Covenant Logistics Group Inc (CVLG) 2008 Q1 法說會逐字稿

Excuse me, everyone, and welcome to the Covenant Transportation Group first-quarter conference call. We now have our speakers in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of the presentation, we will open the floor for questions. At that time, instructions will be given if you would like to ask a question.

I would now like to turn the conference over to Mr. Joey Hogan.

Thank you. Good morning. We would like to welcome everyone to our first-quarter conference call. Joining me on the call this morning are various members of our management team, and David Parker, our CEO, is on the call via conference call, due to him traveling.

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 risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. Please review our disclosures in our filings with the SEC.

As a reminder to everyone, a copy of these prepared comments and additional financial information is available on our website. Due to the length of discussion in our prerelease and our final release, our prepared comments will be brief and then we will open up the call for questions.

In summary, I would like to state that we are not pleased with our performance for the quarter. There were several positives that we were excited about, but the impact of rising fuel costs more than overshadowed any positive operating achievements for the quarter. Additionally, we were not happy about reporting outside of our previously estimated range of earnings, and continue to be reminded of the operating leverage within the Company with slight changes in assumptions.

Our freight revenue, which excludes fuel surcharges, grew 3.5% to $149 million, primarily due to a 2.4% improvement in miles per truck and $8 million of revenue growth from our Solutions subsidiary. Our operating ratio increased to 106.5% from 101.9% last year, primarily due to the almost $0.075 per mile increase in net fuel expense. We define net fuel expense as fuel expense less fuel surcharge revenue.

Excluding the cost of fuel, however, the Company's operating results in the first quarter of 2008 were slightly better than the operating results in the first quarter of 2007.

Now I'll briefly go over the highlight of the quarter. First the positives. Number one, in an attempt to keep our trucks and drivers moving, we were able to increase our miles per truck by 2.4%. Number two, we were able to reduce our driver turnover in the Covenant fleet by 35 percentage points compared to the 2007 quarter. Three, we continued to aggressively grow our non-asset-based Solutions subsidiary, although investing in the future by adding several senior operating personnel.

Number four, even with a tough quarter workers' compensation wise, our asset-based truckload operations continued its cost savings initiative by lowering their nonfuel expenses by approximately $0.03 a mile. Number five, since March of 2007, we have been able to reduce our total indebtedness, which includes off-balance sheet obligations, by $48 million.

The negatives. Number one, our asset base rates climbed by 1%. Two, freight obtained through freight brokers increased to 15% of revenue from 13% in 2007. And three, our cost of diesel fuel increased on average $0.93 per gallon during the quarter compared to the same quarter of 2007, while our surcharges only increased $0.53 per gallon, costing us approximately $00.075 per mile.

What are our current initiatives? Number one, lower the dependency on broker freight. So far in April, we have been able to reduce that to about 12%. Number two, institute a fuel enhancement program within our fleet. This program includes reducing the maximum speed of many of our trucks and implementing strict idling guidelines. Several of the fleets are in the process of reducing its maximum speed to 63 miles per hour.

Number 3, solicit rate increases from shippers with less compensatory overall freight rates and fuel surcharge programs. We will have these discussions with all customers, but have begun discussion with shippers who have a $0.06 per gallon surcharge increment, and have had some successes. We will be resolved in our efforts in this area. If a customer chooses to not be supportive in this effort, we will be forced to reallocate assets to other customers and reduce the overall fleet size, if necessary.

Now, Ashley, we will open up the call for any questions that those may have.

(OPERATOR INSTRUCTIONS) Justin Yagerman.

I am just curious. As I was thumbing through the press release, it looks like the Covenant regional fleet was up 12.8% in the quarter on a year-over-year basis. What is that attributable to on an average basis? I was a little surprised to see that the trucks were up, so maybe I am reading something wrong here.

Yes, basically, we made some changes late last summer inside our Covenant division. And prior to that time, as we were managing the three divisions, we were managing each of them in silos. So to the extent that Xpedited opened up trucks or Dedicated, in particular, opened up trucks for losing a customer or single team mix in Xpedited fleet, we would keep those trucks in that particular division.

We made a change that says first of all that we can't let our Xpedited division teamwise get what we call upside down. We cannot let solos -- there would be too many solos in Xpedited division. To the extent that happens, or the extent that that became an issue, we moved trucks out of Xpedited. Number two, Dedicated. If we lost business inside of Dedicated, we were not just going to leave the trucks there. If I didn't have business for them, we were going to move trucks out of Dedicated.

Both of those changes, those trucks were moved into OTR. And we have a better chance of finding "freight" for those trucks in OTR than diluting the team operation or just keeping trucks inside of Dedicated with no business.

Makes sense. So it's kind of acting as a catch-all for any underperforming assets.

That's correct. Then ultimately, if we're not able to move those trucks successfully, then you have a decision to make relative to excess trucks in that fleet.

I guess that was my next question, is why hold onto those trucks at that point? Why not just kind of get them out of the fleet and try to use them to raise some capital, pay down debt, and --. I don't think bringing trucks on is ever going to be a problem for you guys. It is getting them out of the fleet right now while they are being a drag on earnings that's probably -- in my opinion -- more of an imperative.

Yes, and that is happening throughout -- it happened some throughout late in the first quarter, and will be happening throughout the second quarter and through the rest of this year.

How is that used truck market feeling right now for the equipment you are selling? You decide I don't want a tractor anymore -- take me through the kind of time period or the life of getting rid of that tractor and what kind of gain or loss you are able to realize on it.

The market, there's no question, has softened somewhat, since probably here in the last couple of months. Fortunately for us, we don't have many trucks that we had already planned to pull anyway in the second quarter, so any trucks that we do pull -- we have very low inventory right now. So that's a good thing.

We really don't begin taking replacement trucks for 2008 until -- meaningfully until July, is when we start getting some. So we've got a two- or three-month window to the extent that we pull any trucks which we are, that we can sell. Our inventory is very low for all practical purposes.

I do believe that long-term, that is a concern for the whole industry, especially when you consider the amount of trucks the industry will be replacing in 2009, as well. Fortunately, we still have residual agreements on all of our equipment, which is a help. And I don't anticipate -- we could have slight losses for the rest of this year, but I feel that second quarter-wise anyway we're still in pretty decent shape relative to the values of our equipment and in the market.

How pervasive are residual agreements in the market these days? Do you think the OEMs are in trouble as we get to 2009, if they have kind of written checks that they may have trouble cashing at some point?

Well, I don't know. I think it is hard to get a good, good feel of inventories from the OEMs right now. I do think it is a possibility. There is just a lot of equipment that is going to be replaced in 2009, and it is an issue.

I think that is why we feel in pretty good position, because we have had our own used equipment sales program for years, years and years and years. So we have a network that we've worked hard to establish over a long, long, long period of time, and we have not just jumped into the marketplace here in the last year or so, trying to move equipment.

So those residuals are kind of backups in case the used market goes so soft that you can't realize above them?

That's correct.

Got it. Where is the average age of fleet right now?

Our tractors, it is 20 months -- our tractors is actually two years, and our trailers are 3.6 years.

I would imagine that two years is kind of getting up towards the limit of where you want to see that go.

Yes, it is. It is not going to climb. In fact, that is probably the peak and it will start going down as we move throughout this year.

Okay. And I guess last question and I'll turn it to somebody else. On the getting rid of the broker freight -- because I agree with you, that has got to be a big focus right now -- what are the different things? Because it's impressive to have gotten from 15% to 12% in such a short period of time, and I guess if you can keep that momentum going, that is an incremental positive for you.

Is that getting rid of trucks or is that actually finding different employment for those trucks? And is that employment just by the nature of the surcharge more profitable? I guess just a little more color on how you guys are transitioning that freight as a percentage of the total.

Justin, it is a balance that you go through when you are going through that decision process. I think at the end of the day, simply put, you can tell your people to stop hauling. That is one thing. But then you have a balance with that as far as balancing the driver needs, as well as any particular service issues -- service commitments that you've made with customers. So, that's that balance.

I think one of the things that we're doing is a whole bunch of little things, whether that is limiting the areas we move trucks to, whether it is limiting or minimizing -- or I should say maximizing the amount that we're willing to pay a broker for that move; that is putting some limits on it. We are attempting to get at least our variable costs out of a move for a broker load. So that is a very meaningful change in pricing, and we've seen that move dramatically --.

Putting collars, in other words, on what you are willing to do with the broker?

Our average rates that we're paying to brokers have moved substantially. And so that is a little positive, depending on what your view is on supply and demand. So that is a very interesting change there.

Are things feeling a little better that are allowing you to do that or -- I mean, is the overall environment getting any better in April than it was in the first quarter?

Justin, it is by fleet. It varies by fleet. I think as we move through April into May, obviously we're real focused on what is happening in the reefer market, what is happening there.

I think that on the reefer side we started out the quarter very strong in January, kind of mid to February. And then based on how we started the year, it pulled back a bit as we moved throughout the first quarter.

Xpedited side, you know, we are -- our issue there is our teams are running very well, all things considered. Just right now, we've got initiative to grow teams for various reasons. So most of the broker freight on the Covenant side is related to moving the teams.

But we have set out with an initiative to re-establish ourselves and our team business, and so we have actually been growing our teams over the last year. So that is putting pressure on moving those teams. So we spent a lot of time and effort and investment in that initiative, and so the last thing you want with a team is having a team sit. We're moving them. (multiple speakers)

Most of your broker (multiple speakers) right now is with the teams?

Yes, a lot of that broker number is with our teams.

Why would you be growing the teams then right now?

Well, that is who we are. And we had in '05, '06, it was -- '05, '06, it was our most profitable asset we had. Over the last 20 plus years, it has continued to be, all things considered, our most profitable asset. And we had continued to allow that to shrink.

Do you make money on a broker load with your -- in your team division?

No. No. Well, we are covering our variable cost on that load. So again, for a service or a driver issue or to put you in a [head haul] market that allows you to make quite a bit of money on the load itself, I doubt very seriously most people make any money moving a broker load. But again, as I said earlier, there are several other things you have to decide as you move that load.

Is that just trying, I guess, then to get that division to critical mass so that you will be there to take advantage of an opportunity when it arises?

Well, that is the obvious reason. I think, first of all, again, it is our most profitable asset. Two, we're bringing on a lot of freight related to what I call the old air freight business. We have a lot of Hazmat and we've got several Hazmat initiatives on our teams side that has quite a bit of freight opportunities attached to that.

So we've just decided that we needed to get our teams back to --like, good word you used, a critical mass -- to take advantage of these opportunities when the market does turn.

Justin, also -- this is David. Also keep in mind the team side is winning some pretty decent business as we speak. And as he said, their brokerage in April is down 3% or 4% for the total company, with all three companies' utilization being positive, up a little bit in all three companies, with brokerage being down 3% or 4%. So it gives you an idea that they are being replaced with pretty decent freight.

Okay. So it feels like at least now it is trending in the right direction.

Yes. Yes, from that standpoint. I mean, fuel has been eating it all up, but from that standpoint, it is. And you'll be seeing it in the fuel recovery, if the lag time -- if fuel would just get to a flat number, whether it's 117 or 115 or some number, you get to a flat number, you would start seeing in the fuel surcharge recovery. But the lag time is what is affecting it.

Got it. Okay, I appreciate the time. Thanks.

Chaz Jones.

Good morning, Joey. Good morning, David. Maybe to circle back around on that expedited question, has your experience been in the past that when the freight market begins to recover, that the expedited category is generally one of the first places to see that recovery, as inventories begin to rebuild, or is that not necessarily the case?

It is the case. You do start sensing it from JIT, as they start doing exactly what you said there. I mean, everybody's inventories are very, very low, and as you start getting a sense that sales are being good for your customers, then they're going to start demanding you to be there in a critical time period.

So you could see freight volumes begin to improve at the Xpedited maybe before some of the other divisions?

You will usually see that, yes.

Okay.

Yes. Because you've got a lot of companies that are doing downward vision from a standpoint of get it out of air and try to put it on teams and those kind of things. So it allows you to -- as the air freight companies come back -- I mean, their goal is to keep out of there as much as they can. So as their business comes back because of inventories increasing a little bit -- or at least sales increasing a little bit -- then you start sensing that immediately.

Okay, that's helpful. Then looking at the Solutions, I think you guys had mentioned -- maybe it was in the fourth quarter -- that your target was to hit $100 million run rate in terms of revenue by the fourth quarter of this year. Is that still a target that you have in mind?

Yes.

And could you talk a little bit about the gross margins there, as we continue to ramp up that business? Should we expect those gross margins to come in some, I would imagine, as a function of just kind of building up that business and getting critical mass, or not necessarily?

You know, I think the margins long-term will be around -- we have got that 94, 95 operating ratio target set for that group. They have achieved that since 2006, except this first quarter; the margins backed up to around 100 in the first quarter, as I said, for quite a bit -- actually, quite a bit of investment in personnel, which I believe will positively affect it pretty quickly, both short-term and long-term.

But I think long-term, the structure is there to support that mid-90s ratio, maybe a little better. Obviously, in the early periods, we are still investing. Even in '06 and '07, when we ran a 95 OR, we were still investing, all things considered. And I believe that we've got an opportunity -- the structure is there to support a little bit better than that, but I think for the foreseeable future, kind of mid-90s is the target until we see the revenue really start to slow.

Remind me, Joey, is the asset-based division hauling any of that freight?

Yes, it is.

Are you willing to kind of break that out, how much of that is related to kind of in-house business?

The asset companies are hauling for Solutions, I'm probably remiss to say, but it is a large chunk of it. It is at least half of Solutions' revenue has been hauled by sister companies.

As far as revenue being generated by Solutions for Solutions, it is not half. I would say it is probably in that 30% to 33% range that the asset companies generate for Solutions. So Solutions is generating the majority of its revenue for itself, and then the asset companies are the major benefactor as far as hauling that freight.

Okay. Then looking at the AP used that you started to install on the fleet, any timeline for when you would expect the fleet to be fully furnished with those APUs? Is that a twelve-month run rate or how is that going to play out?

Well, I think that there's several factors that go into that. For example, our reefer fleet has a form of APU you; they've got heaters on all of our reefer fleet. It doesn't have an air AC component to it, but they will be testing that. So our whole reefer fleet has an APU unit per se in it.

On the non-reefer fleet side, the payback on the particular unit we are using is good. And so on the Covenant side, we have a fair amount of our solo trucks in it.

I think the complication with us is that nevertheless, on our team side, because idle time is less, is that the payback on a team truck for the particular unit we use is fairly long. And we just haven't been able to make that plunge on the team side, just because there's too long of a payback right now.

Now, as fuel prices keep going, I'm sure that does shrink. But so far, we have not installed them on our team operations just because the payback is too long.

Last question and I'll let somebody else have it. Just maybe if you could give some commentary on pricing. I know that may be a little difficult just in terms of shifting the assets around the various divisions and the impact that mix changes have in terms of pricing. But just from a gut check standpoint, what is kind of the expectation as we look at rates kind of throughout the duration of 2008?

I think directionally right now, the market is still very, very difficult. So achieving any kind of rate increases per se just for the sake of rate increases is slim. I do feel, though, on the other hand, because of fuel that customers are willing to talk with us about the impact of fuel.

And so yes, some of that ends up as rate increases, because customers may not want to change their overall surcharge program, but it is under the context of fuel. And I feel that several of the larger fleets are out there talking about that as we speak.

When does it --? Let's -- if we can somehow take fuel off the table, which you can't do -- but when does the market get to the points with supply and demand to where general rate increases can be discussed? I don't know. There's several anecdotal points, whether you're looking at truck searches on Internet websites, load searches on Internet websites, what our own broker pricing has done over the last four or five weeks, what we have been able to see as we are in the middle of this discussion with our customers, some of the early successes that we have had.

I don't know. I think that that is still the big question, is when does supply and demand axis cross?

I believe that because of where fuel is, the industry can't absorb anymore. It just can't. And so it has got to move. And if that is through general rate increases, then fine. If that is through fuel surcharge changes, then fine. But the industry can't absorb anymore on the truckload side. We don't have the benefits that other modes have, just because of the competition that's out there.

And so it has got to move up to at least cover the incremental costs of fuel; it just has to. And I think most of the fleets -- we've shrunk a little bit over the last year, 150, 200 trucks. I think most of the larger fleets have exhibited that over the last year, that they are shrinking capacity. And I think that if there is not help, and meaningful help, I think you'll see the fleets shrink even faster.

So when does that cross with supply and demand? I don't know, if that's late second quarter, third quarter, fourth quarter, early next year, I don't know. I think it is soon. I think that we are closer to that supply and demand axis crossing than there were six months ago. And certainly 90 days ago. I think we are a lot closer to that. I just don't know when that is.

Okay, that's helpful. Thanks for the commentary, Joe.

[Tom Alberton].

Let me just go back to a question that Justin asked, because I don't know if I really quite heard the answer I was hoping for her. You know, you obviously dumped some trucks into the regional group. A, I don't know if I heard a number; and B, I know that has kind of been where you've dumped trucks off and on over the last few years. Why do you continue to do that? I understand a couple years back why you did, but I guess I'm still puzzled.

What is happening there, Tom, is that the Dedicated will be X amount of trucks depending upon how much freight -- how many contracts they've got. And Dedicated actually is performing pretty decent for the first three months of the year. Actually, there's some activity going on in Dedicated which I find kind of interesting from a contract standpoint.

But what we have determined is that Dedicated side of the business will be whatever amount of trucks it is supposed to be based upon the contracts. And, as you know, Dedicated is one of those things that is always a sliding scale going on because you're gaining contracts, you may lose contracts. And so you are consistently out there in the field determining how many trucks ought to be in the division. So that is going on on Dedicated.

The on Xpedited, we have decided that Xpedited will always maintain somewhere in the 70% to 80% team percentage. You will always be -- whatever number you want to pull; but between 70% and 80% will always be teams in that division. If it ever gets below a certain number, then we will take those trucks out of Xpedited, because if all of a sudden Xpedited becomes 60%, then you don't have enough teams to service the hot shipments that you've got. And so we will not allow it to go below a certain percentage.

If in fact, it does, then what we do is we have been taking those trucks out and putting them into OTR. OTR became the catchall. But what is happening, though, OTR -- the 100, 150 trucks that have gone out in the last 12 months have gone out of OTR. There's trucks right now going out of OTR, and there will be trucks that will continue to go out of OTR.

So the other ones are just simply -- they are operating whatever number they're supposed to be operating, and then OTR is a catchall. But at the end of the day, trucks will leave OTR because of the profitability of it. So --.

In some ways, they go into OTR until you can find the right place to sell them?

Absolutely. That's exactly the way in which you need to look at it. It's the catchall until the market -- as Joey went through the used truck market and those kind of things -- the catchall until you get rid of the trucks, until OTR tells you how many trucks ought to be in the division. And however many trucks that is going to be based upon how much revenue per week it's generating.

Right. I know at one point, going back a year and a half or so ago, you were able to at least conceptually discuss what divisions were profitable, what divisions were not. But I have got to believe in the first quarter that perhaps outside of Xpedited, every division -- and maybe the SRT portion -- outside of those two divisions, all the other divisions lost money. You would that be a fair statement?

You would have a fair guess there.

Actually, Dedicated was our most profitable asset in the quarter. That is just because -- and it makes sense, the strength of those contracts and the fuel surcharge program, it had the best recovery in the quarter of all the asset companies. So in the quarter, Dedicated very consistently each month was our most profitable asset in the quarter. Actually made money in the quarter.

I think if you use the phrase most profitable. Joey, when I look at your financial covenants, the one that I typically think the most about is your cash flow coverage. But you don't have a lot of room on your tangible net worth either.

As you run your own projections, is there a point at which you can envision tripping one or more of these covenants, and how proactive will you be to seek waivers?

Just to remind everybody on the call is that our covenants step down or tighten in the second quarter. And that is what we said with our prerelease, was that basically that the second and third quarter -- or actually for the rest of this year, it's going to be really tight with that stepdown.

We are in very heavy discussions with current lenders as well as potential new sources as we speak to avoid any covenant trippings, if you will, for the rest of this year. We are working hard for that not -- just in case, is I am not -- we're out talking people right now about that very fact.

Joey, refresh my memory. Your main commercial banker, too, is --?

BofA is our lead bank.

Okay. With big roles supported by who else?

SunTrust, National City, Regions Bank -- those are the four biggies in the group.

Okay, all right. Then you did a good job discussing the APUs, but I guess what I didn't hear was do you have a timetable to be like at 50%, 100% a year from now? I mean, is there something you can discuss there on the implementation of the APUs?

The decisions that we have made is that on Covenant's solo fleet, our goal is to be 100% equipped with some form of APU. And that is -- we're getting close to 500 of the 630 or so OTR trucks, and then we have a fairly good-sized Dedicated solo fleet. So we have got quite a bit of work to go. We have not set a timeframe, because frankly we're still evaluating do we want to go with our current vendor or do we want to change?

On the SRT side, as I already said, they are already 100% equipped with heaters -- 100%, (multiple speakers) all solos. So actually SRT is testing a cooling unit this summer that I'm real excited about. I'm hopeful that it works as well as it could, because that could lower our overall capitalized cost on the group's fleets if SRT is able to put this configuration together.

Star has some very, very, very few trucks. And so at this point, there has not been a decision on the Star fleet at this point. Star is watching the paybacks on both the Covenant and SRT fleets as far as what to do there.

Also, Tom, one good thing on the Star side, a good thing about running the south, as you know, is the weather. So they consistently have been running in the low 20s on idle time, 22 to 25%. So the payback is a lot longer because they just don't get into a lot of the bad, bad weather.

No, that makes sense. I think that is all I had for now. So thanks for the discussion.

Donald Broughton.

Good morning, gentlemen. Let's delve back into the pink elephant in the room -- the fuel. You talk about the lowering dependency on broker freight. What is the lowest that's been in the last couple of years, if I go back to '04, '05?

8%.

8%?

Yes -- 7%, 8%.

It is not the -- correct me if I'm wrong. The issue is not necessarily really broker freight as much as it is getting paid fuel surcharge or an adequate fuel surcharge on the broker freight.

That is correct. It is just the way we account for it. It is spot quoted, and so we keep the entire bill as part of line haul. So that is so the way that we see it is zero fuel. But you are negotiating on a spot basis with the broker on the line haul the fuel and any accessorials that there is.

So as long as the total all-in rate is adequate, it is not broker freight in and of itself that is evil, so to speak. It is just that you have got to make sure that you're getting paid enough.

That is correct. That is a fair statement.

All right. Your fuel enhancement program, what percentage of the fleet is already capped at 63?

SRT started moving -- or actually Star started moving its fleet a month ago. David, do you know how many trucks --?

Yes, it began like this. Star is at about 50% of getting theirs done. SRT on adjusting their speed is probably about 30%, 35%. Covenant is just the beginning stages of it. So it will happen probably by the end of the second quarter, all the companies will be there.

Yes. What are they capped at right now?

Say it again.

What are they capped at right now?

65 to 68 miles an hour.

And it varies by fleet, but that is basically the range that we are in now.

Is it driver turnover? Why didn't you do this already?

It is that. It is mainly driver issue and, potentially on the team side, a transit time issue. So there's a couple of things there, mainly driver. Drivers don't like speeds turned back.

I would also like for you to continue to be in business, so --.

I understand.

Rate increases, you are saying you're trying to have discussions with shippers who have the six-gallon increments. What percentage of your fuel surcharges broken out under total revenue generated are at smaller increments than six?

Again, it varies by fleet. The largest fleet, the Covenant fleet, about one-third of the volume is with $0.06 increment customers, and about 40% is $0.05. And then there is a group of customers that is better than $0.05 increments.

All right. and Star, SRT?

It is more denominated against smaller fleets; much larger $0.06 increment components to those two fleets.

Much larger -- so 60%, 70% are at $0.06 increments?

Over 50 would be a fair number.

So there's a lot of ground to be made just on that metric.

Yes, that's correct.

All right, gentlemen. Thank you.

Ed Wolfe.

Hi, Joey. Can you talk a little bit about the progression of both freight and yields throughout the quarter and through April?

January, I would characterize January freight was good relative to our expectation. Freight was good. Rates were not a big surprise versus our expectations. I would say it is about what we expected and pretty good. February was terrible. As far as generally speaking, freight dropped off a cliff. Rates got extremely competitive in the month of February.

March, they improved. I would not say it was a great March, but it was a decent March freight-wise. Rates seemed to stabilize a bit. And then April, I would say we are doing probably as a group a little bit better than we expected so far for the month of April. Like I said and all the reasons we already said, there's some interesting things going on that I don't -- it's too early to say is a trend by any stretch of the imagination. But --

You said asset-based rates declined 1%. I'm guessing they will come back immediately if freight gets a little better in April. Are they still down about 1? Is it better, worse, the same?

Rates are moving sequentially up from the first quarter and even the month of March. Rates are moving sequentially up.

But year-over-year is down 1 a fair enough placeholder or is it different?

It is probably continuing on that, maybe flattish, a little bit more flattish. But sequentially, it has moved nicely, which is what our expectation was. And yes, versus year ago, I would say it will stay -- it's in that flat-type range.

Are you having many clients asking to lock in multiple year contracts and have you done any of that?

Yes, and trying not to.

So it sounds like some you have done.

We have not done any, though, that does not give us a yearly out to do rates.

That's right.

And if you sign a two-year deal with that kind of option, is generally the second year up, flat, or down?

Yes, that's correct. The first year is the larger number, a larger percentage, with the second year being a smaller percentage.

Okay. What's the impact, David, of the early April in the first quarter versus the second? Was it a real impact with Good Friday or is it not much of an impact when you think about everything?

Good Friday, to give you an idea -- normally, Good Friday is 60% of revenue, typical Friday revenue. So it can be a $1 million kind of number from our Company. But what we have found over the years it is that Good Friday, no matter how big or small you are, you're going to do about 60% of the typical Friday revenue.

So another way to think of that is you gained a full day from leap year and you lost 40% of a day. And the next quarter, this quarter, April, you'll make up 40% of a day.

(technical difficulty). And not only do you lose the 60% on a Friday, but you also on Monday/Tuesday lose about 25% -- Monday, Tuesday of the following week, because the trucks didn't load on Friday for delivery.

I see. So it's really a day, it seems like.

Yes, that's correct.

Is that maybe what you are seeing year-over-year at this point in April, or have you taken that out of the equation?

I don't disagree with that. April last year had Easter and this year it did not have Easter. But I do believe that there is -- even though you've got the [call] side on fuel that's killing you, from the freight standpoint and the revenue standpoint, nothing to get excited about, but it is a little bit better. I do sense that.

When did utilization turn positive, and wouldn't you think that as utilizations improve, other than a mix difference, that that will lead -- pre-leads pricing getting better at some point?

Yes, it definitely will what you just said -- is be ahead of the pricing or lead the pricing standpoint. I think that utilization -- personally, I think utilization, based on what I'm sensing right now, will continue to have positive results.

When did it turn positive for you, though? What month?

January was, February was flattish, and March was kind of a -- (inaudible) a little bit of positive.

Okay, so March is when things have really started to turn, it sounds like.

But even though March was not -- again, there was Good Friday. But the last couple of weeks of March, we did start sensing a freight environment that started improving that kind of has carried over into April as a better. So yes, to answer your question, what you just said there, I would not disagree with that.

When I look at your insurance and claims line, can you take us through what is going to continue there -- up a point year-over-year as a percent of revenue -- and how you think about that going forward?

We are -- the way I would think about it is -- right now we are in that -- on a long-term basis, we're still in that $0.075 a mile range, plus or minus $0.005 around that. Last year, we were still on the ends of our old program with our carriers, where we had a large premium reimbursement -- premium reimbursement for releasing the policy. We had $1 million premium reimbursement, roughly, that we recognized in last year's quarter, that going forward we basically lowered that dramatically for some less premiums on an ongoing basis going forward.

So when you compare to year ago, about $0.01 a mile difference is just related to that one difference right there -- was that difference in -- that premium reimbursement, if you will.

So there's this 7/10 of a penny that we need to account for -- was bad weather or what was it?

Actually, it was one accident that had some unfavorable development that we were able to settle; actually, we were very pleased with being able to settle it -- one large accident that we had some unfavorable development in the quarter to close that claim. So it's that $1 million premium reimbursement, and then almost a penny -- so say 8/10 of a cent a mile -- on one accident in the quarter.

We had a good quarter severity-wise. The weather was a bear. I was very proud of all of our fleets and our safety folks, with that considered, we had a good quarter in that one quarter.

Okay, but $0.075, give or take, a quarter going forward is a good number there?

I think that's fair. Until we show you consistently $0.07, I think that is probably a good number.

But you talked about your new trucks coming in in July and having residuals. Can you cancel those trucks if you don't need them?

Yes.

How many trucks is it?

We are going to take about 900 trucks -- replace about 900 trucks this year. That steps up to about 2000 trucks next year.

And the 900 is July through September?

No, through the end of the year.

Okay.

We're taking 100 to 150 trucks a months.

So what is the CapEx expectation there?

We're around $40 million -- $35 million --.

Net of proceeds.

Yes, net of proceeds.

Okay, that's all I had. Thanks a lot for the time, guys. I appreciate it.

Justin Yagerman.

I just wanted to follow up on the Dedicated that you said you were seeing some uptick in the business. And I am not holding you to it because you said it is still early in terms of trends. But just curious what kind of business that is. Is that kind of taking over someone's full distribution operations from a DC standpoint or a fleet outsourcing standpoint? Or is that more kind of the lane-by-lane dedicated business that is a little less, I guess, not intensive -- you know what I'm asking. I was curious how you would characterize that business that you are seeing.

Most of the bids that we are seeing going on on that part is really -- would be taking market share away from somebody else, Justin. And it is pure dedicated type, in and out of plants movements, not just going from plant to customer and those kinds of things. It's really short haul regional in and out type freight that -- one we just won took away from a small carrier.

And so I don't know what the issues were with the small carrier, but we are -- we probably have got seven or eight of those type of bids in-house that we feel pretty good about.

When you target that business, do you have a minimum OR threshold --?

Yes, yes, yes, yes.

And what are you looking at? (multiple speakers)

Well, you had a division that the last year operated about 100 OR, and our goal is to first to get it to about a 95 OR.

Got it. Then you gave a little bit of detail and I think I just missed it on the percentage of customers at a $0.06 per gallon fuel surcharge, a $0.05 per gallon fuel surcharge, and there was a small percentage that was a little bit better. Could you just go back through that? I apologize.

It's around -- if I was to look at it on a consolidated group basis -- let me amend what I said, because I was commenting just from Covenant -- on a consolidated group basis, I would say that it is probably about 60% of our freight is on $0.06 increments, and we have got probably 40% on $0.05 -- I mean 30% on $0.05, and about 10 on better than $0.05.

Got it. But that doesn't leave room for the 15% of brokered freight where you're probably getting less than that.

No, that is just customer freight.

Okay, that is on customer freight. All right. So that 60% is the opportunity bucket that you guys see.

That's right.

Okay. Thanks for the clarification. Appreciate it.

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