Covenant Logistics Group Inc (CVLG) 2005 Q3 法說會逐字稿

Good afternoon, my name is Marie and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Covenant Transport third 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. (Operator Instructions). Now I would like to introduce your host for today, Mr. Joey Hogan, Chief Financial Officer, and Mr. David Parker, President. Mr. Hogan you may begin.

Thanks Marie. Welcome to our third quarter conference call. I will first read the forward-looking statement of disclosure and then I will start the rest of the call. This conference call will contain forward-looking statements within the meaning of Section 27 A of the Securities Act of 1933 as amended in Section 21 E of the Securities Exchange Act of 1934 as amended. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. Please review our disclosures and filings with the SEC.

First I'll make a brief comment on the quarter. The detailed operating information is posted on our website and we will not cover that information during the call. David will then provide an update on the current status of the Company and an update regarding the on-going transition in our business model.

During the quarter we made visible progress in terms of regaining revenue in our system. However, cost increases versus the prior year were greater than the revenue progress we've made. Accordingly, we earned $0.09 a share. The earnings number, although less than what we would like, was consistent with our expectations.

The business environment strengthened throughout the quarter from a fairly soft start with improvement through August up to a strong close of September. Our goal during the quarter was to bring on some new accounts and stabilize the freight base. David will discuss more of the details later but we feel we made some progress in this effort and that the sequential increase in freight revenue per truck per week from the second quarter to the third quarter of 3.6% was the largest increase in the company's history.

Additionally, the 1.1% increase in revenue per truck per week over the strong 2004 period after a flat first half was an encouraging sign that our freight issues of the first half are improving. Net of fuel surcharges our rates have improved from $1.46 to $1.50 to $1.52 during the first three quarters. At the same time, miles per truck were off 8.4% versus the prior year for the first six months of 2005 and off only 4.7% for the third quarter. We see this as a sign of the measured progress we discussed during last quarter's conference call.

On the cost side, our cost per mile was up substantially versus a year ago but only slightly on a sequential basis versus the second quarter. Compared with last year, our cost per mile increased 9% while our average freight revenue per total mile increased 6%. The main expense items were driver pay up $0.05 a mile, fuel expense net of surcharge revenue up $0.01 a mile, and equipment costs, which is depreciation, interest, and rentals, were up about $0.02 per mile. Miles were down 4.7% versus the prior quarter which increased our fixed costs on a per-mile basis.

Additionally during the quarter we accrued $750,000 or $0.03 a share pr a $0.01 a mile in costs related to potential bad debts on two customers. One customer is in mediation and the other customer announced a planned liquidation late in the quarter. On a sequential basis, our cost per mile increased only $0.01 which was attributable to fuel. Other than fuel prices, we do not expect our costs to increase materially in the next couple of quarters. Based on the low number of unseated trucks, we do not expect to raise driver pay for at least a couple of quarters and 100% of our tractor fleet is equipped with post 2002 engines.

Our balance sheet debt decreased by $11 million from June 30th primarily because of $7 million in equipment dispositions and excess of equipment purchases. Our off balance sheet debt decreased by $6 million to $104 million, excluding the residual portion of leases where we have trade back arrangements. The decrease in balance sheet debt was a temporary phenomenon resulting from the sale and short-term rent back of approximately 600 2000 model year Dry Van trailers.

Additionally, we negotiated the swap out of 1,200 1998 and 1999 Dry Van lease trailers with the lessor. The 1,800 trailers-or replacement trailers will be placed in service over the next year as new trailers are delivered. After the completion of this transaction the oldest trailer we will be operating will be a 2001 model year trailer. This continues our equipment strategy of operating a new revenue equipment fleet in order to minimize operating costs and maximize residual opportunities.

We continue to be comfortably within all debt covenants and have ample borrowing capacity. That wraps up my discussion of the quarter, and as a reminder, for additional financial statistics, please see our website. Now, I will turn it over to David to talk about the current status of the company's operations.

Thanks Joey. The main focus of our management team continues to be aligning our operations around our four service offerings; expedited team, refrigerated, dedicated and regional. We first announced this plan last quarter and have made significant progress in the past 90 days.

The highlights include the following. Implement separate refrigerated, dedicated, expedited team and regional operations with separate management measurement of key operating statistics, and with their own Vice President and General Managers. Designate internal candidates with substantial experience and proven success to lead the expedited team division.

We also hired external candidates to lead the refrigerated and regional operations, each of whom have substantial experience for leading companies in their designated area of responsibility. The head of our refrigerated operation is Jeff Taylor, formerly Vice President of Operations and Sales of Jim Palmer trucking. The head of our regional operations will be Jeff Paulsen, who helped establish the Southeast region for Werner Enterprises and most recently managed Werner's field sales operations. Jeff Taylor is already with us and has been with us for a couple of months and Jeff Paulsen will be joining us this week.

The early results on the separated refrigerated and expedited divisions are very encouraging. To give you some examples in our refrigerated division, our revenue per truck has increased 28% while our length of haul has grown 14% to 1,429 miles. Our total refrigerated operations, including our S.R.T. subsidiary, grew revenue during the quarter by 40% over the third quarter of 2004.

Also in our expedited division, which is ran by Jeff Acuff (ph) -- Jeff has been with us for about 18 years. But anyway, his revenue per truck has increased 8% while our length of haul has grown 23% to 1,477 miles. Our expedited division grew its revenue by 14% during the quarter over the 2004 period. Additionally, the driver turnover has decreased about 30 basis points on both divisions from their highs of this year.

As I stated last year -- or last quarter the realignment of our company will take time. I want to emphasize that the results I just discussed are very early. However, our whole management team is encouraged by the progress to date on these two divisions. I would recommend that you visit our website and review the conference call script from the second quarter to review in detail our thought process regarding this restructuring.

Another major area of emphasis has been to refill the freight bucket after we lost some freight earlier this year. We have added or increased our volume significantly with five to ten strategic accounts during 2005 and have won back some incremental business with other accounts that reduced our volume during the first half of the year. We believe the impact of the additional freight is beginning to show.

While our utilization was down versus a year ago by about 8% during the first half, cutting that shortfall versus a year-ago during the third quarter to 4.7% shortfall compared to a very strong third quarter of 2004 period shows me some nice improvement. We will also able to continue to raise rates and revenue per truck. As we continue our work on aligning the company around business units, our short-term goals will be to continue to improve our revenue per truck per week as rapidly as the market will allow.

Regarding the market in general, we believe the relationship between freight demand and truck capacity remains favorable. We are not seeing an influx of capacity into the marketplace. Demand has been good and qualified drivers remain a scarce commodity. Given driver demographics, high fuel prices and the potential for additional increases of truck prices into the 2007 emission requirements, we do not expect additional capacity to flood the market. Absent a significant economic pullback, we view the freight environment as likely to be favorable for the foreseeable future.

I will comment briefly on our plans for our tractor fleet, as that has been a topic of some interest with 2007 approaching. We operate about 3,200 company trucks. In 2005, we replaced almost 1,100 tractors. For 2006, we have orders placed for over 2,100 new trucks, all or substantially all of which are replacements. Of this 2,100 truck order, about 500 to 600 trucks or what I call a pre-buy against 2007. Accordingly, by the end of 2006 we expect that our oldest truck will be two years old with most being one year or less and our average age of about 12 months.

Based on our normal cycle of fleet age, we would trade out about 500 trucks in 2007, the ones which were assigned to teams in the year 2005. However, based on our average fleet age and the ability to reassign trucks within our solo and team operations, we expect to enter 2007 with significant flexibility to purchase or not purchase 2007 model year tractors depending upon our evaluation of the cost, fuel, mileage and reliability of the new models. At this point, I am going to turn it back over to Joey for a few comments on our expectations for the rest of the year.

Thanks David, regarding our expectations for the fourth quarter, there are two items that I would like everyone to focus on that will be important differences when compared to the fourth quarter of 2004. First of all, based on our view of the freight market David expressed earlier, and continued progress on operational plans, we do expect freight revenue per loaded mile to increase sequentially versus the third quarter of 2005 by about 1%, and average miles per tractor per week to decrease against the 2004 period, but about the same amount as it was in the third quarter of this year. Accordingly, we expect average freight revenue per truck per week to increase sequentially from the third quarter but slightly less than one-half of 1%.

Second, based on current price levels, we expect fuel costs before fuel surcharges to increase sequentially by 20% or 25% in the fourth quarter of 2005 compared with the third quarter in 2005. We also expect to recover the same percentage of fuel surcharge from our customers, but the absolute size of the uncollected amount continues to grow. Therefore, we expect fuel costs net of surcharge to be $0.03 or $0.04 per mile higher sequentially when compared to the third quarter of 2005. We expect our other costs to be flat with the third quarter on a per mile basis.

In summary, based on these trends, we expect our costs to increase $0.02 to $0.03 per mile higher on a sequential basis versus the third quarter of 2005. I will now open it up for questions that anybody might have.

(Operator Instructions). We will pause for just a moment to compile the q-and-a roster. Your first question comes from Ed Wolfe with Bear Stearns.

David, you mentioned that you won back some accounts. Can you talk a little bit about what kind of business that was and who you won it from maybe?

Ed, we went into the first six months -- going back to our account base and working some that I felt we had upset, because of hours of service and those kinds of things there in the year of 2004 and we saw it in the first quarter that some of those folks that slowed down in the business environment. We only lost one retail account, a smaller retail piece of business, is the only one which we are not doing business with today. We definitely saw people that were shipping 10 loads that went down to five loads a week and people shipping 20 loads that went down to 10 loads. That is what we saw.

In the second quarter, our marketing department and sales guys, Mickey(ph) Miller and Mike Miller and myself are really going out to the customers and working those accounts, we have been able to achieve some very nice results with those customers. It is really across the line Ed. There is a couple of accounts that one a medium-sized retail piece of business that has stopped doing business with us that we regained back their freight. But it is really a mixture of a lot of accounts that again went from 10 loads to 5 loads.

I could throw out some names, but it is really across the board. I mean it's from retail to manufacturing to some of our consolidation customers. Really, consolidation was not hit that much. It was mostly retail and manufacturing that was hit - and some consumer goods. But again, note if you look at the sheets nobody was down dramatically, so it wasn't something that was point out - and say okay if I go get this one account back everything is fine. That was not the issue. The issue was we had a bunch of accounts that were down 4% and 5% and when you lump them all together it got us into the first half like we came out with.

Sure but when you those accounts and got it back or lost some business and got it back, were you finding that they were from big public competitors or were they smaller guys? Were they going to brokers?

I've got you. I'm sorry. One of the things that I do believe happened in 2005 in the first six months, I believe that the customers made a decision in 2004 because they felt, not just Covenant, I think that they felt like that they had too many eggs in the baskets of the core carrier. Even though the core carrier we believe in it and believe that the vast majority of the freight is still moving under the core carrier, I think the customers went into the new year with the decision made that we are going to expand our trucking base and they looked at every small carrier that they could look.

Because we both know why. They do not have the - the smaller carrier does not have the ability to increase when they need increases and those kind of things and the customers have the ability to dictate to the smaller carrier. So I do, without a doubt, they went into 200, 300 truck fleets as the year progressed and business seasonally slowed down and they utilized those accounts.

I think as the second quarter and the summer heated up, I think there was a mutual coming together of Mr. Customer, maybe you were right to some extent and maybe we did go too far, and they were coming from the standpoint that these 200 truck fleets could not cover my freight. I think it was a healing process that you are seeing taking place in the industry.

Your guidance for fourth quarter seems to be costs will remain flat other than fuel. Pricing will go up a percent. Should I assume from that net of fuel your margins should be better-- your operating ratio should be better in fourth quarter than it was in third quarter? If costs are flat and yields are up, that is the implication.

No. What I said or meant to say is that costs rather than fuel will be flat. Fuel is going to be up $0.03 or $0.04 a mile sequentially, and revenue per mile is up about 1%. Let's say $0.01 to $0.02 a mile. Our costs are going to increase, including fuel, $0.02 to $0.03 a mile faster than our rates. So it would be just the opposite, that there could be pressure on margin in the fourth quarter versus the third quarter.

No, but I was saying net of fuel -- net of fuel it will be better, but gross of fuel it will be worse.

That is correct.

Ok, I just wanted to make sure I was looking at that right. And if you assume 1% sequential rate increase I'm getting that's 2% year-over-year when you are just putting up 7% or whatever you put up this quarter, I have to go back and look. So I guess it's just a tougher comp on the pricing side or is the pricing market getting tired here?

We said it in October and we said it in January and we said it in April and I said it again in July, if you go back and check all the scripts, we said the rate of increase would narrow greatly throughout 2005. Why? Because we saw 2005 was no way it was going to replicate the 2004 activity and that the rate of increase versus a year ago would narrow greatly. What's planned out is exactly what we said for the last two or three quarters.

We has such a great, if I remember correctly, Ed and you look back but I think fourth quarter last year rates were up14%.

Even more than that for you guys, I believe.

It was some big big number. We are definitely not going to the marketplace with those kinds of numbers out there. The environment is very good, and I think if we wanted to do what we did last year and come out with it very strong - but I don't want it to hurt me in the first or second quarter.

I am showing 15.9 last year. Just to follow up on some comments, when you are breaking up the divisions and you look at refrigerated and you look at the old team drivers and you look at the regional business and the refer (ph) business, is the regional the only one that is not profitable right now on a stand-alone basis?

We will have better information on that once we get it out late this year or early 2006. We have disclosed so far a percent of total for revenue which you have all seen -- is it growing or not versus a year ago. We are still sorting out what all we are going to be required to disclose going forward but we all know that - we all feel that our over the road regional business is our least profitable one of the group is kind of the way I would like to answer that.

David, getting in your head in terms of how right now the end October the market feel, we get a sense that the demand is very good. Would you say demand is as good as it was a year ago in October at this point?

Very close to it. I think the only difference that I see out there Ed is that in Southern California is still strong, but I do believe that some of your companies definitely moved import to other areas, where we are feeling that strength but you will see Seattle, Houston, Oakland, Virginia, those have became much more dominant than they were in the last couple of years. Freight is very good. We get a lot of freight in Southern California that is not overwhelming us like it did for the last two or three years. That would probably be the only place I would say there is a difference. Which is a good difference to me because we were just making everybody mad the last two years anyway.

Last year, though the demand was not only good in October, it was pretty much good all through the quarter. So I guess that is the other issue how long is it going to stay this way?

It was good. Freight demand was good until Christmas.

Thank you as always for your time.

Your next question comes from John Barnes with BB&T Capital Markets.

David, on the utilization front, when do you think this turns? What is your idea when utilization, I don't know, flat or even gets into positive territory?

The two things that are out there, in the second quarter we said guys it may take up to two years to divide this thing up and get it conquered and get it going the way we want to. There is no doubt that we are trying and striving very hard to get this thing faster and quicker than that, but that is kind of the internal limit that we have put on ourselves that says that we believe it could take this long. I was very, very encouraged by what I was seeing in the third quarter on those three divisions, especially the long haul and the refrigerated side. They are running above our expectations.

But quite frankly, we are just now starting to really tackle the regional side, and those other divisions, expedited and refrigerated, we are happy with what we have seen there. There is more improvement to be made, but there is not a tremendous amount of improvement that is needed, in my opinion, in those divisions as it turns to utilization. They are not doing bad. It is the regional side that we have to get healed.

I would add that one of the issues impacting our utilization versus a year ago is our reduction in our team count. On the financial statistics, it's on our website, we've averaged during the quarter about 955 teams year end and 1,040 last year. That is a big portion of the 4.7% decrease versus year ago. All things equal, and actually our team count is about the same as it was in second quarter, so the team reduction has stabilized. The issue versus a year ago is the utilization being short because the teams is pretty close to going away. Again, all things else equal, we are going to see that minus 4.7 should continue to shrink until we wrap around the same team count versus a year ago. I have not run the numbers, but the large majority of the 4.7 is because of the team reduction.

All right. As you continue to grow the other three, the refrigerated, the team, the dedicated will you continue to take equipment out of the regional business and reallocate it? Is there a plan to continue to shrink the regional side as well?

Exactly what you said, is what will happen. We will - as Joey said earlier, we get operating stats on all these, we'll have financial indications in the latter part of this year and the very beginning of next year. At the end of the day, you can really look at operating stats and get a gut feel of what is happening. As we are today and as we will go forward, we will take our assets to the most profitable division that we have.

Is there any reason that the unmanned equipment that you have now, is there any core level of unmanned equipment that you are constantly dealing with? Let's say it's not 300 trucks, let's say it's 150 that you have constantly got that churn. Is there any reason not to shrink the fleet by 150 trucks or something today? Shut them down, take your worst trucks. You have a pretty nice fleet, so there is probably not a lot out there like that. Is there anything that you can do to shut part of the fleet down now?

I would have no problems on 100 trucks. To give you an idea, to answer your thing also, that is a decision we made about a month ago that we are getting rid of 100 trucks.

So you are looking to take out some of that unmanned equipment?

We are selling them. That is exactly correct. Again, not to keep pointing everybody there, but that is where a ton of information is. We have 3% of our fleet unmanned, not counting wrecks. Take wrecks out of the equation. It is right at 3% of the fleet. That number will, assuming unmanned trucks does not get any worse, that will get better between now and the end of the year.

Based on these sales?

That's right.

Okay, very good. Last question David, you said when you started this process, that you would look at every alternative on how to improve the profitability, the utilization. You would look at every individual division. You are 90 days into this process. You have talked about three pieces of the business performing fairly well. Have you given any further thought to what you would do with the regional business? Is it still too early to pull the trigger on doing something more radical on the regional business?

It is too early -- it is too early. The other ones - one of the things, when you divide these things up in divisions, and you had 3,000 trucks doing 7,000 loads a week before and you divide them up, the ugliness comes up real fast. You cannot hide, you can't run. Nobody can hide and run. The ugliness comes up.

As an example, you have a refrigerated truck that gets empty in Cincinnati, Ohio and it's just part of 3,000 trucks. The driver gets empty in Cincinnati, he goes on the list and he is number five out in the state of Ohio this morning to get out. When number five load comes up, it is a load out of Columbus, Ohio. You send him up to Columbus, Ohio. He drops his refrigerated trailer there at a Dry Van shipper but you wanted that truck to get utilization. He drops the load in Columbus, Ohio at the shipper. He goes and gets a load and he is gone. You took care of the truck, and you took care of driver. You have got a reefer(ph) at a Dry Van facility.

A week the customer calls at the Dry Van facility in Columbus, Ohio and says I'm not going to unload this reefer you need to get it out. So what is the next thing you do? You look in the state of Ohio and let me find out where my nearest truck is that knows how to operate a refrigerated trailer. Then you find out that you bypassed five trucks in Columbus, Ohio because none of them have reefer experience. Your only driver is in Detroit, Michigan, so you dead head a truck in Detroit, Michigan to Columbus, Ohio to pick up the refrigerated trailer to get it out of there. That is what I mean by ugliness.

That is why you are seeing the improvement already in the refrigerated side because now it is a baby to itself. When that truck gets empty in Detroit, Michigan they have to load it out of Detroit. So it is not supporting the Dry Van and it is not helping, it's hurting. You have the ugliness come up real fast. At the same time, those are your opportunities when you see that stuff happening. We already see that on the regional side of the business. It is not like we are not doing anything on the regional. But 1,200 trucks, it is a process and it's going to take some time.

Thank you for your time.

Your next question comes from Chaz Jones with Morgan Keegan.

First question here. In the press release you outlined a lot of the key positions that have been filled at expedited, refrigerated, and the regional divisions. Are there any changes at dedicated? To tack on to that, do you have all the people in place now at the various divisions or are you still trying to fill some spots there either internally or externally with candidates at the divisions?

Dedicated is one that a) is doing well for us and it is also one that is, I don't want to say -- it is not easy, so do not get me wrong, but it definitely does not have the issues. We have not put an official person yet over dedicated. It has really ran between marketing and operations, marketing gets and operations performs it. There will come a time in the next few months when we will determine the person that will be totally responsible for dedicated and go there from that standpoint. The dedicated still is doing that. On the other ones, expedited and refrigerated is there too -- one was an inside guy, and the other one is outside. They have to bring on their own internal people that they have picked thus far.

As we get into the regional side of the business, and Jeff gets here, there is definitely x amount of candidates internally that we have recognized have the ability to head up some of these divisions. As you take these 1200 trucks and you set up however many divisions you have to set up-- a Southeast division, a Midwest division, an East Coast division, a Southwest division, whatever that is going to be, then we will leave it up to Jeff and work with Jeff on looking at the internal candidates that we have as well as outside candidates. At the end of the day, making sure that we have the right people in the right positions on the right bus.

So you are kind of still early on in the draft?

That is correct. So far what we have done is hired the boss. Now it is a matter of hiring the support and that is why it won't be done in three months.

Maybe switching over to equipment. A lot of equipment coming on. Could you maybe give us an update on the expectations as far as net CapEx in 2005 and 2006? I have a follow-up to that as well.

We have not given that out yet. Chaz, we are probably not going to, right now at this point. Here is the deal, on the 2,100 tractors, not all of those will be purchased. We do lease some of our tractors in walk away transactions. We like the flexibility that gives us to manage the fleet, and so a pretty decent sized portion of those 2,100-- let's say 400 to 500 of those will be leased. Which we are currently leasing let's say 500 in our current fleet. It is not that full 2,100 that is going to be bought, it is probably more like 1,500, 1,600, 1,700.

On the trailer side, the 1,800 trailers that I mentioned, pretty much all of those for the most part, are currently leased already, and so we are just swapping lease for lease, so there is not going to be a real big CapEx burden related to those trailers. It is not as big as it might look, but there are several factors that could swing it a little bit. It is not a $100 million number, or anything like that, it is not anywhere near that. On the surface it looks to be big. It is big from a logistical, tactical standpoint, but from a CapEx standpoint it is not near as big as it might look.

My thought would be with as young as the fleet is, we would think a little bit more benefit on the maintenance side. Is that $750,000 worth of bad debt expenses is that where that is showing up in operations and maintenance lines?

No, it is in general supplies, the general supplies line.

Is there anything else that is driving that line a little bit higher? As young as the fleet is, I would think you would get a little bit of a benefit on the maintenance side.

The $750,000 bad debt is in the general supplies and expense line. The operations in maintenance line, if that is what you are looking at, what is driving that is a lot of these trucks that we bought of next year's truck order, 1,500 or 1,600 of those trucks next year are wrapping 18 months, two years age this year. We are wrapping a lot of tire expense related to those trucks. So that is kind of what this year's driving operations in the maintenance cost up. Plus, some recruiting new hire expense as we come into this year and the drivers situation has worsened, we have increased our recruiting and new hire expense in 2005 relative to 2004.

Talked a lot about rates, could you maybe share with us how much of your business is up for renewal in the fourth quarter?

There are three or four major accounts that are significant that we are in the process now of negotiating with them. There are some big accounts that are up in the fourth quarter, Chaz. That is why again, one of the reasons why you saw last year, I think 15.5% or so, there is some large accounts during the fourth quarter.

How about turnover? The driver situation appears to be pretty good, but just in terms of turnover trends, any changes there?

We have seen it as we have separated the divisions, and that is what we felt like would happen as we separated the divisions and the general manager, Vice President general manager is over those divisions, turnover is also his responsibility. Fleet managers are his responsibility, sales are his responsibility. As they are only dealing with a few trucks 300 trucks, one 900 trucks versus 3,000 trucks, we are starting to see improvement in turnover within those divisions. We expect to continue to see.

Last thing, I am trying to figure out if you look at the statistics out there on the website, the actual expedited revenue is up 14% year-over-year, but driver teams are down year-over-year. Are there more solo drivers in that division now or am I missing something there?

The existing trucks that you have got within that are producing more.

Understood.

They are doing better. That is what we expected to continue to happen.

I appreciate the commentary.

Your next question comes from Tom Albrecht with Stephens Inc.

Tom?

Can you hear me? Sorry about that. David or Joey, have you given any sort of a big picture cost estimate on how much the segmentation of your businesses is going to cost between IT expenditures, additional personnel and other expenses?

We have not.

Do you have a sense of that, even if you do not want to reveal it today? As you went through, have you decided to move forward?

We are moving forward, there is no question. We went over in our conference call last quarter that one of the risks was some duplication of headcount temporarily until we formally completed the transition. That is very much happening as we speak. We have invested some additional resources and people in our IT area. It is not significant, but it is about four people. In the software side, so far has not been a big investment, although there is a couple of peripheral systems we are having to invest in. It's is mainly people right now as far as hard dollar costs.

As far as inefficiencies that spring up inside the network of freight systems, that is hard to quantify those people and systems and hardware. It is not what I think, we disclose in our Qs every quarter our headcount, so I think you will see that once we disclosed that, it is a number that I see and watch but it is something that I do not think will be significantly material.

Joey, back to Chaz's question on operations and maintenance, it was up about $5.5 million year-over-year. How much of that would have been driver recruiting and advertising?

Driver recruitment's, about $200,000. Tires, $600,000. And then some new accounts in the shorter haul business that we brought in our unloading -- unloading costs are in there about $400,000.

On tires, do you go new or do you recap?

A little of both.

Trailers are recaps.

Okay.

Those tires also, as you know, those things run kind of in cycles. About 18 months is when you you've got to really recap - just about put on new tires all around the whole tractor. Excluding the steer tires anyway, that you have to put on the drive tires. We went basically from a 3-4 year trade cycle you will see a big volume of new trucks coming in because of going back to that 3-year trade cycle. All of a sudden, next year you've got 21 of your 3,300 tractors, you will have that benefit for what 18 months or 2 years. So your tire cost will go down, but that second year you will see that bump up in tire cost. Do you know what I'm saying? That is what some of this that you are sensing here.

At $400,000, you're talking old-fashioned lumping costs, right?

That is correct.

I know there have been some questions indicating how much tolerance you have towards the regional business, but I guess I would like to ask the other side of the coin, when you examine the size of the various freight markets and the longer term growth potential, I would think that strategically, Covenant would find it absolutely critical to not only get into the regional markets, but succeed there. I guess I am looking to hear that you will do whatever it takes to succeed there rather than opting out of the biggest, most attractive market.

I agree 100% with you. We have got to be successful in the regional market. It is 75% of the business out here and we have to be successful in it. That is what our total management team and the reason we're making the investments we're making, into the regional markets because we've got -- there is no alternative, we have to be successful in it.

Absolutely. I appreciate your update.

(Operator Instructions). Your next question comes from Andrew O'Connor, Wells Capital.

Good afternoon, guys. I wanted to know, in terms of timeline and specific goals, then how much by win in each of the four operating divisions that you are building around, and we will hear more about in the fourth quarter, did I hear you suggest that Dave?

The four operating divisions, we are just saying that on the regional side, it could take us a couple years to do it. We are happy that we have done so far the expedited, the refrigerated or the dedicated side. I would say that, we are ahead of schedule, ahead of where we thought we would be at today. On the regional side, we are just starting the process.

In terms of some quantification, we are looking for that in the next quarter, right?

I think we have given some quantification today, and we did some last quarter on the breakout of the divisions as a percentage of the total. The revenue growth of each -- so we can get a percentage of size of each, and if they are growing or not. As far as the detailed profitability of each, that is still a question on what we are going to be required to disclose or not. We are getting out as much information as we can when it becomes available.

Fair enough. Most of our other questions were asked. I wanted to know what trends you see in the sales of used trucks currently and how do you see that trending in the fourth quarter?

Sales have been good for us. As most people know, we sell 100% of our equipment - both tractors and trailers. The market during the third quarter was very good. We sold quite a few tractors this year, through the third quarter, I know what the second and third quarter number is, I'm trying to think of the first quarter, we have probably sold 7 to 800 tractors so far this year, and not a one of those tractors has been to a new entry into the marketplace. Not one. I think a big whopping two have been sold to owner-operators. So as far as new entries and owner operators, we have had no activity and we have been selling trucks for a lot of years.

We have sold quite a few trucks to wholesale as well as existing companies. And the average order to existing companies has been four to five trucks. So they are fairly small. And of those trucks that are bought from existing companies, about 70% of those are for replacement, albeit there are some it is for growth. The majority of it is replacement to existing companies. The market the last 30 days seems to be slowing down a little bit. I would agree with some comments that people were talking about last week. I wasn't at the conference but I'm hearing some feedback on that. We do see it slowing a little bit. Right now, and it is just a reaction to fuel pricing, until that stabilizes and, gets sorted out, a bit I think it has kind of dampened things a little bit. We are still selling a lot of trucks. The new order calls seem to be slowing a little bit.

That is helpful.

At this time, there are no further questions. Mr. Parker, Mr. Hogan are there any closing remarks?

We would like to thank everyone for joining us and we look forward to updating you next quarter. Thank you.

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