Covenant Logistics Group Inc (CVLG) 2004 Q4 法說會逐字稿

Good morning. My name is Tina and I will be your conference facilitator today. At this time, I would like to welcome everyone to Covenant Transport fourth quarter earnings release conference call.

[Operator Instructions].

Thank you. Mr. Parker, President, Chief Executive Officer, and Mr. Hogan, Chief Financial Officer. You may begin your conference.

Thanks, Tina. This is Joey Hogan. I will begin with the financial highlights for the quarter and then David will follow up with his perspective of the current freight environment as well as any updates on efficiency measures, drivers and equipment. I'll state in advance that this call will include forward-looking statements within the meaning of the Private Securities Litigation Formats of 1995, and this information is in accordance with the company's current expectations and is subject to certain risks and uncertainties. We encourage you to review those risks and the company's filings with the Securities Exchange Commission.

I would like to begin with miscellaneous financial information that was not covered in our press release. First of all, we ended the quarter with 217 on our operators. They comprised 6% of the miles for this quarter versus 11% of the miles in the fourth quarter of last year. Regarding revenue equipment, our capital expenditures, net of dispositions were $5 million during the quarter, and we finished the year at $32 million.

We averaged for the quarter about a 1013 teams, which were 190 less than the fourth quarter of 2003, but we're about the same as we had in the third quarter of 2004. Revenue equipment rental expense was $9.4 million in the fourth quarter compared to $7.4 million in the fourth quarter of 2003.

An approximate 90 miles per load reduction in our average length of haul was a contributing factor in our dead head or non-revenue miles percentage increasing, about 140 basis points to 9.1% from 7.7% last year. Total miles decreased 11% as a result of fewer teams, fewer average tractors, and increase in unseeded tractors and a shorter length of haul.

Regarding expenses, our operating expenses net of fuel surcharge excluding the non-cash insurance charge declined during the quarter by 1% to 135.7 million from a 136.8 million in the fourth quarter of 2003. Remember though that our total miles decreased by 11%, so cost per mile increased.

Within the detail of expenses, because owner operators accounted for only 6% of the miles during the quarter versus 11% last year, costs were shifted from purchase transportation to salaries and fuel. Driver pay itself was up 6.3 cents a mile or about 18% versus a year ago as a result of three driver pay increases we instituted during the year. Second versus a year ago insurance and claims expense increased 1.1 cents a mile to $0.09 per mile, which is within the accrual range that we have discussed in our press release, and the same amount that we recognized during the third quarter.

Regarding fuel costs, we worked very hard during the quarter to strengthening our fuel surcharge program to minimize the increased costs of diesel fuel and to help recapture some of our lost fuel economy due to the new 2002 emission-compliant engines. Diesel prices averaged $0.61 per gallon higher than the fourth quarter 2003 and $0.27 per gallon higher than the third quarter of 2004.

Additionally, our fuel economy was 3% worse than a year ago due to the growth of the 2002 emission-compliant engines as a percentage of the total fleet. These factors negatively impacted our fuel expense by $9.4 million.

On the other hand, our fuel surcharge revenue grew by $10.4 million and helped us reduce our cost of fuel net of surcharges to 19.9 cents per mile from 21.3 cents per mile in the third quarter of 2004, but it was still up slightly versus the fourth quarter of 2003 of 19.5 cents per mile. Our equipment ownership costs net of maintenance expense increased approximately $500,000 for the quarter versus last year.

For the past two years, our revenue equipment strategy has been to invest in upgrading our fleet and offset as much of the capital cost as possible with maintenance savings, driver acceptance, and greater reliability.

We believe we have one of the newest tractor fleets in the industry with an average age of 16 months as of December 31st, 2004, compared to 19 months as of the end of 2003. As a result of this strategy, revenue equipment ownership costs bore the sum of depreciation, lease revenue equipment, and interest expense increased $2.1 million over a year ago, mainly because of the additional capital costs of the new emission-compliant engines. This was largely offset by savings in operations and maintenance expenses, which decreased by $1.7 million because of the newer fleet. Overall, we believe that the increase is less than we would have incurred without accelerating the fleet upgrade.

Now I'm going to talk about the non-cash increase to our claims reserves. Without repeating everything that went into the press release, I want to cover the chain of events that contributed to the increase in reserves. Prior to 2001, Covenant operated with little self-insured retention, so claims accruals and reserve analysis was not a material part of our business.

After 2001, as a result of significant changes in insurance market that affected companies in many industries, Covenant increased its primary attention layered at several stages between 2001 and 2003 up to $1 million for worker's compensation and $2 million for casualty claims.

We implemented a policy for estimating claims, engaged the services of an experienced third-party administrator to help us establish and monitor claims reserves as well as began quarterly internal reviews of our reserves. After our retention levels were increased, we experienced an increase in the frequency and severity of accident claims; in particular 2003 was a difficult year.

Though several large clients eventually showed a growth and estimated ultimate liability that was above anything we had expected. We believe an actuarial study was prudent because we were approaching two full years of $2 million deductibles for casualty claims. We were experiencing the development of large claims above our estimates, and our aggregate reserves had reached a substantial size.

We engaged a third party actuarial firm during the third quarter 2004 and their report was completed on January 6th. The actuarial report was over 200 pages long with numerous detailed assumptions with the main recommendations being two things. A range of estimated accruals for existing worker's compensation and casualty claims and number two, a range of estimated accrual rates for worker's compensation and casualty claims based on our historical incident rate as well as historical development factors.

After reviewing the report in the range of actuarial or methods used, which provided additional information and insight. We revised our estimates of ultimate liability for incurred claims. We used actuarial recommendations as one factor of many that we use to evaluate our claims reserves.

In revising our estimate, we recorded a $1.5 million pre-tax increase to workers compensation reserves, which is included in salaries, wages, and benefits expense in our income statement. We also recorded an $18 million pre-tax increase to casualty reserves, which is included in insurance and claims in our income statement. For casualty accrual rates going forward, we are expecting for the immediate future to accrue eight and a half to nine and a half cents per mile until such time as there is a material and sustained change in our frequency and severity of accidents.

For 2004, particularly the trend was significantly better than in 2003, but we're not ready to incorporate recent experience in accrual rates at this point. The estimated range is within the range recommended by the actuary.

For workers compensation, we are expecting a future accrual rate consistent with our accrual rate for the past two years, which is also consistent with the range recommended by the actuary. Based on the amount of time and effort, we and our advisors have spent in assessing claims reserves, we believe that there has been an exhaustive study of the estimated ultimate pay out of our claims.

Based on all the information and development available to us, we believe we have an appropriate claims reserve estimate accrued.

In addition, we have developed additional internal tools for performing analysis of our reserves using many of the same procedures used by the actuary. We intend to report these analyses, in addition to those presently done, on a quarterly basis.

The next question we have to answer, and the more important question for the future is how will we reduce our claims costs in future periods? The most effective way is to reduce our accident per million miles.

To this end, in the second half of 2003, we instituted a four-part program that is beginning to show results. The key components are, number one, stabilize our safety management group by recruiting the best leadership we could find. Number two; increase the training for inexperienced drivers using focused programs. Number three; team students after their graduation from a trainer in order for them to capitalize on learning experiences from other drivers of like driving backgrounds.

Number four, improve our weather-tracking program and empower our risk management group to proactively enforce severe weather shutdowns for our fleet. We have partially or fully implemented all of these components and believe that they have helped us to reduce our accidents per million miles by 17% in 2004 versus 2003, as well as reduce the number and severity of accidents that we categorize as major by 20% and 52%, respectively.

We are also evaluating other methods of controlling our claims expense, including bringing a greater portion of our claims management function in-house. We believe the prospects for reducing claims expense in the future are good. However, even if the positive trends continue, it will take several quarters for improved results to be reflected in our quarterly analysis and our financial statements. Over the past few minutes, I have summarized months of work on our claims reserve and estimated accrual rates. We wanted to provide a good amount of information and focus on the important task of bringing down costs.

Now, I''ll turn to the balance sheet. Despite significant capital expenditures to upgrade our fleet, our financial position remains quite strong. For the quarter, we paid down our balance sheet debt by $8 million to $52 million.

As of the end of December, we had $196 million in stockholders equity, which resulted in a balance sheet debt total capitalization ratio of 21%. While our book value per share ended the year at $13.15 per share. Our off balance sheet leases had a present value of $116 million at December 31, 2004, excluding the residual portion of track leases, which, where we have trade-back arrangements.

In December, we completed a new five-year $150 million credit facility with a bank group that included four additional participants. This new facility is priced competitively with flexibility built into the agreement to again capitalize on growth opportunities at the right time.

Looking ahead to 2005, we are not planning on adding any growth to our fleet until we achieve approximately a non-operating ratio. We anticipate that we have replaced about 1200 tractors and 300 trailers during the year. Capital expenditures for the replacement units are expected to be in the range of $65 million to $70 million, assuming we purchase all the equipment on balance sheet.

We have the opportunity to take delivery of 100 to 200 incremental tractors during the second half of the year. It is justified by our results. The incremental units have not been reflected in our capital budget. Assuming continued strength in the shipping economy, growth in trucking capacity at or lower than the growth in shipping, and a continued evolution of our business towards dedicated routes and shorter average length of hauls, we expect to raise our average revenue per loaded mile, excluding fuel surcharges by at least 6% in 2005. We expect driver pay to increase approximately 10% to 15% year over year in 2005, considering the full-year effects of the 2004 raises, plus planned 2005 raises.

We believe that we have a good opportunity to lower our cost of fuel after surcharges, as compared to 2004 based on the new surcharge programs we began implementing during the fourth quarter. Other expenses are expected to follow normal trends, and as we discussed at our last conference call, due to the complications of forecasting a business with the models evolving, we are not going to project EPS expectations for '05. Nevertheless though, for 2005, we expect continued improvement in our margins. Those are the end of my comments. Now, I will turn them over to David.

Thanks, Joey. The fourth quarter results are really exciting to me. When you consider 180-basis point improvement in our operating ratio to 92.2% excluding the charge, which is the best quarterly performance since 1999 is an accomplishment. Our main accomplishment during the quarter was that we were able to grow our revenue per loaded mile by $0.21 per mile or 16% during the quarter versus a year ago.

Additionally, the rates grew $0.09 per mile or 6% sequentially versus the third quarter of 2004. These increases help reduce an increase in our revenue per truck per week of slightly over 6% to $3208 per truck. Of course on the negative side, our utilization was down approximately 7%, 6.9% versus last year, primarily as a result of fewer teams and a shorter length of haul. For the quarter, our average unmanned truck count was approximately the same as last year. However, we did fill approximately 55trucks during the quarter to finish with about 3% of our fleet unmanned versus 5% at the end of last year.

Customers and rates for the quarter; our top 100 accounts represented 90% of total volume, and they grew 23%. We have 32 new accounts in the top 100. Excluding the new accounts, the remaining top 100 were up 8%. Obviously, with our freight revenue and total being flat with a year ago, and our top 100 accounts growing greatly, you can see that we're concentrating our capacity with customers that will pay us a fair price and work with us to increase efficiencies within their supply chain. An obvious result is the consolidating volume within our top 100 accounts.

For the quarter, the percentage of revenue, transportation was 32%, retail 23%, paper packaging 12%, food and beverage 9%, manufacturing 7%, floor coverings 5%, electronics 5%, autos 3%, consumer goods and housing materials 2%.

As we have said earlier, our average freight per load of mile for the quarter was up 16% over the same quarter last year. During 2005, we expect our average revenue per load of mile to grow at least 6%, although the rate of growth over the prior year's period may narrow in the second half of the year because rates accelerated for us in the second half of 2004. During 2004, average price revenue per load of mile grew by $0.18 per mile or 14% from a low of $1.32 in the first quarter to $1.50 in the fourth quarter.

Our 2005 sales objectives will be to continue to raise our rates and grow our dedicated division. Even though our length of haul has declined about 90 miles versus a year ago and contributed to our rate increases, we have raised our rates nicely in all length of hauls, particularly we have raised our rates in our medium haul or our tweener loads by $0.14 per mile and a percentage of loads have decreased from 22% in the forth quarter of 2003 to 20% in the fourth quarter of 2004. For the year, our dedicated division grew 85% from 300 trucks in 2003 to 554 trucks at the end of 2004.

A little bit on new engines. We currently have in service almost 82% of our company-owned fleet, 2700 units, which are equipped with new emission-compliant engines. We probably have the highest percentage of new engines among the public companies and have already taken the majority of the hit for the additional engine costs and reduced fuel economy. Our cost of capital and lower fuel economy should not go up as much in 2005 as they did in 2004 due to that fact. We continue to be pleased with the performance of the engines versus our expectations. We are currently seeing approximately 3% fuel degradation and no significant maintenance increase versus a pre-EGR engine. This concludes our comments and we will now open it up for any questions that you may have.

[Operator Instructions].

Your first question comes from Edward Wolfe from Bear Stearns.

Good morning guys.

Good morning.

Good morning.

Hi, Joey, I apologize if you went over this a little bit, but can you just talk about where CapEx ended the year in '04?

Yes, the end of the year, $32 million, net of disposition.

What was the gross?

If you go into another question, I will get that real quick. I don't have it right here.

Okay, so the next question would be, the '05 guidance of $60 million to $70 million, that is net of disposition?

That's correct, that is net of disposition, assuming all of its own balance sheet.

Okay. Can you talk a little bit about how the quarter unfolded, David, you know, as you look out, you know, October and November, and December and now January? Have you seen any change in demand year over year taking seasonality out of it? Is the economy getting a little better, getting a little worse? Are the costs getting a little tougher? What are you seeing sequentially as you look out and you face demand.

First of all, the forth quarter was definitely a great quarter and really was just a -- you could see the momentum building as the year progressed into the fourth quarter and the fundamentals that, in my opinion, have been there for the last year and a half continue to be very, very good. There's not a lot of capacity that's in this market, and so all of those safe fundamentals of supply and demand and all that stuff is still there. December was a very good month. There's no doubt that Christmas on a Saturday definitely helped, as much as Christmas on a Wednesday hurts.

So it definitely helped because it gave you a full week's running during that time, so we came into the first of the year in January and it is more of a typical January, it is really where you're at it. If you remember the industry really experienced last January, maybe the best January ever.

I mean, it was an excellent, excellent January, as well as we got some pretty decent relief from the weather last January. The weather didn't really start getting crazy until February time frame, so January was a good month. I would classify this January as a typical January that's out there.

We have started seeing -- you know, after the first two weeks in every year, I don't care if it is a good or bad January, it takes us about 10 days, the first 10 days of January to get your trucks back in operating and get them back on the road and those kind of things, and so that's what happened the first couple of weeks.

We started seeing business picking up pretty nicely last week, and I actually started getting pretty encouraged about it, and then I saw, you know, Friday, Saturday and Sunday, that started in Minnesota, Wisconsin, and you lived it, and some of the folks definitely lived it in Boston on the blizzard that happened, and so that knocked out a lot of Friday, Saturday and Sunday and Monday's business, so, you know, that hurt.

You know, what we're seeing there is this. I'm seeing a typical January. I'm seeing rates right now that are still continuing to climb and will continue to climb. I'm seeing rates, right now at 8% to 10% over last January. I'm seeing utilization 5% to 7% less than last January, and again, keep in mind, we have got 190 trucks less teams than we had last January, and you kind to look really, the last year and a half as our model continues to evolve, what that percentage of less teams does to the total overall amount of numbers, right now, it's probably 3% or 4%.

That's kind of what I see. Again, I'm very encouraged from the standpoint that I believe the economy is going to be a very good economy. I don't sense a slowdown other than the month of January is January.

You improved your operating ratio, not including the one-time accrual charge, 180 basis points year over year in the fourth quarter. Can you sustain that type of OR increase in the first quarter, assuming nothing crazy happens between now and the end of the quarter? You know, year over year, realizing you had a very tough comp in January a year ago with all the costs and things you are doing?

You know, there is no doubt, I'll let Joey say, there is no doubt, as you know from a team standpoint, even though we have reduced our teams, we still have 1050 teams. We have still got a lot of teams. There's no doubt that the first quarter is more difficult in Covenant on the long haul side with our teams that it has a lot of folks on the short laps of hauls because of the teams not out there stretching and running, you know that third shift department out there, factory, so that's hurt us every first quarter of every year and that's why our earnings are usually lower in the first quarter. You know, we feel very, very encouraged about what we see happening out there. I mean Joey; do you want to add anything?

Well, I think the thing to keep in mind is besides what David said is that the fourth quarter was an exceptional period for us. I think, you know, I don't want to come on -- we're confident that the margins will continue to improve. Third quarter was 130 basis points over a year ago. You know, I've got the full year effect of all these three ratings, driver pay increases that we talked about in the first quarter, plus one month of our new increase.

We have announced another driver pay increase effective March the 1st, and we'll have a full month of that in the quarter, in the biggest month of the quarter, so -- nevertheless, the whole industry is moving and we felt we needed to move because we have made some progress. We wanted to keep the pressure and the momentum building from a driver standpoint. So, you know, from a driver cost side, the biggest side of the income statement is going to be big in the first quarter compared to a year ago - our rates are moving up to.

But your rates are moving quite a bit comes in also; you think you can hold those?

Hold the rate?

Yes.

Yes, I mean rates are going to continue to climb.

Okay, so I mean the feeling I'm getting is maintaining 180 basis points year over year is not so easy to do on a first quarter. It is easier to do over the year maybe, but not over the first quarter, is that a fair statement?

That is very fair. Very, very fair.

Thank you. You talked about a little about demand David and team versus regional. Where is the best pricing right now for you?

We have raised -- we have raised both of them. We are learning, as I've said, in the last two or three conference calls, I'm getting more and more impressed with all of our abilities around here on this short haul. We are learning this short haul on a scale of 1 to 10, you know, a year or 15 months ago, we were at a zero, and I would tell you today we're at about a 6 or 7, and so we have made tremendous progress and we have been able to raise pricing in all lanes, and what I mean by that short haul, those tweeners and our long hauls.

Now, have we been able to raise the long hauls because of our reduction of teams? Maybe yes. There is not as many teams out there in the United States as there used to be, starting with us, and there is no doubt that there is a tight capacity of teams, and so we're able to charge what we need to charge, so we've been successful in all three of them. Does that answer you?

Yes, I mean, -- so none of them is obviously stronger or weaker on than the other in terms of pricing?

No, I'm very happy with all of them.

Okay. Joey, just any sense of the timing of when the charges we can have a cash impact?

No. No. I don't have any idea. But it is not, I mean, I would venture to say that it is anytime within '05. I'm very comfortable with saying that. But no, I don't have any idea.

It won't all happen at one time either, right?

Absolutely. Absolutely. I mean it is, as December 31st , non-cash, zero impact to our credit facility, zero impact to our pricing. I mean, it is non-cash, and it will stay non-cash for a good while of which I don't know how long that will be. Obviously, if the ultimate pay out ends up being true, it will turn into cash at some point in the future, but we have no idea when that would be.

Okay. Were you able to find what the gross CapEx number was?

Yes, I do, in the fourth quarter, it was $18.1 million and for the year it is, $81.6 million.

Thank you very much. I appreciate it.

Your next question comes from Tom Albright with BB&T

Hey, guys, good morning.

Hey, Tom.

I just wanted to ask some more strategic-based questions. Over the last three years, you've gone from virtually no presence in the retail industry to 23% this quarter, yet the last three or four quarters it's kind of stalled out at 22%, 23%. Is that about where we should think about Covenant over the next couple of years in terms of its retail exposure? I guess, in my own gut, I'm thinking that as your length of haul comes down and you continue to grow dedicated, that over time that may grow to represent 30% or 35%.

Tom, based upon our current size, I kind of think you're within 2 or 3 points of that number right now, because we are making a concentrated effort on how big we're interested in growing that, and you know, so, as long as the economy is a strong economy out there, we're going to pick how much retail business we want to do. I mean, if we went to into a recession tomorrow, you may see, you know, next year, you may see, it going a little bit higher, but we are making a concentrated effort for it not to become a big, big, big portion of our business.

Okay, and then owner-operators, you lost 196 during 2004, end of the year at 217. If you have another year like '04; you're going to be down almost nothing. What steps are you doing to stabilize that? What -- I mean, should we just sort of think about Covenant is having 200 owner-operators ongoing? Help us understand the dynamics there, and that, you know, big decline in 2004.

Tom, I do think that is a correct statement that, you know-- personally, my belief is until this owner-operator pay gets up dramatically. I think it is kind of hand in hand with the driver situation, and until it gets up dramatically, I just don't see a whole lot of hope. I don't think paying these guys $0.88, $0.90 a mile. I don't think they can pay for their trucks, unless they are truly a pure owner-operator. What you have sensed from us is that the fleet side of our business is virtually gone. I mean, we are really a pure owner-operator with a guy basically driving his truck that can pay for it.

And you know make somewhat of a living like he does as a truck driver, and hoping that one day the property he makes his equity that he's able to establish in that truck, but that is having to eliminate these, you know, $2200 and $2400 and $2500 a month payments, and when those folks could come to us, even though short-term, it might be the right thing to do, but as we get $2400 and $2,500 payments, we almost persuade them not to come to Covenant because I don't see that it is a long-term situation for any owner-operator out there that could make it out there with that kind of payments out there.

I think we're fooling ourselves, and I think these owner operators' pay needs to be up thereat $1.10 kind of numbers. If we think that we're going to have the industry that has got a lot of owner-operators, so, yeah, if think about you, I think I would plug 200. We are trying --. We are offering a lot of things out here from insurance to maintenance work and trying to do the -- where they can buy products and those kind of things and trying to do the things to help them, but at the end of the day, you can only dress that truck up a little bit, but after a while, if it's ugly, it's ugly.

Right. What about -- I know for the most part the industry is generally been hesitant to pay owner-operators a percentage of the load, whether it be IRS concerns or other issues. Given the enormous problem that the company-oriented fleets are having with owner-operators, what are your thoughts on paying a percentage of the load?

Well, we basically have just stopped to do that. I mean there is no doubt that you have got Lance Star that has been the most successful in adding the owner operators. There are times that everybody that I know was losing owner-operators. Now that the total owner-operators are being lost, so it is not a matter of one company losing them. It's a matter that the whole amount of owner-operators is down, and, you know, they do some good things over there for their owner-operators standpoint, and you know a lot of it is the percentage that they are offered them, as well as, I think, a lot of their owner-operators come in with 20 and 30 fleet kind of deal with business intact. They are almost running their own little company, and we don't have that model, but it's not to say that a percentage of revenue is not one of the answers. I mean their model has shown it is one of the answers, so you don't ignore it forever. I mean you look at it.

Right, another sort of big picture question. I know you remain committed to getting the OR down first, and then if the opportunity arises, you may add 100 to 200 trucks, which is very modest percentage growth, but the M&A market is starting to heat up a little bit. My sense is talking to someone who specializes in representing carriers that want to sell, that their prices might be getting a little bit more realistic. What are your thoughts? You were a big-time participant there, given the increased values in the used eye equipment market. Are you going to re-explore that in 2005?

Tom, we always have four or five companies that we have relationships with and have built relationships with over the years and continue those same relationship, and very up front, from our standpoint for the last two years, that they have got, we have no desire, absolutely no desire, still love, still like, you still go out and play golf if you want to, but we have no desire to purchase anybody until we know that this company of Covenant is where we want it at and not take anything away from our management team, so you know that's our position.

Now, at the same time, I do believe for the industry that you're going to start seeing acquisitions taking place. In my personal opinion, in the year 2005, maybe the second half of 2005, if the economy is the way we all think it's going to be, I think you will start seeing that, because I do believe that the major truck load carriers have absolutely gotten religion about this capacity.

I mean, we don't think the industry wants to go through what we went through and I think we're going to do everything in our power to control capacity because the end result is that if you don't, you go broke in this industry, but at the same time, you know, speaking for Covenant, we want to grow. Under a worried young management team, and we want to grow, but we're not going to do a tremendous amount of internal growth, so it would be coming through the acquisition side when we determined that time was right.

Okay. Then, lastly, Joey, to clarify on the improvement in your rate per mile of about 6%, was that including changes to your length of haul or that sort of net of whatever goes on with the length of haul?

Yes, that is net. The key word there is at least.

At least right?

At 6%, so we feel that's a very good number, and you know, David has already said we're tracking higher than that, you know, in the first quarter right now versus a year ago, but we're comfortable with at least 6% for the entire year.

Okay, good. That's all I had. Thank you, guys.

Your next question comes from Andrea O'Connor with Wells Fargo.

Good morning Dave and Joey.

Good morning Andy.

Most of my questions were answered, but any meaningful up check of truck college in to or out of the Los Angeles area caused by weather related interruptions derail earlier in the month or is this incorporated in your description of January's typical, Dave?

Yes, it is. It is incorporated into the typical January, but there probably have been, Andy, probably have been 25 or 30 loads a week that I could say came off the rail and you know we put hundreds of trucks a week out there, so I mean we pay up, but it's not anything that is really major material.

Okay. Great quarter. Thanks, guys.

Thank you.

Your next question comes from Nick Farwell (ph) with Harbor Group (ph).

Good morning, gentlemen. I was kicked off the call for a few moments so I'm not sure if this question was covered perhaps by Tom, but where would you think you would see the initial improvement in the availability of drivers? Where might that be manifested initially? Should compensation levels reach a level where drivers begin to show up both at your company obviously and at others?

And the question is, what do I think that number is?

Well, I guess that's part of the question. I didn't think of that. That's a good question, but I'm thinking more about where do you think you'll see it first? Would it be owner-operators? Would it likely show up in company drivers? How are we going to gauge that approach towards equilibrium.

It is going to be the company's side of it, but Nick, in my humble opinion, what I think is happens, and we filled what, 55 trucks in the fourth quarter and we got whatever 3%, 120 trucks or so that are empty right now.

Anyway, though, I think that is what is happening is that we have increased our driver pay and other carriers have increased their driver pay. The only thing that we've done is stolen from other carriers. I think this March increase that we're coming out with, it's good and it's the right thing to do, and we will steal some more drivers from other carriers that have decided right now that it's not the time to raise, they are waiting until June or September or until whatever everybody is doing.

I think there is still this stealing of drivers because, you know, our average pay is up around $40,000, $41,000 per driver, so we raise them 10% this year, so we get up to $44,000 per driver, and my humble opinion I think it's going to be $55,000 to $60,000 a year before we're going to see people coming out of this warehouse across the street from me and walking up the driveway saying I want a truck driving job.

I think -- I personally think it is many years away. I think it's two, three, four years away, barring recessions. As you know, as recessions come, we get all our trucks sealed, don't have nothing to do with them, but we get them all filled. Barring recessions, I think it's a few years away before we're going to do it because no one has the guts to take it to $60,000 tomorrow, because if it doesn't work, you're out of business.

But isn't that -- I assume that compensation levels are also associated with the business mix. For example, dedicated a regional, might your compensation level might be different than long haul.

I don't disagree with that statement. That's a true statement. I don't disagree with that at all. At the same time, there's definitely a big benefit of running a short haul that you're getting the driver home. He definitely does not require the amount of money that a long-haul driver is going to require.

There's no doubt also that most of his expenses like eating and those kind of things are lower, probably by about 25%, so his cost of living is not as much running on the short haul side and you're able to get him home.

They will work for a less amount of money than what the long haul guys are, but both of them are still underpaid to be able to get a big group of people to come into this industry.

And you haven't seen any shift, I assume, David, in either one of those growth segments either long-haul team or regional dedicated because of rising compensation levels yet?

No, I haven't.

I had forgotten what the March wage increase was or will likely be, whatever the right way to say that.

It is going to be around $0.03 a mile.

Okay. So that's -- what does that translate into - on a sort of annualize basis.

As far as dollars for a driver?

Yes, roughly. Are you increasing it 7 to 10% or --

Oh, that will be about 8% increase.

Okay. That's on top of the fourth quarter increase of something relatively similar; that right, Joey?

Correct, Yes, we go from 12-31-03 to 12-31-05 if you were count benchmark pre, and the post, driver's pays are going to be up for us 25 to 30%.

I see. Okay.

Now on your additional question, we did say, dedicated (inaudible) who are still interested, you know, in growing our dedicated fleet. Not only is it more of an annuity strain, arguably you might miss out a little bit in the spot market, but long term, we feel it one of the best products we can do, not only for our customers, but our drivers, and so we know our turnover is much better in our dedicated program for reasons that David has already said.

It is consistent freight. It's good pay. It's fair pay, and the turnover once you get a network to calm down is extraordinarily low versus just regular over-the-road freight, so, you know, as David said, I think the way to think about it is that at some point, the industry will cross a line that will keep a driver that's working with us today from leaving today. Whatever that number is, the ultimate number we all believe, several of us talked about it, $60,000 or higher. But I think as we go along that pass toward it, we will cross the number that will at least start improving the situation.

You know, I kind of characterize it back into the 90s. You kind of examine that period of time when the economy was very good, driver turnover was high, but the industry was able to grow 20% a year. The reason was we were consistently hitting driver pay each year, three, four, five percent a year on top of their tenure-based increases.

We were consistently hitting it each and every year. Unfortunately, we went 2 or 3 years in the industry, there were some people out large doing it, we went 2 or 3 years of not doing anything and what we are doing right now, we're in the middle of catch-up, and until we kind of get the ball moving again, we're in that middle of catch-up and then we will hit a poor period where we will see retention improve.

We will see turnover start to decline, but right now, my opinion is that the industry is just doing catch-up until we get the ball going and I think it will be able to facilitate possibly, possibly growing again, and so that's kind of the way I think about it.

Is the 25 to 30% numbers you suggested, Joey, reflective of a wage increase beyond the 8% of March, in your mind?

No, that would include that number.

Okay. So if there's another increase post-March that would be incremental to this rough estimate of 25-30%?

Well, that number includes a possible another round in the fall.

Oh, it does? Okay. That's what I was asking. Okay.

It's a big move and I think the industry as a whole has moved around those numbers but it's big. If you go from '03 to '05, it's going to be for several carriers 20% to 30%, easy.

On the basis, someone who is earning in the mid 30s are now earning in the mid 40s?

That is correct.

Something in that magnitude?

Correct.

One other question I want to follow-up on and that is, where do you see your line of business evolving towards -- I apologize I didn't say that very clearly. If you were to take long haul team as your core business and dedicated regional as your new emerging business and we are to look at the mix today, in a rough sense between those two segments, where might it be heading, do you think, over time?

I think that you are probably seeing without any growth, just flat lined of where Covenant is at today, I kind of think that you are probably close to bottoming out of our team. You know, we kind of started seeing that the last couple three quarters, so I think it's in that 1000, 1050, 1100, you know, kind of number on the teams and those trucks are your long haul, just you know moving back and forth very nicely, and then it also on the reaper side of the business, that's where a lot of teams are going to be located at and then on the regional side of the business, we will continue to take market share not from those thousand trucks, but predominantly from the tweeners.

So you are going to see, I believe, the tweeners getting lower and lower on percentage that we do of that business and those trucks will be going to regional short haul or the dedicated side of the business.

Do you ultimately see yourself -- I mean, to try to project this out over time, could you be as much as a third in regional dedicated?

Yes.

Yes, yes.

So that could be, perhaps, 40% of your business?

Yes, yes. I mean I see it getting bigger than that.

Oh, really? So 50/50?

Yes.

Oh, okay.

The way to think about it is that there are, to be clear, the way we think about it internally, there is four units. There is expedited, long haul, team freight, there's dedicated, which can include singles, the teams, there is refrigerated, which we're extremely pleased with, continuing to give assets. It's going to get more assets in '05 and has been growing over the last 2 to 3 years and then we have what we call regional.

That's obviously everything else and so the assets have been going over the last two years, in particular, '04,you know, in a big way, dedicated, I would say grew 85%. They got an additional 200 trucks within the unit.

The reaper (ph) side as far as fleet size grew about 10%. So, reaper side grew. Teams, we have already said, we are down 190 versus a year ago, not as much by choice, but more driven by the driver situation, but it has stabilized, so the regional side is obviously where the opportunity has always been for the last 2 to 3 years, and continues to be, but was in that what David was saying is that you will see freight moving from the tweener side to the short haul side probably.

If there is a choice of one or the other, it is going to move to the short. So, you know, that piece of the business, if you then go and combine just short haul, freight, excluding the others, you know, it could be a meaningful piece of the pie, or it's going to be a meaningful piece of the pie.

Thank you very much. I appreciate it.

Thank you.

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We want to say thanks to everybody for joining us. We will be looking forward to talking to you next quarter. Thank you.

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