Covenant Logistics Group Inc (CVLG) 2004 Q1 法說會逐字稿

Good morning. My name is Lisa, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Covenant Transport first quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star then number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. At this time I would like to turn the call over to Mr. Joey Hogan, CFO. Please go ahead, sir.

Thanks, Lisa. Good morning, everybody. I will begin with financial statistics and our current expectations for 2004 and David will follow up with his perspective of the quarter, current freight environment and comments regarding the new hours of service rules.

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. This information is in accordance with the company’s current expectations and is subject to certain risks and uncertainties. I want to encourage you to review those risks in the company’s latest filings with the Securities and Exchange Commission.

I would like to begin with some miscellaneous financial information that was not covered in our press release. First of all, we ended the quarter with 363 on owner/operators. They accounted for about 11% of the miles for the quarter, versus 10% of the miles last year’s first quarter.

Capital expenditures, we had dispositions of revenue equipment in excess of purchases by $2.3m. We averaged for the quarter about 1,100 teams, which were about 50 fewer than the first quarter of 2003 and about 120 fewer than the fourth quarter of 2003. Revenue equipment expense was $8.6m in the first quarter of 2004, compared to $5m in the first quarter of 2003. And approximately 70 mile per load reduction in our average length of haul was a contributing factor in our deadhead or non-revenue miles increasing about 73 basis points to 8.9% from 8.1% last year.

Regarding expenses, our after-tax cost per mile increased $0.05 per mile to $1.197. The main area that affected our cost for the quarter was a $.05 per mile increase in our “ownership/lease costs”. What I’d first like to do is step back for a minute and give everyone a little more background on this area, because there are a lot of moving parts. This area includes revenue equipment rentals, depreciation, and interest of both leased and owned equipment. It also includes the costs to prepare the equipment for trade or sale and the effect of gains or losses on disposition of the equipment.

Thus, in a quarter with a significant amount of equipment moving in and out of our system and particularly in a quarter with seasonally fewer miles per tractor, these costs can be affected on a short-term basis more than you would normally expect.

As our press release discussed, we are nearing the end of a massive fleet upgrade. Recall that in 2001 we extended our trade cycle to four years and did not buy 2002 model year tractors because of the depressed market for used tractors at that time. We also held onto our trailers longer during the 2000-2002 timeframe. During 2002 and the first half of 2003, we undertook a detailed study of our overall costs of ownership and maintenance of tractors and trailers and decided that, overall, the operating cost savings of a newer fleet outweighed the additional capital cost needed to shorten our trade cycle.

In addition, by 2003, the depreciated value of our tractors and trailers as a whole had come back into line with market values. Accordingly, in 2003, we decided to shorten our trade cycles for tractors and trailers and replace a large amount of the fleet in order to bring the average age of our equipment down to our target.

During the past twelve months, we have taken delivery of approximately 1,700 tractors and 3,800 trailers, and disposed of approximately 1,700 tractors and 2,900 trailers. Most of this activity occurred during the fourth quarter of 2003 and the first quarter of 2004, when we moved through our system more than twice the numbers of tractors and trailers as would be expected on a consistent schedule for our size fleet. Because of the fleet age, the costs per tractor and trailer for trade prep were higher than we expect on an ongoing basis.

As a result of this process, we absorbed $2.0m, or $0.08 per share, more than last year in costs associated in preparing our equipment for trade or sale during the quarter, as well as for accumulated depreciation on a sale leaseback transaction that we signed last year and which will be completed by the end of the second quarter. These costs are expected to drop significantly in the second quarter and beyond, as the trade cycle smoothes out, particularly with regard to trailers.

The portion that will not decrease relates to the increased prices and decreased residual values of new tractors and the cost relating to our decision to increase the size of our trailer fleet by 1,000 trailers in response to a shorter length of haul. As the rest of our tractor fleet turns over in the remainder of 2004 and 2005, we expect an increase of about one-half cent per mile.

Taking all those factors into consideration, we expect the $0.05 per mile impact to be reduced to a $0.02-$0.025 per mile impact after the second quarter, recognizing that it might fluctuate a little by quarter, based on equipment dispositions and utilization.

I hope this background is helpful in explaining the impact of these items on this quarter, why we believe these costs will go down quickly in the future, and why we believe the upgrade was the right thing to do. All of the items discussed above have been taken into consideration in our budget and expectations for the year.

All other operating expenses as a percentage of revenue were 330 basis points lower than the first quarter of last year. The main area of reduction was in the operations and maintenance area. This category was lower than year ago by $2.3m, or about $0.017 per mile, which is a direct correlation of the fleet upgrade I just discussed and was a big factor in our decision. We reduced the average age of our tractors to 1.5 years as of the end of March, compared to 2.2 years last year. Also our trailers average age has been reduced to 2.4 years, from 4.6 years last year. We expect on a go forward basis for operations and maintenance to be around $0.07 a mile.

From a balance sheet perspective, our aggressive 2003 equipment plan is beginning to come to an end. For the quarter, we paid down $21m of on balance sheet financing and added approximately the same amount of capitalized value of operating leases. As of the end of March, we had $192.9m in stockholder’s equity and $40.5m in balance sheet debt, for a debt-to-total capitalization ratio of 17%, while our book value per share ended the quarter at slightly less than $13 per share.

Regarding our expectations for the year, our forecast has not changed since our conference call in January. We expect our tractor fleet will finish the year at about 3750 trucks. Our utilization will be flat to down 3% each quarter versus year ago. Our rates, including accessorials, will be up 4% to 6% each quarter versus a year ago. Our after tax cost per mile for the year is expected to be in the $1.16 to $1.17 per mile range. The increase of $0.04 per mile over year ago on cost, is expected to be mainly driven by the March 15 driver pay increase and higher ownership/lease costs, partially offset by lower maintenance expense.

Based on these expectations outlined above, we believe freight revenue will increase around 5% 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. We anticipate second quarter earnings will be $0.26 to $0.29 per share, third quarter will be $0.36 to $0.39 per share and fourth quarter will be $0.33 to $0.37 per share. Capital expenditures, including those purchased and those financed with leases, are expected to be around $55m for the year.

And now I’ll turn it over to David.

Thanks, Joey. Let me just start off by saying I’m sorry if my speech is a little slurred, but I had a tooth problem about a week ago and had to go this morning and get it fixed. So, excuse me.

You know, after a slow beginning in January, freight volumes built throughout the quarter with March being quite good. On the positive side, I’m very excited about what I’m seeing on our rate per mile movement in the first quarter and this momentum that has carried on into April. Including accessorials, our rates were up $0.066 per mile, or 5.3% over the first quarter of 2003. This is very encouraging and is a big important step as we strive to improve our net margin at a greater pace than we have over the last three or four years.

On the negative side, our utilization was down. The impact of severe winter storms, especially over in the Carolinas on two different occasions, but the severe storms throughout the quarter combined with the new Hours of Service rules and more unmanned trucks versus year ago, made analyzing the quarter difficult.

The main issue we feel that affected our utilization most during the quarter was the impact of unmanned trucks. We have been discussing since the third quarter of last year that the “driver issue” was back. During the quarter we averaged about 5% to 6% of our fleet unmanned, versus less than 2% last year. This impacted our utilization for the quarter by 3.5%.

Another factor that affected our utilization was that our team truck count was lower than a year ago by about 50, which negatively affected our utilization by about 1%. Even with the lower team count, if we had the same unmanned truck percentage as we did last year, our utilization would have been up instead of down 1.8%. In other words, there was plenty of demand for our trucks and we just needed more drivers. The open truck situation was the reason for the driver pay increase that we instituted on March 15, and since the announcement we have been able to reduce our unmanned trucks to slightly over 3% as of March 31st.

A little bit of information on customers and rates. For the quarter, our top 100 accounts represented 79% of total volume and they grew at 28%. We have 28 new accounts in the top 100. Excluding the new accounts, the remaining top 100 were up 13%. Obviously, for our revenue in total being flat with a year ago, and our top 100 accounts growing greatly, we are growing with customers that will pay us a fair price combined with those that recognize the importance of working with us on the new Hours of Service rules.

As we said earlier, our rates are up 5.3% over year ago in the second quarter, and we expect the remainder of the year to be up 4% to 6% over a year ago. We had two large initiatives during the first quarter. One, working through customers’ issues and concerns regarding Hours of Service. And two, raise rates. Our accessorial revenue went up $2.4m, or $0.023 per mile, mainly due to an increase in detention with power.

During the quarter, approximately 14% of our loads had detention billed with an average total detention time, including free time, of just under four hours. In past periods we billed basically very little detention with power charges. A dramatic change was in the number of loads that involved multiple stops. In 2004, approximately 20% of our loads had multiple stops, whereas during the first quarter only 14% of our loads had multiple stops, with an average numbers of stops per load of 1.5.

Excluding accessorials, our rates were up $0.043 per mile, which is the largest quarter to quarter increase that we have had in quite some time. We have several other large customer contract increases that will begin helping us in the second quarter, with us moving our rates being the biggest component of returning our margins to historical levels.

A little bit about new engines. We currently have in service 1,683 new engines, or 52% of our company-owned fleet equipped with new emission compliant engines. We continue to be pleased with the performance of the engines versus our expectations. We are currently seeing approximately 4% fuel degradation and no significant maintenance increases, versus the pre EGR engines.

That wraps up my prepared comments and we will now open up for any questions.

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

Your first question comes from Chad [Stone].

Good morning, David. Good morning, Joey. A couple of questions here. Could you maybe talk a little bit more about demand in April and kind of what you’re seeing here in the month of April?

Yes, Chad, if you just take out the Good Friday situation for Easter, freight demand has been very, very strong. I’m more excited about how I’m seeing business and the environment and capacity problems that exist out there than I have been since 1999. So demand is very good, virtually allover the country. The East Coast has been a little slack over the rest of the country, but the business is very good and environment is very good.

Okay. And then if I heard you right, I think you said 4.3% rate increase after kind of taking into consideration accessorial. I’m just curious, how much did mix play into that or was it really not a factor?

Chad, it was 5.3%, including accessorials.

Right.

Okay. I thought you said 4.3.

Excuse me, I thought you said 4.3 after backing out--?

Yes, that’s right, 4.3 after you back out accessorials, $0.43 per mile. We are raising rates across the board. So, there is not one segment of the business that is not taking rate increases. We are taking increases, whether it’s transportation retail, hard floor covering, floor covering, it doesn’t matter. We are taking rate increases.

Maybe if I could shift gears here and maybe get some comments just on kind of some of the different business segments and maybe if you could just give us an update and kind of the dedicated area, the regional area and the refrigerated area and kind of where things stand in those segments?

Our dedicated ended at 375 trucks March 31st. And that’s down a little bit, because quite frankly, we had a couple of accounts that we reduced dedicated on in order to take a big enough rate increase that would satisfy us. Now, that went down.

I will tell you, you will see that bounce back up very nicely in the next couple of months, as we have got three or four good sized dedicated contracts that are in the process of happening now as we speak, and we will be ramping them up in the next couple of months. And those things should be in excess of 150 trucks. So we’re down about 25, but we’re getting ready to add, in my opinion, about a minimum of 150 trucks on the dedicated in the next couple of months.

The other segments of the business, to give you an idea, Chad, transportation is 32% or our business. Retail is 20% of our business. Manufacturing is 13. Food and Beverage is 8. Consumer Goods is 7. Floor Covering is 6%. Paper and Packaging is 5%. Housing Materials is 3%. Electronics is 3%. And Autos is 3%. The refrigerated side of our business is also continuing to do very, very nicely. I don’t have it right here in front of me, Chad, but it’s around 14%.

Okay, fair enough. One last thing and I’ll let somebody else have a chance. I believe on the fourth quarter call you were expecting utilization to be kind of flat to down 5% at that time, given what you knew about the Hours of Service rule. I’m just kind of curious, now that we’ve been through a quarter, kind of what your thoughts are there and are there any changes to that?

Well, we’re still saying that utilization is going to be down 3 or 4% or so for the year, because I do believe it is. And in my opinion, January and February are very difficult months to figure out what kind of effect Hours of Service has on utilization, simply because of the bad weather that existed and does exist those two months out of the year. That really does not put a big burden, because your trucks can’t get from point A to point B as you want them to. We started seeing some effect of Hours of Service in the month of March, as business started increasing. But it’s not anything significant yet that we can tell.

Chad, where I think that the problem is going to be out there is on the 70-hour rule. That’s really where we’re zeroing in at, is that the 70-hour rule is still the same as it was previously, before the new rules. But once you reach 70-hours today, you’ve got to take 34-hours off in order to reset your clock. And as business is improving, we are running into some trucks that are running decent, running good or running hard, that will get to 70-hours, say on a Friday morning they reach their 70th hour and instead of being able to count back eight days earlier and see how many hours they can drive today, they’re literally having to take 34-hours off. And I think that that is going to be where the truckers in the next two or three months will get a feel for what kind of Hours of Service impact there is. But that’s my feeling, but I don’t have any substantial amount to say that it’s 3% or 4%.

Okay. Thanks for the update, guys.

Your next question comes from Tom Albrecht.

Hey David, Joey, everyone, thanks for all those detailed explanations. I wanted to clarify a couple of things. Joey, I think you said kind of for the second half of the year that the cost of ownership, all those different factors, would be about $0.02 to $0.025 per mile, and obviously, the first quarter was around $0.05. Did you say kind of the second quarter impact, is there still a little bit of transitional noise going on?

Yes. It’s up $0.05 and we expect it to go down by $0.02 to $0.025. As far as increase over a year ago, it’s still going to be up for some of the things that we mentioned. But it’s going transition in the second quarter. The dollars, I think, will be slightly down. As our utilization improves, our cost per mile will improve pretty nicely in the second quarter, but I don’t think it will be until the third quarter until we kind of get all this big package kind of completely behind us and kind of get back to a normalized schedule.

But I do think it will be down in the second quarter on a per mile basis. It’s just we probably won’t see kind of the normalized effect until the third quarter.

Right. When you say down, you mean sequentially?

That’s correct.

Okay. And then you gave the owner/operator miles, but do you have the actual number of owner/operators at quarter end?

Yes, it was 363 at quarter end and we actually averaged 396 for the quarter.

Okay. And then you guys were giving so many numbers, my fingers could only move so fast. On the accessorial fee, the $0.23 a mile increase year over year, how much was that in millions? I mean, I could look at your miles and get it, but David, you gave a number.

I’m pretty sure, Tom, it’s $2.4m that it was up. And the reason we’re kind of – normally, we won’t be breaking out accessorial separately from kind of ongoing freight revenue. It’s just we’ve transitioned it, as we said in the release, because of Hours of Service and the size and kind of the recurring nature of it, we’ve decided to put accessorials back into freight revenue and all the appropriate operating statistics. So kind of for a couple of quarters until we transition everybody back to – we’re going to kind of talk about accessorials separately until everybody kind of gets transitioned through that.

Okay, that’s helpful. And then let me just ask kind of a couple of strategic questions. With capacity tight and the economy really having a great year, how do you approach these rate discussions? I mean, how much of the time are you willing to walk away from business? How much of the time is it a true negotiation? How much of the time is it this is what it is regardless? David, I know you meet so regularly with customers, could you just give us a sense of how these discussions are going as you’re able to obtain these rate increases?

Well, Tom, number one, nobody loves our customers any more than I love our customers. I mean, we appreciate every load we get from any customer we’ve got. But we’re full of ourselves if we don’t think that from 2000 to 2004 that our customers didn’t take advantage of the competitiveness of this industry and the economy. And they did. And all of us were very fortunate if we were able to keep our rates flat. And during 2001 we actually had a decrease in rate.

So those conversations, as we kept our customers back in, because I did not want to lose any of them, and we have had very nice conversations. Those conversations were wonderful, as they were telling me to drop my rates 3% or lose the business. And on most of them we would sit there and we would either keep it flat or we would drop the rates and keep the business.

Well, those conversations are changing today and they have been. And we still go have a great discussion with them. We love each other and all that kind of stuff, but at the end of the day, we’ve got a rate increase. And we really tell the customers, I would not be shortsighted on this, but at the end of the day, we have got to have more money. And those are the way the conversations are going and it’s not a screaming match. If they have something they can do during a bad economic time, they do it. And if they don’t have something they can do during good economic times, then they pay us. And so, that’s really where it’s at. If anybody’s got partnerships with the customers, I think Covenant has them. But I can probably count them on my left hand.

Okay. Going one step farther, over the last couple of years you’ve had a dramatic increase in your retail business, but the last couple of quarters it’s flattened out at around 20% of the mix. Which segments are most appealing to you in the overall rate environment that we’re enjoying?

You know, Tom, of course our transportation side is still very, very attractive by a couple of pennies over maybe some of the other segments, strictly because of the transportation and the hotness in the teams that gravitate to that segment. It’s still very, very good. Other than that, really all the segments are basically the same.

Now refrigerated is probably right up there with transportation. I mean, it is SRT [Tony], Covenant’s refrigerated side of it, they’ve done a great job of being able to increase that pricing very, very nicely on the refrigerated. And we see that continuing. So probably all lines, but refrigerated being better and the team side of our transportation being a little bit better.

Okay. Thanks for that color, David.

Your next question comes from Michael Latronica.

Good morning, David. Good morning, Joey. Nice quarter. I need to get a little bit of clarification on a couple of things you said. But first let me start with tax guidance for the year. Can you give me a little help on what kind of number we should be modeling for the tax rates here?

Oh taxes, my favorite topic. About 50%.

Okay, because it should be above that the first quarter, obviously.

Right. And remember, because of the per diem impact, a quarter that your earnings are low, the per diem is a bigger piece of the pie, so therefore, it drives your effective rate up. But our ongoing rate is still around 38% to 39%, it’s just the low earnings drive your effective rate up.

Okay, so let me try and understand now. For the full year I should be coming up somewhere close to a 50, 51% rate?

Yes. I mean it’s going to be 45% to 50% each quarter. I expect 45% to 50% and it should average around 50% for the year.

Okay, terrific. You gave a length of haul number as being down 70-miles. I’m showing last year was 1,095, so that put you somewhere at about a 1,025-miles?

Last year in the quarter is actually 1,000, for the quarter. The average was 1,070 and this year the average is 1,007, right at 70-miles difference.

And I just want to make sure I heard the owner/operator number right. You said 363, but 396 average of other percent of the freight. And again, my sheet is showing 362 is the number for last year also?

That sounds about right, but I don’t know that we got--.

Last year it was 10% of the miles. It was 11% of the miles this year and 10% of the miles last year. Wait just a second, I’ve got that somewhere – somewhere in a stack of paper here.

If you want to come back to me, Joey, that’s okay.

It was the same.

Okay. Thank you, David. That’s all I really have, thank you.

At this time – I’m sorry, your next question comes from Tom Albrecht.

Hey, David and Joey. Just given what’s happened with fuel out on the West Coast in particular, the spread in the last three to four months, especially the last four weeks, vis-a-vis the national average has really gone to historically wide levels. I think California’s like $0.55 above the national average. A couple of thoughts. Are you comfortable with your earnings in light of that, given how surcharges are so often pegged more to the national average? And then part B would be, given the tight capacity, can you take advantage of that to maybe get some regional surcharges?

I’ll answer the second one. We have received some help. There’s two ways to look at it. Number one, as you know Tom, we don’t do a lot of I-5 kind of freight. But we do. I mean, we’ve got some dedicated business and it’s a few million dollars a year. And we have been and continue today and tomorrow, approaching all those customers about putting them on the California cost and equating our fuel surcharge to the California cost. And thus far we have been successful in doing that. But keep in mind, it’s only a few million dollars a year of that kind of business.

And we just started discussions internally yesterday about what do we need to do and what can we do about freight that comes out of California, even going to the East Coast. Is there something better we can do on fuel surcharges? Even though it gets better as you go across from West to East, you still have a few hundred miles that you’re paying it. We’re having discussions. I don’t know where it’s going to take us.

Okay. I’ll just keep asking you about it then.

Yes, that’s right. Call us in a week and we’ll have an answer.

I mean, Tom, we have on fuel, of course last week it was up $0.04 or $0.05 a gallon. Our latest expectations were with fuel in that $1.60 type number for the year. And yesterday or Monday it reported $1.72. So when it comes to expectations, that’s a little concerning. But on the other side, I think we’ve illustrated over time that our fuel costs stay within $0.18 and $0.20 a mile after surcharges. It pretty consistently stays there, whether it’s $1.70 last year in the first quarter or whether it was $1.00 – which those were the nice days – when it was $1.00. So I think what we’ve got there is the surcharge is the significant piece to keep mitigating that.

Now there are times when it can move us – I think the most I ever recall that the fuel impact of the previous year was like $0.02 or $0.03 a share. So, in a quarter that we’re saying, let’s say we’re going to make 33 to 36 or 37 to 39 or whatever, it can be a number, but it’s not as impactful as paying $1.72, when you paid $1.40 last year. And so the main thing is, if fuel stays where it is today, our costs could be slightly higher. But the plan that we put in place was about $1.60 on average, for fuel. I’m not too concerned about it, because of our fuel surcharge program.

Okay. So, I want to just make sure I heard you correctly then. On the intra-California types of moves, you’re starting to get some surcharges payed off the California rate. Is that true for the Western regional movements? I know there’s not a whole lot of that.

Really, the only regional stuff that we’ve got is that California. We’ll go up and down the I-5 corridor some. We’ll run over to Phoenix and that kind of stuff some, but that’s 99% of it, Tom. So, the answer would be yes.

Okay. All right, guys, keep plugging away. Thanks.

Your next question comes from Chad Stone.

Joey, just a question here. I apologize if you mentioned it. Did you say what the off-balance sheet obligations were?

No. It went up by the amount that we paid down our on-balance sheet. It ended the quarter at about $160m.

Okay. And then do you have a breakout that you could give us of kind of what the fleet’s running in terms of kind of owned, versus leased?

Yes. Hold on a second. It will take me a minute. It’s tractors, as of end of March, 27% of our tractors were leased. And our trailers at the end of March, 85% of our trailers were leased. That’s consistent with our strategy.

What we typically do in any year, is a tractor we pretty much buy and a trailer we put on an operating lease. It’s a lot longer life asset and we tend to take a much longer perspective about financing that. So we typically try to go out and fix that and lease it.

And then did you mention kind of a [mid-cap] CapEx number for the year?

Yes, $53m is our latest estimate. That includes everything; buildings, property, tractors, trailers, everything.

Okay. And then one last thing. And I apologize if you mentioned this. Now that we’re kind of talking about depreciation and lease and interest, that’s kind of a cumulative expense. Did you say what the actual lease expense was?

Yes, I did. In the quarter – and that’s why I’ll start breaking that out for everybody. In the quarter, it was $8.6m this year and last year it was $5m.

Okay. I apologize. As Tom said, you guys covered a lot of numbers quickly there, so I apologize. But that’s all I have.

Your next question comes from [Nick Farwell].

David, Joey, just an add-on question. David, have you seen any moderation in the long haul competitive environment, in and out of California, perhaps as an example?

The long haul market, Nick, it is still very, very good. We have seen a flip-flop in the last three years – and this is something you and I have had many conversations on, but because of the port in L.A., outbound out of California has become the head haul and inbound to California has become the “back haul.” Which is a flip-flop of the last 20 years. And so you’re looking at more freight really coming out of California as it relates to truck movement, I believe, than there is going into California, as it relates to truck movement, because inter modal is definitely, and has been, but they’re definitely involved on the East to West, but coming off the West, West to East, there’s just not enough capacity. And so, the market is still very, very strong and very good, but it has done a flip-flop.

How much of that do you think currently can you ascribe to the Union Pacific’s congestion problem that they’re experiencing?

No, what I just said is zero in [inaudible] to that.

Okay. Has that had any influence, do you think, on rates or--?

No. I mean, we are moving. We’re probably moving what, Mike, 10 a day, 10 a day or so? We’re moving 20 or 25 a week mix that people, because of that, that they are paying us all the way to destination and all the way back to California.

Oh really? To get that capacity?

Yes, to get that capacity. But it is a small amount of the business, like I said, 20-25 times a week.

Do you get it from inter modal or from Union Pacific or typically directly from the customer?

No, we will mostly get it from folks that have relationships with – a lot of it’s UPS freight.

Okay. We’ve talked a little bit about this before, David. I’m curious for you to update me on the notion that if some capacity has been pulled out of long haul and some truckers have announced they have moved some capacity out of long haul, either out of the market entirely or perhaps into dedicated and regional. That on this particular cycle, perhaps one could make a case that rates might increase faster at the long haul, for long haul, relative then to say, the truckload, I’ll call it regional and dedicated. I don’t know what you categorize that as being. Say it’s 1,000 miles versus 500 miles or whatever way you want to categorize it. Do you think that has any merit?

Yes, I do. I think that, especially again, on the outbound off the West Coast. I mean, the outbound off the West Coast is and will continue to increase more dramatically, I believe, than any other region of the country. So that is true.

On the inbound, because you sent the volume coming off the West Coast, you do not want to take advantage of the rate – trying to increase the rates dramatically going East to West, because you want more of it. So that’s a balance. But out of California the rates are going up very dramatically and will continue to go up very dramatically.

How would you categorize the rates for the long haul, versus the Refr business, where there’s also been some discussion that for [inaudible] reasons, capacity may be in greater balance. Maybe that’s not the right way to say it. But perhaps there’s a greater need for incremental capacity in the Refr business at this particular point in time in the cycle.

Oh, there is no doubt. I mean, our SRT has just done a fabulous job. And they have [since did] greater than the dry [band] side of Covenant or the dry band side of SRT, capacity constraints being very bad on the refrigerated side. And we still continue to see that’s going to happen in the future.

Why is that this particular cycle?

Because I think as the 11,000 trucking companies went broke, it started in the refrigerated side. It’s very, very Mom and Pop. I mean, we think the dry band is, but the Refr side is very fragmented into Mom and Pop. And what you are sensing now on the dry band side is what the refrigerated side was sensing 12-months ago. They had pricing power 12-months ago, whereas us dry band guys, besides our wonderful leader J.B. Hunt, we were all scared to death to raise them.

Well now you’re seeing the dry band side raise them very nicely.

Right. And do you see that pricing power maintaining itself in the Refr side for some--?

Yes, yes, yes. Yes, I do.

Okay. Is there any incremental capacity that you’ve seen come into the Refr side in any significant way?

No.

I don’t know the players, what, Martin and Frozen Food – are there any other major players besides Martin and Frozen Food?

You definitely named the two largest ones. You’ve got CR England. It’s a large private. You’ve got Prime that’s a large private refrigerated segment. And other than them, even though a couple of those I just mentioned, three out of four of those I just mentioned are basically flat. Some of them are even down on the amount of trucks that they’re running, over what they used to run. And those are the major guys. And the smaller guys are – we’re just not seeing it.

I see. If you’re getting 5% in long haul, are you getting in the Refr side, 6 to 7% currently?

Well, let’s say this, they started getting 5% kind of numbers 12, 14-months ago and we are now starting to see some 6 and 7s out of them.

I see. So that’s compounding. If you’re up 5% last year, you may be getting another couple of percent this year, on top of the 5%.

That’s a correct statement.

Okay. And then Joey, I wanted to ask you, I thought that there was somewhat of a lag in the fuel surcharge, so that if fuel goes up rather significantly in a relatively short period of time, as it has, other than today, the last six or seven days, that you sort of lagged that and there was some impact that hit the P&L. Unless it reversed itself and came down, of course.

Right. There is about 8 to 10, 12 days, sometimes two weeks of a lag. Last year first quarter that hit us. Fuel spiked in the $1.70s right in the last three or four weeks of the year and that’s what happened. Now if you look at the second quarter, net fuel helped us, versus second quarter of 2002, because that lag came in early second quarter and fuel stabilized. So, last year is exactly a good situation to look at and see what it did, because fuel kind of “hurt us all a little bit in the first quarter.” But in the second quarter, fuel, net a surcharge, helped us all a little bit.

Again, because it came rolling down off of that spike at the end of March?

Correct.

Okay. So we’ve now spiked up in the early part of April and for that to sort of replicate itself, although the prices may be different, is hopefully you might see some decline in May and June to be somewhat similar to last year’s pattern?

That’s right.

Okay. So if it doesn’t do that, then that could be an impact here in the June quarter.

Well, our surcharge is going follow it. Again, we don’t cover 100% of fuel increases and all of that, but our surcharge will follow it. And as long as it stabilizes, our cost will move up a little bit, but it’s not going to kill us – be $0.06 a share or anything like that.

Right. One last question I didn’t ask earlier about the Refr business. David, is there much long haul Refr business in and out of California, say the Midwest into California for goods to cheese, I have no clue, but something of that nature? And then you’re taking lettuce or produce out of California, where pricing has changed in any noticeable way?

No, not really. Most of the refrigerated guys, there is definitely more refrigerated products coming out of California than there is going into California. And you’ll find that most of the refrigerated guys, to get to California, they’re hauling probably 50% dry.

Okay, just to get the capacity in and get the rates out of California.

That’s correct.

Okay. And is that pretty much all produce that’s going in and out of California or do you have, I don’t know, dairy products or any other major export out of California other than Imperial Valley?

Yes, you do, I mean from a standpoint that it’s all agriculture related, of course. But I mean, you’ve got a difference between [pure] lettuce and tomatoes and stuff that come out of California, versus bread that will come out of California that’s got to be refrigerated. But most of it out there is dramatically, agriculturally based.

Thank you, Joey and David. I appreciate it.

At this time there are no further questions.

Well, we want to thank everybody for joining us and we’ll be reporting back to you next quarter. Thank you.

This concludes today’s Covenant Transport first quarter earnings release conference call. You may now disconnect.