Covenant Logistics Group Inc (CVLG) 2005 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Covenant Transport fourth quarter 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 session. (Operator Instructions). Mr. Hogan, you may begin your conference.

Welcome to our fourth quarter 2005 conference call. I will first read our forward-looking statement 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 of all, I would like to make a brief comment on the quarter. We will try to keep our comments brief. The detailed financial statistics are posted on our Web site right now and we will not cover that information during the call. David will then provide an upgrade of the ongoing restructuring of the Company and the current status of the freight market.

During the second half of the year, we clearly made strides to not only regain revenue in the system but also to improve the quality of freight in our network. Our goal during the second half of 2005 was to bring on some new accounts and stabilize the freight base. The third quarter of '05 was a nice start that accelerated throughout the fourth quarter. Following a 3.6% sequential increase in revenue per truck during the third quarter, with a 6.1% sequential increase in revenue per truck during the fourth quarter over the third quarter illustrates that the recovery is accelerating.

Growing 1.4% in revenue per truck over the fourth quarter of '04 was much better than we anticipated. Net of fuel surcharges, our rates have improved throughout '05 from $1.46 to $1.50 to $1.52 to $1.55 in the fourth quarter while our length of haul has increased. Miles per truck were off 8% versus the prior year for the first six months of the year, off about 5% for the third quarter and down only 1.7% in the fourth quarter. We view these revenue trends as measured progress.

On the cost side, driver pay increased $0.03 per mile or 6% versus year ago. With diesel costs coming down 22% throughout the quarter, from the highs of the late third quarter and early fourth quarter, the lag effect of collection of fuel surcharges fuel surcharge revenue was meaningful. Our fuel cost, net of surcharge revenue decreased about $0.01 per mile on miles driven by Company-owned trucks versus the fourth quarter of 2004. The positive impact for fuel versus the fourth quarter of '04 was about $0.03 a share. It was obviously a big difference in insurance and claims, but that comparison is not meaningful because of the large increase in reserves we took last year.

There were several items in the income statement that I will quickly comment on that bears some explanation regarding some fluctuations in certain line items. Under salaries, wages, and benefits, driver payroll increased as we already discussed $0.03 a mile versus the fourth quarter last year, due to the pay increases we implemented in '05. Under revenue equipment rentals, we accrued $900,000 increase to lease expense and under depreciation and amortization, we recorded a $1.5 million decrease to depreciation to reflect two adjustment items. Although the net effect of these positive and negative adjustments was only $500,000, we've mentioned them because of their impact on different line items. Also under depreciation, our expense was reduced by a small gain on disposition of revenue equipment compared with a $1.4 million loss in the fourth quarter of '04.

Under fuel expense, the decrease in fuel prices during the quarter had a positive impact of approximately $780,000 compared with the fourth quarter of '04. Under insurance and claims, we accrued a pretax increase of approximately 1.5 million to our casualty reserves to adjust for actual or expected settlements of prior period claims. In addition, under salaries, wages, and benefits, we accrued approximately $500,000 to workers comp reserves for prior period claims.

Following these adjustments, a good safety year in 2005, and a settlement of a substantial balance of claims during the fourth quarter, our estimated balance of open claims is the lowest it has been since 2003. And our reserve for incurred but not reported claims is the highest it's ever been. I'm going to expand a bit on these accruals because they may seem a little counterintuitive.

As I just said, we had a good safety year and our outstanding claims balances have been reduced to relatively low levels. On the other hand, we are increasing reserves. The reason has to do with a multiyear actuarial analysis. We have a good trend going but one year out of several years of data has not yet overcome a less favorable history. Given the past year's major accident trend, we felt good about our reserve levels before the adjustment. We increased the reserves, however, to be consistent with our actuarial program. After increasing the reserves we feel very comfortable with the size of the accrual. If our safety performance holds, we would expect a gradual reduction in our insurance and claims expense, beginning in several quarters.

In addition, there is one balance sheet item I would like to clarify. Our available borrowing capacity at 12/31/05 was a combined $32 million under our revolving credit and securitization facility and are comfortably within all of our debt covenants. That wraps up my discussion for the quarter.

As a reminder, for additional financial stats, please see our Web site.

Now, let me turn it over to David to talk about the current status of the Company's operations.

Thanks, Joey. As the third quarter, 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 in July of 2005 and continue to make progress with the realignment phase almost complete.

The highlights during the fourth quarter and since October include the following. We hired Steve Taggert to serve as our Vice President of Regional operations. Steve reports to Jeff Paulson, who we introduced last quarter as our Senior Vice President of Regional operations. Steve's role will be to assist in the design and the day-to-day management of our over-the-road division, Regional division. He was formerly Chief Operating Officer of [Mike Brooks] Trucking, a Midwest regional fleet company. We have filled the senior management positions in all service offerings except the head of our Dedicated division. This position should be filled during the first quarter of 2006. We have completed the transition of all existing operations and sales positions to the new divisional structure.

Our first two Regional fleets began operating this month, January 9th, which consisted of about 80 trucks in the Southeast and 80 trucks in the Midwest. The Refrigerated and Expedited Service offerings were separated in May and in August last year 2005, with the results that the second quarter of 2005 being extremely encouraging. Just to give you some ideas, on our Refrigerated service offering, revenue per truck has increased 39% while our length of haul has grown 21%, to 1410 miles. Our total Refrigerated operations including our SRT subsidiary grew revenue during the quarter -- about 34% -- over the fourth quarter of 2004.

Our Expedited Service offering. Revenue per truck has increased 21% while our length of haul has grown 24% to 1525 miles. Our Expedited Service offering grew its revenue by 10% during the quarter over the 2004 period. Additionally, the driver turnover has improved about 30 basis points for both of these service offerings from their highs of 2005.

As I've stated for several quarters, the realignment of our Company will take time. But I am encouraged that by the end of the second quarter of 2006, we will have management teams chosen, system conversions and financial reporting completed and our operating plan in place for each service offering. All of this is about one year from the time we started.

In the second half of 2006, we expect to begin the execution phase with all the divisions fully operational against their business plans. And, we are very encouraged about where we stand on the restructuring up to this date.

Another major area of emphasis has been to refill the freight bucket. As we lost some freight in the early part of last year we've added or increased volume significantly with strategic accounts during 2005, and have won back some incremental business with other accounts that reduced our volume during the first half of 2005.

As Joey stated earlier, the utilization gap versus a year ago has closed greatly and is a direct result of the progress that we have made. Even during the time when we were looking to add freight, we were also able to continue to raise rates and revenue per truck. Additionally, we were very focused on taking care of our existing customers during a capacity tight fourth quarter and feel that we are in much better shape freight-wise going into the first quarter. 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 us.

Regarding the market in general, we believe the relationship between freight demand and truck capacity remains favorable. We're 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 in truck prices, into the 2007 emissions requirements, we do not expect additional capacity to flood the market.

As to the significant economic pullback, we view the freight environment as likely to favorable for the foreseeable future. Regarding our equipment plans in preparation for the 2007 engines, I would advise you to visit our Web site and review our third quarter conference call script that discussed in detail our future equipment plans.

At this point, I'm going to turn it back over to Joey for a few comments on our expectations for the first quarter of '06.

Even though our expectations for the Company are increasing, we feel that the meaningful improvement in earnings will be focused on the second half of 2006. During the first half of the year, we continue to anticipate that freight will be rationalized out of the network and within service offerings. Additionally, from a cost standpoint, number one, fuel will be higher than the first quarter of 2004. Number two, driver pay were will be higher as we cover the full quarter effect of the 2005 increases. Finally, the massive equipment transition will affect us in a couple of ways.

We plan to trade all 1600 trailers and about 1,000 of our tractors in the first half of the year with another 1100 tractors in the second half. The cost of trade prep will be heavier in the first half and will run through depreciation as a reduction of sales proceeds. Maintenance entire cost and tire cost on the other hand should be reduced, as the fleet gets even younger and we avoid tire replacement cycle in a portion of the fleet.

The greater part of this benefit will come in the second, third, and fourth quarters. The result is that we expect some volatility and unpredictability to impact first half earnings as we complete this first year of the restructuring. As a baseline goal, however, we will be disappointed if earnings do not improve both sequentially and year-over-year for each quarter in 2006.

Now, Meredith, we will open them up for any questions that may be out there.

(Operator Instructions). Ed Wolfe, Bear Stearns.

Can you talk a little bit about what the environment is out -- feels like out there in January? There has been a sense from some that it's gone a little more seasonal than the great strength of fourth quarter. Can you talk to the demand environment in the different -- either parts of the country or parts of your business right now?

Ed, we have -- no doubt that it is -- January is January. We're feeling pretty good about the freight environment. The West Coast is one area that has been hit since January 1st. Maybe the first week of January was kind of okay but the last couple of weeks of January, the West Coast has been slow. And realizing that Chinese New Year this year is January 29th, I hope and I think there's a lot of reasons for the slowness out on the West Coast.

You know, excluding the West Coast, the rest of the freight is not bad. We will have a day here and it's spotty in the South and then the South is okay the next day and the East Coast has been good all winter so far for the month of January. The East Coast has been good. The Midwest will have a spotty day and then be strong again and Texas as well.

But really, the only area that I can say that I wish was operating better would be California predominantly but that Utah Idaho area has been slow as well. The first couple of weeks, the Northwest was doing very good for the first couple of weeks of January. And for the last week, I've seen a slowdown in the Northwest. So, I'm pretty satisfied about where the freight environment feels as we speak right now.

Is the slowdown in California -- is that just the long haul stuff? Is it the regional stuff too?

No, we're seeing it both. We're seeing it on both sides. Even though I've got to say, Ed, as you know probably 85% of what we do out of there is long-haul out of the West Coast. But, we do some short-haul but we're seeing it across all lines of our freight. That it's just not robust out of the West Coast.

Okay when you look through the year, David, and you think about what rates might look like net of fuel and net of mix changes, what is your goal for rate this year?

You know, our marketing team is looking at that and I feel very confident that rates can go up 5% for -- as contracts come up for the year. So, I think that that's a good number. I think it's somewhere in that 5 to 7% range but I think that 5% is not too bad of a number as the year continues to get stronger. Keep in mind a lot of hours happen in the mid springtime. So, it's probably going to be more in that 3 to 5% if you were to look at it over a year-to-year basis. For the full year.

Okay. So I mean if I look at revenue per mile the last couple of years, you've had 11% and 7 or 8% in '05. You're thinking 5 to 7 kind of the equivalent to that -- is that fair to say?

I think that the way ours comes up with a lot of our contracts don't start coming up until the second quarter of this year. If you were to look at it, starting that time, I really think you're looking for the calendar year of '06. I think it's more in the 3 to 5% but I think the 5 is a very -- is a number that we can stretch for. But, internally, we're going with 3 to 5.

Okay and in terms of costs that are ramping for you, you are already at 100% post October fleet. So there's nothing too materially different I'm guessing in terms of the fleet mix of D&A other than the earlier trades, right?

That's correct.

And driver pay, what is your gut in terms of what's going to happen with driver pay this year?

Ed, we are just evaluating that and all four divisions are looking at that. You know, Covenant for the last 18 months has increased driver pay pretty dramatically. And so, we are on the sidelines from a standpoint of wanting to continue to see driver turnover reduced with these four divisions because I really believe that that is a result of these four divisions, we will see driver turnover reduced. And personally, I don't think that we will have the pressure to raise driver pay dramatically if at all next year. But, we're on the sidelines on that. That decision has not been made yet.

I think you reported that you have 5% trucks without drivers or you did during (multiple speakers)

That's right. About right.

Where does that number -- what number do you have to kind of go make the decision that a pay increase makes sense? Is it 10%? Is it -- are you right near it? Where is that number?

You know if you were to sit here and say that for instance one thing we know, when we split off Refrigerated and then in August, that was May -- and then August expedited, we know that those turnover ratios for those two divisions dropped 30% -- or 30 basis points in turnover from the highs of 2005. So, even though their highs might have been in April, those two divisions still saw a 30 basis points drop in their turnover.

We are continuing to see -- if you were to look at the first three weeks of January, it's over 100% but is less than it was for the first three weeks of last January. Down by -- as a total company down around 20, 25 basis points. If we continue to see that, then it's (indiscernible) this 5% is going to become 3 and 2 and numbers that we can work with. If we stay at 5% all year and our turnover's been exactly where it's at we will feel the pressure that we need to increase driver pay. So, but, right now, I'm encouraged about what I'm seeing on driver turnover.

Would you characterize it as it's slightly better now -- the driver situation -- than a year ago at this time?

Ours is. Ours is and the thing I don't know, though, is how much these divisions and getting smaller and more personable and all the positives that we think we will end up getting out of these and we know that we're seeing right now -- I don't know how much of that -- ours is definitely more favorable. I don't know about the industry.

Any impact from hours of service, the change that went into effect with a soft enforcement in January. Is that going to impact utilization?

For the first three weeks of the year, we are not seeing any large decrements on that but Ed, I really need a couple of months before I'm really going to be able to give you an answer.

And when do they start to enforce that? In March?

No. They are basically enforcing them today. It's being enforced so that the hours are there but because it is January, if we have a driver that has some hour issues then it's easily right now, easy to replace that driver and get somebody else on that load. You know what I'm saying?

Yes I got you. It's the wrong time to get a good read about that I've got that (multiple speakers)

For me to answer how much of a problem that it's going to -- is or is not going to be.

Joey, can you just give a sense of CapEx for the year? What you're thinking?

Yes. About $65 million net of disposition.

Okay and so that really hasn't changed from your thought process in terms of where you are. What percentage of that is equipment?

About 55 of that is equipment and 10 is bricks and mortar. One thing I want to clarify when Ed is going off is on the rate question. Another thing that is impacting our rates in '06 is mix. When we say 3 to 5%, it's not that we expect the rate environment to slow dramatically because of either the freight environment slowing or a lot of capacity is coming in, a lot of competition.

Mix is impacting our overall rate numbers for 2006. And so it's Expedited group is a bigger piece of the pie right now, it's always been what I would call in the upper end of the rate scale anyway. It's impacting the overall rate mix in '06. And so, that 3 to 5 that he gave, if you look at it by division, the teams are or the team division is pulling the overall rate mix down.

So, I just wanted to clarify that when you don't compare it to (multiple speakers) that that is a big issue that's impacting that.

Joey, can you hear me?

Yes.

Yes.

What would you expect it to be, taking the mix away then just in the regional market per se.

In that 5 to 7 range of that David mentioned.

Chas Jones, Morgan Keegan.

Just trying to understand the first quarter here a little bit better, in terms of what it's going to take to be profitable. Joey, you outlined a number of expenses that certainly are going to impact the first quarter. But is it a level of demand or a particular price point that's going to have to be achieved to actually get to a positive quarter here?

Well, you know one thing from the business environment, one of the things during the days that Covenant operated at 90 operating ratios. As you know, our first quarter was always worse than the group and then as the year progressed, we got better and usually better than the group. And predominantly, the reason for that is because of the long-haul nature of our freight.

So you've got two things happening there. You had the long-haul that was always there that would get impacted in the first quarter and for whatever reason -- I don't know if that's inventory control, where -- I don't know the reason for that but we always know that ever since we've been in business, our first quarter during good years and bad years has always been a tougher one of our quarters as it pertains to our peers. So that's a given.

One of the things that we think the reason for that also is that we don't think that these inventory fluctuations are as big in the short-haul marketplace. We believe that the long-haul marketplace increases inventory levels from origin on their long distance of warehouses and that they increase that inventory to help them get by. We believe that the short-haul freight that's from origin to shorter length of haul destination that the customers do not increase inventories. And they react on a given notice of 24 hours and those kind of things and so we do believe that that's one of the things.

Well, one of the negatives you got is that we are still [heeling] our short haul. I mean, we got the plan in place, we got all that stuff. I expect in the future, as we go forward and as we get the short haul operating and Jeff Paulson and Steve Taggert get it operating the way we want it to operate in that we will be able to benefit from that theory of warehousing and how freight moves in the short-haul market.

So from an operation standpoint, that's what we believe happens on miles in the first quarter.

And then maybe if you can remind us just and this is Covenant specific, how did demand trend last year in the first quarter? And I guess I'm trying to get at it on a monthly basis.

If you remember, we made some -- all of those change or decisions in the fourth quarter of what year? 2004. Fourth quarter of 2004 change in fuel surcharge being very adamant on the detention and you remember all of those kind discussions we had. And then went into January. After about the second week of January, we started feeling the effects of some of those decisions that I made. And we lost some freight. We lost -- only lost one customer -- literally lost one of the customers which, we don't do business with that customer today. But, we saw a bunch of freight that went from 10 loads a week to five loads a week and seven loads a week to three loads a week across-the-board because they said, "David, your company is being too hard on detention. You came in here four different times in the calendar year '04 etc."

And we had to go and make that up. Whether it's forgiveness tour or whatever you want to call it and going back out to our customer base and going to more of the industry standard on detention. And we didn't have to give rates back. They didn't make that. But we had some customers that were upset at us and as soon as they had the opportunity to take advantage of it, they took advantage of it. They didn't kick us out because their fear of capacity but they did take advantage of a period of seasonal slowdown.

So as we went into January and February, that was the -- that was what we were feeling. So maybe we are feeling better so far about the first three weeks of January. But some of that might be because I was feeling so poor about the first three weeks last year.

I guess that's what I was just trying to understand a little bit better. And then lastly here, plans here to I guess you have commenced operations on two regional locations. Is that going to be it in 2006? Or you know are there additional geographies out there that could potentially be opened?

No you know that's, really, you got two things happening as we speak and then I will talk a little bit about the future. You have got these 1100 trucks approximately that are running in our Regional division. Our Regional division is one of two concepts. One is a regional regional like Midwest Regional that use all those 80 trucks and the Southeast region which is running those 80 trucks. And that's how all they're operating in is within those regions.

We also have our Regional business that is the -- if you want to call it ad hoc trucks whatever you want to call it that we are defining as North and South. And these trucks do not go to the West. About as far East as they go is Texas. So they will go Texas East. They are not in a little mini regional hub yet but they are running basically Texas East in a shorter length of haul.

And so, you got those two happenings that are there. So I don't want you to think that we just opened up 80 trucks in the Midwest and 80 trucks in the Southeast so okay these 1,000 trucks are just still running all over the country. They are not. They are much more disciplined today than what they were a month ago getting our hands around them. And then as those regions gets stronger and stronger and the correct freight comes up in the Southeast region, in the Midwest region, we will then start growing those divisions.

Now, to answer your question, we definitely see some time in the summer probably July kind of time-frame, we see a Southwest division starting up. It will start similar to the way you see in the Midwest and the Southeast. So, let's say that we got by that time we probably have 140 or 50 trucks running in those divisions in the South and the Midwest; then we would start off with 80 or so running the Southwest division region and grow it.

Andrew O'Connor, Wells Capital.

Congratulations on the quarter. First, I'm just trying to get a sense how much of the restructuring is complete at this point? And then second, would there be other signposts or dates that we should look for between now and the end of the second quarter which will mark progress towards completion of Covenant's restructuring?

Andy, I think the main thing that -- let me go to the end of the second quarter. We will have completed all senior management positions, all of the mid-level management positions, including sales, operations, support staffs around those, systems conversion, financial is complete. business plan is approved, will all be accomplished by the end of the second quarter.

The only thing -- there's only two things. There's only two things of all of that is not done today. One is hiring a general manager of our Dedicated division. We fully expect to get that done by the end of the first quarter. And then, second, is final approval of all the business plans, both short-term and long-term plans. That will be completed also in the first quarter. Actually, February, those will be completed.

So, we said at the end of the second quarter because frankly that's a year from start to finish; and everybody said we were crazy to think we could get it done in less than a year. We will get it done in less than a year. But nevertheless, that's where we are right now.

Okay so, in terms of where we are at the moment, how much would you say you have under your belt?

All of that. I mean we got all of that but division general manager for Dedicated and business plans approved. All that is done except for that.

And then after that, Andrew, it just becomes the blocking and tackling. As they open up these divisions, you've got the guys that are set in there working with marketing saying "Well, here is the freight. We've got 80 trucks in it, we want to get to 150, marketing, go find this particular type of freight." So then, the blocking and tackling comes in to make it the success.

Thanks very much. Great quarter.

Adam Thalhimer, BB&T Capital Markets.

Just a quick question on Q4. Can you walk me through the D&A line? I just don't -- how big was that -- was the gain from asset sales that offset that line?

$150,000.

That is all it was, the 150?

In Q4 '05, gain on sale was $150,000. Q4 '04 was about a $1.4 million loss. So there was a big swing between the two quarters on gain loss and sale of equipment. But, the actual profits in the quarter were only $150,000.

What accounts for that 1.9 million sequential decline in D&A in Q4?

That gets back to that adjustment that I mentioned. There were two adjustments -- it's hard to separate them because it gets around revenue equipment and things like that. But we had a $1.5 million decrease in depreciation expense in the quarter in D&A but we had a $900,000 increase one-time up in lease revenue equipment. So if you just are focusing on the D&A line, there was a $1.5 million one-time adjustment in that quarter.

Then kind of a bigger picture question. In your view, what is the issue on the Regional side? And you know, these couple of guys you've hired to come in -- what do they bring to the table, what are they going to change, what is the solution there in your view?

It is systems. It is A., knowing how to operate in a regional arena. It's focus, it is discipline, it is traffic lanes, it is those kind of things that (indiscernible) sitting there directing your marketing staff that sit there and says I want to go from Charlotte, North Carolina to Atlanta, Georgia. I want to go from Chicago to Columbus, Ohio, and if I've got five times a day, I want to do this and I need eight, I don't want to go from Chicago to St. Louis. I want my marketing to go out and go from Chicago to Columbus and beef up those density and those traffic lanes in those regions that you have elected to serve.

So that's what they've done. They have come up with the regions, they've come up with the states but not only the states as defined by cities and where their power lanes are going to be at. And so that is what they are really really focusing on in order to make that happen. So, you're going to see an influx of more freight. We are going to our existing shipper base and saying "Hey, I know you are giving me Chicago to St. Louis, but I really don't want Chicago to St. Louis. I really need Chicago to Indianapolis with the same customers."

If they can't give that to you, then you're going to have to go out and get customers that will give you that freight and not just use customers that say "Oh, you can move 10 loads a week out of Chicago? Great. Thank you for 10." If they can only give you five to where you're wanting to go, go get you another customer that has got five loads. That's what it comes up to, Adam.

And then, I think in the past you said one of the things you thought was the problem on the Regional side was that you were kind of late to the party. And a lot of shippers already had dedicated carriers or relationships that went back a ways. Does Steve bring relationships to the table? Does he have accounts he can bring in immediately to kind of resolve that issue?

Jeff and Steve both are working very diligently and, quite frankly, do they have customers? The answer would be yes. But quite frankly, I think, Steve, if you were to look at all of the major carriers we all probably got very close to the same customer names on the list. So, there is a relationship, no doubt they've got relationship. They are able to get indoors on some people that we do little maybe only a little bit of freight. But, we also got the doors that are opened and we need to go into our existing customer base of $550 million of revenue and do what I say. So, it's not a matter of do they have five different new accounts that they can bring? The answer is yes; but we've got a whole big customer base that they can attack a lot easier than trying to go out and create a new one.

Have you given them some hard metrics to hit by a certain date and I mean can you share that? It seems like -- I mean, obviously once you turn around that Regional business, you guys are fixed. There is no more drag on the operations.

Adam, I don't disagree with that statement. And you know, what we're doing is, we are putting besides the plan, the business plan to put all that into practicality to make sure that we are all on the same wavelength and going forward, every one of those divisions are going to be incentivized in order to hit certain goals at certain times and those kind of things. And quite frankly, the next couple of quarters that's why I am very optimistic, very encouraged but we still got a couple of quarters in my humble opinion, we still got a couple of quarters of choppiness. Because we are just now as we start on this Regional -- which you said is the vast majority of our problems and it is -- we're just now starting to implement the business plan that we've been going on for the last couple of months. It's now there.

Well, they are not going to be there tomorrow, they are not going to be there in six months. But I do believe the second half of this year that we're going to start seeing -- me and you both -- will start seeing some very nice improvements that we will both be very proud of. So we're going to incentivize them to give them targets and goals, quicker the better all of that kind of stuff within those divisions. Because keep in mind as these P&L statements come out, each one of those divisions will be bonused upon how their divisions do it.

So, we are incentivizing in all of those ways incentivizing top management and those kind of things.

I think Adam, one other thing I'd like to add is that, again, you're hearing some excitement from us, relative to where we are. But, I recall last conference call we had and then the call in July where some of us on the call felt that this restructuring could take three to five years.

And now we're talking about metrics for the over-the-road regional business -- how quickly can we get there? So I think the combination of those is -- what we are saying is we're moving a little bit faster than what we have expected. There's no question. There's no question, it's not going to take three to five years for us to accomplish what we need to accomplish. We said that was too long; but we didn't know. I think as time goes by, we continue to build confidence, that we think we can get to where we can at least have everything in place to move forward very quickly. How quickly we get to 90 ORs is another question.

So, I get to -- I just want to make sure we all keep focus on -- we are moving drastically. We are also addressing culture. We are addressing management styles. We are addressing accountability. That's all different in this Company and you can't change that overnight. And so we've got to stay patient. We got to stay focused on allowing this thing to evolve but yet push it as best as we can. And so we are excited but it's clearly not going to be three to five years.

I guess that begs one more question. Sorry, guys. I mean on the financial, you being the financial guy, you know, you talked about some customer bleed in Q1 of last year. You know, the rate increases that you pushed through in Q4 were probably about half of what we had modeled and I don't know how precise that process is. But, nonetheless, are you being a little bit soft on the rates to keep some of that business and keep this thing moving forward? And as the financial guy and your seeing rising cost pressures, I mean, does that make you concerned at all?

On the rate side, you're exactly correct in your thought process. You know, we, instead of going in in the six-month intervals, we wait -- we are waiting until the one-year contracts. We are a kinder, gentler -- whatever word you want to use -- carrier today than what we were. And we think that's the best way to operate on the rate side.

So yes, Adam, that does. Really, as far as rising costs, there's two -- as I outlined -- there's three areas in '06 that we are watching. Fuel we all have to watch. Volatile -- we don't know what it's going to be. Driver pay, which we talked about -- undecided. But I've got to pay two more months effect of that in the first quarter. Because we didn't do it until March of '04 last year. March of '05 -- last year.

And then lastly, is this whole equipment plan which is a lot of piece of equipment. And how is that going to impact the quarters? We feel that the expense is probably going to be a little front loaded just because it takes you time to pull them out, get them in service and all of that. We're going to be very focused on moving those tractors or selling those tractors as quickly as we can so we may see the savings on the maintenance side lag until those trucks can fully get in the system.

So those are the three things. My CapEx -- I mean my D&A cost per truck is not going to change measurably. We've been at 100% new engines since basically the first quarter of '05. I don't have any insurances for the most part on an ongoing basis has stabilized and that $0.09 to $0.095 a mile range. So that, cost-wise, I feel it is fairly measured and we understand what they are, we understand what the issues are, the restructuring costs are minimal. We've added 20 people, we've added about $100,000 of software expense and about $100,000 of recruiting and relocation costs amongst the whole network. So it's not a direct cost being issued right now at this time. We don't really foresee it really changing that much.

So really, as we -- as David said in his kinder, gentler Covenant environment, when we have a first quarter [around the quarter] that we lived through last year, that wasn't fun. At the time when we are restructuring the Company, we continue to move forward with great pause until we get through it. So, that's kind of what we are saying.

Shaun Nicholson, Kennedy Capital.

I just want to get one thing clarified. I know you guys talked about, you said you would be disappointed if earnings did not improve both sequentially and year-over-year. But then in the press release you stated that it was hard to establish if profitability would occur because of the restructuring. I mean, I guess I'm just trying to figure out where you guys really see the first quarter coming in at.

Well we lost $0.08 in the first quarter of '05. So anything, what we have said there is we're working hard to be profitable in the first quarter. So you are right, versus sequentially first quarter to the fourth, we're going to be down. But really throughout '06 and our goal is to have sequential improvements each quarter as well as improvements over a year ago.

Did you guys break out driver turnover -- do you guys break that out at what, in total, what it was over 100%?

It's just a little bit over 100%. We don't break that out.

And I noticed your purchase transportation went down. Is that a trend that you guys see continuing?

The biggest part of that, Shaun, is the reduction in owner operators. I mean for example, last year, we had 6.8 million in the fourth quarter of '04 and this year it's 5.1 million. So, the biggest chunk of it is mixed change. Last -- this year we did about 4% of the miles in the quarter for owner operators and I think last year it was 6 to 7% of the miles in the fourth quarter were owner operators.

Were there any accidents in the quarter? I know there were not any major ones but I thought there were two accidents in the fourth quarter. Is that correct?

We didn't have anything major. We had one accident that's arguably around $1 million type of an accident. But there were no fatalities or anything like that. So, it was a fair quarter from an accident standpoint.

And do you guys break out what the reserve level is for the insurance reserve?

We do and it will be published when we publish the K. But I will go ahead and tell you what it is. Let's see real quick. It's 42.1 million at the end of December versus 46.2 million in December of '04.

David Mack with J. Goldman and Company.

Nice quarter. I had two questions. The first one I want to talk a little bit about what you're looking for from your managers in your business plans. And as you go forward throughout this process, how you're going to think about committing trucks and people and capital. How should -- how are you guys thinking about the goal that managers are setting and how you're looking at it?

David, first of all, for the business plans standpoint, I mean it's a matter of all the divisions coming up with what do you want to be? What does regional mean? What does it mean to these folks out there? What does Refrigerated division mean to these guys operating in that division? So, together, we come up with the definition of what it means to them. What areas are they going to run, what do we see our internal strength at from a standpoint of regionalizing? That's why we started the Midwest and the Southeast because we know, currently, that is where our stronger points are that would get us now out there quickly or quicker.

So the business plan starts with that then the business plan comes up with everything from what is the base amount of trucks you are going to operate at to what is the utilization of those trucks to what is the rate per mile going to be on those trucks? To the revenue per truck per week on those trucks. So the business plan comes up with those kind of issues.

As we have separating all the divisions into their own P&L statements, that there is going to be the answer or a lot of the answer to where you throw your assets to. Do they need to go to Dedicated? Do they need to go to long-haul? Do they need to go to Refrigerated? Do they need to go to Regional? And our goal will be to be to put the current assets we've got into the most profitable pieces of our business.

So that's the way in which you commit equipment to those areas and then when they are all four humming very nicely, then the decision will be how do you grow those four divisions you know from where they are at today.

My other question is for you, David. You know, this is a big change for you and for the Company. How has your role within the Company and how has your mindset within the Company changed as a result?

Yes; because you are right -- there is changing and I think that it's more -- it's more coach. It's more cheerleader, it's more that kind of stuff than it is doer. Probably one of the most thrilling things to me, David, that happened while I was out of town last week, I was out of town and as I told you all the West Coast was not humming. The West Coast is slower than what I would like it for it to be. I can tell you in years past, you probably know this, I would have been with myself or and Mickey Miller or someone would be on the next airplane headed to California trying to figure out what we're going to do in California and trying to get more freight and all that kind of stuff.

And before that even crossed my mind, the division Vice President that runs our expedited long-haul marketplace, he didn't tell me. I heard from Joey or somebody that he was headed to California. That was the best news that could ever happen to me because that does nothing more than shows me that these VPs are getting it. The VPs are knowing what we are asking of them. They know that we are holding them accountable and they are not waiting on David Parker to run to the West Coast and find freight. They are going on their own.

He runs his 900 trucks. He is going on his own because he saw the area that he was concerned about. That thrilled me. Because in the past, that would not have happened. So my role is changing. Still involved on the customer side. I will do whatever they ask me to do. If I can help them, if my card helps them, whatever that means, we're going to do. But at the end of the day, I will be want these customers to look at these Vice Presidents and general managers the same way they would look at me and that is, if it's a good decision or bad decision, they've got to be the one to the customer that's making it.

Dan Moore with [Robust] Asset Management.

Congratulations on a great quarter. All my questions have been answered. I just thought I would say those few words.

Well, I need to hear that from time to time.

Tom Albrecht, Stephens.

I've heard most everything. I guess while I was a little late in getting on but it was brought to my attention, there was a lively set of Q&A on rates, etc. and I don't think I heard that you guys had said after the struggles in the first quarter I very explicitly remember that you all said there was a pretty strong chance that your fourth quarter rates would be down year-over-year and some of the struggles that you admitted to. So the fact that they were up I just wanted to lend a little perspective to how far you've come from six or seven months ago.

That's it. You're exactly correct because that's really where we felt like they would be at. You are exactly right on that.

At this time to there are no further questions.

We just want to wrap it up. One tidbit that I wanted to bring in. Somebody asked -- I don't know if it's Chas or somebody about the mixed regional (indiscernible) -- think it is scheduled for late this year or early next year will be Oklahoma, Arkansas, Louisiana is the regional which we've picked -- that will be the next one. So I just wanted to tidy that up to everybody. Thanks, everybody, for joining us and we look forward to continuing to progress and going from there. Thank you. Bye.

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