Covenant Logistics Group Inc (CVLG) 2006 Q4 法說會逐字稿

Good morning. My name is Miranda, and I will be your conference operator. At this time, I would like to welcome everyone to the fourth quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. [OPERATOR INSTRUCTIONS]

Thank you. Mr. Hogan, you may begin your conference.

Thank you. We would like to welcome everyone to our fourth quarter conference call. Joining me on the call here are David Parker, CEO and Chairman of the Board, as well as various members of senior management. This conference call will contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E 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. We ask that you please review our disclosures and our filings with the SEC. As we begin the call as a reminder to everyone, a copy of our prepared comments, as well as additional financial information is available on our website. Our prepared comments will be brief, and then we will open up the call for questions.

In summary, and as discussed in our Press Release, quite simply the pickup in seasonal demand typically seen during the second half of the year did not happen. The very soft freight demand experienced in the third quarter carried forward to the fourth quarter. October was a fair month demand-wise, followed by a weak November, and a fair December. Additionally as we all knew coming into the fourth quarter, the revenue and operating comparison to the fourth quarter of 2005 would be very difficult.

From an operating standpoint, average miles per tractor decreased 2.5% versus the fourth quarter of 2005. Even though our rate per loaded mile was up 1.6% versus the third quarter of 2006, pricing for spot market and surge business was not as robust as in the past, and our rates were down 1% versus the fourth quarter of 2005. The combination of lower rates and utilization produced a 4% reduction in average freight revenue per tractor per week.

From a cost standpoint, our after-tax cost per mile increased about $0.05 a mile over the fourth quarter of 2005. The main variances were discussed in our Earnings Release. One additional item to note was that our capital cost comprised of leased revenue equipment, depreciation and amortization, and interest, was up for three main reasons.

First, our fleet expanded largely due to the Star acquisition. Second, non-cash amortization of the intangibles associated with Star, and three, we recorded an $813,000 loss on disposal of property and equipment during the quarter, compared to a gain of $152,000 during the fourth quarter of 2005. We began the fourth quarter with about 3,850 trucks, and ended with about 3,700 trucks, and our plan is to operate at about 3,700 trucks on a consolidated basis throughout 2007.

From a Balance Sheet perspective, the completion of the new $200 million credit facility in December, gives us ample debt capacity, enabling us to continue making decisions that are focused on the long term profitability of the Company. We were able to reduce our total indebtedness including off-balance sheet obligation and outstanding letters of credit of $29 million during the quarter, allowing us to actually improve our Covenant compliance picture versus September 30, 2006. Additionally our equipment pre-buy 2006 will allow us to only have to replace 500 tractors, while we will be actually downsizing the trailer fleet by 1,000 during 2007.

We also expect to reduce the majority of our $23 million inventory of assets held for sale at December 31 by the end of the first half of 2007. The combination of the tractor and trailer plans and the reduction of the assets held for sale, results in a minimal net capital expenditure spend for 2007 within the range of 10 to $15 million.

Now I will turn it over to David to give an update on the business realignment and our outlook for 2007.

Thanks, Joey. We are now approximately 18 months into our business realignment, which was expected to take 24 to 36 months to implement. At this point, we believe that our SRT, our Star, and our Expedited Long-Haul service offering are operating reasonably well considering the soft freight environment. These service offerings aggregate approximately 2,200 of our 3,700 tractors, excluding tractors held for sale. Although the first half of 2007 may not produce the level of profitability for these service offerings that we expect on a long term basis, we view these as capable of operating at or near our goal of a 90% operating ratio in a reasonable freight market.

The lack of probability of approximately 675 truck Dedicated service offering has been disappointing, however we believe we have identified most of the problems in this operation, including the contracts that carry unfavorable terms. Contracts covering 46% of the Dedicated fleet were renewed during the fourth quarter of 2006. Contracts covering approximately 37% of the Dedicated fleet are subject to renewal by the end of the first half of 2007, with an additional 13% of the contracts in the second half of 2007.

We have received generally positive responses concerning renewal terms from most of the customers with the 2006 and 2007 renewals. Based on these responses, we expect that Dedicated service offering to be solidly profitable in 2007. If contract renewals do not proceed on an acceptable basis, we would expect to dispose of the unprofitable equipment.

As previously announced, our former approximately 285-truck Covenant Refrigerated division was eliminated on January 14 th. The solo-driver units were combined with SRT, and the team-driver units were combined with our Expedited Long-Haul service offerings.

Finally, our regional/solo service offering continues to provide the largest challenge. The regional operation had approximately 570 trucks assigned in it at December 31, 2006, down 400 trucks since June 30, and 200 trucks since September 30. We plan to continue to seek the fleet size that most effectively matches our quality freight.

As we stated in our release, our primary goal for 2007 is to improve our operating ratio by 100 to 200 basis points versus the full year of 2006. Due to seasonably slow freight volumes and the resultant concern regarding capacity supply and demand in the marketplace, earnings improvement during the first half of 2007 could be very challenging.

Our expectation is that the combination of one, the downsizing the Regional service offering during the second half of 2006, two, reallocating non-performing assets from Covenant Refrigerated, to SRT and Expedited Long-Haul which occurred this month, three, aggressively improving the dedicated service offering profitability as contracts expire, and four, reducing overhead and capital costs in all non- performing areas, should produce earnings improvement during the second half of 2007.

We will stop now with the statements, and we will go ahead and open it up for questions.

[OPERATOR INSTRUCTIONS] We will pause for just a moment to compile the Q&A roster. Your first question comes from Edward Wolfe with Bear, Stearns.

Good morning, guys.

Hi, Ed.

Joey, can you just talk in terms about liquidity? What do you have on the revolver? Obviously you are going to generate cash if you don't spend the CapEx with your depreciation where it is, but can you just talk about right now if you wanted to borrow some money, how much leverage do you have before you impact your Covenants, or how much room do you have before you impact your Covenants?

Well today, we have about $30 million of borrowing capacity that we could go get right now, and I see that as very ample, especially considering the significantly reduced capital expenditure spend for 2007. As far as debt Covenants, it is pretty much public information.

We stated in our Third Quarter 10-Q that we were right at our Covenant level. We were in compliance. We were 3.0 debt to cash flow, and at the end of December, once you go through all the math, it's less than that, so it acts as I said, we improved, and with our new revolver, we increased our limit from 3.0 to 3.25.

So we have got plenty of debt capacity. I think we have ample room in our debt Covenants, and I think our capital picture will albeit it's not in bad shape, I think our capital picture will continue to improve throughout 2007.

Thank you, and David, on the operating side you talked about how you are confident that when kind of we get back to a more balanced supply/demand scenario, that all your businesses can be at a 90, we are not there, assuming that we're in more of a 2001/2002 kind of scenario, what can they get to? Is it a 95, is it a 93? What is a go on that scenario?

Yes, the two pictures that you got there, Ed, was the confidence that we have in the Expedited division, the Refrigerated division and the Dedicated division, and let's say that you are in a '01 kind of atmosphere, that it feels like today. The Expedited, the Refrigerated is going to be somewhere in that 92ish kind of number, if I was going to throw a number out there, that's where I feel very, very confident at. They both operated lower than that, all of 2006, and including in the fourth quarter, so if you wanted to throw it to a year round of '07, I think it's around a 92 kind of number.

The Dedicated which was at a loss in '06 as we have stated numerous times, we do believe by the end of the second quarter, that that division will be somewhere in the mid-90s, whether that's 94, 95, 96, it's going to be somewhere operating at that number. The OTR side of it, the Regional side of the OTR, which is predominantly the Star side of the business, we believe that they are going to operate somewhere in that 92, 93 kind of number, during an '01 kind of level, and then you have got our OTR that's operating over 100 on the Covenant side, where we have got to get the work at, and we would be thrilled at 100 OR.

Yes. And when you look at profitability based on fourth quarter, it's not fair to assume profitability obviously in first quarter, but do you think by second quarter we should see a positive EPS number, given the current environment we're in, it doesn't change one way or the other very much?

Based upon today's environment, the way in which we are filling in the month of January for this freight, I would expect that.

Okay. Can you talk about January, I know January is a tough month always, but coming off of as weak a peak as we had, does January feel like a normal January, a worse than normal January, a better than normal January, or it's just hard to tell?

I think that January feels similar to really two things going on. I think it feels similar to the January the last couple of years. I do think that gift cards are starting to play a part in the January feeling better about the world. There is no doubt that the State of Texas last week, with the ice storm, a snowstorm that ranged anywhere from Amarillo to El Paso to Dallas to Houston, it shut down the vast majority of the interstates in the State of Texas for up to a week, when you look at the SRT based in Texarkana, and then you just look at the Covenant side on how much we do in Texas, that did affect last week pretty nicely, especially on the SRT side, it affected it. If you were to eliminate that and say that there wasn't a snowstorm last week, I would have felt pretty decent about the month of January thus far.

Okay, and --

But also keep in mind that the Covenant side of the picture is dealing with less trucks, and part of that plan was to have the same, as much of the same freight base that we got, and divide it over a smaller amount of equipment.

Yes. If you look at your Regional business, your Star business?

Yes.

That is performing right now ,and you look at pricing, what are your competitors in the regional market yesterday said in effect that the spot market was down quite a bit. They are holding on to their rate, but they expect that over the next couple quarters as contracts come up if they get any rate they will be happy, and they are going to get less rate anyway. What's the picture you are seeing on pricing in that regional market?

I think everything you just said there is correct statements. We believe that for the year '07, that a 2% kind of number of increase is available to us. We believe that the partnerships that we have got with customers, we will be able to increase that pricing, but at the same time because of lack of business and the slowness, you may be bringing on some new accounts at a lesser price than what you want to, just to be able to get them in the front door, so that will have a negative affect, but we do believe for the total year of '07, there will be positive rate increases in there.

There's no doubt in the Regional side of the business, the Southeast has been suffering. I mean the Southeast probably has been one of the regions of the country that's been hit, in my opinion, as we have seen it, as much or worse than any other region in the country has been the Southeast, and I think it's predominantly because of two reasons. One is the housing industry. Think about how much the carpet, the tile, but not only that, we think we've lost all of the textile business in the United States, but what is left is still based in the South, and when the housing industry isn't moving, the sheets and the bedspreads and stuff like that are not selling as well as you'd like for them to also, so that has a direct affect on it. So, the South is definitely on the regional side, is slower than what you'd like.

And then the spot market, what are you seeing for pricing ?

It's no good. I mean, it's down. As you saw in the fourth quarter, there virtually, A) demand was so bad, I mean there was not enough freight period in the fourth quarter, and there wasn't even a whole lot of spot market business that was out there, so spot market freight is down, you know, Ed, I haven't looked at it, but I'd say it's 10% kind of numbers.

Yes, and directionally does it get worse before it gets better, or this is kind of the bottom?

You know, I just gave a talk this week to Marketing, and based upon what I'm seeing on the economic side, and based upon what I'm seeing on housing inventories starting to go down, et cetera, I do believe that we possibly could be at a bottom of this thing, and starting to perk back up in the coming months. That's where I'm at in the world, but who knows.

One last one. Low sulfur fuel, are you seeing impact right now, and can you quantify what the impact is if you're seeing it?

We're not having no impact on availability. It is assumed by our fuel vendors that low sulfur fuel has got $0.04 or $0.05 a gallon to the price that you are paying today.

But in terms of fuel mileage any degradation or no?

No, not yet.

Okay, thank you.

Your next question comes from Justin Yagerman with Wachovia Securities.

Good morning, gentlemen. How are you?

Fine, Justin.

You touched briefly in your prepared remarks on an impairment charge that was embedded in the D&A number. Can you give us a little bit more detail on that?

I didn't say anything about that in our prepared comments.

You said three things were impacting the D&A.

Well, I mean, what the statement was there was trying to help explain the changes in D&A for the quarter, and I said that there were, you know, we had the non-cash amortization of the intangibles for Star, which was about $400,000 in the quarter.

That's what I thought, $400,000 for that?

Yes.

So if I'm looking at the D&A number and I backed out --

Justin?

I wanted to just get into what else was driving the increase in D&A on a per truck basis, because if I kind of look at that and plug that in, I mean you guys had over, well, just about $1,000 per truck per quarter increase in your D&A expense, outside of that. Is that all because of the newer fleet, and you're owning more of your trucks, or what's going on with that number?

Well, the items driving that per truck were Star's fleet is predominantly all owned. There is very little leased equipment in that fleet, so that impacted, if you are looking at it on a per truck basis, that impacted D&A, and that, including their trailer fleet. They pretty much owned their trailer fleet, so if you are looking at total D&A per truck, that would have been a component that would drive up the per truck cost, if you are not looking at leased revenue equipment in conjunction with that.

Second, the amortization we discussed that was small, and then third, there were a few catch up items, regarding marking Star's fleet to market value, that affected depreciation in the quarter $500,000 to $600,000, so all those together produced the higher amounts.

The second thing, remember, is that our fleet was coming down throughout the fourth quarter. We ran on average about 3,850 trucks for the quarter. It ended the year at 3,700, so we are paying depreciation on a higher fleet that won't be as high going forward, so we are running those trucks, depreciating those trucks up until the point of where we were pulling them for sale, and ended the quarter with a lower truck number, so on a go forward basis D&A shouldn't be as high as it was in the fourth quarter. So that is generally speaking, the main things that drove that number up.

Okay, so as we look out up near these levels but probably not as high as it was in the fourth quarter, in other words?

That's correct.

And I guess one of the things in the report that has concerned me a little bit, given the amount of equipment that you guys have to sell, can you discuss a little bit why you ended up taking losses on your equipment in the quarter? Equipment sales rather? I should be more clear.

Yes. First of all, our overall philosophy is [inaudible-background noise], which we typically don't have big gains/losses. Ideally for us, we would be zero. If you go back and look at the history, you will see it's plus or minus $1 million-ish every quarter.

Second, we do something a little different from the industry. What you see in our gain/loss on sale is not just cash received compared to what we have got on the books for. We also apply to that. GAAP allows you to do that, and we have always done it this way.

We also book against that any expenses to prepare that asset for sale, as well as any expenses to sell that asset, and so we net all of those together inside of gain/loss. If you also go back and look at history, you will see throughout the year, we typically have gains in the early part of the year, that moves to losses by the end of the year. What drives that is our sales process. We typically, frankly, sell the assets with more values.

The people that we have selling these assets are more interested selling the assets that have more value in the early part of the year, when the new year starts, so once we get to the end of year, we are selling the assets with less value. So you see throughout the year, that kind of swing from gains in the early part to losses by the end of the year, so it doesn't concern me. The market is still good. It is just the assets that we had for sale were of less value, than the assets we had the earlier part of the year.

Even with the amount that's likely to come on the market right now in the used truck market, you wouldn't expect to have to take any kind of charges against book value on those vehicles?

No, no. Absolutely not.

Okay. That's what I wanted to hear. I will turn it over to someone else. Thanks.

Thanks.

Your next question comes from Chaz Jones with Morgan Keegan.

Yes, hi. Good morning, Dave and Joey.

Hi, Chaz.

One question, typically, you guys comment on your after-tax cost per mile, kind of forecasting it as we look out to 2007, can you give us any help there, in what you might see?

Chaz, frankly right now, until we get the fleet stabilized, which we're about at that point, I mean, we were reluctant to comment on that. Qualitatively, let's talk about the big driver of cost, driver pay. Our trucks are basically full. We said we are at 2%, it actually rounds up to 2%. It's 1.56% right now, so our fleet is in good shape as far as manned trucks.

We don't foresee right now having to raise driver pay, and for those drivers of ours that are on the phone, they know that our driver scale is for both solos and teams, the whole package is very good. It's in the top end of the group, and we're working hard on getting them more miles, so we don't foresee having to raise the scale, but all the performance-based incentives that we have, as well as the tenure base within the scale will continue. So we don't foresee having to do that.

The other big driver of cost, fuel. Fuel is fuel. I think generally speaking we are feeling better about that, but fuel, I would say is a push, because I just don't know, and it will be whatever frankly it's going to be. There are some things we are doing on the cost savings side that will help us save a little money, but really not prepared to talk about that right now. The capital cost we have talked about. That should be less on a go forward bases than the fourth quarter.

Insurance we are getting close. If you noticed in our Third Quarter 10-Q, we did lower our long term accrual rate from $0.085 to $0.095 per mile, to $0.08 to $0.09 a mile, so we are getting more comfortable that that number on a long term basis, has come down for the last three quarters. It's been $0.08 a mile for the second and third, and $0.082 for the fourth.

That number again without an extraordinarily bad quarter accident-wise, that number we feel going forward will be in that 0.08 to $0.09 a mile range, and if we continue to have good quarters that we've had this year, could settle into that $0.08 and possibly less. So I don't directionally through all of that--

I guess what you are saying is you probably wouldn't expect it to be up as large as it was in the fourth quarter?

No. Again, fuel, you got two things driving that, amongst, well, we have talked about it in our release. Driver pay that's mix related, as well as the impact of the Star acquisition. Our driver pay was up almost $0.02 a mile. We did not raise the scale $0.02 a mile.

It's just the mix, between mix, team miles, Star, and some incentive programs that we put in place, to help us fill our trucks, driver pay was up about $0.02 a mile. That will probably wrap around year ago quarters, and will continue to be a cost increase versus year ago, probably until we get into the second half of the year. Fuel is almost $0.02 a mile in the quarter, and we clearly talked about that in our Third Quarter Conference Call in October. We said fuel will be up on a cents per mile basis versus the fourth quarter, because of the favorable lag effect that we all had in the fourth quarter last year.

The net of that to us was $0.01678 a mile increase over a year ago. So of the $0.05 a mile increase, $0.02 was driver pay, that will continue until we get to probably the second half. $0.02 was fuel, mainly tough comparison to year ago, and then $0.01 was plus and minus of different items, capital cost was up, insurance was down.

Okay. That's helpful, Joey. Another question I had was the 285 trucks that were a part of former Covenant Refrig Division. As you reallocate that equipment, I mean, is there any expectation for material repositioning cost, one, and two, how much pressure does that put on the two divisions, in terms of finding new freight in this type of environment?

I'll let Joey answer the first question, and I'll answer the second one, but the second question, to put pressure on divisions when you are in the month of January, yes. I would say that it does. If you look at the Expedited side of that Refrig business, the Expedited side was doing pretty well. It was doing about as good as the Expedited Dry side. That's why we just took the 115 trucks there and we just took them and put them into Expedited, and literally those trucks are almost going to be operating in almost Intra-dedicated-type atmosphere of going out and picking up produce-type freight, and bringing it back, that we have pretty much on a regular basis.

There is no doubt that led is the month of January, it is not as heavy as it is the next couple of months, you know, it gets stronger so that's there every year, and it's built into the numbers, so does it put pressure in the year? No, it helps the year. Does it put immediate pressure in January? Yes, it does. So that is it, but for an entire year, it's good.

SRT, those 175 trucks, as I think we have probably had some discussions, our goal, SRT has done a great job. SRT is one of the leading refrigerated carriers out there and SRT, we were planning on doing an acquisition for SRT in 2007, just because of the job in which they have done since we have owned them, and that was part of the plan process, and quite frankly just decided that it would be a good file for them to do "the acquisition internally".

And so are there challenges, yes, there are challenges to any acquisition. The customer side of that on the Covenant, 175 trucks that went to the SRT, along with about 25 million or so of revenue that was associated with those trucks, the customer acceptability was very good. We did not lose one customer in that transition. Worked with all the customers, new contracts, those kind of things, and they were as a matter of fact, they were very excited about it because they saw 285 trucks going to 800 trucks, and so our customers were very excited, and so we are very pleased with that.

I mean, if their business is as good in January as it is in June? No. The answer is no, so there is challenges there, but the foundation of that is still there, that we believe will increase and give SRT even greater opportunities, but that is why we are seeing them backing up a couple hundred points possibly here in '07, because of freight environment.

Okay.

That answer you?

No. That's good, and then I guess

What was the other question for Joey?

I just was curious, I mean, is there any material repositioning costs for that equipment?

No.

Okay. And last question here. Looking at the Dedicated fleet, it seems like increased rates is a big opportunity here in 2007, to help improve that division. You alluded to the fact there may be a few other opportunities there to see some improvement. What are those areas if you could share that with us?

You know, at the end of the day, Chaz, keep in mind the Dedicated, we got all of the financial statements last February if you remember, all of the divisions. Getting the computer and all of that stuff associated with it, but last February was the first financial statement that we were able to get, and then you spend two or three months going over those financial statements, and everybody arguing about how you are allocating expenses, right? So come about June, you feel very good about what the financial statements are showing via the divisions, and then you can start operating off that.

In studying the Dedicated side of the business, in the third quarter kind of atmosphere, August, June, July, August, and September, studying what we were looking at, we did. We saw many opportunities there, and it was predominantly on the revenue side of the equation, and customers that were not quite frankly not hitting the minimums that they should be hitting, and the way in which we were accounting minimums, and running days, and opportunities like that, that we went back to the customers quite frankly, and we addressed those issues very up front.

And as well as we will absolutely honor the contracts, and that's why we said in the third quarter that the Dedicated division of straightening it out, and getting it performing at least to acceptable numbers, is easier quite frankly than the other divisions, because once those contracts come up for renewal, you can put the revenue to wherever you need to put the revenue to, and if the customer stays, then you win.

If they elect to leave, then they leave and you take a non-performing asset, and either move it to something that a customer will allow you to do, or quite frankly you get rid of the asset, and with that in mind, that is the way in which we are doing the Dedicated side, and as you saw in the Press Release, we have already hit 46% in the fourth quarter of all of those contracts, and the trucks that we did lose, which was only about 25 or 30 trucks of customers that decided not to, we replaced every one of those with new pieces of business, that were performing on the revenue requirements that we won't, so we got another 35 to 40% of those contracts that come up predominantly in the second quarter, and so you're going to have about 85% of the contracts done by the second quarter, that will be producing numbers that will become acceptable.

So it is predominantly revenue side. I mean, they are doing things on insurance and safety, and those kind of areas to enhance it, but it's predominantly the revenue side.

Okay, great. Well I appreciate the feedback, guys, and best of luck in 2007.

Okay, Chaz.

Your question comes from David Shapiro with [Aegis] Financial.

Hello?

Hi, David.

Sorry, guys, my question was already answered. Thank you.

Okay, thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from Tom Albrecht with Stephens Inc.

Hi, guys, good morning.

Hi, Tom.

I just wanted to understand a little bit more about the divisional performances right now, and I missed a few minutes in the beginning. You might have covered this, but is SRT performing worse in its OR than when you bought it, and I think it was like a 90.9, but there were some executive salaries that probably were going to work to your benefit in the change in ownership?

You mean Star?

Yes, Star I'm sorry what did I say?

You said SRT.

Okay, yes.

Yes, there's no doubt that in the fourth quarter, as we bought Star, that the fourth quarter was very, very disappointing for the industry, including Star, so yes, to answer your question, it did not operate in the fourth quarter, as well as what it had in the previous three or four years, but very few trucking companies did.

And your 92 to 93 comment earlier, was your thoughts on if we kind of went back to an '01 type of environment where Star might settle in, is that correct?

Yes. Yes, I believe they're in a slowdown '01 kind of timeframe, that Star is going to be in that 92 to 93 kind of number.

Okay. And so Expedited, I think has been kind of a 92 or better OR Company. Refrig, I don't know, maybe a 95, if you take like an 89 at SRT, and 100 at the old Covenant Refrig trucks. Star is a good contributor. I guess, David, my question really is, it seems like your OR goal, which I am going to call around 97 this year, because you did a 98.6, is too pessimistic, given the fact that you still have two or three businesses performing quite a bit better than that, and I guess I would like your comments on that, but also has Dedicated now become what OTR regional was a year ago, where it was closer to 110 OR?

Let me start, Tom.

Okay.

That's our goal, we said, was to improve our operating ratio at least 100 to 200 basis points, alright? So that's the goal. Will we be happy with that goal? Probably not. With everything that we have done, probably not, but that's the minimum goal that we set for ourselves, so you can read in to that however you see you need to.

Dedicated was closer to 100 OR for the year. It wasn't what you think it might have been, 110, 115, whatever that might be for 2006, and that is the one that we probably see right now, based on again a lot of things that have happened over the last four or five months, plus what we think is going to happen throughout the first half of this year.

That is one that we feel we'll see some pretty meaningful improvement pretty quickly and we started seeing that in the fourth quarter. Its operating ratio throughout the fourth quarter was improving quite nicely throughout the quarter. So I think that that's one that call it gravy, call it our wildcard, that couldn't move it meaningfully. That's one of them. But probably the biggest one frankly for this year is the movement of the Covenant Refrig division, into SRT and Expedited. That's a huge opportunity profit-wise.

Yes.

And the key there is how quickly those divisions are able to assimilate those, and get it closer to their long term profit run rate, because that Refrig division was higher than 100 OR in 2006.

SRT, let's not misunderstand. I mean, 175 trucks to SRT it's a huge acquisition.

Yes.

It's a huge acquisition. That's a third of its fleet roughly, and that would be like the Consolidated group buying 1,000 truck fleet. That is a big, big acquisition, but there's a lot of benefits to them. They have a customer base that comes with it. They didn't pay anything for it. They have got drivers that come with it, and they're got a Company that they have easy access to, as far as information through that transition.

So all the things that should help them quickly get their hands around that are there. We are watching it separately for that division, for that Company, so we can stay on top of how those 175 trucks are doing, and how they are getting assimilated, how they're affecting SRT's existing drivers, so we're watching that very closely.

On the Expedited side, that one is probably a little easier, because we know those customers that are there, and obviously it's easier. Those teams that were running in that division did quite well. They know what their teams in the Expedited division are doing quite well, and so I think that transition should move fairly smoothly.

And then lastly, the OTR side. There has just been a lot of change in that division over the last six months, and as I said, we are down 400 trucks in that division since June 30th, and I think we made a lot of decisions.

We have reallocated overhead inside of that division, so we're wanting to, we have put a lot of decisions in place, so now we're in the process of how do we operate that division in the new structure, and the new truck count, the new overhead count, and so that's going to take a little time to see how that works. So we put a lot of decisions, and a lot of work in place to, we hope, move the OR at least 100 to 200 basis points, but that's all that we are willing to say right now.

Could it be pessimistic? It very well could be, but that's really all we're willing to "commit to" publically right now.

Let me ask you, how do you fix Dedicated when the way I'm picturing it, that's typically a division with longer term contracts, more than the traditional year with 30-day outs. It's usually not a function of just better lanes and all that, where you would look at how freight is obtained and run.

It's you're kind of locked into some relationships. Pricing is already known. It would seem to me that that would be a much longer term turnaround, but yet in three months you sound fairly encouraged, and so just kind of walk me through how that would experience a more rapid turnaround than maybe I'm thinking about?

Yes, everything you said is exactly correct, Tom, and I think the two strongest points of those statements is one, relationships. You do have better and bigger and nicer and all that kind of relationship, because as you enter into it, you are getting into the depths of their business.

You are really seeing, they are having you and they are dumping all their freight into your computer, and you're massaging it, and all those kind of things, they're coming up with programs, to say Hey, I think you can run 10 trucks, 20 trucks, 5 trucks, whatever it is, and so there's much more openness, and it's not transactional kind of basis. It's much more relationship driven, so that's #1, and that works okay. I mean, you have got a better, deeper reasoning for relationship and talking.

#2, every contract, I don't care if we got a 3-year contract or a 5-year contract, every contract has the ability once a year, to sit down and to talk about pricing. You got some contracts that would have pricing already built into it. The vast, vast, vast majority of ours do not have that, where it was one year it goes up 3%, the next year 3%, and those kind of numbers.

98% of our contracts are or the vast majority of them, Tom, will have where we do have the ability to sit with them after one year, so that's the reason why you heard me saying in the third quarter, that we really believe it's a second quarter situation with Dedicated, because that's when I knew the contracts were going to not be expiring, but allowing us the opportunity, so what quite honestly what you do, you go into the discussions with them with good relationship, with more partnership kind of relationships, that you can say, you know, quite frankly, whether they didn't live up to their side of it, or the business is down a little bit, or you "underpriced" it, which is predominantly what we did, where it was underpriced, you simply, I don't want to use the word simply, but you sit down and say, here is what I have got to have.

And so you deal with that, and so far, the success has been very, very good upon getting that, and the few trucks that we have decided not to be able to get to an agreement with the customers, we have been able so far to quickly replace those. The pipeline in that division is very, very strong.

We have got a lot of business opportunities in there, so if they don't want it, then we can go other places and also, probably to the general manager running that, Tom, as a background, is that we got 675 trucks in that division, and my thought process is that guys, that's a reason, the reason why we didn't go in in September and say we're doing it now, we will keep losing, if we're losing until the contract expires, is because of relationships and wanted to keep it, but at the end of the day when that contract gets to that date, that it's time to discuss increased pricing, if those 675 trucks need to be 500 trucks, I don't care. I will sell another 150 trucks up here, but whatever trucks are operating in that division, are going to be acceptable operating ratios, that we won't.

Tom, we are seeing, I mean and the difference is and it's really conflicting what generally speaking freight is down, people don't feel good. We didn't have the peak season in the fourth quarter, and it was a third quarter that we all felt. The Dedicated market on the other hand, we're not feeling that type of pressure. I'm not saying it's as strong as it was prior to that, but it's different and I think you have to, that's the key question to ask, is why is that? And I think it's two-fold.

I think that from talking to our customers and understanding that is one, they do have a long memory, and they do understand what problems they had covering freight throughout '02, late '02, '03, '04, and throughout 2005, and so plus two, they like the smoothing effect of their costs. I mean, it's a certainty, it's capacity, they know what their costs are, and they like that, and that's the only thing we can conclude, that the pipeline is still pretty good there, and I think that is pretty interesting, if you step back, and think wow, this freight market we haven't had since 2001, and we've got a segment that's still inside of our portfolio, that still has some meaningful growth opportunities.

Okay.

I think too, as I step back and look at the results, our revenue per truck per week was down 4% in the quarter. Dedicated was up quite significantly versus year ago in the fourth quarter, and so again, that's not anecdotal, that's kind of fact that says something is happening there pretty quickly, as the group was down in total 4%, that division was up again significantly versus year ago, and so I think that that momentum is continuing on throughout this first half that we see.

April is a big month for that division. It's a lot more, these first half contracts that renew, a lot of them in the month of April, so there is still a lot of work to do, but we are excited with what we are seeing right now.

Okay. That is helpful, thanks for that additional explanation, Joey.

At this time, there are no further questions.

Well, we just want to thank everybody for joining us, and we will be talking to you the next quarter. Thank you.

This concludes today's Conference Call. You may now disconnect.