Covenant Logistics Group Inc (CVLG) 2009 Q2 法說會逐字稿

Welcome, everyone, to the Covenant Transportation Group's Second Quarter Conference Call. (Operator Instructions). At the conclusion of today's presentation we will open the floor for questions. At that time instructions will be given after the procedure to follow if you would like to ask a question.

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

Thank you. Good morning and welcome to our second quarter conference call. Joining me on the call this morning is our CEO, David Parker, our CFO Richard Cribbs and various other members of our Management Team.

This conference will contain forward-looking statements within the medium of Section 27A of the Securities Act of 1933 as amended in Section 21E of the Securities and Exchange Act of 1934 as amended. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. Please review our disclosures in our filings with the SEC.

As a reminder to everyone, again we have our prepared comments, which are short again this quarter, and additional financial information on our website. Our prepared comments will be brief and then we will open up the call for questions.

In summary, the key highlights of the quarter were freight revenue declined 19% to $129 million from the second quarter of 2008. Freight revenue per tractor declined 10% where the average tractor fleet declined 11% versus the second quarter of last year.

The asset base division's operating expenses net of fuel surcharge revenue declined about $0.11 a mile with cost declines versus year ago accelerating throughout the quarter.

After several years of consistent revenue growth, Covenant Solutions, our non-asset subsidiaries revenue, declined by 14% but an increased focus on profitability produced an 85% increase in operating income.

Since year-end 2008 total indebtedness net of cash and including off balance sheet obligations has been reduced by about $8 million. We were in compliance with our financial covenant end of the quarter. For the quarter our consolidated operating ratio deteriorated by 30 basis points and we lost about $3 million after tax.

So those are the highlights for the quarter. Our results for the quarter reflected continued weak freight demand, excess tractor and trailer capacity in the truck load industry and significant rate pressure from customers.

The overall competitiveness in the marketplace was at historical, unprecedented levels as shippers were focused on procuring the lowest cost for transportation. Our carriers were focused on maintaining market share at the most profitable yield possible.

We did see the utilizations declines versus a year ago stabilize throughout the quarter. In fact, June was ahead of year ago.

On the other hand, rates continued to decline throughout the quarter but did bottom and stabilize in the month of June. Although very early in July, our freight volumes and pricing yields have been a slight positive versus our expectations.

We are very pleased with our efforts and results on the cost side of the business. Our employees continue to focus on areas of improvement and savings and we were able to reduce our after tax costs by about $0.05 per mile sequentially from the first quarter even though we did experience higher insurance claims cost during the quarter.

Additional cost savings efforts put in place late in the second quarter give us confidence that our costs per mile will drop again sequentially when comparing the third quarter to the second quarter.

As for the current environment across the product lines, our Covenant Transport subsidiary [Team] franchise is seeing some stabilization in its freight base and its dedicated operation is beginning to see some increased opportunities.

Our SRT refrigerator subsidiary had a very strong quarter profit wise and continues to explore measured growth opportunities. Weak freight in the Southeast continues to negatively impact our regional Star subsidiary but the difference to a year ago are closing rapidly and that group has managed its cost structure very well.

We discussed last quarter that our Solutions Group would have negative revenue growth in the second quarter due to the decline of fuel prices and the closing of a large Company store in October of 2008. Covenant Solutions has done a great job at managing its yield and cost structure and we expect the rest of the year for them to produce nice margins, although revenue growth will be constrained.

Regarding our expectations for the year, as stated in our Press Release, our goal of profitability for the year has not changed. However, because of the magnitude of year-over-year reductions in freight rates and our results for the six months of 2009, we acknowledge the reduced profitability -- the reduced probability of achieving our goal, but continue our expectation of recording a profit for the final six months of 2009.

Based on our second quarter results, to attain profitability for the second half of 2009 will require us to implement additional identified cost savings, avoid multiple large casualty claims, maintain net fuel costs at the current levels, hold rates steady and build on the utilization improvements that we saw late in the second quarter.

With what we've seen early in this quarter, we are on track towards achieving the second half profit objective. To achieve profitability for the entire fiscal year would require success on the cost items, no large causality claims plus a near term change in the freight environment that allows higher freight rates and miles per truck.

With that, we will now open the call up for any questions anyone may have.

(Operator Instructions). Our first question comes from Chaz Jones with Morgan Keegan.

Just talking about July here a little bit, you talked about it being a little bit better than your expectation and I guess I don't want to get into too much about the expectation, but does that kind of assume when you're talking about profitability in the second half of the year that revenue per truck per week's got to improve off of what we saw in the second quarter?

Yes.

Is that more utilization or pricing driven, Joey?

It's a little of both. I mean you know you do have -- there's no question in our mind that -- and I know that a lot of folks have released and reported results, but there's no question in our mind. We saw freight bottom out late in the first quarter, in our opinion, and since that time freight has continued to slowly improve across all of our Companies. Rates did continue to drop throughout the second quarter but did bottom out in June, early June. And I think we've seen rates since that time stabilize and is slowly, very, very slowly moving. Some of that's through yield management; some of that's reduction in broker freight, things of that nature.

So, we do expect as we normally have, again assuming no major change in the economy up or down, that freight will very slowly sequentially improve as it always does and that rates will continue to firm as utilization improves slightly.

So you don't have kind of an overhang from the bid season that wasn't fully implemented in the second quarter?

No we thing we've seen most of that already.

Okay. The average fleet age of 25 years obviously -- you talked about the 950 trucks that you expect to purchase over the course of the year. Is that number going to come down in the back half of the year at 25 months?

It should stay relatively flat, Chaz.

Okay so is there any opportunity from either an operations or maintenance perspective in terms of getting some traction there in the back half of the year?

On the cost side.

On the cost side we see a little improvement as we add some -- as we are adding some new trucks and so we'll see some tire costs go down as well as should see improved maintenance as our average age has slightly decreased since the first of the year and so we expect to see a little improvement in that over the last six months.

With the smaller fleet now, is there -- I mean obviously it's going to vary year to year, but just in terms of maybe trying to think about what a normalized maintenance CapEx number is now with the fleet down as much as it is?

Well, we feel like that's what we've got right now. We're just basically in a replacement cycle on a regular maintenance schedule, just slightly slowing down our [repairages]. Really with just very few trailer replacements this year, approximately 200 reefer trailers is about all we'll do this year?

Chaz, the size of the fleet doesn't have as much to do with it as how many miles. We're really looking at trading trucks and selling trucks based upon the miles.

Sure

So as miles have been down, we do have X amount of trucks we're able to extend the trade cycle zone on those but it does have it to do with that and not the size of 3,100 trucks versus 3,500.

Okay and then lastly and then I'll get back in the queue, you talked about cost savings in the back half of the year. Is there anything you can elaborate on there as far as where those are going to come from?

It is across the board, Chaz, as it has been that you saw how big of a drop we've had in cost. It is virtually every line item that's on there. I mean we still have through a phase that we did on pay from all employees from me on down to the drivers, we still have stuff coming out in that as the year progresses so it's anywhere from that to some things that we're doing on better fuel economy to -- it's just all kinds of line items.

It's just more follow through of what's been going on?

Absolutely. That's exactly correct. I mean we have cut off, as you know, millions and millions of dollars and we believe that we're going to continue to get some more millions of dollars for the rest of this year.

We made some of our final changes early June with some wages and some head count reductions and so those were just in place for one month of this past quarter.

Okay, great, I appreciate the commentary, guys. I'll get back in the queue.

Nick Farwell with Arbor Group.

Just a follow on question, to what extent are you seeing attrition in the -- in your competitive long haul segment of your business?

You know we -- that's interesting, Nick, because we are seeing some of that. I mean I believe some of the things that I've read the last couple of weeks about a lot of carriers getting -- exiting the long haul market and leaving it to a lot of the smaller carriers. I don't disagree with those statements. I think their analysts are right on on those thoughts and quite honestly I believe it leaves us with some great opportunities out there in the long haul marketplace and we got the short haul covered with our Star subsidiary and we'll continue to react to that marketplace.

But I'm pretty optimistic about -- I mean if it's -- I'm speaking during a recession, but I'm optimistic about the long haul marketplace. I remember 10 years ago when it was us and a couple of more carriers that were in the long haul and then everybody and his brother got into it. It seems like to me that everybody is retrenching from it, which is fine. I mean I think it will leave some opportunities for us.

Do you still feel you're loosing share to the railroads, David?

Nothing to talk about, Nick. I mean, as it has been for ever since I've been in the business, I mean you know they're up from what, 2% on intermodal and 3% on intermodal? And I mean there's opportunities there. Matter of fact, I mean I think eventually one day we'll be in the intermodal side of the business because you think about a lot of the customers that we do business with and, as you know, it's a lot of transportation companies and air freight companies and those kind of electronics and those kind of customers that predominately ship by truck, but they do have occasional loads on that go rail that we're by passing now. So we're in there getting their freight on the long haul and not even talking to them about the intermodal.

Now, we have not done any intermodal but it's on the radar screen that says it's a niche that our customers that we're calling on every day have 5%, 10% of their business will go intermodal. So we see that as an opportunity but you know, we -- the freight that we're handling is freight that, again, cannot go intermodal.

In terms of, David, the trucks that are trading out of your fleet, proportionally how much is coming from long haul versus I'll say every thing else, which the regional and dedicated?

Are you talking about the trucks we down sized?

Yes, please. Is it disproportionally still long haul?

Yes. I mean, you know, the average of the haul on the Covenant side, Nick, is about 900 miles, which is down about 40 miles from a year ago. To give you an idea, now dedicated is in there. Let's let me just think about the long haul. It's down from say 1,500 mile length of haul down to about 1,200 miles length of haul over the last two or three years. So it's dropped about 300 miles but -- so the freight, let's say that is not going from Chattanooga to Seattle, Washington that is long haul. We're still doing a lot of freight from Chattanooga to Amarillo, Texas or Chattanooga to Salt Lake City, Chattanooga to Denver. You know those are still the long haul. To us anything that's over about 850 miles, definitely 1,000 miles, so that's a pure sweet spot in a 24-hour run.

Yes, exactly. And then one last quick question. When you look at this particular cycle, do you see when you look at your internal leading indicators that give you some sense about the stability of the marketplace, is the trajectory that you're feeling right now similar in any way to any recent recoveries that, recent meaning since you guys started business, since the 70's?

Nothing that I've gone through in the last nine months reminds me of anything since I've ever been born.

Yes, okay. That's what I figured. So it's pretty tough to say, "Oh I've seen this before and therefore I should posture my business accordingly?"

It's, you know -- we can't.

Yes. Actually I had one other thought. I know it's difficult for you to tell by sectors or industry groups, retail versus manufacturing, in some gross way only. But are you seeing any notable indications by segment and that is retail maybe is picking up, which it should earlier in a cycle versus manufacturing, or is it just sort of spotty across your customer base?

Joey, you want to answer the Covenant side of the question?

Does that make sense?

Yes, no it does. I mean I think one of the things we're seeing on the expedited side is it has been a noted change in our electronics business, which is interesting. And I would say the last month, six weeks to a month, there's been a noticeable in attitude and concern for capacity on the electronics' side and I don't know how much of it is a reaction to their reduced inventory levels, how much of it is a reaction to price off at retail, their expectations of consumer changes throughout the year. I know I've seen several of them and they're getting concerned about capacity and we're seeing freight picking up quite nicely on the electronics' side. So that was an interesting -- that's a very interesting segment to me.

I think on the other hand without, throughout the expedited, I mean I think it's kind of more of the same. It's kind of spotty. A few of the retail guys are little focused on capacity late in the year but I would say across the board it's nothing -- you know, not any one segment is jumping out other than electronics. It's definitely grabbing our attention right now.

Doesn't that surprise you a little bit, Joey, given the environment in which we're in? I mean, retail sector has got to be de-inventorying, if that's the right expression, other than they had a tough spring. I can understand that.

I don't know. This whole inventory question is a complicated one to me. I know we all read the same thing relative to retail manufacturing inventories but I haven't seen a shipper of size in the last two months, especially on the retail electronics' side, that hasn't said that they are very happy with where their inventories are. And I haven't seen all of them in America, but I've seen a lot of the large electronic ones and two or three of the huge retail ones and they're pretty happy with where their inventories are.

And statements of we don't know how much more we can take it down, statements of it's close to where we wanted it to be pre-recession, or it's close to being back to where it was pre-recession, very few -- I haven't -- frankly, I haven't found a one that has said we've got a lot more work to do on the inventory side. So I think that's interesting. You look at our refrigerated product and it's getting real interesting out there on the food and beverage side of the equation. Not saying it's back to where it needs to be, but it's definitely -- it seems like it's starting to move.

You mean because of the attrition of competition?

All the above.

Everything you and Joey are sitting there talking about. I mean I really believe that consumers are still, since they have been since September, are still necessity buyers and it's like they go buy something and then see something else and they run to the mall and soon as they can get out they leave. I mean that's what we've seem. And then -- and that's causing fits and starts within transportation and inventory is up and inventory is down.

Thank you very much. I appreciate it. I've taken more than my fair share.

Donald Broughton with Avondale Partners.

Real quick, I hear you're confident about motored rate per mile improving, about the demand improving slightly sequentially, but I wonder how much of that is seasonality? You should be seeing that from a seasonality perspective already and I understand that last year second quarter things have begun to improve and to get stronger but the percentage negative, mean your now running at rate per loaded mile is down 7.4%, per total mile down 8.2%. That's worse than the 3.5% to 3.4% negative you posted in the first quarter.

What is it that gives you confidence, the pattern you're seeing is more than just seasonality?

Donald, I do believe -- I believe two things. I believe that it has bottomed. I think that saw it all through now probably a good solid 45 to 60 days, definitely 45 days of all three Companies that we saw a -- the Asset Companies, that we saw rates stabilize and not go down any more and then we started seeing them in the month of July starting to perk up about, say about a penny a mile increase over what we thought that they would be at, and based upon the June numbers. So we started seeing it but I do think that it probably is bottoming and then seasonality kicking in and, quite honestly, that's what we've got in our budget and it's not three and four pennies. I mean it's more pennyish kind of help that we want to see and I believe that the seasonality personally will give us that.

So if I were modeling for a $1.42, $1.43 a mile per loaded mile for the remainder of the year, that's a range you're comfortable with?

I don't know that. I don't know that answer, but I'm seeing -- as I see last week our brokerage percentage, Donald, was the lowest I've seen it in two or three years last week. Fuel surcharge recovery was much better than what I anticipated because of the reduction of the broker side, which -- you know, so that's telling me something. But, I want to say that because I don't know where you're at or where we're at on internal -- I mean on budget, where analysts are at on budget, but our internal for the second half has got rates going up about a penny a mile.

All right. That's obviously saying, you know, you posted [$1.415] in the second quarter, then $1.42, $1.43 would be another penny or two a mile is what you said. And when you said brokerage you're speaking of the amount you have to go out to brokers. They find loads for your Company and other operator trucks, correct?

That is exactly right.

Fair enough.

And it's down significantly.

Fair enough. Well, good luck in the second half, guys.

At this time I am showing there are no further questions.

Thank you for your attendance and we'll talk to you next quarter.