Covenant Logistics Group Inc (CVLG) 2005 Q1 法說會逐字稿

Good afternoon. My name is Meredith, and I will be your conference facilitator. At this time, I would like to welcome everyone to Covenant Transport's first quarter earnings conference call. Speaking today will be Joey Hogan, Chief Financial Officer, and David Parker, President. 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 one on your telephone key pad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the conference over to Joey Hogan. Please go ahead, sir.

Thanks, Meredith. Good afternoon, everybody. As you recall, we preannounced our first quarter earnings and had a well-attended conference call about a month ago. During the call today, I will begin with the financial highlights for the quarter, and then David will follow-up with a few comments about any changes in the freight market over the last month, and then we'll just open it up for questions. I'll state in advance that this call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. And this information is in accordance with the Company's current expectations and is subject to certain risks and uncertainties, and we would encourage you to review those risks in the Company's filings with the SEC.

I'll begin with some miscellaneous financial information that was not covered in our release. We ended the quarter with 198 on our operators, and they composed 6% of the miles for the quarter versus 11% of the miles last year. We had capital expenditures in the quarter of $12 million, and that's a net number, net of dispositions. We averaged about 975 teams during the quarter, which were 125 less than the first quarter of 2004, and were down about 60 sequentially from the fourth quarter of 2004. Revenue equipment rental expense was $10.2 million during the quarter, compared to $8.6 million in the first quarter of 2004.

A 100-mile per load reduction in our average length of haul to 907 miles per load was a contributing factor in our deadhead, or nonrevenue miles percentage, increasing about 130 basis points basis points to 10.2% from 8.9% last year. Our total miles decreased 13% as a result of fewer teams, fewer average tractors, and a shorter length of haul. Regarding our expenses during the quarter, our operating expenses net of fuel surcharge declined during the quarter by about 3% to $123 million from $127 million in the first quarter of 2004.

Remember, though, that our total miles decreased by 13%, so our cost per mile increased almost $0.12 a mile to $1.31 from $1.20 per mile during the first quarter of 2004. 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 purchased transportation to salaries and fuel. Driver pay was up about $0.06 per mile, or about 16%, versus a year ago, as a result of the various pay increases instituted during 2004, and another $0.02 per mile increase as of March the 1st of 2005.

Second, versus a year ago, although insurance and claims expense of 9.3 cents a mile is within our forecasted range, it has still increased 1.7 cents a mile, from 7.6 per mile during the first quarter of 2004. Lastly, general supplies were up 1.2 cents a mile versus a year ago, due too that we are now paying for physicals and drug tests for our drivers than in the past we were charging drivers for, and an increase in our general bad debt reserve. Regarding fuel costs, diesel prices averaged $0.47 a gallon or 29% higher than the first quarter of 2004.

Additionally, our fuel economy was 2% worse than a year ago due to the growth of the 2002 emission compliant engines as a percentage of the total fleet. As of March 31, we have approximately 86% of our fleet running the new engine -- the new emission compliant engines, and we anticipate being 100% by the end of this quarter. These factors negatively impacted our fuel expense by $5.9 million. On the other hand, our fuel surcharge revenue grew by $7.3 million, and helped us reduce our cost of fuel, net of surcharges, to 21.5 cents a mile versus 21.2 cents a mile in the first quarter 2004.

The 29% increase in diesel fuel prices only negatively impacted our earnings by approximately $0.01 per share versus a year ago. Our equipment ownership costs net of maintenance expense decreased by $1 million for the quarter versus last year, even though our company owned fleet increased by 157 units versus a year ago. 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 are excited to say that the last of our 4-year-old trucks were replaced in the fleet during the first quarter, and we believe we have one of the newest tractor fleets in the industry, with an average age of 15 months as of March 31, 2005, compared to 18 months as of March of 2004.

As a result of this strategy, revenue equipment ownership costs, or the sum of depreciation, leased revenue equipment, and interest expense, decreased by $565,000 versus a year ago, mainly due to getting the last of the 4-year-old tractors out of fleet. Additionally, we had savings in operations and maintenance expenses, which decreased by $500,000 because of the newer fleet and as well as lower miles. Despite the loss during the quarter and continued significant capital expenditures to upgrade our fleet, our financial position remains quite strong. For the quarter, we paid down our balance sheet debt by $12 million to $40 million, reducing our debt to capitalization ratio to 18%.

Over the last month, we have purchased 473,800 shares of Covenant stock for $8.2 million. Our off balance sheet leases had a present value of $117 million at the end of March, excluding the residual portion of track leases, where we have trade back arrangements. Looking ahead to 2005, for the rest of the year 2005, will be -- as we stated in our release, freight demand has improved somewhat since the second half of -- since the second half of March, but it is knot still not what we'd call robust. Although we still expect a seasonal increase in freight demand as the year progresses, recent economic data has cast some doubt on the level of growth in the overall economy. We are not planning on adding any growth to our fleet in 2005.

Capital expenditures for the year are expected to be in the range of 50 to $55 million, assuming we purchase all remaining equipment for the year on balance sheet. We still have the opportunity to take delivery of 100 to 200 incremental tractors during the second half of the year if justified by our result, although these incremental units have not been reflected in our capital budget. We are achieving rate increases on a customer and lane specific basis and on certain new business, but not as broadly or at the levels we achieved during the second half of 2004. We expect to raise our average revenue per total mile, excluding fuel surcharges, by at least 5% 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. If fuel remains at the current levels, we believe our cost of fuel, net of surcharges, could increase for the year about a penny a mile over 2004. On the positive side, we expect our equipment ownership costs to continue to come down versus 2004, as we realize the full benefits of maintaining one of the industry's youngest fleets.

The net effect of these comments, combined with if our freight demand does not increase relatively soon, our goal of improving our operating ratio in 2005 compared with 2004 will be difficult to achieve. Now, I will turn it over to David.

Thanks, Joey. You know, we were disappointed with our performance in the first quarter, and our results for the quarter were consistent with the guidance we gave last month. Softer-than-expected freight demand impacted both the average per tractor -- average miles per tractor, and our ability to obtain the level of rate increases we originally expected. Our average freight revenue per loaded mile, which excludes fuel surcharges, increased $0.14 per mile, or 10% compared with the first quarter of 2004.

While this level of increase is significant, it was about $0.02 per mile less than what we expected. The combination of having 125 fewer teams and a shorter length of haul contributed to about an 8% reduction in our average miles per tractor, and an increase in our nonrevenue miles percentage by 130 basis points to 10.2%. A little bit about customers and rates: For the quarter, our top 100 accounts represented 90% of our total volume, and they grew 21%. We have 32 new accounts in the top 100. Excluding the new accounts, the remaining top 100 were down 1%.

Obviously, our freight revenue in total being down 5% versus a year ago, last year's top 100 accounts were down about 24%. We continue to concentrate our capacity with customers that will pay us a fair price for our services. For the quarter, as a percentage of revenue, transportation was 32%, retail 22%, paper/packaging 10%, manufacturing 8%, food and beverage 7%, floor coverings 6%, electronics 5%, consumer goods, 4%, auto 3%, and housing materials 3%. As we've said earlier, our average freight revenue per loaded mile for the quarter was up 10% over the same quarter last year. Even though our length of haul has declined about 100 miles versus a year ago and contributed to our rate increase, we have raised our rates nicely in all lengths of hauls, roughly in the range of 9 to 12%.

For the year of 2005, we are lowering our guidance slightly and expect our average revenue per loaded mile to grow at least 5%, and continue to feel that the rate of growth over the prior year's period will narrow in the second half of the year because rates accelerated for us in the second half of 2004. So far this year, we have either have completed or are in the process of raising rates of 13 of our top 25 customers. Additionally, only two accounts of our top 25 accounts have had their trade out for bid. The remaining accounts that we received increases from either renegotiated separately with us, or their existing carrier group as a whole.

Our 2005 sales objectives are to grow our volume and continue to raise our rates in all settings. We are particularly focused on growing our refrigerated and dedicated business. Versus a year ago, we've grown our revenue for the refrigerated and dedicated division by 10 and 40%, respectively. That concludes our prepared comments, and we'll now open it up for questions. Meredith?

At this time, I would like to remind everyone, if you would like to ask a question, press star then the number one on your telephone key pad. We will pause for just a moment to compile the Q&A roster. Your first question is from Ed Wolfe.

Hey, good afternoon, guys.

Hey, Ed.

Can you can talk a little bit -- you know, when you say you expect to get 5% of yield, is it different in the long haul market versus the regional? Do you get more in the regional and less in the long haul? Is that a blended number? Or is it similar in both situations?

No, it's -- okay, really it's very similar, Ed, in both situations. We're able to some pretty decent increases of the long haul as well as the short haul, so, no, it is really across the board.

And in the -- I.

I would say this. You know, when we're saying, you know, 5%, 6%, some number like that, if you were looking at trying to go after a larger percentage of an increase, it is easier to get a larger percentage of increase in short haul versus the long haul.

But you're not looking to do that, it sounds like?

No, that's correct. We're just wanting to grow the short haul as it relates to our existing customer base, but there's no data, as we bring on more and more short haul business, that in itself will have a higher rate per mile, which therefore gives us a greater potential, better numbers than what we got there.

I understand. The mix will go your way that way.

That is correct.

Okay. In the pre-report call, you had mentioned that it felt like the economy may be slowed down a bit seasonally but that there was maybe more substitution going on with smaller carriers or railroad or whatever. Are you still seeing that? You know, we're now in April. Has any of that tightened up with the economy, or not yet?

Ed, I will say this. That I still believe that the short haul carrier -- I mean, excuse me, the smaller carriers are feeling happy about the world as it pertains to freight volume. And --

What do you mean by that, Dave?

I think that there has been a shift in some freight in the first quarter that went to the smaller carriers from the larger carrier, as well as I think that some of our customers, even though -- what, we have two, I believe, going out for bid, so, you know, customers are still very concerned -- I've been on the road a lot in the last 30 day -- customers are still very concerned about capacity, but they're also getting a few more phone calls. They feel that capacity has definitely loosened up somewhat, but they're still concerned. And what we are seeing is that our customers are definitely negotiating with us.

They're really not interested in throwing out to some major bids, so they're not feeling well enough that there's a lot of capacity out there to throw out an open bid; but at the same time, what we see is that they are bringing on some smaller carriers to infiltrate, you know, at the second, third, fourth quarter gets stronger. Now, to answer the second part of your question, we -- the first 10 days or so of April were a continuation of March, and for us, March virtually just did not happen. January and February were where we thought they would be at. They were typical January and February months, and we were -- you know, we were pretty happy with January and February.

But March just did not happen for us at the end of the month, end of the quarter, and that's what ended up happening. The first 10 days of April was a continuation of March. I will say for the last 10 days, now, you know, we're starting to see a decent pickup out there. We're starting to see business coming back. I mean, it's not where it was in October, but I'm pretty happy with what I'm seeing this week out there.

It sounds like, though, the Easter calendar didn't have that much of an impact, but maybe we're in a slow spot and it's starting to pick up now. Is that fair?

I think that that is a possibility. If you remember, last July -- from July, the end of July, around the 20th, 25th of July -- up until August 20th, if you remember, there was a pause in the economy. I mean, there was just a little pause that happened that we all talked about feeling a little bit about that on the third quarter conference call last year. That is the way that we would describe it, is that there is a pause. It's not -- we have not lost any business and those kind of things, but it is not just humming the way that it should have been; but again, you know, we probably will have -- this week will probably be our largest week of the year, which is, you know, something that we're happy about.

And then we haven't seen the same struggles with the guys that aren't as long haul, like you and U.S. Express. Do you think it is really the long haul versus regional at this point that is the difference in impact?

I think that there's no doubt -- evident, quite evident that long haul has definitely been hurt more than short haul. Let's put that a little bit in perspective, Ed, is that under our operating model, when we operated at 89 and 90s, and 91 operating ratio, our first quarter long haul is always -- it's just the way the model is -- it is always depressed even during the year, but you got a 90 operating ratio. So you have a depression in that first quarter that is because of the amount of teams that you run, you're not running them three shift like a manufacturing company during January and February. Usually by March, they're out their humming and they're running 24 hours a day. That's the reason on the long haul side that the first quarter is always a little slower.

I mean, what did we make, $0.05 last year, and we had a good year last year on our road to recovery, getting back things, and I'm very, very optimistic going into this year with the first quarter that was down. So that -- put that in perspective, long haul is tough in the first quarter; but on top of that, there is no doubt in my mind that the long haul market has been hit harder than the short haul market.

Okay. And I think that all makes sense. Can you talk a little bit about driver pay? Is -- are you starting to see any impact or do you still have some trucks parked, and do you have to give another round at some point later in the year does it feel like?

Yeah, Joey can give you the numbers. I'm very encouraged. I think it's like 55 runable trucks right now? We're down to 55 runable trucks is all that we've got open. We have filled -- we have filled quite a few trucks in the last 60 days. I'm very, very pleased with where that's at. It is the best that we've been at, I think, for the last couple of years. Don't you Mike?

I would agree.

In the last couple of year, our driver situation is the best position it's been in. If that continues, and I personally think it's going to continue, then we will not have to give no driver pays in the fall.

Okay. And you didn't give any guidance for the second quarter at this point in terms of earnings. You gave some other numbers. But I look at a consensus and it's like people didn't take their numbers down when they -- after your pre-report for the quarter. Can you give some guidance? Consensus I'm looking at is about $0.30, $0.31. I'm guessing given the other things that you gave, that that's probably aggressive at this point.

Yeah, we haven't given out, you know, particular guidance per se, Ed. I think what I would just kind of focus everybody on is what I said in my comment, that, you know, if, you know, freight for us doesn't move, you know, pretty meaningfully here shortly, you know, it's going to put pressure on us to exceed our margins for a year ago, for the rest of the year. Particularly, you can bring that down -- the second quarter is the first one upon us. But it applies most specifically to that. So, you know, we made $0.30 last year, so I will kind of let everybody interpret into that whatever they want to do. But we haven't given out specific numbers on the second quarter going forward.

Okay. And just to recap what you just said, I think I understood it, was you are going to be hard pressed to match last year's margin at this point? It's not impossible but --

If freight -- no, no, no it is not impossible at all. If freight doesn't move to that next level, that, you know, should be there here shortly, you know, it'll put pressure on us to exceed year-ago margins.

Okay. And then the last thing, you talked a little bit, Joey, in your comments about the shift in owner operators versus company drivers. Is there anything else that's driving the salary and wages line higher -- obviously, driver pay -- and the purchase transportation number lower? Is there something besides the mix? It seems like a big change for not that big a change in the mix between owner operators and drivers.

Yeah, I think what you've got -- if you look at it on a total mile basis, salaries, wages and related expenses is up about 10% cents a mile in total. If you just focus on, yes, from $0.57 in the first quarter, from $0.48 last year -- so $0.09 a mile. $0.06 a mile of that is pure driver pay increase, so the difference is in the shift of miles from one to the other. Actually, benefits is actually down a tenth of a cent a mile versus a year ago. So it's really between driver pay increase of $0.06 and the mix shift is driving that total $0.09 a mile move.

Thanks, guys, for the time, appreciate it.

Yes, very good.

Your next question is from David Mack.

Hey, guys.

Hi, David.

I wanted to dig in a little more on the demand side here. Do you think -- I mean, I'm just trying to figure out, you know, some carriers have said April has really come back strong, and you're obviously not seeing that. Is that because of the mix? I mean, is this like an LTL issue, or are you seeing light haul miles down for LTLs? Is this with logistics companies? Is this an issue related to the produce season out west? I mean, I'm trying to figure out a little more rather than just regional versus long haul, what's driving some of this weakness.

David, I have no idea. I mean, you know, I sit around doing exactly what you do. I mean, I sit around saying what is driving -- what is driving the weakness? I mean, you know, it's easy when we got more freight than we know what to do with, but when you don't have, then what is driving that? And you know, I mean, I think we've discussed about everything there is to discuss from the standpoint is it economy is, it long haul, is it short haul, is it, you know, rapid pay increases that we talked about, you know, during our preannouncement? I mean, it's -- I think it's all those issues that are out there that we have to work through. I mean, the ports out in L.A. are very good. I don't have as much freight going out there as I'd like. So that's one thing. But no, I don't know how to answer that, David, because I really don't know.

Do you think it might have something to do with the sales force then? I mean, is it -- it does signed like -- I mean, correct me if I'm wrong, but most of the other carriers that have reported and have talked publicly, and even some private guys, have said April has come back in a meaningful way.

I had a large carrier -- a large carrier that you would know -- call me two days ago -- no, two or three days ago -- and here's the comment he made: Nonpublic, private large carrier. He says "David, I saw your press release, I just want you to know that if anybody took your freight, it wasn't me." He said "my utilization is down 8%." Now, you know, so what do you make of that, David? I don't know. You know, as I look at first quarter, our utilization is down 8%. Most people were down whatever number, 3, 4% kind of numbers. 8%, 2% of that number was the difference in team drivers. So compare apples-to-apples, let's get down to say we're at 6%. People are at 3 to 4%, so you know, we're worse off, 2 to 3%, kind of numbers, and there is no down that that 2 to 3%, is the difference between us making $0.05 a share last year and losing $0.04 a share this year.

And there's no doubt that that 2 to 3% is a number that's very, very important. But we're talking 2 to 3%, that in my opinion, I think it goes back to the same stuff that we talked about -- long haul, short haul -- long haul, more effective in the first quarter than short haul. I think that's evident We see that in our business. I think that's there. Why? I don't know. Is it inventory levels? Maybe so. I still don't know that answer of why that is. And then I was going to say something else on that, but I can't remember.

You had, what, 32 new accounts in your top 100, right? So, you know, that means 32 accounts less the top 100. Was there any pattern -- I mean, what types of carriers -- I'm sorry, what types of customers left the top 100 and what were their reasons, and I mean, are they still customers?

Yes, we have not lost any accounts to speak of -- any major, major account. You know, we have had a couple of accounts that were down. We know one that started their truckload carrier and so that hurt. I mean, you know, there's no doubt about that. I mean, it devastate it when they answer to our quarter, but it hurt. And so I think -- I think that the 2 to 3%, as you compare apples-to-apples with, David, can be contributed predominantly, is it marketing? Yes, it's marketing. If you don't have enough freight, that's a marketing problem. So from that standpoint, you got to ask why.

Is it because there's no doubt in my mind that, right or wrong or indifferent -- you know, Monday morning quarterback is very easy from my standpoint -- I'm talking about me being Monday morning quarterback. That's very, very easy to come off a great fourth quarter, being very encouraged about what we were seeing and had a great fourth quarter, to go and have a terrible first quarter like we experienced, and you've got to wonder why? Well, a lot of it is some of the things that we led the industry in last year. We went to the marketplace, raised rates very dramatically. Why? Because we needed to and we had to; expenses were going very, very rapid, just like everybody else is. But we were one of the leaders out there last year in doing the big, big numbers on increase to our customers. We were very stringent on hours of service, more than anybody else out there. Was that a right decision? I think in January last year, it was.

Looking back, I think that we were more aggressive than what the market was. You know, we will address that. And we are having to address that. But I think hours of service is one of those things. I think that the emergency fuel surcharge on the West Coast last year -- we were one of the first, if not the first out on implementing emergency fuel surcharge. I don't know what you're supposed to do when you got a western division that, all of a sudden California is up $0.40 a gallon over the national DOE. I had no choice but to do that. So we were one of the first to originate doing that last May. A lot of people came and did it afterwards.

We made a decision to increase, to get rid of a bunch of old equipment -- it's definitely helping us on the expense side; but one one of the negative sides of that that now you're starting to hear about from other carriers is that 90% of our fleet has got the new engines in it. Well, we had that number very dramatically up there last year. So we started having fuel degradation problems last year before anybody else. Now, you've got everybody's brother that's started to get a lot larger on that -- on the DOE engine, and they're going to have those issues.

Now, all of those are negatives from our standpoint last year that definitely contributed to this first quarter. Now, the positive side of that is that there's a lot of carriers out there that's go to go it through what we've already gone through. There's a lot of carriers that I'm saying that we changed our fuel surcharge in the fall of last year, that's why you heard the numbers that Joey said that did not really affect us greatly on the fuel surcharge, because we went out there and changed it. We were forced to because of how many trucks we were running with the new engine. You got the carriers now that are going to be changing their fuel surcharge program. So it's all those kind of issues.

Now, the only positive I can get out of it is this: I feel confident that our costs are probably maxed out. I mean, unless something major happens, we know where our costs are. We don't have to worry about those kind of issues. So now, it's a matter of getting enough freight, getting that 2 to 3% increase in utilization back, and Mickey Miller and I will live on the road until we get it.

I just wanted to make sure I got two things. One, the -- you're not seeing any issues in terms of like a weak season out west because you know, I would think with all the weather and the rain that the harvest out in California might be a little weak. So that's -- do you think that's having any impact on some of that western business out of the ports?

No, no, I mean I -- I will say this. That if you looked at last year compared to this year, there definitely was a lot more volume off the West Coast last year compared to this year from a capacity standpoint and loads available; but I will also say that our -- excuse me, our negative numbers of layovers out there, they're pretty consistent with what it was last year, even though business is down. We got a lot bigger spread of customers that come off the West Coast. So, you know, I don't want you -- I don't want you to even think that, you know, our problem was because of California. But what you said -- or Northwest, and stuff -- but what you said is a true statement. Because of all the rain, there was -- on the produce side and the refrigerated side of it, there was a little negative impact that hurt California.

Okay. And then on the logistics side, on your logistics customers, you know, how has the health of that business been?

On us doing the business with the logistics companies, David?

Yes.

Yes, you know, that is -- because there's two things that we define. One's logistics, one's broker. You know, they all [INAUDIBLE] logistics, and you know, we do some -- a lot of business with a lot of good quality logistics companies. You know, our goal on the broker side is to limit that as much as you possibly can. And it's strictly because of the rates and those kind of things an on the pure broker side of the business.

That business, we went into the first six weeks of the year doing very little of brokerage business, thinking that the business would be there; and quite frankly, again, January and February, we were pretty happy with where business was at. But starting around the end of February, we opened up the brokers, and we're doing more brokerage business in the month of March than what I would have liked for us to have done.

Okay.

But the logistics business is good, to answer your question. Sometimes I ramble.

All right. All right. Thanks a lot. Thanks for the time. Hope everything gets righted.

Okay, David.

At this time, it there are no further questions.

Well, I just want to thank everybody for joining us, and we'll keep you updated. Thank you.

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