Covenant Logistics Group Inc (CVLG) 2009 Q1 法說會逐字稿

Excuse me, everyone. 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 Joey Hogan. Sir, please begin.

Thank you. Good morning and welcome to our first-quarter conference call. Joining me on the call this morning is our CEO, David Parker; our CFO, Richard Cribbs; plus various members of our management team.

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 our prepared comments and additional financial information is available on our website. Our comments will be brief and then we'll open up the call for questions.

In summary, the key highlights of the quarter were freight revenue declined 18% to $122 million versus the first quarter of 2008. Freight revenue per tractor declined 8% while our average tractor fleet declined 11%. The asset base division's operating expenses net of fuel surcharge revenue declined about $0.09 a mile. Covenant Solutions, our non-asset-based subsidiary, grew its revenue by 8%.

Since year-end of 2008, total indebtedness net of cash and including off-balance sheet obligations has been reduced by about $29 million. We were in compliance with our financial covenant at the end of the quarter. For our quarter, our consolidated operating ratio improved 225 basis points versus year ago. And then lastly, we lost $5.5 million after tax.

You know, as an overview, the impact of the recession continues to impact our results simply in a lack of freight. Also during the time of declining miles, forecasting and managing our costs particularly in the team expedited market has been exceptionally challenging. It appears to us though that we have seen the freight market bottom. We think that happened about the end of February and we seem to be bouncing along the bottom since then. We have not although seen any measurable improvement since that time, but thankfully it hasn't worsened.

Our revenue per truck continued its double-digit decline in January versus year ago period and has slowly improved to low to mid single digits decline since then. We finished the quarter slightly behind our earnings target, but we do remain focused on our goal of achieving profitability for the year.

As for the current environment, across the product lines, our Covenant Transport subsidiary continues to see weakness in its expedited markets while its dedicated operation is both profitable and stable. Our SRT Refrigerated subsidiary is not only profitable but growing. While after a very weak first quarter, our Southeast regional subsidiary, Star Transportation's revenue base has slowed its decline after some recent positive customer awards.

Our Solutions subsidiary continues to grow its load count while its revenue per load continues to be down versus year ago due to declining fuel prices. Also due to the closing of a large solutions company store office in October of '08, we do anticipate slight decreases in load count and revenue versus prior year in the second quarter.

Regarding our expectations for the remainder of the year, as stated in our year-end release, we still expect to operate at a loss for the first half of the year and our goal remains to make money for the full year of 2009. After the first quarter, we are running modestly behind the results we anticipated were necessary to reach our full-year goal.

Although we believe our goal of profitability for 2009 remains achievable, it has become incrementally more difficult to reach. To attain our goal we will need to rapidly implement additional identified cost savings, hold steady or experience only a small further reduction in rates, and slightly improve our utilization of our remaining fleet of trucks for the remainder of the year.

And Stephanie, now we will open up the call for questions.

(Operator Instructions) Justin Yagerman.

Good morning, David. Good morning, Joey. This is [Rob Salmon] on for Justin Yagerman. You guys have provided some targeted costs savings initiatives in the earnings release this morning. Could you go into more detail on the potential magnitude of the savings on an annualized basis and which line items we should see these benefits accrue?

Rob, it's Richard Cribbs. It's really across the board. We've discussed some of those before from all employees' wages to benefits. We have had a fleet reduction which has improved some cost line items. It's basically all the line items I would say save one probably insurance. On the insurance line, we had a really strong first quarter and the expectations for that wouldn't be to able to maintain that for the rest of the year as you always expect a few negative and unfavorable outcomes in some cases as an accident. So basically every other line item and I don't really have a number to quantify for you in total for that right now.

Okay, and then with regard to those initiatives, have they already been implemented or are they going to be implemented? \

Most were already implemented right at the start of the year. There were a few that we weren't able to put into place until middle of February or so and then we have identified approximately $5 million to $6 million more of cost savings that would be for the remainder of the year. That's not an annualized basis. That's the number for the remainder of the year that have not been put in place yet that we are trying to put in place by middle of June or first of July.

Thanks, that's really helpful. When -- could you give us a sense in terms of how pricing trended throughout Q1 in terms of the year-over-year changes with regard to revenue per loaded mile in January, February, and March as well as what you are seeing in April month to date?

Just from a flavor standpoint, Rob -- Joey is looking at some hard numbers, but just from a flavor standpoint, the first six weeks of the year were pretty good. I mean at least they were keeping up and it looked like that the pricing was going to hold up until about the middle of February and then the middle of February the next six weeks, they were just down. I mean they were crashing 4% and 5% kind of numbers virtually out of every region of the country. And it's like just a barrier went on from the customer base of new businesses as well as existing business that was virtually demanding decreases.

And so first six weeks was pretty good. The last six weeks were bad. And as Joey said, I guess if there is any bright spot, it does seem like for the last three weeks that it had settled down to at least every week is kind of flat to $0.005 a mile to down to $0.005 to flat. You know, we are starting to -- that's what we've seen for the last three weeks.

Dave is exactly right, but the first two months, January and February, we were down approximately 2.5% versus last year for those months on rate and then in March we saw that go down to about 4.5%, but it was still declining by the end of the month. And so for April, we are looking closer to a 6% reduction from last year.

Then I would imagine with regards to kind of realizing that full-year 2009 goal that the toughest piece would be on pricing or would it be utilization if you had to characterize which feels like it is more challenging right now?

Let me answer it this way. I guess our biggest concern would be pricing. As I look at our budget that we've got as we speak right now and I actually had a president's conference call yesterday even though everybody feels very good about where their budget is at, where am I at is I would have more concern over pricing even though I am kind of satisfied with the last three weeks of what it's doing because it's in our budget.

But that would be my biggest fear over -- we're bringing on new business. It's just not at pricing that it should be. So it is not a lack of not winning some of these bids that even our customers and there's definitely got to be a mix going on, mix change going on throughout the industry. People are losing, people are gaining, and we're losing some of our business and gaining others through bids. But it does seem like it's quieting down but that is my biggest concern would be the pricing side.

Keep in mind we reduced our fleet size too so a lot of our contract freight we are getting on fewer trucks. So utilization is holding or up a little bit.

Got you, that makes sense. And then when you think about your fleet and the potential to age your fleet, you still have got a relatively young fleet. Kind of where do you feel like that can move out? And also in terms of your fleet, do you have the potential to extend new tractor purchases following the reduction of roughly 100 tractors that you had mentioned in 2009?

We pretty much -- Rob, we've pretty much done all that. The equipment fleet, we look it at each quarter, productivity of that fleet. How much spot market freight we are bringing on or having to use, whether that's brokerage or out in the spot market with regular customers. Are our trucks full? And yes they are full, so there's several things that go into that and we look at it each quarter and make an assessment on used equipment market. Can we sell more equipment? And so there are several things that go into that equation, but we do look it each quarter and make those decisions at that time.

So there's a lot that goes into it. I can't say that even if we wanted to sell more trucks right now the used truck equipment market is still very weak, so you have to balance that with your OEMs and things of that nature.

All right, I appreciate the color. Thanks so much for the time, guys.

Nick Farwell.

Good morning, gentlemen. I just have a quick follow-up. Pardon me. David or Joey, given the current difficult economic and operating environment, I'm curious if you have observed any actions on the part of Swift that reflect their precarious financial condition, pricing, bid activity, lane consolidation, perhaps their activity in the used truck market or any other actions that might suggest their competitive footprint is likely to shrink or is shrinking?

Nick, I really haven't. I would believe that everybody's footprint is shrinking and I think that Swift probably is also, but I don't have no solid numbers on that. I mean I see them out in the market on the used truck side. Being competitive in the market not -- I don't see them slaughtering the market on used equipment. The market has already been slaughtered. They are just a participant in it. So that's kind of what I see from that standpoint.

And then when it comes to the rates and bids, I don't see them leading a downward spiral. I see the whole industry leading a downward spiral. At the end of day, I believe that -- I believe what is really happening out here is that our customers are coming back saying I can send this out to bid. I've got somebody to do it for $1.10 a mile, just use the number. Do you want to match this rate to keep it? I think they are doing that throughout the United States and I think that there is no leader. We all probably go in at $1.40. Then we get a phone call on our existing business at $1.10 and you make a decision whether you want it or lose it.

And I think that is happening to everybody. So I don't see anything that Swift is leading any effort in any of that stuff. I think we're all in the mess of it.

Are there any signs that the expedited business is showing improvement? And where would you --? If that wouldn't be one of the leading indicators, what part of your business do you look at to give you some sense that business is in fact stabilizing? In fact, you might look for some improvement?

You know, that is true. That's -- because one of the first things you know during downturns and over the 15 years that we've known you, Nick, you've always known the first quarter to be the roughest quarter on the expedited side of the market forever. That's just the way it is because whether it's a 5% GDP growth or a negative 5% GDP growth in the first quarter they are always trying to get "airplanes" out of the air but they are trying to get if they can go on a single, they will go on a single. If they go on -- if it can go on intermodal, they will go on intermodal.

So that always happens and quite honestly from October, the team side just went to nothing. I mean it just went horrible in the fourth quarter and we have only recently in the last few weeks have seen the team side starting to pick up a little bit. Maybe by 2% or 3% all over some terrible declines of 12% and 14%. So it kind of went bottomed for five months and we started seeing an uptick.

So to answer your question, yes, you do think that the team side would be a leading indicator of activity starting to do something.

David, typically that should be happening anyway seasonally, from a seasonal standpoint.

That's true, absolutely. There's no doubt that if we do a negative 5% GDP in the first and a negative 2.5% GDP in the second and I think that's probably where they are all going to be at, we should feel improvement even in those ugly numbers.

Right, and then one last thought. And that is that with the team side of the business and the shrink, I assume there has been significant shrinkage in competition, if you get some confidence on the part of retailers and industry and business in general, you have the potential for rather substantial inventory swing.

I don't disagree with that statement. I mean, you know what has not happened -- we're hoping it does happen and it could happen. You know we basically have seen some inventory corrections based on the manufacturing side that will start helping us. But we haven't really seen it on the reefer because they are still there. They are still -- somebody was telling me the other day about going in and buying a product. Oh, it's carpet, going in and buying some carpet for their room for a room to refurbishing and it was three weeks before they could get their carpet -- a piece of carpet. Well, what does that tell you about -- about what they are doing when they place an order manufacturing it.

So they've got to get some confidence that that person is going to come back more than once a year before they are going to start at least start making enough carpet to take care of a little bit of demand.

I think too, Nick, to your point just regardless of the economy, as David said, either plus 5 or minus 5 GDP, you know freight does seasonally improve. And I mean for example on the team side, our revenue per truck so far in the second quarter is up about 10% versus its first-quarter average. And so that is significant, but that always happens. And so people don't -- I don't think understand that and so teams are much more cyclical within whatever economy it is in. And so the teams are responding. The revenue per truck has improved, but it's pretty much seasonal as we expect. Still don't know where it needs to be and we need more freight for the teams but it is improving.

Thank you very much. I appreciate it.

(Operator Instructions) Neil Deaton.

Good morning, gentlemen. A quick question on your debt covenants. I just want to get a sense since there are a lot of the other carriers in the space are in negotiations with their banking groups with TL and LTL side. I guess how often are you talking to these guys? And what is their willingness to play ball going forward if you were to need to renegotiate or amend the covenants again? Obviously I realize you just did that in early March, but worst-case scenario, if things don't materially improve?

Well, when we just did that, Neil, at the end of March, the banks were very encouraging. You know, and a little bit of surprise me, they were extremely encouraging instead of just helpful and they were very willing to work with us and we worked through the amendment process and the amendment that we put in place gave us what we believe to be sufficient cushion for the remainder of the changed terms that we got on that. And so we really don't see that we would need to go back. However, they've been very supportive, so that's how I would say they are being.

Okay, and that's the consensus of the whole group, not just kind of the lead?

Well, there's only three in the group and two large and one small, a smaller player and they were all on board together.

Okay, that's good to know. And this is an unrelated question but your percentage of brokered freight I know in the release it said the actual percentage was similar to what it was a year ago. I didn't see that on the stat sheet. I may have overlooked it. If I did I apologize, but what was the actual percentage of brokered freight this quarter versus a year ago?

We are no longer including that on the stats and I don't have that number here in front of me. I apologize.

Is 7% or 8%, though, just to give you an idea.

Okay, that's helpful. I might follow-up off line. Thank you.

(Operator Instructions) Chaz Jones.

Good morning, guys. Just quickly here -- I think you kind of talked around it, but can you give us a sense for the fleet? It almost -- you guys made it sound like that certainly things are bottoming. You continue to bring the fleet down some here but I kind of got the sense that probably assuming that things are bottoming that we probably shouldn't see much more fleet reduction from here. Can you kind of go through that?

I think, you know, we are literally looking at it, Chaz, on a monthly basis. Our -- if we make a decision tomorrow today for instance, we are going to reduce the fleet more, it takes a couple of months to be able to really make anything happen and we are looking at on a month-to-month basis. And if in fact what we are sensing today from an operating standpoint we probably would not reduce it much more. There could be 50 trucks that could come out, maybe 100 trucks, something like that. But we don't see a 300 or 400 truck type situation based upon April 28.

Okay, that's helpful. Then one last one quickly. Just in terms of the pricing that you talked about and kind of the sequential progression of that, and I apologize if I missed this, is that just kind of across-the-board from an operating subsidiary basis or have you guys seen pockets across the franchise that are faring better, whether that's dedicated or temp controlled or whatever?

Now I've got to say that all three companies, I'm not talking about Solutions now but all three asset companies have had -- have sensed the burden of rate pressure. It's really not by any region. Maybe if there was one region that's better, the West Coast has probably held up better coming out -- coming off the West Coast than anywhere from a pricing standpoint. But even in the typical Midwest region of the country, there's been a little rate decreases in the Midwest. So it's really all over.

Southeast is a little -- Southeast, as Richard says, Southeast has really been the worst of them -- which is a true statement even though I've got to say I'm starting to get kind of a little bit more satisfied with the Southeast outbound ability of freight, but it's not at pricing that we would like.

Now maybe besides the West Coast, Chaz, I have seen pressure from February 15 until both April 1 for those six weeks I saw pressure on every region in the United States. And every -- whether it is reefers, short haul or long haul.

Okay, that's helpful. And then I guess just to clarify, I think, Joey, you had said -- I'm not sure I caught this right -- that revenue per truck per week had improved 10% so far in the second quarter from what you experienced in the first quarter.

Yes, that was on the expedited side.

Just on the expedited side. Okay, perfect. I appreciate the commentary, guys.

[Greg Oless].

Hey, guys, most of my questions have been answered but I just have a few things. Kind of stemming off of the region discussion with weakness, were there any products that seem to just kind of hang in there as opposed to others on that -- that you can think of throughout the quarter.

Even though we [sent] pricing pressure at all three asset companies, it was interesting during the quarter on the SRT on the reefer side, they would have two strong weeks where, you know, you are ready to get up and shout. Then followed by two weeks that were weak that you really just couldn't get a feel for what was going on within the reefer. The SRT division made money in the first quarter, so they definitely had a good first quarter. But it was up and down as consistency to inconsistency is what happened there. The rest of the dry side, Starr and Covenant, for the quarter had pressure on the rate from February 15 until April 1.

Excellent, excellent, and just one last thing. Can you comment on the bid environment compared to previous years? I know a lot of people have said it has picked up tremendous and then more -- had more bids than in previous periods. Also, I just wanted to know actually how much is left out there. I assume most of that was done throughout this quarter.

For example, for us our bids were pretty much exactly the same as they were in 2008 in the first quarter. I would say the size of the bids were larger this year as far as the scope and size were much, much larger. I think that it does appear that it seems to be slowing just a little bit, I'd say a little bit. Just the velocity and porosity, if that's two words I can put together, seems to be slowing just a tad. There's a lot of big bids out there that we are waiting on resolution for.

I have seen quite a few customers over the last month or so and you feel it kind of slowing and -- but I think it is a little bit too early to tell, say that it's over. It seems to be trying to slow a little bit.

Were you able -- throughout the quarter, were you able to kind of gain any new customers through the bidding process?

Oh yes.

Yes, but it has been pretty much I think all the carriers are doing a good job of protecting their turf, if you will, with existing customers. And the customers are to the best of their ability are trying to lean towards incumbents as best as they can. And so you've really got to be exceptionally price competitive to knock an incumbent out if they are providing good service. So the shippers are and that's including those that serve us are working with us as best they can providing good service. They want to stay, but they are under a lot of pressure.

And so if somebody wants to buy the freight, it has to be pretty significantly lower than an incumbent for you to get that freight. So protect your turf and then getting new business has been difficult. There's just no question and so -- but we are picking off what I call small pieces here and there with some target accounts that -- and industries that we are trying to grow with.

Okay. Thanks a lot, guys.

Neil Deaton.

Just one or two quick follow-ups. We are -- I know you said you mentioned that SRT made money in Q1 '09. Did that -- was that just in I guess the balance overall they did, but in January and February, they were profitable too?

Yes, they were profitable in all three months.

Okay, and how about Star or Covenant? Did either one of those swing a profitability in March?

Really the only piece that our dedicated group made money in the month that's part of Covenant expedited and our solo operation lost money in the quarter. Solutions was right at breakeven type operations for the quarter.

Okay.

Star loss the first two months and made in March.

Star lost in January and February and made money in March.

Okay, and one final question. I know the cash flow coverage ratio hasn't been in the focus as much as the interest ratio, but how did you finish the quarter with regard to the cash flow coverage?

Well, we were well above the covenant and, you know, it's not your normal calculation. And we have part of the amendment was to build in $3 million of cushion into the numerator for that. And so we were well ahead of our 1.0 required ratio going into the first month of what will end up being a trailing 12 months. But at this point, it's just a one-month calculation. We restarted on March 1.

Okay, but as far as I guess the traditional leverage ratio, the total debt to EBITDA before it had been 3.5 times --

We don't have that as part of our --

Is that now -- it has gone away?

Yes, we only have one covenant now and that's --

So you just have the one times for the fixed charge coverage?

Right.

Okay, thank you.

(Operator Instructions) Sir, I'm showing no more questions at this time.

Well thank you, thanks, everybody, for your time. And look forward to talking to you next quarter. Thank you.