Covenant Logistics Group Inc (CVLG) 2006 Q1 法說會逐字稿

Good afternoon. My name is Jody and I will be your conference operator today. At this time I would like to welcome everyone to the Covenant Transport first 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. If you would like to ask a question during this time simply press star and the number one on your telephone keypad. If you would like to withdraw your question press the pound key. Thank you. I will now turn the conference over to Mr. Joey Hogan, Chief Financial Officer. Please go ahead, sir.

Thanks, Jody. Welcome to our first quarter conference call. This conference call will contain forward-looking statements within the meaning of the Section 27A, the Securities Acts of 1933 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 in the filings with the S.E.C. First I'll make a brief comment on the quarter and then David will provide an update on the ongoing restructuring of the Company and the current status of the freight market. Additionally I would like to remind everyone that detailed financial and operating statistics are posted on our Web site and we will not cover that information during the call.

Regarding the first quarter our first quarter can be generally characterized by a good January through the middle of February while the end of February through March was softer than we expected. From an earnings standpoint things pretty much played out as we expected. We had previously stated that achieving profits in the first quarter was going to be difficult and that improvements in the business would not be quick enough to offset increases in costs versus a year ago. On the positive side our freight revenue per tractor per week increased 6% to $2,938 per week. As we unfold the divisional restructuring of the Company we continue to change our freight mix across and within all service offerings in order to build density of freight, which will benefit both our customers and our drivers. During this period of transition we may rely on more non-regular business or brokerage freight in order to rebuild the network. During the first quarter about 8% of our loads were attributed to broker freight versus 4% in the first quarter of 2005.

In addition the mix of our business toward longer length of haul service offerings is beginning to affect the metrics of revenue per truck. The longer length of haul service offerings have higher miles per tractor but a lower rate per mile. From a cost standpoint our after tax cost per mile has been pretty stable over the last three quarters at about $1.35 per mile. Compared with the first quarter of '05 our after tax costs were up $0.039 mainly due to two reasons. First, driver pay increased $0.021 a mile as a result of the 2005 pay increases and health insurance costs were up 1.4 million or $0.014 a mile. Our health insurance costs have been very stable over the past four years with a little seasonality toward the first quarter of the year. The first quarter of 2006 was about 30% higher than our historical first quarter average. We did have 7 more large claims in the first quarter of 2005 that cost us about $400,000 with the additional costs still being researched. We do not see any reason at the present time that indicates that this overrun will continue throughout 2006. Compared to a year ago the health insurance increase cost us about $0.06 a share during the quarter.

Diesel fuel costs were up $0.42 a gallon or 22% versus the first quarter of 2005. Fortunately our fuel surcharges were up $7.7 million, which allowed our fuel costs net of surcharges on a Company mile basis to be flat with a year ago. One positive note on costs was a retroactive adjustment to our liability insurance premium for 2005. Because of favorable safety trends during 2005 we were eligible for a rebate of 960,000, which we recorded in March. Although we are not changing our $0.095 per mile actuarial accrual rate at this time, we consider this another step towards bringing down those costs over time. That wraps up my discussions of the quarter and as a reminder for the additional financial statistics please see our Web site. Now I'll turn it over to David to talk about the current status of the Company's operations.

Thanks, Joey. We continue to focus the management team on relying our operations around our four service offerings, Expedited Team, Refrigerated, Dedicated and OTR Regional. By the end of the second quarter we will be completed with the first year transition to this new operating structure. I am very proud to say that we will accomplish our first year goals of the realignment plan and look forward to hitting the ground running with a transitional phase behind us. These highlights this January include the following. We developed and improved business plans for the Expedited Team, Refrigerated and Regional service offerings. We relocated allocated tractors and trailers among the service offerings. We implemented measurement and accountability tools including budgets, incentive targets and income statements for each service offering and addressing driver retention by focusing on driver development and satisfaction as key components of every aspect of our business.

As an update on how we are performing, if you remember the Refrigerated and Expedited service offerings were the first two service offerings to be separated in May and August of last year respectively. The results seen versus the first quarter of '05 are very encouraging. Our Refrigerated service offering; our revenue per truck increased 16% versus a year ago while our length of haul has grown 51% to 1,436 miles. Our total Refrigerated operation including SRT, our subsidiary, grew revenue during the quarter by 32% over the first quarter of 2005. Our Expedited service offering; revenue per truck has increased 6% while length of haul has grown 18% to 1,493 miles. Our Expedited service offering grew its revenue by 12% during the quarter over 2005 quarter.

Our Regional service offering was separated in January of 2006. The early results are showing some encouraging signs regarding the new Midwest and Southeast regions but as we expected, the hill that we have to climb is steep. The new Midwest regions revenue per truck has improved dramatically since its separation while the Southeast region has started out a little slower. In our OTR or the remaining of that division the remaining trucks in the OTR division are operating from Texas east and we are continuing to work on the utilization of this division. As been expected we expected the regional division will continue to decrease as we expand the regional divisions. From a service offering management perspective the last remaining piece of the puzzle is designating a Vice President and General Manager of the Dedicated Division. The hire has taken longer than we expected but we remain focused on finding the best possible candidate for the position. Additionally we are pleased to announce that we have initiated a freight brokerage operation and hired Robert Bob Stephens, formerly Managing Director of a national brokerage operation as our Vice President and General Manager of our Brokerage Division. We feel that the Brokerage operation will help us continue to serve customers when we lack capacity in a given area or the loads do not meet our operating profile. We expect this service to be especially helpful as we realign our trucks between service offerings and manage our freight mix toward more preferred lanes.

Regarding the freight market in general we expect the relationship between freight demand and capacity to remain favorable for the balance of the year. I am encouraged that we were able to improve our utilization by 3.3% even with slightly more open trucks and slightly less teams in the first quarter. This tells me that the efforts we began last year to refill the freight bucket after a tough first half of '05 continue to pay dividends. Had unmanned trucks and team count been the same as a year ago our utilization would have been up an additional 2.1% points higher. 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 by at least 5% versus a year ago period for the balance of 2006. Go ahead and turn it over to Joey.

Thanks, David. I'd like to preface my comments about the rest of the year with several thoughts. First of all, in terms of trucking fundamentals we're expecting a sound shipping economy, a demand capacity equation consistent with rate increases at least equal to inflation, fuel prices in the range of $60 to $70 a barrel and a driver market that remains tight but does not require major increases in compensation in order to keep sufficient trucks seated. Our financial expectations assume these expectations are correct. Second, we're in the process of trading 1,600 trailers and about 2,100 tractors. 1,000 of the tractors will be replaced in the first half and another 1,100 tractors in the second half. The costs of trade prep will be heavier in the first half and will run through depreciation as a reduction of sales proceeds. Maintenance and tire costs should be reduced in the second half as the fleet gets even younger and we avoid a tire replacement cycle in a portion of the fleet. The greater part of this benefit will come in the second, third and fourth quarters.

Third, we're in the midst of a broad restructuring of most of our operations. This process may include changes in management, internal reporting, customer brace, driver assignments, preferred lanes and other key business factors. One of the key items here is transforming our freight mix to better reflect our mix of operations. We absolutely believe in the process that we have started and we believe that we have many of the right managers on board. However, the number of moving parts makes it difficult to predict a pace and magnitude of the financial improvements. Based on the expectation and the assumptions that I have outlined we expect second quarter results to be similar to the second quarter of 2005 and for improvements in our earnings year-over-year to begin during the second half of 2006. There are a number of scenarios under which the improvements could be quite meaningful but we are not prepared to put out any numbers or time lines today. We do expect earnings though for the full year of 2006 to be greater than the full year of 2005 and Jody will now open it up for any questions that anybody may have.

[Operator Instructions] Ed Wolfe of Bear Stearns.

You talked about freight softening in February and March. What are you seeing in April and I realize the Easter calendar is a little funky versus a year ago. How does that play into it?

Ed, you're right. After the first six weeks of the year we felt pretty good and the last six weeks of the year we definitely saw a slowdown in the business environment throughout the month of March and probably more typical this year than what it had been for the past couple of years so I don't want it to sound like it was a recession or anything like that because it wasn't. It felt more typical to what our first quarter normally would but the first six weeks of that quarter that was not the case. It felt stronger than it should have. So far in the month of April it is if you were to exclude Good Friday last Friday it's also about like March. I mean it's not booming but it's not pathetic. I mean our layovers on a day-to-day basis are numbers that are pretty pleasing so we're not disappointed with how many trucks we're laying over on a daily basis. No doubt that Good Friday last week just that one day took out about 50% of the revenue for a Friday Saturday, which are your two best days of the week so if you exclude that it's okay. I mean it's not pathetic.

Okay and I know it's tough with all the mix changes you have going on but we're hearing generally there's a lot more trucks out there than a year ago and if you just look at everybody's revenue per mile net of fuel as they report them they're solid but they're not as strong as they were the last couple of quarters for sure. Are you sensing that pricing is firm but not as firm?

I don't disagree with that statement, Ed. You know we've had numer-- we've been on the road a lot seeing customers as well as we've had quite a few customers that have been into the Chattanooga office here just in the last month and what you said is correct. I mean they are two things. They are getting a few more phone calls from us existing carriers or from carriers predominantly that are carrier based so which tells you that the Covenants of the world and the other carriers could use a few more loads so they're calling them. They are sensing that. They are still very concerned about capacity in the second half of the year. Rightly or wrongly they're concerned about that so that would definitely lead you to believe that pricing is going to be there. They're going to get your rate increases. We have no customer at all that's coming back and saying, "You're not going to get nothing." They are definitely working with us on rate negotiations but you know it is definitely not going to be as high as what anybody would like for it to be.

Fuel costs this quarter was give or take a push for you guys?

That's correct. We were $0.215 per Company mile in both quarters so fuel was not an impact to us in the quarter.

And can you maintain that into, you know, $70 oil?

I think not. That's kind of what I said for the future as we haven't hit $70 in the past before so, again, we're in new territory and again as fuel rises we're recouping let's say 80% to 85% of that number so as fuel goes up we're going to eat 15% to 20% of it so I have some concerns about that going forward if it sustains and stays at that level but Q1 to Q1 it was a push.

One of the things, Ed, also on that that we're very early into it but we're sensing some success on our customers going even to a lower base after fuel hits a certain number, you know between $2.00 - $2.25, whatever that number is that's allowing a base to get reduced. Now we're in the early stages to that but that has not been-- so far it's been pretty well received on a first week kind of basis and if that could happen it could definitely help us as well as the industry if the whole industry could do something like that.

On the driver side any plans at this point for driver pay and is that better, worse, the same than six months ago?

The driver situation has been the same overall for about six months now but we actually went in January, Ed, and opened up a few more trucks because our unmanned trucks were up in the first quarter over the first quarter last year with a lot of that happening in the early part of this quarter, of the first quarter in January. We've made great strides on that in the last three weeks or so and quite frankly today are sitting at our lowest number of the year today so we're making good strides there. If we can go another month with what we've done in the last month we're going to have some pretty decent numbers.

And why do you think that's improved? Have you taken up pay, done anything or is it the housing market slowing or what do you think that is?

Yes, well we did-- Covenant on the pay increases that we did, Ed, over two years rate driver pay $0.09 on our team and on our single it really did increase and put us in the top 95%. I mean we're up there in the top on what we're paying on team and single so that's a benefit but more than anything I believe these divisions as we're starting to see the turnover ratio decline and drivers are staying with us longer so you don't have to have as many coming. Our coming in is up. The numbers are up on drivers coming in but our turnover is down so, therefore, that's the way we're really making the headway.

Okay can you just explain to me why is your length of haul lengthening again? It for years was going more regional and now you're lengthening again.

Yes, and that's one of the things that we were saying on the rates. For instance in the first quarter we were pretty I don't want to say satisfied but we made stronger headway say on the rate side than whatever 2.8% or so ended up showing but what is happening is we-- keep in mind you've got a Refer Division. You've got an Expedited Division, long haul Expedited Division. There's two divisions and the Refrigerated Division is running about 35% team and then you've got an Expedited Division that's about 70% team and those guys are doing, Ed, the old Covenant. I mean they are the ten year ago Covenant that is going out there saying, "I'm transcontinental, Mr. Customer; I want to go from Atlanta to Los Angeles; I want to go from Chicago to L.A.; I want to go from Seattle to New York" etcetera and truly focusing that they only want their divisions running that. So that happened last May and then the Expedited in August so as you compare it to last year you're seeing the length of haul extend very, very nicely just within our own shipper base with the same shippers.

Now the other side of that though is that, as you know, the longer length of haul the rate per mile even though you may be happy with those rates, the rate per mile is going to be less as you consolidate them all together. Now also going on right now, which is part of the mix and it's going to get greater and greater as we go forward, is that as we split off these regional divisions-- January 9th we started in the Midwest and January the 9th we started the Southeast region and they're only running-- their average length of haul is like 480 miles or so in those length of hauls and the rate per mile is extending with the length of haul going down. So that's what Joey said that there's a mix that is taking place with the longer haul going up and the regional going down that as it continues to go forward the numbers will kind of even out wherever they're going to end up being at. Does that answer your question?

Yes it does. That makes a lot of sense. Thank you very much for the time, guys.

John Barnes with BB&T Capital Markets.

David, could you talk a little bit about just the regional business and last time we spoke you indicated they were still-- you know, you still had a lot of trucks operating at a loss and you were gradually trying to figure out the right size for that. I mean we've obviously seen one of your competitors put up some pretty solid numbers by right sizing their network. Could you just talk to the regional business and where you think you stand in terms of getting the size of that fleet correct?

John, no doubt that the regional side, as we said, is where the vast, vast majority of our problems are located at. What we've done number one, we've brought that down from 1,200 trucks operating in that division three or four months ago, say December, down to about 900 trucks. We brought it down. Those other 300 trucks went to other divisions that are operating profitably and operating better than the regional so we brought 300 to get some pressure off of that division. We will continue to do that as we go forward as at the same time with the regional straightening itself out. Of those 900 trucks the two divisions, regional divisions that we've got in the Midwest and the Southeast, they're running a couple hundred trucks in those divisions combined so it leaves about 700 trucks that are still running in "the ad hoc division." Now before I get into the ad hoc as we split those regional divisions the Midwest and the Southeast and they're running about 100 trucks each in those divisions, the Midwest is performing nicely. We're very encouraged with what we're seeing in the Midwest region.

The Southeast region is coming along slower than what we would like since January the 9th but the Midwest region is doing well. Those 100 trucks are pumping pretty nicely out there and we'll continue to grow that as we get the freight and the network and the drivers in that division. So then it leaves the 700 trucks that are in the OTR ad hoc regional division, that OTR ad hoc. Our goal is to continue to reduce that. It will never get down to zero because it will always be a division that was going to be supporting all the other divisions at one time or another but our goal is to continue to decrease it as we increase the regionals. As the Midwest increases we'll throw more trucks-- for instance, this week I think we added 15 trucks over the last couple of weeks to the Midwest region. We'll continue to add trucks there. As we get the Southeast operating stronger we will continue to take trucks out of the ad hoc and put them into the Midwest or the Southeast region as well as we'll be opening up another region, which is going to be the Southwest region, sometime latter part of this year and those trucks will come out of the ad hoc. But at the same time we are working on the ad hoc very feverishly to get away from tweeners and to put the trucks in high-density traffic lanes.

Okay what was your unmanned truck situation like during the quarter? I mean what did you peak out at in terms of unmanned trucks?

7%.

Okay and where are you today?

5%.

Okay does it make sense-- I mean you know--

Yes it does, to get rid of them?

Does it make sense to look at taking say your 2 or 3% of your worst trucks, your oldest trucks in the fleet, and just retiring them and shrinking the size of your own fleet or do you think there's enough business out there that you really don't need to go to something that drastic in terms of turning around? And I'm just looking at 700 ad hoc trucks and the regional business still losing money and an unmanned truck situation of somewhere between 5 and 7%. Is that a better way to address it and get a nearer term bang for the buck or is that sacrificing too much longer term?

No. No. No I don't-- to answer your question it's not sacrificing too much longer term because if you-- as you get the thing straightened out and you get more drivers then you know buying a truck is not hard to do. You can always buy trucks. One of the things that we're working on internally quite frankly is besides trying to give the divisions opportunity to fill the trucks but besides that is this amount of trucks that we've got coming in with our OEMs, freight liner, international trucks that are coming in with our OEMs, to give them a period of time to be able to take those trucks out of their network, in other words start canceling some of those 300,000 truck orders that OEMs have, which takes about 60 to 90 days to do that. So it is one of those deals that we're working as we speak now right now on one or the other making the decision that says, "Guys if we're not going to get there quicker than you think then there's nothing wrong with getting rid of 150 trucks out of your network that would virtually take you very close to zero open trucks besides wrecks." So that is a probability of that happening. Again, we have not spoken to the OEMs. This is a discussion that we've just had in the last couple of weeks internally but if I was going to put a percentage on it, John, it's about 70% chance that it probably will happen.

Okay. All right so do you want to get that low though, David? I mean do you want to run the fleet so lean as to have zero unmanned trucks?

No. I mean you would like-- you know the best place in the world is to have zero unmanned trucks and have a bunch of rental trucks waiting on your new trucks waiting on your new trucks to come in. That's what you would like to but no it's not to answer your question and that's one quite honestly everything you're saying there is a debate that we've had internally going on for two weeks now is exactly what you said. Is it wise to be down to zero because to be down to zero means you're not going to have any more accidents? No more trucks are going to get deadlined as well as you're not going to have a weekly influx. All of a sudden you hired a lot more this week than what you've anticipated so the answer is not to have zero. I mean that's-- you know the answer may be to have 50 open trucks because you're always going to have driver situations come up and down. Maybe the guy doesn't want to run as a team any more and you've got to have another truck for him so the answer is not zero trucks.

Okay and then last question on your Southwest regional expansion do you anticipate putting about 100 trucks into that like you did in the Midwest and Southeast and how soon do you think that becomes profitable or is it a bit of a ramp up?

It will be a ramp up. If we-- when that happened and we've kind of got it on the table for the fourth quarter kind of time frame of this year as the next region but it starts off with 50 trucks, John, and builds there. We do think that we've probably got within our network pretty close to now of having the ability to probably run about 50 trucks in that Southwest division or region.

Okay and then on the Southeast-- I'm sorry just one last one. On the Southeast could you just elaborate a little bit as to why that's coming along slower?

Yes, we have always been predominantly to give you an idea of what happens when you start one of these regions, before we had the region January 9th we just handled freight out of the Southeast that was part of our long haul as well as freight that was in that OTR ad hoc division and so it was just part of those loads that were being called in. At that time we did very little-- when I say very little, probably enough to run about 40 trucks-- but we did very little North Carolina to Alabama, Alabama back to North Carolina, that kind of freight so what we've had to do as we build it we had more drivers in that region that wanted to run that region than we literally had the freight available in that region. So we started off with the trucks and we're building the network as we go forward in that region so we're going to our existing customer base, which is a lot in the south. We go to our existing customer base that's giving us freight of Seattle, Washington and we tell them we not only want their Seattle but we also want to start hauling their Alabama lane for them too so in a nutshell that's what happens and we're what, 2.5 months into it and it's producing at about 20% less than what our Midwest region and you and I would be pretty happy with the Midwest region numbers that we're doing right now so it's about 20% under there that we've got to get it up.

Okay. All right, very good. Thanks for the explanation, David.

Justin Yagerman of Wachovia Securities.

I wanted to just do a couple of housekeeping things first. In terms of net cap ex for the year are you guys still holding tight? I think last time we spoke it was somewhere around 65 million.

Yes it's probably going to be a little bit more than that now. It's I would say the relevant range right now is probably 75 to 80.

Okay and what's that extra related to? Is that just more costly trucks or more and more coming on?

No it's not more. It's really property. It's really property driven. We've got some opportunities that we've been waiting on for a few years that are starting to happen that will help the network long term as well as some upgrades here locally, so that's really what it's driven by.

And then in terms of tax rate as I'm going out into the next few quarters, are you still thinking that you got 200 BIPS of tax rate for every 100 BIPS of OR one way or the other?

Yes. That sounds fair.

And then, just generally, I wanted to get a sense for what the broker freight was that was coming in in the quarter. You said you had about 8% versus 4% a year ago and I mean does that fill in the gaps on some of the losses from customers that have gone away and if so, what kind of freight is that in comparison to the freight it was replacing?

Justin, Predominantly what that is is that as we rationalize our network-- and let's take the Midwest region-- as we develop the Midwest region and put the trucks up there running and you say I only want to run in these certain traffic lanes. I only want to run in these certain states, but not only in these certain states but to these certain cities within those states and you've got these 100 trucks that are up there running in that network where you've told the drivers you're going to be home on the weekend as well as customers say from Chicago to Detroit, Michigan that I'm going to be there five times a day in Chicago to go to Detroit. Well, one of the things you've got to do if you've only got three loads a day from Detroit going back to Chicago, instead of allowing the customer to give you three loads a day to Chicago and then two more loads a day to New Jersey, you're saying no on the New Jersey and you're going out to your existing customers as fast as you can to get two more loads a day to Chicago. When you're not able to do that you're going to the secondary broker to say give me two loads a day from Detroit to Chicago in order to rationalize my network. Now what you've got is you've got marketing that's going into Detroit and then saying I got three; I need two more and if my existing customers cannot give me the two then I have to go to new customers and I will keep hauling the broker freight until such time that I find the two extra loads a day to go to Chicago from Detroit.

Got you, so it's filling in the gaps in the backhauls and that kind of stuff?

That is exactly correct, as you're developing the regions.

Okay that makes a lot of sense. As you guys have been pushing out, obviously, a little bit into the longer length of haul with Refer and Expedited, what's inter-modal competition been looking like? I mean when you go to shippers and talk to them about the decisions that they're making, are you guys just competing in that really service sensitive freight that the guys not even looking at inter-modal or does that enter the discussions right now?

No, you're exactly correct on your second part. You know the thing that I've said forever, ever since I started this Company in 1986 with long haul, long haul, long haul is that the railroad was not going to be able take every load in the world and they can't. Now, I don't know how big we can grow. We would like to grow it bigger than it is today. With this driver situation I don't know. We're attempting. We're trying. If we could reduce turnover by 20 or 30 more percent in that division that in itself will allow them to continue to grow that division to where we would like it to be at, but at the same time and it is literally going after the freight that cannot move correctly inter-modally. I mean, as you know, you get out of Memphis, you get out of Chicago, you get out of Dallas the inter-modal service is nowhere near as it compares to truck, so we're very easily just doing what the old Covenant has done all its life and that is that the freight that we handle is not-- it is just not inter-modal capability to be able to shift it over there to them.

I got you. I guess on the dedicated side, what's going on with the progress in finding someone to head up that division and in the meantime kind of how is that working in terms of looking at the business and I guess what the success rate has been so far is kind of what I'm getting at in terms of maybe how many swings you guys have to take to get a hit and what do want to get that to by bringing in a new guy who's got more experience doing that?

Yes, our dedicated is up about 16%, 20%. It's up about 20% to give you an idea on the amount of trucks and we are in the process, continue to be in a process. Our goal was to have it done by March 31st. We have interviewed outside people, as well as about 5 or 6 candidates internally and the thing that we want to make sure we do is that not only do we have that bus full, but we want to have that right person on that bus and so we've got about 20 applicants today that we're really looking over again. We've narrowed it down from about 80 applicants down to about 20 applicants. One positive side of it is that when we seriously went out there looking for somebody we were absolutely overwhelmed with the amount of people that had an interest in running this division. That's one of the reasons why it took us so long because we literally have gone through about 100 resumes because we want to make sure we pick the right person.

Well we took that 100 and we've narrowed it down to about 20 outside and about 5 on the inside and we're doing that interview process on those people, so it may take us another 30 days to find that person, but we'll have a very good experienced dedicated person out there. The opportunities-- the bucket is very full. I mean the pipeline is very full. We got a lot of trucks, a lot of deals that are in the midst of happening that if our success rate is 20% you could see that Dedicated jump probably 100 trucks in the next few months if you hit 20% of them, so again, what we're doing because we're not growing the fleet, whatever Dedicated was to win we would take them out of the other division, say the OTR, which has got the worst performance. We would take it out of the OTR, take less pressure right now off of OTR and put it into another division that has a better profitability.

That might solve some of that unseated truck issue.

And that's exactly correct also, exactly correct.

Yes, absolutely. And I guess you were having a discussion with somebody else just before about capacity out there and where we are in that discussion and basically in reference to pricing and I mean I just wanted to get the sense from you, you guys aren't seeing any new capacity coming on? It would be my guess-- it'd be more first quarter was a choppy demand quarter and maybe there was some excess capacity from the existing capacity in the market. Would that be how you'd characterize it? And then, I mean in terms of percentage rate increases this year versus last I mean, Joey, I guess you said you wouldn't-- you would expect-- sorry, let me back up. Would you expect them to be more severe in terms of deceleration than the deceleration between GDP this year versus last year?

I'm not sure I'm following your question.

In terms of rate increases year-over-year?

Will it be greater than GDP?

Well, if you look at deceleration between '05 and '06 in terms of GDP growth, I mean is that kind of the relationship that you'd think about in terms of the deceleration in the growth of your rates right now?

I think one of the things we're looking at, I mean that's probably fair, I mean if GDP last year was 4% and it's going to be 3% this year rates will not be as strong as they were last year. So will it be 100 basis points? Relatively speaking I don't know. I do know that we're confident on the inflation side that rates will grow and should grow for the industry at least what inflation is, so if inflation is 2, 2.5% it's going to grow at least that, so I don't know if I'm answering your question, but that's kind of the way that we think about it because the other thing for us that's a little different is that the mix of the business is changing so dramatically what I was saying when I gave you those prepared comments was we're trying to take into account the overall consolidated view on rates, so some of that is mix related. So if our longer haul lanes continue to grow at a lower rate per mile it's going to affect that overall mix of rates, but we feel like overall, even including that, that rates will grow at least by what inflation is growing.

That also to answer your question there, Justin, is that I don't think there's meaningful capacity addition coming into the marketplace. I don't sense that. I mean I do sense that when you go call on a customer talking about the big guys I mean they'll tell me that Warner just called or US just called or somebody just called, Hunt and whatever. I mean name who ever you want to name that looking for a little bit more freight and I think that what they tell me does come into correctness when the guys are reporting kind of utilization being down a little bit, so therefore, they are calling. I think a wildcard out here that is also happening is that there in slower periods of time I'm absolutely convinced that the new hours of service are between a negative 2 and negative 4% on utilization. I just see it out there happening. Now, during a soft period of time that negative 2 or negative 4 whatever it's going to be on hours of service it's going to be a number that we all deal with, but during good freight environment when freight is very, very strong it's going to hurt capacity. Capacity is going to get even more tighter during those periods of time because of the new hours of service.

Yes. I agree with you on that.

One other [inaudible] to answer your question, Justin, is that again remember that we sell 100% of all of our equipment, so we're well into our third year of selling our equipment and we have yet to sell a piece of equipment to a new entry in the industry since we've started, so we just don't-- we're probably one of the largest used trucks sales companies besides another competitor, besides the OEMs and we don't see it. There is not new because if somebody's coming in new to the industry and you're wanting to buy 5, 10, 20 trucks, I mean if you're wanting a standard spec, a well maintained truck and can't afford new we're going to get those calls and they're not out there. There are no new truckers coming into the business.

Yes I would echo that sentiment.

So I just wanted to make sure that we do have some very strong anecdotal as well as factual analysis that says there's not new capacity. Is there additional capacity from existing truckers growing? Obviously some of the smaller fleets we do see that in our customer base.

Okay thank you. I appreciate it, guys.

Chas Jones from Morgan Keegan.

Question for you on the fuel surcharges, is your fuel surcharge different coming off the West coast than it is for your East coast freight?

The base is not. I mean so the general one is not. The only thing that we've got out on the West coast is what we call the Pad5 Emergency Fuel Surcharge Program and it basically is the western states, the eleven western states out on the West coast and we have an additional surcharge on that freight that is tied to the Pad5 fuel base, but it has to get about I think it's $0.10 cents a gallon higher than the national average, so when the Pad5 gets $0.10 higher than the national average then a West Coast Emergency Fuel Surcharge Program comes into play. You've got your base that's the same if you're in Boston or if you're in Chattanooga, Tennessee or L.A. and then there's an emergency on the western.

In the financial stats table, given a little more visibility by division with the truck count, length of haul, you know just looking at it on the surface I'm just trying to understand this a little bit better. The Refer truck count's about 280 below the OTR regional division, but yet the revenue is about 3% higher. You mention 35% teams on the Refer side. Is that the difference or does it really just get down to there's that big of a delta on the revenue per truck per week between the two divisions?

It's basically what you just said there. It is basically the difference in the revenue per truck per week on the two divisions.

Okay and then certainly I think we've had these financial statements internally for couple of months by division to give you some better visibility over each segment. Could you talk at all maybe-- I know it's early, but how much that's helped you in the decision process so far?

What'd you say-- ask it again, Chas, because we were talking.

Yes, it's been a couple months now the way I understand it in terms of you having the individual financial statements broken out for divisions and I'm just wondering how you feel today versus when you didn't have them in terms of the decisions that you're making in terms of whether it's allocating equipment or how aggressive you need to be here or there?

Directionally it's playing out about what our gut expected. There's some ranges of that, but we're still a little early in that. I mean we're-- even though we've had them for a good two our three months we're still working through some of the items that get allocated across divisions and some of the overhead that gets applied, but directionally it's playing out to about what we expected.

Yes. I understand it's not an easy one to answer, but--

And it does direct your decisions on what you're doing in all those divisions.

Sure and then the last thing, just curious the impetus, I guess, behind the sales lease back transaction on the headquarters?

Yes, I mean basically it's financial flexibility combined with historically speaking extremely high real estate values and historically speaking still very low long-term interest rates, so as we unfold the restructuring of the Company as well as taking a look at those two values that you have and especially since we're going to be here for a long time, it's basically a 20 year lease with 8 five year renewal options, so it turns into 60 years and so we just felt that it was a good opportune time to capitalize on that value of which we were getting basically no borrowing capacity for it, not that I needed it, but as we looked into the future just to keep maximum flexibility and maximize the value of our balance sheet.

That's really all I had guys. I appreciate the commentary.

[Operator Instructions] Andrew O'Conner with Mose Capital Management.

It's Wells Capital Management. Joey, you know, what does your comment about earnings for the second quarter '06 and I thought I heard you say about the same as last year. What would this incorporate for average freight revenue per truck and after tax cost per mile? Thanks, so much.

Sure, Andrew.

Or is there another operating metric, which you can share with us which would be incorporated in your estimate of earnings for the second quarter?

I think what David said was that you had to go up several paragraphs or part of it was that we do expect our revenue per truck per week to be up at least 5% for the remaining quarters of the year. We expect our cost where it had been $1.35 right at it for the last three quarters. Our costs have stabilized. It's going to be that $1.35-36 range and then we said that all those other qualifiers I gave said that fuel is the question that I have right now and a pretty big question. Somebody asked that earlier on what the impact of that could be for the rest of the year. If it stays at $70 a barrel it's going to be impactful for the second quarter and beyond. So I think the main thing, Andrew, as we back up and think about it is that the top-line operating metrics are moving in the right direction. That very much encourages us. If we look at what costs did to the first half of last year, our costs rose to a point that have stabilized. Our revenue per truck even at 5% has to improve greater than that for our earnings to improve much over a year ago and so we're battling that issue of revenue per truck growing. It needs to grow even more to offset our costs and we're clearly pointing all of our efforts to improving our margins and our earnings to the second half of the year because this rationalization of freight question is a big question. We spent a lot of time on this call talking about that between broker freight, aligning the network appropriately, mixes moving around between divisions and so we're really kind of focusing our-- we really think the margin improvement should begin meaningfully in the second half of the year.

Got it. Thanks, for that. And then, secondly, related to your balance sheet, your current and total debt net of the sale lease back proceeds would be 50.3 million. Is that correct?

That's correct.

That's all I have. Thanks, very much.

[Operator Instructions] There are no further questions, sir, at this time. Do you have any closing remarks?

Just thank everybody for joining us today and we look forward to participating next time and give you an update of where we're at. Thank you.

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