so high, since a big portion of our expense is non-taxable. Our current blended rate of taxable wage and per diem is about 35 cents a mile, single and team average. And our owner-operators are right at 88 cents a mile. So those two numbers will go up approximately 3 cents, starting March the 15th.

So a blend -- so you're thinking somewhere like the 5 to 7 percent increase for wages?

On those two pieces, that's correct. Our non-driver pay is down. We didn't really talk about it. We are down about 50 people, the end of 2003 versus the end of 2002.

What is your ratio versus where it was a year ago, drivers to non-drivers?

We ended 2002 at about 3.6 tractors to non-driver ratio. We ended this year just shy of 4 -- 3.9 number. As far as drivers to non-drivers, we are right at 5 at the end of 2004.

End of 2003.

Yes, end of 2003. And the end of 2002 -- hold on a second. At the end of 2002, we were about 4.8, so we were able to move it up a little bit. So we are right at 5 now, 5 drivers for 1 non-driver.

And just switching gears for a second, can you talk about the impact of fuel? Fuel costs just continue to go up. It's becoming less of an issue, but it still an issue out there. Can you talk about how you see that impact playing out through the year and going forward? And what do you think the net impact was in the quarter? If you said that, I'm sorry; I missed it.

What had impacted us in the quarter -- let me say one thing. Our program is designed to 18 to 20 cents per company mile, whether it's DOE (ph) national average of fuel is $1.60 or it's $1.10, it's going to stay in that 18 to 20 cents a mile. The big contributing factor to helping that is our surcharge program.

With that being said, our cost in the fourth quarter was 19.5 cents a mile versus 18.7 last year -- still in the range, but it obviously moved up. That impacted us about $800,000, or 4 cents a share, in the fourth quarter versus fourth quarter of 2002. I have no idea -- our crystal ball on fuel -- I mean --

But assuming fuel stays where it is right now.

Right. It's going to be around 19.5 cents a company mile. It's just not -- it's confidently, because I'm confident in our surcharge program that it helps us manage that. And it's just -- if you go back and look for the last six or seven years, and you just go back and look at it, it stays around 19 cents a company mile. And it's got like 0.5 cents, 0.7 to 0.8 cents a mile swing around that, depending on where fuel is.

And just another question. Accessorial pay to the drivers with the new hours of service -- how does that work? Do you pay each driver differently, based on their total load and unload time and their stops? Is it an hourly thing? How does that become a fixed-cost component of an otherwise variable cost? Or is it variable somehow?

It's a full range. I mean, it is -- on the detention, it is on a per-hour basis. And then, depending upon team and single. And then we increase drop pay, depending upon how many drops they have got. Then we increase unloading pay on top of that. So it is a lot of difference. We give them now hazmat pay, we increase DET (ph), effective January 4. So depending upon how much hazmat shipments, so it's a bouncing ball out there, just depending upon what they're doing at that particular time. But virtually detention time per hour, unloading pay, higher drop pay and hazmat pay all went up.

But none of those are per mile; right? Those are also kind of (multiple speakers).

But they will all go into driver pay, and they will all be part of salaries and wages. And the design of the program was, again, an estimate of what was the lost productivity with the new rules. And then the way that we went about addressing that was looking at the various accessorial types of pay, which we have some now -- stop pay in particular. And what else do we need to do to cover this gap for them? Again, the goal was when they were net neutral; the take-home pay was not to change. And obviously, the industry instituted a detention hourly pay. We instituted a hazmat pay. And you are right; none of that is on a per-mile basis.

David, do you think that there is some risk -- you've got 5 percent of your tractors not seated now -- that that could go up, because your driver pay in March is a little bit after what most people are telling us, January. Some people put one in in September, too. Or is it just kind of a seasonally -- time where it shouldn't get worse right now?

I kind of agree with the (indiscernible). I feel like it should not get worse. And we have definitely in the last, what, Mike, three or four weeks we have seen the flattening out. It's really not gotten worse for the last three to four weeks weeks.

That's correct. And the applications have really been a big push upward in the last two weeks.

So we are definitely -- it had flattened out, and applications are starting to increase pretty dramatically. And we really see -- from February to April is our three biggest hiring months of the year.

Why do you think applications have started going up? Have you done anything, more marketing or anything promotionally, or is it just the market?

We have increased advertising.

That's correct. It's been out for about two weeks.

Yes, increased advertising, as well as it's that time of the year, where construction is not happening and dumptrucks ain't operating. And so you've got those people that will drive a truck for six months until farming comes up, which is typical ever since I've been in trucking. That's what ends up happening. So you definitely sense that, as well as, hopefully, the accessorial pay and now 3 cent a mile increase -- the smaller truck lines that are not doing that, and you've got a bunch of them that are not even charging accessorial pay now, because they are not giving it to their drivers and the thing that we have said is that there's not a truck line in the United States that will not be getting accessorial pay from the customers, or they'll be out of business, because us and everybody else will have all their truck drivers. So it's a domino effect.

Donald Broughton, A.G. Edwards.

I know you've had a number of initiatives on the maintenance line in addition to, obviously, renewing the age of the fleet. Can you kind of review that for us? Because I saw that we had some continued progress there on the operations and maintenance line, especially when I look at it on a per-mile basis? I saw, what, almost a 5 percent drop.

Again, the strategy on the new equipment -- everybody's got to buy a new engine sometime; it's inevitable. Whether you buy it this year, next year or the year after, everybody's going to be buying a new engine because you're not going to run a 10-year-old truck. And that's going to be additional cost of 2 to 3 cents a mile. Between the additional capital, interest, less fuel economy, it's 2 to 3 cents a mile in additional costs. We felt strongly that, to offset that cost, that one of our strategies was to reduce the age of our fleet. And we still feel very strongly that reducing the age of our fleet back to a three-year trade cycle in trucks and six to seven years on trailers will cover that 2 to 3 cent per mile increase in ownership cost and less fuel economy on the new engines. It just takes you time to get there, and so that's why we feel confidently, is what we said, was we expect our maintenance savings to continue to accelerate, as we get this big package into the fleet and worked into the fleet. So you haven't seen all of it yet, and we expect our maintenance cost, that gap, will continue to widen throughout 2004. Other than that, just to make mention of note, is that in the line that you see, it's operations and maintenance. And there's a couple of other big items in there. One we already mentioned is recruiting for drivers. We have increased that some, and so that will eat up a little bit of our maintenance savings on the younger fleet in 2004 versus 2003 because we have moved it up 0.2 or 0.3 cents per mile. But still, directionally, we are very confident in the strategy that reducing the age of the fleet will offset the cost of the new trucks. It's just going to take us a little bit of time to get there.

We also saw some continued improvement on utilization, but maybe I missed it, because you jam-packed your initial comments with numbers and facts. But did you mention how many unseated trucks? Do you have an unseated truck --?

Yes, it's about 5 percent.

So that certainly, if nothing else, dictates --

That's right. To me, the hours of service is throwing darts right now. I think, on the first-quarter conference call, all of us cared (ph) to have a definite, better idea. I personally think it's going to be March, as freight really picks up and the environment gets better all over the United States. As I said earlier, I'm pretty happy with the environment, or most of it, but as we really start revving hard, we will get a sense, in my opinion, of what hours of service are affecting our utilization, because right now, we said in the release it's 0 to 5 percent, because we are not sure what it's going to be. So that's the major thing, and then the open trucks not only affected the fourth quarter, which was a good fourth quarter, but it's affecting our January, also.

So, David, you'd expect you're going to see -- assuming that unseated trucks will actually start to drop even before the pay increase takes effect --?

Yes, we expect that to happen, yes.

It's normally the pattern, isn't it?

Yes.

And one thing I'll note, too, for everybody on the call, is we do publish our script of this call on our Website, so you can -- sorry, Donald, for all the numbers. But to the extent we move too fast, you can go to our Website and see the full text of the script.

Michael LaTronica, Excalibur (ph) Research.

Nice quarter. Joey, just a housekeeping thing. Did I get it right when you said off-balance-sheet debt totaled 139 million?

That's correct.

David, could you give us a little bit of an update on the tweeners we discussed in the last conference call, those 500-plus-mile runs that tied up your drivers for more than a day but less than two? You were talking about maybe rates there being as much as a dime low?

Yes.

What kind of progress are you making there?

Michael, first of all, I still believe that those rates are about 10 cents a mile too low. What we ended up doing, because we are behind the eightball in that, and we're addressing it, as we speak, again. But really, what ended up happening -- as we got into it -- I think I talked about this in October, if I remember correctly. But we talked about how long it really takes to address these tweeners with a customer. It's really about a 2-3-4 meeting type situation. You've got to bring tons of computer printouts and show them really what a tweener is, and what's good and what's bad, and how it's going to affect them. And that ends up being another meeting, and it really takes a long time to get that process through, and to either, say, increase the tweeners customers or take me off this freight. And that's been our attitude. Well, what we did, as we saw that in September, coming into play and how long it was taking us, we decided that we needed to address it as much as we could, but go out and get rate increases basically across the board. Because it is taking us so long to do the tweeners. And so we did that, and that's why you saw the rates up so nicely in the fourth quarter. But it does not have much of an impact on the tweener side, because we just address that. If we got a 4 percent rate increase, we went into the account and took 4 percent on the tweeners and took 4 percent on the short-haul and that kind of stuff. And so, then, as soon as that happened, hours of service and the letters and the communication -- you know, myself personally, I think I was on the road about 20 days with Mickey Miller in December, working with customers on nothing but accessorials. And so now that starting to quiet down, and we are now back upon rate increases and tweeners, as we speak.

So, if I'm hearing you right, there's been a kind of a general across-the-board lift in the rates, but that's not specifically driven by the tweeners, and it has been driven by the broad-based rate increase and the hours of service charge?

That's exactly correct.

That will continue to be an area of focus for you?

Every day, it's a focus. It's just a matter of doing it.

Most of my questions have been answered. I thank you very much. Good quarter, guys.

John Barnes, Deutsche Bank.

Joey, if I missed this, I apologize a little bit. But could you just go over again your tractor and trailer purchases for the year? I had to hop off for a second.

It's no problem. We're going to be replacing 1,000 trucks, so no adds, but replacing 1,000 trucks. And we will be buying 1,600 trailers and trading or selling 2,300 trailers.

And once you do that, where do you think the average age of your tractor fleet and your trailer fleet will be? Just ballpark?

We'll be right at 18 months on tractors and 30 to 35 months on trailers, which is about where we are right now. I don't see it changing too much; it's going to be in that 30 to 35, which is obviously a trade cycle on trailers less than seven years, on average. Because we have quite a few reapers (ph) that we trade in five years. So it should be less than kind of 40 to 42 months. Tractors we are right at it; 18 months -- that's an average three-year trade cycle; we are right at almost where we need to be.

David, with the driver shortage issue rearing its ugly head, it seems to me, one of the ways to combat it is to try to acquire companies as a means of acquiring drivers. Has the M&A market gotten any better? I know equipment values and things like that have kept a lid on it for a while. Has that improved at all? Are you still seeing the same number of opportunities cross your desk of a weekly basis, and is there any appetite there?

John, it definitely could be geared up in a very fast period of time. There is still a lot of folks that would like to sell. And our focus -- number one, if a good carrier came back, came around, appetite would be there. But we are not interested in purchasing one right now that we've got to turn around, because we are still working on covenant. And when we get covenant back to where we want covenant to be at, then we will address looking at -- be it a turnaround or a great company. But if a great company came about right now at a reasonable price, I mean, we're not against that.

Do you think the thesis is right that one of the ways to pick of drivers is going to be to acquire companies to do so? Or do you think that the wage scale alone, the increase in the mileage pay, the increase in the accessorial pay, is enough to help you with your recruitment efforts? Are you going to have to do something a little bit grander?

I think that the whole industry -- as we go forward, I think that we are operating back in the 90's, and 3 cents -- thank God for 3 cents, and it's better than not giving them nothing. But 3 cents is not the answer, and the industry has got to hit it again, whether it's the end of this year or the beginning of next year; we have got to get their pay up, and my opinion, where a guy has got the ability to make between $50,000 and $60,000 a year. And once they make that ability, you'll see turnover ratios go from 100 to 50 percent kind of numbers, and something that we all can very -- most of us can live with. So I think that we've just got to continue the process of increasing the driver pay. We do not look at acquisitions from a standpoint of saying, hey, I'm going to get me a bunch of drivers. Matter of fact, most of the time, we find it works kind of the opposite, that you will have a fluctuation of drivers that leave you, to the tune of 30 or 40 percent of the base. Matter of fact, that's really what we're doing. As we look at companies to purchase, instead of saying I will give you this and this, we're basically saying, after a period of 90 days or six months or some timeframe, we'll see how many drivers we've saved, and then we'll pay you based on how many drivers we've got leftover. So you definitely -- I do not look at it as an opportunity to get drivers. I do look at it as an opportunity for our industry to grow and add individual capacity without adding overall total capacity to the network, and that is the key to producing good financial numbers to our industry.

And then, lastly, on the driver pay issue, do you envision the issue getting severe enough that you have to do something -- the industry as a whole has to do something as grand as, say, move away from mileage-based pay and start paying these guys by the hour? Do you ever get these guys on a salary, or is the only way to make sure they are incented to drive the miles is to pay them by the mile?

Everything you just said, John, has gone around in our minds, too. Will the day ever approach? It could. Is that day today or tomorrow or a year from now? I don't think so. Is it in the next five years? I think you could see some of that labor that would end up being out there, because I think the government is telling us, and has been for ten years, but they just enacted it January 4, we don't like the way you pay. You pay your drivers based upon everything you just said, get more miles, more miles. You are paid to the carrier on more miles, more miles. And they are concerned, right or wrong, even though trucking as a whole, accidents have decreased dramatically. But their opinion is that that's not the correct way to do it, that you are incentivizing some unsafe practices. And I don't agree with that, as the industry has seen. But at the same time, what you say, I don't disagree with it. I think that somewhere down the road, that you'll start seeing some of that.

(OPERATOR INSTRUCTIONS). Thomas Albrecht, BB&T.

A couple of things -- number one, Joey, you discussed the whole billing of accessorial fees and that. And I know one of the dilemmas pre this year was always billing verses collection. In the early reads on your ability to collect more accessorial fees and not just bill for them? Or should I be asking that a month from now?

This is David, Tom. Yes; I feel confident that we're going to collect. We were one of the few, in my opinion, that went out and had -- and maybe everybody did this, I don't know -- but had direct talks with our customers, mostly face-to-face, went over the accessorial pay numbers, financial numbers with them and then had them sign it. You know, it's going to be -- I don't want to be so silly to think -- I mean, I get cuts on signed stuff today that we've got to go and argue about. But I believe that we've got an agreement with our customers, and they know what the agreement is, and I do not expect them to cut it. At the same time, I'm sure there will be some cuts, and we'll have to go and argue and flight with them. And I think, at the first-quarter conference call in April, that all of us carriers can have a little insight to that.

Yes; that will be something to track. And I think the other thing, too, on the utilization declines, anywhere from flat to down 5 percent -- when I look at Covenant, I basically see three fleets. I'm excluding your new regional, which is more or less getting started in the new rules. But you've got a reefer fleet, a team fleet and a solo fleet that's doing a lot of tweener freight. Can you discuss your utilization declines by each of those fleets? I would think team would be close to a neutral event, reefer might be the hardest hit, and then tweener -- who knows?

Tom, I don't disagree with what you're saying. We have not done that for the first three weeks of January. We have not divided it up. We will, as we go forward. We will be looking at those kind of stats, and seeing exactly what the effect is. I can tell you that most of our teams are -- from an hours of service standpoint, are not being affected that much. The thing that we have done, though, with our teams, is that they will also get paid accessorial pay, because I don't need them to decide that they want to run as a single driver. And so, we have had discussions with some of our customers, because some of the customers that wanted to think that a team is affected -- they are incorrect on that, if in fact they need teams. If they want teams long term, these drivers are individuals. And you put two individuals together, and they want to know why they are not getting paid sitting at the same location that a single drive came into, and all of a sudden he's on the clock and they are not. They don't like that. So we are paying them, and we are instructing our customers that, listen, we have got to get this pay for these drivers, or you're going to wake up one day and you won't have no teams in the whole industry.

So, from an hour sense, they are not going to run out of hours going from point A to point B like a single drive would. And on the reefer side, Tom, I can tell you that what we are seeing on that side is definitely more delays, that the accessorial pay will be greater on the reefer side, because of the more inefficiencies in the supply chain on the reefer side. But we know that in the first three weeks of the month, but that's about all we know.

I'll just keep following up, then. Thanks for the good updates overall.

There are no further questions.

No further questions?

No, sir.

Okay. We want to thank everybody for joining us, and we'll be back with you in April.

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