Covenant Logistics Group Inc (CVLG) 2004 Q2 法說會逐字稿

Good morning. My name is Frances and I will be your conference facilitator today. At this time, I would like to welcome everybody to the Covenant Transport Second Quarter Earnings Release 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 the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key.

At this time, I would like to introduce Mr. David Parker, President, and Mr. Joey Hogan, Chief Financial Officer. Thank you. Mr. Hogan, you may begin your conference.

Good morning. Thank you, Frances. I'll begin with, as usual, our financial statistics and our current expectations for 2004 and David will follow up with his perspective of the current freight environment, as well as efficiency measures and driver and equipment updates.

Before we begin, 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 risk and uncertainties. We'd 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. We ended the quarter with 287 owner-operators and they comprised about 9 percent of the miles for the quarter versus 10 percent of the miles last year. For the quarter, we had net capital expenditures or purchases of revenue equipment exceeded dispositions by about $11 million.

Additionally, regarding our recently announced share repurchase program from the end of May until our mandatory blackout period beginning in the middle of June, we purchased 121,500 shares of Covenant stock at an average price of $15.75 per share. We averaged for the quarter about 1,050 teams which were about 80 fewer than the second quarter of 2003 and about 25 fewer than the first quarter of 2004.

Revenue equipment rental expense was 8.8 million in the second quarter of 2004, compared to 5.8 million in the second quarter of 2003. An approximate 115-mile per-load reduction in our average length of haul was a contributing factor in our bed-head or non-revenue miles, increasing about 130 basis points to 9.3 percent from 8.0 percent last year.

The second quarter of 2004 included the benefit of a 500,000 or 2 cent per share non-cash pretax adjustment for the reduction in market value of interest rate derivative agreements.

Regarding expenses, our after-tax cost per mile increased 8.6 cents to $1.216 per mile. Three areas that comprised the majority of the increase were driver pay, fuel and revenue equipment, ownership, lease and operating costs.

Salaries and wages are up due to -- mainly as a result of the 3-cent per mile driver pay increase we instituted March 15 of this year. Additionally, as a result of our owner-operator fleet being down versus a year ago, our company trucks ran slightly more miles as a percent of total miles versus a year ago.

Several factors negatively impacted net fuel expense, which is fuel expense less fuel surcharge revenue, by 1.7 million or 7 cents per share. Diesel prices averaged 28 cents per gallon higher than the second quarter a year ago. Our fuel economy was slightly worse than a year ago, due to the growth of 2002 emission-compliant engines as a percentage of the total fleet.

We had a greater percentage of our miles run by company trucks and due to that West Coast diesel fuel prices were much higher than normal, versus the national average of diesel fuel. Our surcharge billed on a per-mile basis was lower than expected. These factors produced a net cost of fuel per company mile of 20.1 cents versus 18.4 cents last year.

Lastly, we discussed at great length last quarter the evolution of our equipment plan over the last 12 months. In the second quarter, we completed the upgrade in which we accepted delivery of 1700 tractors and 3800 trailers and disposed of 1700 and 2900 trailers over the past 12 months.

Compared with the second quarter of last year, our operating expenses related to ownership, lease costs and revenue equipment, increased 3.9 cents per mile. Ownership lease costs include both leased and owned equipment and are reflected in a combined cost of revenue equipment rentals, depreciation and interest. This increase is comprised of increased cost of tractors, additional trading costs and the addition of 1,812 trailers versus year-ago in order to adjust our trailer to tractor ratio, as our average length of haul has decreased.

These increases described above were partially offset by savings in other areas of tractor and trailer maintenance, as the newer fleet saved us 1.8 cents per mile compared with the same quarter last year. This resulted in a net increase of approximately 2.1 cents per mile in operating costs relating to revenue equipment.

Ownership lease costs are down about a penny a mile from the first quarter of this year, and we expect these costs to drop by approximately another penny a mile by the end of the year, as the majority of our trade-in and related expenses associated with the fleet upgrade roll off.

I would encourage you to review our first quarter conference call script posted on our website if you'd like more detail on the recent history of the factors influencing our ownership lease costs.

For the quarter, our balance sheet debt increased by $20 million and we paid down $5 million in off-balance sheet financing. As of the end of June, we had 195.5 million in stockholders' equity and 60.5 million in balance sheet debt, for a debt to total capitalization ratio of 24 percent, while our book value per share ended the quarter at $13.22 a share.

Regarding our expectations for the year, although we're encouraged with the progress shown during the quarter, we still have a lot of work to do. We plan to stand firm on our commitment of not adding additional equipment until our margins improve to more acceptable levels. Therefore, we're number one, we expect our tractor fleet to finish the year at about 3700 trucks. We expect our revenue per tractor per week to be up 3 to 5 percent each quarter versus the previous year's quarter. We expect our after-tax cost per mile for the next two quarters to be in the $1.21 to $1.22 per mile range.

The increase in cost over a year ago continues to be driven by the March 15 driver pay increase and our expectations of continued high diesel fuel prices, higher ownership lease costs that decreased somewhat during the second half of the year, partially offset by lower maintenance expense.

Based on these expectations outlined above, we believe freight revenue, before fuel surcharge, to increase about 2 to 3 percent each quarter, compared with the same quarter in 2003 and earnings to be in the $1.15 to $1.20 per share range for the year. We anticipate third quarter earnings to be in the range of 38 to 42 cents a share, and fourth quarter earnings to be 40 to 44 per share.

Capital expenditures, net of proceeds from dispositions, are expected to be in the range of 55 to 60 million for the year, of which we've already spent $9 million.

Those are the end of my comments and I'll now turn it over to David.

Hello, everyone. You know, to begin my statement, I would like to say a thank you to all the employees at Covenant, which gave such a great effort by producing these results that we are talking about. We made good progress toward our goal in the quarter of a sub-90 operating ratio. You know, a strong economy combined with a very tight truck capacity, certainly aided in our progress. There was several positives achieved during the quarter, with the main accomplishment being that we exceeded nicely our earnings guidance, despite an additional 7 cents per share of diesel fuel expense.

Also, our revenue per load of miles grew about 12 cents per mile, or 10 percent during the quarter, which helped produce an increase in our revenue per truck per week of almost 4 percent to just shy of $3,000 per truck. Our truck capacity continues to be very tight and requests for dedicated capacity also continues to come in at a very high pace. We believe the combination of improvements in our pricing philosophy and the continuation of the current relationship between demand and truck capacity will enable us to improve our revenue per truck per week throughout the remainder of 2004.

On the negative side, utilization was down. The main issues, of course, are the shorter length of haul, fewer teams, and really, we just need more drivers. The combination of having about 5 percent of our fleet unmanned versus virtually zero percent last year, and then we have 80 fewer teams than we did a year ago, negatively impacted our utilization by 4 percent versus a year ago.

The open-truck situation was the reason for the driver pay increase that we instituted in March, and we continue to evaluate all areas from recruiting to retention to increased compensation as a source for drivers.

A little bit about customers and rates: for the quarter, our top 100 accounts represented 81 percent of total volume and grew 25 percent. We have 30 new accounts in the top 100. Excluding the new accounts, the remaining top 100 were up 11 percent. Obviously, with our revenue and total being flat with a year ago, and our top 100 accounts growing greatly, we are concentrating our capacity with customers that will pay us a fair price and work with us to increase efficiencies within their supply chain.

For the quarter, as a percentage of revenue, transportation was 35 percent; retail, 19 percent; manufacturing, 12 percent; floor coverings, 8 percent; paper packaging, 8 percent; food and beverage, 6 percent; consumer goods, 4 percent; housing materials, 3 percent; auto, 3 percent; and electronics, 2 percent.

As we said earlier, our rates are up 10 percent over a year ago in the second quarter. We expect the remainder of the year to be up 8 to 10 percent over a year ago. We had several large initiatives during the first half of the year that are beginning to pay large dividends. We have been pushing hard to raise our rates and to grow our dedicated division.

Even though our length of haul declined and contributed to our rate increases, we have raised our rates nicely in all lengths of haul, particularly, we raised our rates in our medium haul and our tweener load that we've been talking about for a year now, but we've raised that tweener load by 8 cents per mile. And a percentage of those loads have decreased from 29 percent in the second quarter in '03 to 25 percent in the second quarter of '04. Also our dedicated division has grown by 43 percent to 537 trucks since the first quarter of '04, which we feel speaks to the tight truck capacity in the market.

Also, we worked diligently to combat the high cost of fuel on the West Coast by procuring a supplemental fuel surcharge program in addition to our normal fuel surcharge, and to date, we have received commitments on 91 percent of the loads that originate out of Pad Five.

New engines. We currently have in service 1,928 tractors that have the new '02 engines in them or 59 percent of our company-owned fleet. We continue to be pleased with the performance of the engines versus our expectations. We are currently seeing approximately 4 percent fuel degradation and no significant maintenance increase versus the pre-EGR engines.

That concludes our prepared comments and we will now open it up for any questions. Frances, we're ready for questions.

(Call instructions). Your next question comes from Justin Yeager.

Just a quick housekeeping item. One is just you guys mentioned, I think, 287 as an ending owner-operator count, but what was the average in the quarter?

294.

294 was the average.

And you guys have talked for a while about, you know, when things start heading towards a 90 OR or below, you start adding capacity. You know, things are tight. We're hearing from the LTL guys that they're getting a lot of truckload overflow in terms of freight. And it seems like if you kind of look at your guidance, you started ahead in the below-90 type of range. You know, as we go out into third and fourth quarters, in terms of the OR, it's not quite down to the 90 or sub-90 level, but getting there.

And what's your thought process right now in terms of, you know, what you need to see to get -- to start adding some meaningful capacity? And, you know, I guess that also relates back to what you guys were talking about in terms of utilization and how do you find the drivers to seat those trucks because, I mean, just looking at the model, it seems like utilization is going to be somewhat key to getting this thing really to the goals that you guys are talking about.

Justin, a couple of things. You have 90 OR is what we've been talking about for the last couple of years and that is the only thing that's consuming us, is a 90 OR. And when we get to that 90 OR, then we'll be making a decision based upon a lot of factors. Number one, are we happy with the 90 OR, or does it need to be in the 80s? And we'll make that decision when we get there and look at the landscape out there to see exactly what you just said. How is the driver situation? You know, can we add meaningful capacity with the driver situation?

You know, that's a cursing and that's a blessing. It's a cursing that it makes you mad if you want to add equipment. It makes it difficult to add equipment. The other side is a cursing because that tells you that capacity is not going to be coming into this market by itself by people just going out and adding equipment. So we will just have to evaluate it and look at acquisitions or possibilities out there. We've had no desire to do one the last couple of years and we don't have a desire right now at this point in time to do one, but that's also a possibility.

You know, from the utilization standpoint, we want utilization to go up. I mean, that's our goal is to maximize it. We would literally be maximizing it now if it wasn't for the open trucks that we've got in our system, but as you know, the power is in the race. I mean, that's where it's at. The power is in the race, much greater than what -- utilization, so you know, in order for us to get to a 90 OR, I mean, can we have 500 open trucks? And the answer is no, but the power is in the race. If we maintain our open-truck status as it is and continue to get very meaningful rate increases, we're going to be able to accomplish what we want to accomplish. So that's our thought process right now, Justin.

Yeah, that's kind of what I was getting at. Do you guys believe that you can get to a 90 OR without needing -- I mean, let me back up. The way it looks in the quarter is, you guys have been hitting hard on rates and I mean, it's very commendable, but at some point, do you need to raise the utilization level in order to actually get to that 90 percent goal?

We need to raise our revenue per truck per week.

Right. That's the key and however that's accomplished, as our length of haul has declined, I mean, it's still, you know, 920 miles, still long relative to the market. So our goal is to grow revenue per truck per week, period. Now if that comes through utilization, great. If that comes through rates, rates is more impactful and we know we need utilization to keep the drivers happy. But at the end of the day, if our revenue per truck per week is growing, it certainly is the main thing that drives us to that 90 operating ratio and will afford us the opportunity to do whatever we need to do, we feel, on the driver side.

So it's kind of a shift from us, you know, over time, you know, focusing as we have more shorter-haul, medium-haul business, is what's the revenue we're putting on the trucks every day, because we know it's less efficient than the longer-haul lengths. We know that from a utilization standpoint. So that's the key, is growing that revenue per truck per week for all the various modes that we have.

Fair enough, guys. And I guess my other question for you, Joey, is just kind of a modeling issue. You've in the past guided to 300 basis points of tax rate improvement for every 100 basis points of operating ratio improvement. And that has to do with the per diem and the way that the effective tax rate flows with that. Is that still valid as you get down into the lower 90 percent range and get more profitable or is there a different rule of thumb we should be using when kind of looking at these models?

No. It's still the same. I mean, once you get down into that -- you know, I've said at a 90 OR, it's going to settle out into that 42 to 44 percent range, you know, on an effective rate basis. So that's still the same.

So the lowest is kind of 42 to 44?

Well, at a 90 OR. When we move it to an 88, it'll get even lower.

Well, I'll be watching for that one.

That's right.

I guess the last question I have for you is, we've been asking (inaudible) different people and I'm not sure -- there's been mixed responses. And Dave, if you could just talk a little bit to demand right now and in June and how it's transitioned into July and then, you know, with your growing retail exposure, what you've been seeing from that sector. We've heard different people say it's strong; some say it's fallen off a little bit. I want to get a sense for what you guys are seeing out there.

Justin, June was a very good month. July, which is typical, is a little softer than, of course, what June was and, you know, I've been talking to a lot of customers here lately and we saw a couple of things. We have seen customers that have also taken their own price increases and a lot of those did that in June. And they told us up-front that they expected to have a little slowdown because July is July. It's the summer month. It's not as bad as January, but it's still July. The next magical day, as you know, is August 15, because that's when you start sensing the Christmas rush.

So you kind of go through July, but we're happy with where our month is thus far in the month of July, especially on the pricing side of it. Rates are continuing to increase and our customers are continuing to give it to us, but we have had some customers that have increased their pricing, that a lot of their orders in June were prepurchased before the rate -- their own individual rate increases, but as of yesterday, a large -- one of our large customers, a paper company, was telling me that they did that and it's -- they are now starting to see the old orders starting to flow back in to pre-July kind of numbers.

When you say July was a little bit softer, are you talking just sequential or are you talking kind of year-over-year?

No, I'm talking sequential of June.

So but on a year-over-year basis --

Yeah, this July is better than last July because it's really last July, around the 20th of the month, is when we could really started seeing the economy turn around. So you know, we're kind of there a year later, so as we speak right now, we're feeling much better about his July than we were last July.

So that was kind of the bottom and the way up, and now it's even better.

That's a correct statement, not June, but it's July and, you know, we have seen a little softness, but it's nothing that is concerning us.

Your next question comes from the line of Chas Jones.

My compliments on a nice quarter as well. Maybe if I could just start out on the rates. I think you were saying in the second half of the year 8 to 10 percent. Are you talking about loaded miles or total miles?

That's total miles.

Okay. And then if maybe we could just talk about the rate increase here in the second quarter, very significant rate increase. I was just curious if maybe you could break that out a little bit more and give us a better feel for how much of that was, you know, a kind of a pure rate increase versus a kind of shift towards a shorter length of haul business?

I think it's probably safe to say that probably 3 percent of it is shorter length of haul with the rest of it being just pure rate increase. We did -- our long haul, everything went up. I mean, just to give you an idea, Chas, our total went up 10 percent and our long haul was up about 8. So, you know, that gives you an idea of short haul being up about 12 and then we worked on the tweeners.

Okay. Are you getting involved in any of the expedited rail service that I think one of your truckload brethren there close to you is currently getting involved in?

No. We have not.

Okay. And then on the driver side, I apologize if I missed this, but I think you said in the first quarter that the unseeded tractor count was running about 5 or 6 percent and I'm just curious on kind of where we're at now.

It's about -- it's 5 percent.

Okay.

You know, basically what we did is that when we gave the rate increase to the drivers in March, announced it February or March, we immediately filled about 35 or 100 trucks and then we've kind of just been stuck there.

Does that explain some of the -- I think you were kind of guiding towards utilization originally on the last call of flat to down 3 percent. Does that unseeded tractor count where it is still, does that explain maybe why it came in a little below what maybe you were expecting?

I think that's exactly correct. That's 90 percent of it and then 10 percent of it is that we're continuing to grow the short haul. And I'm going to tell you, we've been very open the last couple of years, as our customers asked us to get into short haul. We are lacking this short haul. We're lacking what we're seeing. We're learning how to operate in this short haul and I think that the future is extremely bright for us on this short haul type of the business that we're involved in.

So you're going to see utilization, you know, being down, but again, the only thing that we're looking at in this company -- the only thing you all need to be looking at is, how much revenue do you produce in those trucks? I mean, that's the key. We got one truck -- to give you an idea, one little, dedicated truck that the length of haul is 12 miles, 12 miles, one truck. He generates $3,000 a week of revenue. Am I making any money on that truck?

Sounds like you're making a lot of money on that truck.

I'm making a lot of money. That's exactly correct, so give me that 3,012 versus 25 or 2,600 at 3,000. So, you know, that's the key to it is where the power of those rates are, and if the power of those rates are in the short haul, then you're going to see Covenant go, go, go on the short haul. We won't give up the long haul. The long haul is going to be constant. It's who we are; it's what we do. Our teams, we're going to continue to have those, but I'm going to tell you, we're going to dig like everybody has in this short haul and we're going to be very successful in it.

Where could we maybe see the length of haul settle here? I mean, does it continue to come down from the 940 or is it going to stabilize here at some point?

Chas, it could easily continue to go down, even though as me and you are speaking here, I don't know that, and the reason why I say that is that you heard that our tweeners are 24 percent of our business now. It was at 29 or 30 percent a year ago when we first brought it up to the public, and now it's 24 percent. And it's really where all our customers want us to go. I mean, if they want to pay me for those tweeners, then I'll keep hauling those tweeners. If not, then either put me in the short or the long.

Now when you consider that the short is, what, 75 percent of the market, the chances are that three out four of those decisions that they make when they swap me, three of those loads are going to go short haul and one of them is going to go long haul. So if all that is true, then we should continue to see a decline in the length of haul.

Okay. Maybe a couple more things here. You know, we've had a number of LTL carriers report very strong results and, you know, I guess the question here is it would be my sense that due to your transportation exposure, that the demand in that area should be very strong for you guys. Is that fair?

Yeah, it is. It is strong.

And then maybe another on demand, coming at it from a different angle, could you maybe compare demand, I guess here in the second quarter, David, to maybe some of the years that were characterized as robust in the 90s? Or are we to that point yet or do we still have a little room to go here?

In the second quarter, I can tell you that -- and I know clichés are easy to give out, but I don't know that I've ever seen anything like it, and I think it's evident by the fact that you're seeing these 7, 8, 10 kind of increase in rates and you've never -- I've never seen those before. So that in itself is evidence that there is something, something that is happening in the marketplace and it's caused (inaudible) 12,000 trucking companies and 400,000 trucks.

It's that issue and it's still there that you're not seeing a lot of capacity coming into the market. They can't; they can't get the drivers and much less, the financing and the insurance. They cannot get the drivers to add a lot of meaningful capacity into this market. So let's say that July is a little soft. I'm here to tell you that as long as the GDP is going to maintain at 3 percent or above, we're all going to continue to have pricing power in our hands. So, yes, I would answer yes, that we are seeing some things that I have never seen in all my years of trucking.

That sounds very encouraging. Last question here, I'll turn it over to someone else. I missed what you said the dedicated was as a percent of freight. Maybe if you could just reiterate the breakout here now, the dedicated, the refrigerated and the general OTR? And it seemed like from what you said that the dedicated was up. Were there some new contracts that came on there?

Yeah. Our dedicated, we grew, I think, like 43 percent. I'm trying to find my little note here, but like 43 percent dedicated. I mean, the dedicated thing -- we added about 160 trucks in the second quarter alone on dedicated and that includes one account going from 80 down to about 20 on dedicated, and we still grew by about 160. We will grow in the third quarter very close to that number also in the third quarter just based upon what I know right now, and these are long term contracts that we're signing, you know, with minimums being 18 months kind of contracts.

And so we're very, very happy with the dedicated side and that's another reason why the length of haul beside the short haul is the dedicated, is that we got 500 and, say, 50, trucks on that out of 3,700. So it tells you that it's continuing to grow and a lot of that is in the short-haul marketplace. I don't have those numbers here, Chas, but you can call us and we can get those for you. And nor do I have how much refrigerated and all those segments are generating, but they're still -- refrigerated is still around 14 to 15 percent; dedicated is around 15 or 16 percent; and then the rest is the dry van.

Well, congratulations again and best of luck here in the second half, guys.

Your next question comes from the line of Andrew O'Connor.

I wanted to know, related to your guidance for the third quarter of 38 cents to 42 cents, and then for the fourth quarter, 40 cents to 44 cents, Dave or Joey, is there a topline number and an operating income margin that's commensurate with those estimates, or can you speak to that?

Andy, we haven't given out OR or margin expectations really historically, nor going forward. What we said was our revenue, our freight revenue, should be up 2 to 3 percent for the second half of the year. And we gave out some cost expectations on a per mile basis of $1.21, $1.22. What that basically though gives you is, you know, once you plunk through the numbers, frankly, is in the 92s operating ratio.

Okay. Fair enough. I was just trying to take it down another level. And then Joey, you may have mentioned cap ex for the first half of the year. I think I missed that. And then what is your expectation for the second half?

Well, we said for the year was 55 to $60 million of which we've only done 9 through the first half and that's principally our '05 trade package started basically in June. So right now, we're anticipating we're going to buy all those and not lease them, and so that's when you've got the big cap ex move in the second half of the year.

Okay. And then with this cap ex number in mind, can you walk us through what to expect free cash flow to be then for fiscal '04?

Hold on just a second.

Well, I've placed some numbers here using $1.15 to $1.22, your earnings guidance, and then D&A of roughly 45 million.

Yeah. Hold on just a second. All right. What you're going to end up doing is chewing up cash for the second half of the year, yeah, obviously. You know, we're riding out about $60 million of balance sheet debt. Our balance sheet debt, we're estimating that we're going to finish up the year at around 75 million, 70 to 75 million.

Okay.

And so, you bet that $1.15 to $1.20 with spending, another 40 to 45 million of cap ex, you know, our cash flow for the rest of this year, plus I've got some receivables too that's going to help me in the second half of the year. Our receivables days-outstanding grew a little bit in the first half, and so we think that's going to come down. So you know, balance sheet debt will grow about $15 million is what we're estimating. So some of that cash will go on balance sheet.

Okay. And then kind of with these thoughts in mind, you know, is it possible to buy in much more of shares, related to your share buyback, that is, for the remainder of the year?

Yes. I mean, we've got plenty of borrowing capacity. That's not the issue. We've got, oh, I don't know, 70-something-million of borrowing capacity in our revolver. So I'm not concerned about that, as far having the capacity to do that, and then really, as far as the share repurchase program, it didn't look like we did a lot. We really had a two-week window from when we announced the share repurchase program until our blackout period started for the quarter. And so with the limited volume that companies can do now, we're limited to 10 percent of the float and one day a week of block trades. I mean, it's just very hard to execute what I call -- especially in a small cap company -- big moves in share repurchase. But nevertheless, we're in the market and we did buy.

What we'll do going forward, Andrew, I don't know. You know, it just depends on -- you know, obviously not too many people think we did that well right now relative to this quarter and so, we'll just have to respond as the market responds.

Your next question comes from Donald Broughton [A.G. Edwards & Sons].

I'm looking at what you've said and looking at my model here. As we migrate into this -- call it $1.19, $1.20, cents a mile cost in the second and third quarters. I'm sorry, second and third -- second half, third and fourth quarters. Joey, is that kind of a run rate that we can expect because this has migrated slowly up as you've bought new equipment, offset a little bit by lower maintenance. Is that kind of a run rate that I can model --

Yeah.

-- looking to model for '05?

Yeah. We were -- yes, excluding what we do on driver pay, going forward, but we were $1.217 in the second quarter. We've said that, you know, we'll be at $1.21, $1.22. The equipment side of that, as I said, will go down between now and the end of the year and so that has stabilized and in fact, it should go down a little bit between now and the end of the year. And so there's nothing other than the driver pay increase that we put it in March that's going to push it, in our opinion, going forward. Insurance has stabilized, you know, pending obviously catastrophic accidents or something like that. So that is a good number.

Very good. So we'll see D&A plus equipment lease run at, whatever, 18.5 to 19.5 cents a mile and insurance at, call it, 7 to 8 cents a mile?

That's correct.

This is more kind of a thematic question, probably better for David. You know, the girl you guys came to the dance with was long haul. We've seen a multi-year, you know, compression in the amount of long haul actually offered. Truck to rail to truck intermodal has been pretty successful and there's been a big controversy, argument back and forth amongst all of us, is whether there really a shift out of long haul and intermodal, if that's ever going to come back. Based upon some of the intermodal data I'm hearing, as well as some of just even the beginnings of a turn in trend out of some of the American Trucking Association data, it looks as if long haul is really starting to pick up again. We didn't see a rebirth in it, you know, and obviously, profitability, you've laid that out very clearly. The money has got to be there. Would you be willing to go back out -- after shrinking your long haul fleet, would you be willing to go back out and grow it aggressively as you've --

Yeah, my answer is yes. You know, we're going to go where the money is at and if the customers are willing to pay us, then we will do that. And you are right, we are seeing some growth opportunities. I was with a major -- thousands upon thousands of shipments yesterday, a customer of ours, and the customer had taken off a tremendous freight off of intermodal going coast to coast. And so what you just said is a correct statement and if they are willing to pay us, then we will increase it. We will -- we're going to do what the market tells us to do.

So there's nothing in your infrastructure that you've changed and wouldn't allow you to go back to that --

Absolutely zero.

I thought so, but I wanted to hear you say it.

Yeah, absolutely nothing.

Your next question comes from Will Naskovitz (sp).

all my questions have been answered. Thanks very much.

Your next question comes from the line again of Justin Yeager.

Sorry about that. I was on mute. I just wanted to see if you guys had any kind of update on Conway's Truckload plans? I know we'll probably hear from CNF and possibly ask them that question, but if you've had any more discussions with them, and if you have any kind of insight as to how that might influence your business with them going forward, if anything changed?

Yeah. You know, we've had three or four conversations with them in the last two or three months and they don't expect it to change at all. They really believe that their transcontinental region-to-region business is absolutely exploding. I mean, they believe it's going to be around 200 million this year and you know, they see that thing going in excess of 500 million.

And there's no doubt that they are now doing business with virtually anybody that's got a team, trucker that's got any size at all to them. And that's really where their concern was, is that they started seeing everybody, including us, that said, you know, we can only do X-amount of business with you and we personally think that from their standpoint, that it's a right decision to make. If, in fact, they're going to grow that thing to $500 million, their current carrier base is not going to be able to get it for them.

In judging by their tonnage, it looks like they're heading that way, so --

Yes. So if they don't see it and we don't see anything out there, if they get the growth that they're expecting, we don't see anything out there that's going to affect our relationship with them.

Your next question comes from Nick Farwell (sp).

I just wanted to ask a little bit about rates. Are you able to increase rates at different amounts between dry van and reefer?

You know, reefer, the answer is no. The only thing that probably is different in that, Nick, is that we started seeing our ability to increase reefer rates a year and a half ago. Our reefer side of our business was going up 4, 5 percent starting about a year and a half ago. Now what we are currently seeing is that we're seeing that the dry van is now started to catch up with the percentage of increases on the reefer side.

Are you seeing any region where tightness in capacity allows you to increase rates, perhaps disproportionately more than other areas?

By region, not by van or reefer, by region?

Yes, by region and/or, say, lanes, for lanes, for example, out of California.

Oh, yeah, yeah. We're seeing both of that. Probably the only region of the country that I have a little concern about, you know, that we're only get 10 percent kind of rate increase numbers, we're not going to get that off the East Coast. The East Coast is doing okay, and we are getting rate increases off the East Coast, but it's not going to be at the gigantic numbers, but I will say that the rates going into the East Coast are increasing -- I don't know -- 15 to 20 percent kind of numbers to offset what we're not getting on the outbound out of the East Coast. So that kind of comes into play on that 10 percent kind of numbers that we got. So regions, the East Coast, concerned on the outbound side, no concern on the inbound, and yes, out of L.A., you basically can name whatever price you want to.

and how does that set you up going into this --

I mean, it's going to be phenomenal.

In terms of regional and dedicated price and in your case, regional versus long haul, have you seen the long haul, as much as you've described the differential between reefer and dry van, do you see that same sort of spread existing between, say, regional or dedicated or long haul? Are you starting to see long haul rates starting to accelerate?

Yes, yes, we are.

Is there any kind of shift mix that you're experiencing of any significance that would also enhance your yield in the latter half of this year?

Shift mix being a commodity or being in the lane?

Well, I was actually thinking of both in the sense of dropping lettuce to pick up, you know, high value-added electronic products, to be simplistic.

Yeah, not necessarily. They are both paying very good numbers now, very good rates, so you know, it almost becomes the ease of doing business and the partnership and all those kind of intangibles that go into play. So we're trying not to switch mix of reefer or dry just because of a three or four month type situation. We want to make sure that we're being corrected (inaudible) because as long as they give us about 10 percent rate increases.

Your next question comes from the line of Chas Jones.

One follow-up here. You know, in just looking at the fuel that negatively impacts 7 cents, you know, I kind of got some of your explanation. It just seems like it was fairly high compared to some of your peers and you know, traditionally, I know you guys have tried to manage fuel, so it kind of stays in a band, I think, of around 18 to 20 cents. Is there anything else there I'm missing or was it, I mean, simply like you said, with the new engines coming on and fuel probably did actually benefit you a little bit in the second quarter.

Well, that's as much of it as anything. I mean, the facts are if you're running a new engine, your fuel economy is worse than a year ago. Now we have 60 percent of our fleet now with new engines, so relative to the peer groups, we probably have a higher percentage than other people. So that probably is impacting us a little bit than other people.

Okay.

But, yes, we're in that -- last year in the second quarter, our fuel cost was 18.4 cents a mile. It was one of the lowest we've had in quite some time and a lot of that was just how the fuel moved late in the first quarter, and we all got a lot of surcharges in the month of April, lowered that. So we're comparing a high period, upper end of the range, to a low period, and you know, the impact to us was significant. I know West Coast Fuel impacted us by about $500,000. About 2 cents a share of that 7 cents was just West Coast Fuel and what we paid out there relative to the national average during -- combined with the gallons that we purchased our there, you know, it's not a small number.

I think that number will go down, because as we said too, you know, we're pretty successful to close the quarter on getting our new West Coast Fuel surcharges in place. So, we're already seeing that revenue pick up nicely since kind of the end of the second quarter going into this year, although the difference is coming down as well, which helps you as well. You know, on average it was 40 cents a gallon higher than the national average in the second quarter and that's huge. That difference today is only about 25 cents, so it's coming down, but we have another surcharge in price that will help us, but you know, fuel -- I still stand by my statement is that fuel travels within a band. It's just unfortunately in this quarter, we're comparing to a very low quarter last year.

Sure. And then your guidance was kind of predicated on fuel not coming down much from your --

That's correct.

Am I correct?

That is correct.

If we see fuel come down significantly at some point here in the second half in the year, certainly that bodes well for earnings.

That is correct.

And then one last thing. Joey, did you mention the percent of lease versus owned on the tractors? If you don't have that, I can follow up with you.

No. I didn't mention it. I've got it. Hold on just a second. We ended the quarter with about 29 percent of our company-owned tractors leased.

Okay.

So we still buy the majority of our tractors, but some of that is some walk-away leases that we did last year, and then trailers, we leased a big chunk of our trailers. About 85 percent of our trailers are leased right now.

Your next question comes from Nick Farwell.

Dave, I just wanted to add on a quick question regarding Union Pacific. To the degree that they have been stumbling in providing capacity out of the L.A. area -- well, out of the West Coast certainly, but particularly, L.A. --

Right.

-- to what degree has that benefited your long haul business?

Nick, it's just made the availability of more freight out there, but there's plenty of freight with or without and they're just putting more pressure on the customers of the freight that comes out of Los Angeles. That makes the rate increases even more easier to get out of Los Angeles, but keep in mind, the last eight or nine months out of the year, it wouldn't matter if the railroad was having problems or not. You know, there's still a lot of freight that comes out of L.A.

Are you aware or have any sense of that situation improving at all or is it your sense that it's deteriorating further, which may aggravate this sort of Christmas rush?

Yeah. We are sensing that it is deteriorating worse and two examples that I have is that -- one is a large, large customer that depends upon the UP a lot, a few months ago was taking a lot of the freight off the rail and trucking it. And then about 60 days ago, they stopped taking it off the rail and we thought that it was over with, and then just in the last couple of weeks, we started seeing more and more of that freight going back on the truck. So that's one issue.

And then the other one is the example I gave yesterday on a customer that had thousands and thousands of loads a year that just made a decision strictly based upon service, that they yanked a lot of their coast to coast freight off of intermodal yesterday. It's going to put it on truck.

At this time, there are no more questions.

Well, we just want to wrap up by saying thank you for joining us. We are glad on the quarter and we're glad on what we're seeing in the industry and what we see the future holds. So we'll be welcome to see you next quarter. Thank you very much.

This concludes today's Covenant Transport conference call. You may now disconnect.