Covenant Logistics Group Inc (CVLG) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for your patience in holding. We now have our speakers in conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to President Joey Hogan. Sir, you may begin.

Thanks, Lindsey. We'd like to welcome everyone to the Covenant Transportation Group Second Quarter Conference Call. Joining me on this call here are David Parker, CEO and Chairman of the Board, as well as various members of our 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 Act of 1934 as amended. Forward-looking statements are subject to risk and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. Please review our disclosures and our filings with the SEC.

As a reminder to everyone on the call, a copy of our prepared comments and additional financial information is available on our website. Due to the depth of discussion in our Press Release, our prepared comments will be brief, and then we'll open up the call for questions.

In summary, I want to reiterate David's comments in the release that, although there were unusual and infrequent items in the quarter, we view our results as disappointing. I'm extremely proud, though, and encouraged that our employees, both driving and non-driving, desire to improve our results, staying focused on making quality, sustainable long-term decisions, and also continuing to provide great service to our customers.

Aside the infrequent items discussed in detail in our Press Release, the combination of a declining truck tonnage and a very competitive freight environment significantly slowed progress across all asset-based companies. The customer bid process accelerated to a fever pitch during the quarter, with bids up 182% for the Covenant Transport subsidiary versus the second quarter of a year ago. Simply put, the results of the bids and soft economy put pressure on our freight rates, decreased our fuel surcharge recovery due to customers raising their fuel surcharge basis, and increased our non-revenue miles as we scrambled to haul the most profitable freight.

We would characterize freight flows during the quarter as slightly improving, but obviously not at the pace that we historically see. April was an OK month freight-wise. May started out soft, improved toward the second half of the month, and basically held at that level throughout June. We did not see a strong close of freight to the quarter. We did see some weeks of increased activity during the quarter where capacity tightened up quickly, but those weeks were not obviously sustained.

From an operating standpoint, average miles per tractor declined 1.3% versus the second quarter last year, and our rates were up 2.1 percent, while our deadhead, or non-revenue miles, increased from 9.6% in the second quarter of last year to 11.1% this year. The combination of these factors produced a .9% decrease in our average freight revenue per tractor per week.

Additionally, we discussed during the first quarter the impact of the soft freight market in the southeast on our Star subsidiary, and the transition of the former Covenant refrigerated trucks to our SRT subsidiary. Both of these events required broker freight to keep the trucks moving, and we saw our loads hauled through brokers jump to about 13% of total loads during the first quarter.

We have made progress in the network in that we have been able to reduce loads hauled through brokers to 10% of total loads during the second quarter, with ground being picked up significantly towards the end of the second quarter. The overall effect on our operations hauling broker freight is negative because fuel surcharge is not recovered, and broker rates tend to be lower than other rates, excluding the portion that would be equivalent to fuel surcharge.

The positive is, if the freight is into that -- desired lanes, the load puts miles on the trucks, allowing you a better opportunity to keep your driver motivated. We fully expect to have this number reduced to below 8% of total loads during the third quarter, with a longer-term goal of being under 5% on a consistent basis.

From a cost standpoint, excluding the one-time items, our pretax cost increased about $0.12 a mile over the second quarter of 2006. Three items comprised the majority of the variants - fuel net of surcharge increased $0.039 a mile. Capital costs, which we defined as lease revenue equipment plus depreciation and interest, increased $0.034 a mile, and purchased transportation expense associated with our new solution subsidiary added $0.027 a mile of expense.

The issues around these three items were discussed in detail in our release. For the foreseeable future, we expect our fuel cost net of surcharge to remain in the $0.23 to $0.24 per mile range, reflecting the new surcharge-based program of our customers. As stated in the release, our capital costs did reduce sequentially from the first quarter, and we do feel it will continue to decline throughout the year.

Our fixed costs in total did decline versus the first quarter by about $0.02 a mile, largely attributable to the reduction in capital costs.

From a balance sheet perspective, we've been able to reduce our total indebtedness, including off-balance sheet obligations, by $28 million since year-end 2006. During the quarter, our assets held for sale was reduced from $26.5 million to $17 million as of June 30, and should be lower than $10 million by year-end 2007. As of June 30, 2007, the company had approximately $26 million of available borrowing capacity under our credit facility. The credit facility contains certain restrictions and covenants relating to, among other things, tangible net worth and cash flow coverage.

We are working with our bank group to amend our current credit facility to reflect our second quarter performance and allow compliance with all covenants as of June 30. We will have these modifications completed by the time we file our second quarter 10Q.

David will now give you an update on the business and our outlook for 2007.

Thanks, Joey.

First of all, I want to start off by verbalizing what I said in our earnings release statement. I want to express my sincere regret and disappointment with our financial results for the second quarter of '07. Although the majority of the loss is attributable to three items we believe to be infrequent, and we know our ongoing business realignment would involve fluctuations in results. The results are, nonetheless, unacceptable.

There were a few operational improvements during the quarter, particularly in the asset productivity of our regional service offering. But, these improvements were overshadowed by the overall numbers. We are committed to a full evaluation of the company's strategy, and we are leaving no stone unturned in our effort to improve the company's results. Fortunately, we have a strong balance sheet, many fine customers, a loyal employee base and stable relationships with our lenders that provide a solid foundation for the company as we continue the turnaround process.

Second, as an example of us continue to examining our strategy to improve results, we have decided for our Covenant Transport subsidiary to unite the sales force under common management. We felt when the restructuring was announced two year ago that focusing the efforts divisionally was a prudent path to allow ownership and specialty of products. Today, we now feel a focused, consistent message for our sales associates and customers is the most critical need.

The sales force will be empowered and held accountable to sell all products of all divisions. And in that regard, we made the decision to reassign Jeff Paulson and Jeff Taylor, both with prior successful sales backgrounds, to help run the day-to-day operations in the united sales force. Their 100% focus now will be on sales. The general managers of the divisions within the Covenant Transport subsidiary will be much more focused operationally to make sure the best service for our customers and drivers are achieved.

Third, from a financial and operating perspective, we've had four goals internally that we considered stepping stones of progress that we wanted to accomplish in the first half of 2007. Number one, we wanted to grow our revenue per truck by 3% over the first half of '06. We were basically flat at about .5% increase. We underestimated the vigor of the competitive environment, which Joey was discussing earlier, concerning the amount of bids that happened in the first half.

Second, we wanted to grow our solutions subsidiary to an $8 million run rate by the end of the second quarter. We did exceed that goal. We're currently on an $18 million run rate. Third, we wanted to hold our variable costs, net of fuel surcharge, to $0.91 to $0.92 per mile. Excluding just the two large insurance claims in the quarter, we operated the second quarter at slightly under $0.96 per mile. Fuel, net of surcharge, was $0.04 a mile higher than we expected in the second quarter. We discussed in the release the major reasons for the variance related to fuel.

Fourth, we wanted to lower our fixed costs to about $51 million by the second quarter. Excluding the plane impairment charge, we accomplished this goal. After the Star acquisition in September of '06, our fixed costs increased to $55 million in the fourth quarter of '06, and we knew long-term that that area has to come down. We expect this area to continue to decline throughout this year. The results of the lackluster revenue per truck movement, combined with the net fuel cost increase, the operating leverage kicked in, backing up our operating results.

Third, what our goals are for the second half of '07. Our near-term goal is to break even for the second half of '07, possibly posting a loss in the third quarter, followed by a small profit in the fourth quarter. We believe this is achievable with help from the economy, our customers, vendors and favorable results from the disposition of our assets held for sale. Of course, it's by no means certain that we can achieve this goal, and we caution our stockholders, employees and customers that we are anticipating a slow and modest improvement, given the current freight environment.

We'll now go ahead and open it up for questions.

(OPERATOR INSTRUCTIONS) Justin Yagerman with Wachovia Securities.

Hey. Good afternoon, gentlemen.

Hey, Justin.

I guess just on your last comment there, David, you said that your hope is to break even in the back half of the year, but you mentioned both in your remarks just now and in the release that that's predicated on a little bit of help from the economy. What happens if you don't get that? Are you still able to achieve that goal?

So, Justin, what we're anticipating is the second half of the year to be -- usually what the second half does, even during a recession time. Now, as you know, quite honestly, in October and November last year, the Christmas season did not happen during that time. I'm anticipating that it will be better than it was last year, or we are at least -- these numbers are anticipating for it to become at least a normal type fourth quarter of the year in relationship to a slow economy.

OK. So, as long as we see some kind of peak season this year, hopefully you'll be able to meet that goal?

That is correct.

All right.

Just a question on the losses on the tractor and equipment sale. I mean, your competitors are posting gains consistently for several quarters, and you guys have been posting losses. What's different about the way that you're accounting for that equipment, or different about the equipment that you're selling? Is there an issue with the way you've been depreciating that equipment?

Or--and I guess you mentioned that part of your expectation of improvement is gains on assets held for sale. And do we have a reason to believe that there are gains to be had on those assets? And I guess that ties in directly to what your real book value is right now.

Yes. Let me clarify the statement. The favorable disposition of our assets held for sale means that we sell it, not what we get when we do sell it. So, that's our issue from our standpoint, is the market did slow throughout the second quarter, and we just -- that's what that statement means, that we are able to continue to move our assets.

Go back to your first question, we do things a little bit differently than our competitors. We take any preparation cost, once an asset is parked for sale or designated to sell, we take any cost to prepare that asset for sale and show that against proceeds from the sale of that asset. So, if it takes us $1,000, $2,000, $3,000 to prep a truck for sale, that goes, in addition to our book value, against the proceeds.

And so, I do know that that's a meaningful difference, because a lot of trucking companies don't do that. We have done that forever because we want to isolate what that cost is as well as to see -- try to recover that cost as best as possible in the sale process. So, we do do something different.

That's different from any of your public competitors?

Well, I think, from the ones I've talked to, a lot of them don't do it that way. They just take ...

A lot -- most of them put it into maintenance.

Yes, they'll leave it in the maintenance expense, what we would call our operations and maintenance line.

OK. It's something I had, and I'd have to look into that.

You mentioned that you're right now in negotiations with your lenders to make sure that you remain, you know, within your covenants. Where are you guys on debt to EBIT dollar basis right now? Where is your covenant? And if you are in breach at the moment, what are you going to have to do to get out of that situation?

Excluding the two insurance claims and the plane impairment charge, we are within our cash flow coverage and our fixed charge coverage. We still trip our minimum tangible net worth ratio.

Now, including those, which we do, we're out of compliance on our two cash flow leverage-type ratios. We expect any day that we'll have waivers to allow us to bridge the gap until the formal amendments are done. I don't anticipate that our actual covenants will change, except for the tangible net worth covenant. Our banks have been very supportive. We verbally talked to every single one of them. B of A's doing a good job of help leading them through that.

And so, we'll get the waiver, which will get us through till we get the amendment done. Amendment done, we'll be done. We have targeted by the 7th of August, which is before our Q is filed.

Is that typical? I mean, when a lender is looking at the financial ratios of the company, that they would take the extraordinary events, such as you're describing, out of their calculations, or -- because as you said, you are out of covenant on that, including those issues.

Well, I mean, it's not -- we're not excluding it. It's only for a point of explanation that says, excluding those two what we call infrequent events, we would have been in compliance on the two -- what I call the two main covenants. I'm not able to exclude them there [unless] I've tripped those covenants. But, it does help give somebody comfort on, OK, yes, I see that, yes, $0.14 a mile isn't ongoing and frequent. Yes, you're not going -- you don't have other planes that you're going to sell and take charges on but, nevertheless, they're part of your results. But, if you hadn't have had that, you would have been in compliance. Only said that for a point of explanation on where we are relative to our covenants and our financial condition. So, they aren't going to take them out. It's just -- we're just working through the process to get the amendments.

OK. I guess when it comes to the insurance side of things in the extraordinary events that you had here relating to some '04, '05 stuff, why wouldn't your prior policies cover the extent of the damage going on here in terms of these claims?

Well, I believe the prior policies -- I mean, I believe our policies are very -- are good policies. Throughout any acts any quarter, any large accident, things can turn against you relative to facts and circumstances. It's going to change your view on the ultimate outcome of a case, and that's what happened in these two.

Should I have known it sooner? Yes we could -- we've argued that internally. And whatever those are, what were the events and circumstances that happened to -- that would affect when we would have recorded these sooner. But, nevertheless, after going through those, we had information move against us on these two that caused us to have to record the new ultimates on those.

Because with the old insurance -- I forget who it was, Justin, in '05 that the deductible [is, say], $2 million. So, you're [reading] the first couple of million dollars of that accident, period, and so that's what happened. I mean, we had on the books at X, and new revelation came through. And I will tell you one little bit on that -- on one of those accidents is that the police report absolutely said not our fault, not our fault.

And so, you put a reserve on there based upon the information you got, and it ended up getting changed a venue to a very liberal state of Alabama from a very conservative state of Indiana. And I'm sitting in here three weeks ago with in-house and out-house outside counsel on this particular accident that said we've got a lot of things in our favor. The car was going around the truck in snow and ice at 70 miles an hour, got ahead of us, spun out, hit the guardrail, went all the way over on the interstate, and we hit this car.

The police report said, "Not your fault." The attorney sitting in the room with me about three weeks ago said we got a lot of good stuff. The negative side is that it is in the state of Alabama in their home city where they live at, with two small children that were involved in the accident. They said, "David, this claim, we take it to court -- and we will -- the claim is between zero and $10 million. What do you want to do?" I settled them for 2. That's what ended up happening.

So, as a process from '05, when you get police reports that says, "It's not your fault," and it's going to happen in the conservative state of Indiana for two years, you would know we had it on the books at X, until three weeks ago you determined that X is not going to be the answer, so that I gamble and say zero to $10 million. And I decided not to.

I hear you.

So, that's one of those two accidents.

OK.

I guess, given where you guys are relative to your book value, I don't know if you're willing to comment or not. But, have you been approached by any kind of financial or strategic investors recently that are interested in your assets?

No comment.

OK.

I guess the last question pertains to SRT, and I'll turn it over to somebody else. I'm just trying to understand. It looks like the refer market, I mean, despite what was sounding like a decent produce season, may have had some issues in the quarter. I know one of your refer competitors posted disappointing results this quarter. What's going on there? I mean, is it just getting more competitive, like the rest of the market, or is there something in the refer dynamics that's hurting those markets, given that SRT is usually a very well performing asset for you guys?

Yes. First of all, your first question, Justin, on the refer, on the produce side of the area of the market, there's no doubt that the freeze -- when the freeze hit the first quarter, it hurt. Now, keep in mind that those vineyards are planted in November for a harvest in the springtime. Well, that springtime absolutely did not happen, and it just curtailed into the early part of May kind of time frame.

Now, in June when strawberries and cherries and that type of freight started coming out of there, lettuce, more heavily, in the last 45 days -- this is July -- at the end of June, all of July, the produce side of it is probably back to about 80% of where you and I would think it would be in July. The freight coming out of there is pretty heavy, but it just started happening about a month ago.

Now, going forward, all the seasons will be normal unless the November planning becomes frozen in January. But, if it doesn't become another freeze like it did this year, then your wintertime will be normal produce harvesting out of there. Hopefully that answers your question on the produce side of it.

The refrigerated side, SRT -- because you're exactly right. They've always been a great performer, and the refrigerated side also slowed down in the first six months, and also in the second quarter because, keep in mind, he got those 175 trucks in January, and Covenant gave him about $20 million -- when I say him, gave SRT -- about $20 million of revenue associated.

Now, for SRT to operate where SRT has to operate at, that $20 million was going to be $30 million. But, right into the teeth, starting January 15th of what you and I know the economy is in today, that the $20 million went down to about $15 million, but his other $90 million worth of business went down to about $85 million. So, they -- that's what they had to react heavily on the broker side of the business.

But, the broker side has been dropping very nicely for SRT. To give you an idea, 30% first quarter, currently 13% to 15% of their business is with broker. And so, you are really starting to see a big gap starting to take place on the good side of fuel surcharge recoverability on the SRT side as they get less dependent upon the brokers. Excuse me. So, hopefully you understood that, Justin.

Yes, I got it.

Thanks a lot, guys. I appreciate it.

John Barnes with BB&T Capital Markets.

Thanks, and good afternoon, guys.

John.

David, when you talk about all options are on the table and pursuing strategic alternatives, I mean, have you retained anybody in terms of an advisor to begin this process?

No.

Are you planning on it, or are you doing it all internally?

John, when it comes to outside stuff, it would be us internally with the Board.

OK, very good.

Can you talk a little bit about the disposition of the assets? I guess I have two questions. Number one, the disposition of the aircraft in the loss there, I understand in trying to get the cost structure right. one, who did you sell the aircraft to? And two, just given the loss that you incurred on the sale of that aircraft, I mean, did that balance out the cost savings of owning it and operating it yourselves? How did you weigh the loss versus any potential cost save?

I'll let Joey talk about the second part of that.

The first part of it, the reason for it, John, is actually, in the meeting with our top management today of 50 or 60 people or more, however many we have plus the telephone, I told them about the airplane, and I told them that, as we're in a continuous mode of cutting costs, we've given Joey -- I've given Joey a goal at Covenant to cut costs X amount. And as you know, the plane was definitely very, very active. You had to have multiple people on that plane to utilize it. And I just couldn't look myself in the mirror and knowing that I'm telling people, watch how much water you're drinking, and I'm running out here getting on an airplane. And I just could not do that.

And so, that was the reason why we determined, shut the airplane down, if nothing else for the [looks] of our internal people that are going to help us turn this company around. So, that's the reason from the standpoint of the sale and all that stuff. I don't know if you got anything to add there or not, Joey.

The plane's not sold, first of all. We made the decision to sell the plane at [partner] for sale. The charge that we took is basically a reflection of the difference between what it's worth and what we owe, because we lease the plane. So, the plane is in the market to be sold, and so we feel like we put a very, very fair number on valuing that.

The savings that we get from making that decision, we pay back that loss, if you will, and hopefully sooner, but probably in about 18 months. But, nevertheless, that combined with what David said earlier, we made the decision that that was the right thing to do in terms of the company.

OK.

In terms of your liquidity and your availability under your revolver and that type of thing, given -- I guess given that you're in violation, or you kind of busted the covenants this quarter and are looking for the waivers and renegotiating those, I mean, when you go through that process, is there any chance that the bank group reduces the size of a revolver and cuts into your availability? Is there any concern about liquidity here?

I mean, is there a chance? Yes. I put a very, very, very, very small chance on that. I fully expect that the revolver will stay at the size of where it is, and we've had indications that that would be the case. We haven't made 100% decision as of we need any relief on any covenant levels yet, other than a tangible net worth covenant. I don't think that will change, but it could possibly change a little bit. Pricing, we could have -- obviously affect pricing-wise, but I think it's a little early for me to say that. So, I'm not concerned about availability with this group.

All right. And then, again along those lines, do you have a feel for -- I used to be in the business a long time ago, and any time we went through this, there was a fee with -- associated with waiver [moderate], providing waivers on covenant relief and that type of thing. Do you have a feel for -- are you looking at any additional charges associated with just bank fees and that type of thing as you go through that process?

There could be. I mean, to get the waiver, I don't anticipate any fees for that. But, the eventual amendment, depending on the extent of it, extent that we choose to change all the covenants or one, I think that's -- there obviously possibly could be some fees -- will be some fees associated with that.

Are they material enough to impact earnings in the third and fourth quarters, or is it negligible?

I would say it's more negligible.

All right.

And then just lastly, I mean, with your discussion about the bid pipeline in the first quarter being up so substantially, have you seen that ease yet? Has that kind of run its course, or is there more to come? And in terms of any potential lost business that you experienced, could you give us an idea in terms of magnitude of what kind of rate cuts was lost business being bid at?

John, this is David. I want to say that 95% of that process is over with. They're just -- all the major, major bids are final, and all that's over with. So, we don't see that, going forward, as being a major issue. What we saw more than anything would be pricing holding, fill surcharges changing. And that's really what we saw among all our companies. And so, we don't see any more deterioration in that. Does that answer your question good enough?

Yes, that's fine. That's fine. All right. Thanks for your time, guys.

OK, John.

Chaz Jones with Morgan Keegan.

Yes. Hey, David. Hey, Joey.

Hey, Chaz.

Wonder if I could ask a question related to drivers. I guess in light of the results, it seems like the seated tractor counts held up fairly well. Are you guys experiencing any type of increases in driver turnover?

We had a tough beginning of the second quarter. SRT, through the change, the acquisition that it made, its turnover did go up as it sorted through that driver base and did impact SRT's results of just too many unseated trucks. One of the divisions inside Covenant Transport had a similar type of issue. I can say where we are today, we're very excited, as you all know on the phone. I mean, typically the summer months are the real, real tough period to hold onto drivers because they have other options, whether it's construction or farming or warehousing or whatever that is.

As of today, we're basically full. I mean, we might have, across all companies, 50 open trucks, and I'm real excited about that. I mean, I think that we're spending a lot of time with our drivers in all our companies to make sure that they clearly understand where we are. And so, we're pretty pleased with where we are right now. I think it did affect us, Covenant Transport Group, throughout the second quarter. But, I do think in the third quarter it will be -- it should not be as much of a drag as it was in the second quarter, and that's something we're real excited about.

OK. Well, I guess what -- yes, what I was trying to get at was, just in light of the performance, has there been any change in employee morale, or are you seeing any uptick in attrition along those lines? And it certainly doesn't sound like it from your answer.

No. I mean, I think obviously any time -- this time we're all focused, is the way I would like to call it. We know where we are, and the least thing that we can do is to make sure everybody knows clearly and honestly where we are and what we need to do to get to where we need to be. And I think that's what we're doing with people, including our drivers, and we're being -- I was with orientation with them this afternoon, and very straight up, exactly where we are and what I need from them.

And so, I'm pretty pleased from that standpoint. I'm not going to say we're sitting here high-fiving everybody right now, but I think that the group is focused on where we need to go, and morale is good. I would say morale is good, but people have concerns, and we've got to address those.

Sure.

Every employee, Chaz, from drivers to in-house to Star to SRT, I mean, we have meetings with those. Those guys are spoken to exactly the way we're speaking to you now or any time we talk to you. It's very, very up front, the good, the bad and the ugly. And as you know, what you find the vast majority of the time it may be ugly to your employees. But, if you're open and tell them what's on your heart, the vast majority of them rally around that. And that's what we have seen for two years.

OK.

One of my concerns is that the reasons you cited for the impact of fuel on the numbers, certainly the concern is, if the freight environment doesn't improve materially, it seems like those three issues are going to continue to sort of be an overhang for you. Am I looking at that wrong?

Well, it depends. Number one, you're not looking at it wrong, if you believe that SRT is going to say at 20% or 30% brokers.

Sure.

I mean, that's a gigantic -- to give you an idea, SRT, because of the broker amount, is about $0.08 a mile, Chaz. I mean, it's a big, big number on their number. Star, for instance in the last 60 days has gone from -- they have cut their brokerage dependence down 50%. That is now under 10%, down around 8%, but got as high as 15%, 16%. Covenant, through this, has always been at this 4% to 5% number that everybody wants to be at, it's around -- less than 5%.

So, yes, it will -- will it get back at where it was? No, not based upon the fuel surcharges that have changed. But, will it stay where it's at? The only way it would is if SRT and them don't make any improvements, and they've made -- both of them made 50% improvement in that one category.

Are they giving up in terms of fuel surcharge when they go from broker to contract at all? I mean, it seems like, from what you're saying in the release, that some of your new business has taken a step back in terms of surcharge in order to sort of maintain rates, I guess. As you shift from broker freight over to contract, are you getting a less favorable surcharge?

The answer is yes. On your existing business that went out for bid, up 182%, which was probably about 100 accounts, you definitely got worse fuel surcharge on those. But then, when you take 15% to 30%, so $230 million or $240 million of revenue, and say 30% of it is with brokerage, and you've reduced it to below 10%, that goes from zero fuel surcharge to at least a fuel surcharge.

Sure.

Now, whatever that -- that [they] can back into the favorable number. So, at the end of the day, it's this. Does it go back to second quarter last year? No. Does it stay where it's at today? No. It improves.

OK.

I know it's tough to sort of peel the onion on, I guess, but the rate was actually up year-over-year if you look at it on a loaded mile basis, about 2%. But, certainly that's being influenced by the amount of brokerage freight you're hauling, as well as the acquisition of Star being a regional carrier. Is there any way that you could sort of give us a ballpark range for short of, you know, maybe what the base rates did year-over-year? And I know that's tough to do because there's a lot of moving parts with the restructuring going on with changes in freight mix. But, if you kind of back all that out, are rates off 2%? Are they flat just kind of on your base business?

Well, I mean, I think that we -- in the release we went through kind of the impact of rates and issues by division/company. Yes, Star is affecting the overall mix of our rates, there's no question.

For the good.

Yes, to the good. If you look at the pieces, as we said, I mean, SRT's rates declined slightly. Deadhead is one of the issues affecting that, as far as rate per total mile. Dedicateds fell a little bit. Expediteds were flat. Covenant Transport's regional business was up a little bit, so that's kind of the -- of course, you don't have Covenant's refer business anymore, and then Star's did affect the overall business.

So, if you kind of look at the groove between regional, dedicated, expedited, it's down two to up one in that group in that range.

OK, that's fair.

A couple other quick ones. Any guidance from a tax rate assumption? You alluded to changing the tax rate in the release. But, based on being maybe break-even in the second half of the year, what would be something we should look at modeling?

Chaz, I think it's somewhere, based on the current year's expectation for the year -- of course, ours would possibly be different from yours. If we achieve our results and the same with yours, the rate should be more flat, if you will, throughout the rest of the year. It's probably in the -- I want to say it's around 20% effective rate, somewhere in that range. But, I'd be remiss to say that without going and looking at it in particular.

OK. No, that's helpful.

And then, one, could you just comment on the first 3.5 weeks of July? And then, the last one would be, with some concerns about debt covenants and that sort of thing, and certainly CapEx has been kind of a roller coaster ride with pre-buys. What would be sort of a normal maintenance CapEx figure for Covenant, assuming it was all done on balance sheet, given where your fleet stands today?

For Covenant Transport Group, and it's been a few quarters since I've done that, it's around $45 million to $50 million net of dispositions on an ongoing basis. That's what the maintenance CapEx number would be, around $50 million.

OK. That's net of dispositions?

That's correct.

OK.

And then, any comments on July so far would be helpful, and I'll give it to -- up to somebody else.

Chaz, July, we have not seen any improvement. We have not seen business take off. July -- I will say this more -- it is a typical feeling July, so I don't want to -- I'm trying not to read anymore into that myself than what I'm reading. It's a typical July. The last three or four weeks of June were pretty decent weeks, and the July went into typical. I will tell you that the optimism is higher going into August not because -- I want to think not because it's just because we're getting to August, but we really see some good business opportunities that are in the process of hitting for all three companies just right around the corner. And so, all three company's presidents are pretty optimistic about that. But, I've got to tell you, July is a typical July, and it's nothing to [said] that the Christmas season is going to happen here in July.

Sure.

OK. Well, I appreciate all the commentary, guys.

Ed Wolfe with Bear Stearns.

Hey, guys, thanks for this call. I know it's trying for you guys.

First, just a little bit about what's going on in the marketplace. Can you talk about -- you said that it feels like pricing has kind of done its thing, other than the fuel surcharge. Are there parts of the market, whether it's long haul versus regional or refer versus drive-in, that feel more competitive than the others? And same question for geography.

Ed, I've got to tell you that, for the group, it's all feeling pretty competitive. Definitely for the first five months of the year, rates were driving 90% of the shippers' decision, and we truckers were folding like a pack of cards. And I will say for the last month that the irrational requests are not happening, and there's more dialogue among all three companies with their customers on pricing. And so, I think that maybe the market is -- I guess we could say that maybe it's bottomed out, and pricing is not absolutely ruling every discussion you have with a customer.

But, in terms of relative to different geographies or different products, is there any difference?

Yes. Ed, not really. Not really. I mean, you've got your typical -- East Coast will be up and East Coast will be down, and Dallas will be up and Dallas will be down. But, no, I don't think that there's any one geographical area. Maybe the Northwest. Northwest has been ugly pretty much all year long, the Northeast -- I mean the Northwest has been. The Southeast, as you know, has led this slowdown in the Southeast, but I will also say that, just in the last month, that Star has started hitting a lot of accounts in the Southeast. I'm encouraged about that, but the Southeast has definitely led the economic slowdown.

OK. And then, the court ruling yesterday on the hours of service, if that were to be implemented, have you looked at -- I mean, what's your sense in terms of the impact of utilization?

First of all, I have not studied what the impact would be, because the impact -- if they keep the sleeper berth rules as they currently are, which would indicate that they would keep them as they currently are and not give you the freedom to go in and out, the only thing they did is reduce your amount of hours you can run, and the only thing they did is did away with the 34-hour restart. One thing you and I both know, it's negative. But, I have not put a pencil and paper with my people to say is that 2% or 5%, but it is a negative number. I think the chances of that happening are very, very small.

The negative, is there a certain length of haul where it's not a negative, and a certain length of haul where it's particularly an issue?

No. No. It is an issue for any length of haul, but freight is slow because you cannot stop the clock whether it's the existing world today or the existing world tomorrow, unless they went back just a couple year-ago rules. And as long as you cannot stop that clock, then whatever it is slow in whatever city that you are waiting for your next load, no matter what the length of haul it was to get there, then that truck is going to be beating up on his hours.

OK.

Just getting to more Covenant-specific stuff right now, when we look at liquidity, you have 3,700 some-odd tractors and 9,000 some-odd trailers. Roughly what percentage of those tractors and trailers, or how many tractors and trailers are completely unencumbered? They're not leased? They don't have any covenants on them? If you needed to sell some in the market, you could?

Well, we could sell all of them whether they're leased or not. We just have to negotiate with our lessor, if you will, those amounts.

On the tractor side, there's only about 500 that are leased now. In the past it's been larger just because we had quite a few walk-aways with our Volvos. Most of those are coming out this year anyway. And so, right now it's about 500 of the 3,700 that's leased.

The trailer still is a big number but, so far as we reduce the trailer fleet -- because I want to say we're down about 600 trailers from where we were back in the fall -- we've been able to work through that with our lessors. I don't have the exact number of what's leased versus on.

Is it more than half that are leased?

Oh, yes. Oh, yes.

OK. We can get that offline.

And you said in your release there's a couple terminals for sale. Can you talk about what your expectations for the market value of those are, at least where they are and how big they are?

Actually made the decision back last fall as we went through a kind of asset utilization, that there were three facilities that we feel just weren't efficiently being used, one in Dalton, Georgia, one in Oklahoma City, and one in Little Rock. We sold the Little Rock facility pretty quickly. We basically almost sold our Oklahoma City property already, and the Dalton facility will sell. That's a very valuable property. And I have no concerns about recouping what we have on the books for the two remaining ones.

Can you tell us what you have them on the books for?

I don't think we disclosed that anywhere. It's not a huge number. I think the two that we have left to sell are less than $3 million value in between the two, but those are out there.

OK. And if I look at the $26 million revolver and the 7 to 10 in assets for sale for the rest of the year, is that pretty much the liquidity that you have outside of your cash flow right now? Is it possible to securitize some receivables or some assets?

Well, the receivable's already in a securitization product right now, and we keep that pretty much loaded up as best as we can, just because of the finance cost, the cheaper finance cost than that.

We do have some other facilities. We don't have any plans to sell any other facilities. We've really kind of gotten those down to a point to where all those that we have, we're utilizing. We're talking about possibly moving one or two, but I don't see us reducing much more there. Is there some liquidity there in a -- if we had to, yes, but it's not tens of millions of dollars.

But, am I right on the 26 revolver and the 7 to 10 for assets, that that, give or take, should give you $33 or $35 million or so of ...

Yes.

... Of liquidity?

Yes, and our CapEx for the rest of the year is we're -- on a net basis after dispositions, we're pretty much done. I mean, we're about at what we're going to spend for the year. I think that we do have some possibilities in our letters of credit. There's no reason, none that are on the phone. I don't have a problem saying it. There is no reason that some of the letters of credit out there are as high as they are, and they will come down.

But, yes, there's some other, and that could be fairly significant. We have, I want to say, about $66 million in letters of credit outstanding right now, and our exposure continues to decline fairly rapidly, especially with these two cases that we settled in the second quarter. So, we're hopeful that that will happen. You'll see some relief late in the second half, but we're not counting on that in our "Covenant projections." But, that could be several, 10 to -- let's say $10 million to $30 million of liquidity that that could free up.

Thank you for that.

David, obviously getting rid of the plane is a start, and it sends a message. But, given the trouble and the difficult market, why not dramatically reduce the fleet and just take steps to really shut down major parts of business that's not working, sell whatever assets you can and bring in some cash and close some accounts and some bad business?

Ed, those are very, very fair questions and something that we are consistently evaluating, and something that is always on the table. We feel like -- and I know that the numbers are not showing it -- but we do feel like that, when you look on a division by division situation -- numbers out there, that SRT is going to be SRT. And it's very close of at least getting into the mid to mid-lower 90 kind of number, and I believe that -- I believe we're right around the corner from achieving that with SRT not just because of their track record, but because of what I'm seeing within their company, the expense side as well as replacement of brokers and where their utilization is at today.

Star, again I will say that Star has had two fatalities in 26 years of operating. Unfortunately, they had one of those two in the month of June that they had to reserve X amount of dollars for the month of June. [Presently], they will go another 13 years without having a fatality. At the end of the day, if you were not to include that fatality, they had a -- '94 (inaudible) OR. Star is in the process of getting to at least respectable numbers.

The expedited side of the business, you've got 1,100 trucks there at that. I will tell you that the teams within that division that last year operated at an 88 OR, that division did, the teams within that division this year, their utilization is up 5% over last year in a year that they operated very, very nicely.

The problem that they've had is that their teams have gone from being 80% -- it will never be 100, nor do we want it to be 100. But, it went from being 80% team -- 78% team -- down to about 62%, 63% team drivers as they have got a [big] crusade that's being successful right now. They have already added -- just in two weeks they have internally recruited and added about 4% on top of that 63 or so.

So, they're in the high 60s now. I know that those teams are operating very profitable, even in today's environment. That leaves about 250 singles within that environment that, at the end of the day, the trucks within that environment have got to run team, or at least 78% team. And if that means that you've got 100, 150 trucks, that we all look around and say we'll never -- they're not going to run team. We cannot get them to run team. That is a question that we will answer. and that question will have to be answered probably in the next 30 days because of this [extent] that they are having internally on teaming -- getting the teams going.

Then, when you get to the Dedicated side, guys, I'll tell you, Dedicated is very close. If I was going to -- I don't know what holds in August but, just based upon what I'm looking at, I really believe in the third quarter -- not in the month of July. Forget July -- but, I really believe that Dedicated, in August or in September, will be in the mid-90s on our operating ratio. So, Dedicated is very close. There's about 50 trucks within Dedicated that we need to make a decision on within Dedicated.

Then, OTR, which has got 570 trucks, that it's not where you and I want it at, but it's getting better every day. Revenue per truck is up 11%, but it's not where we've got to be at, and that's the one that we're all continuously evaluating, so there's 570 trucks there. But, we're impressed with what they have done, but they're not there yet, Ed. But, when you take away the 3,700 trucks, and I just told you that there's 150, 50 Dedicated, probably 100 in Expedited that a decision needs to be made on, and the decision is to remove those 150 trucks out of that, I really believe that we will have about 3,000 trucks operating between mid-90s and -- they say mid-90s.

So, I mean, 93, 4, 5, whatever number you want to post. In just a few more months, whether that's two months or -- but we're right on the cusp, I believe, of that happening on 3,000 of our trucks.

David, I've got to tell you, somebody has been listening. You've been right on the cusp now for a long time, and the market's going away from you, and you're running out of time from a financial standpoint. It just feels like you just, without hesitation, rolled off what I count 850 trucks that aren't there and should be gone. It feels like it's time to act. Am I missing something there?

Ed, are you missing something? Maybe not.

OK, fair enough.

And I've got to ask this, because you did write in this, "We're committed to full evaluation of the strategy." You and your family control 23% and, based on what I'm looking at on my screen, Covenant employees and Directors and Insiders have 29% of the company. Are you open to either selling the company or buying the company in? Are either of those in the realm of things that you would consider?

Hey, I've been very open to the Board.

OK. Appreciate the candor and the time, and I know this is tough, so I appreciate it. Thank you.

Donald Broughton with A.G. Edwards.

Good afternoon, gentlemen. You there?

Yes. Yes.

Oh, OK. good.

According to the -- at least according to the K, last time I've got this all square against your competitors, average age of the trucks was 1.5 years, average age of the trailers was 2.8. What are you going to do on the truck trade? You alluded to it a little bit earlier, Joey. Is it reasonable to assume that you're just going to shut down truck trades pretty much through the end of the year in order to ...

No. We're continuing on our equipment plan from replacing condos at a certain time, solo trucks at a certain time, or refers. We're not altering our trade schedules at all. Going on.

That would be a way that you could end up with more free cash, though, in the short-term, correct?

That is correct.

Little bit of housekeeping. Owner-operators, end of the quarter, what was the count?

Around 120. I'm pretty sure on that, Donald. I'll check and holler at you later, but I think it was 120 is what we ended at, all companies.

All right. When do you think -- I know you've got other issues as to filing the Q. But, when do you think we might, maybe posted on the website, see a more complete balance sheet, cash flow for the quarter, even if it's an unaudited statement?

Typically, we wait till the Q, is what we've done in the past, and I don't -- I'm not anticipating changing that. But, our Q will be filed on August the 9th is our -- is when it's due. Think it's due by that time.

With Conway's purchase of CFI, or pending purchase of CFI, I know at one point that was a big customer of yours. Can you kind of give me some context as to -- I know it's been declining in the past several quarters. But, on a year-over-year basis, what was the change in the amount of business? You used to list them -- a couple years ago I can remember you listed them as one of your largest, if not your largest customer.

We just got back with them about four or five months ago, Donald. It's just immaterial. I mean, I think there's [40] teams or so running in that Conway network. So, it's not a lot. It's not much at all.

All right, fair enough. The rest of what I need I can get offline. Thanks, gentlemen.

Thanks, Donald.

Tom Albrecht with Stephens, Inc.

Yes, excuse me. My questions have been answered. Thank you.

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