Covenant Logistics Group Inc (CVLG) 2009 Q3 法說會逐字稿

Excuse me, everyone, and welcome to the Covenant Transportation Group Third Quarter Conference Call. 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.

Good morning, and welcome to our third quarter conference call. Joining me on the call this morning is David Park and Richard Cribbs, plus various other 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 and 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 prepared comments, once again, 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 18% to $133 million, versus the third quarter of 2008. Freight revenue per tractor declined 9% while the average tractor fleet declined also 9%. The asset-based division's operating expenses net a fuel surcharge revenue decline another $0.04 a mile sequentially versus the second quarter of this year, totaling a $0.17 per mile reduction versus the third quarter of 2008. After several years of consistent growth, Covenant Solutions non-asset based subsidiary revenue declined by 26%.

Additionally, the combination of the revenue reduction and some large receivables write-offs -- the division's profitability worsened. Since yearend 2008, total indebtedness, net of cash and including off-balance sheet obligations has increased by $11 million. And we have increased our borrowing capacity -- borrowing availability, to $29 million.

We were in compliance with our financial covenant in the end of the quarter. For the quarter, our consolidated operating ratio improved by 180 basis points versus year ago. We recorded an $11.6 million non-cash impairment charge related to the write down of an investment in Transplace. And then, lastly, excluding the non-cash impairment charge, we lost $2 million after tax compared to $3.4 million last year.

Our results for the quarter reflected a slight sequential increase in business activity, the full quarter effect of the torrid bid season in the first half of the year, and strong sequential reduction in costs. Miles per truck for each of the months of June through September were at, or above, 2008 levels. And based on results early in the fourth quarter, we fully expect to have positive utilization versus the fourth quarter of 2008. After a free-fall of our rates charged to our customers throughout the first half of the year, our rates bottomed in August, and have improved slightly since that time.

We have the spot market pricing improve since August as well. We discussed in the first quarter that our non asset-based solutions group would have negative revenue growth in the second and third quarter due to the decline in fuel prices, and the closing of a large company store in October 2008. Even though that a comparison to year ago is difficult, revenue did grow 6% sequentially for our Solutions subsidiary. Additionally, our Solutions subsidiary had some large write-offs of certain receivables and other cost issues that negatively impacted its profitability.

As for the current environment across the product lines, our Covenant Transport subsidiary team franchise has definitely seen some freight stabilization and margin improvement, while its dedicated operation is beginning to see some increased opportunities. Our SRT refrigerated subsidiary had another strong quarter profit wise, and continues to explore measured growth opportunities.

Our Star subsidiary has closed the freight gap to year ago, and has seen some weeks of positive revenue per truck growth year-over-year. We continue to be encouraged by the efforts of our employees to reduce cost throughout the organization. As mentioned above, our net operating costs per mile within our asset-based operations declined $0.17 per mile versus year ago, and another $0.04 per mile from the second quarter.

Highlights for the quarter begin with reductions in salaries, wages and benefits expenses, which were reduced by almost $0.07 a mile, versus year ago and $0.02 per mile sequentially from the second quarter. A lot of difficult decision and sacrifices by all employees continue to be made in this area, which we made -- which we believe have made us stronger and more efficient for the future.

Secondly, our net fuel expenses declined by $0.04 and $0.01, respectively, versus last year and sequentially, primarily as a result of lower diesel fuel prices and improved fuel efficiency due to operational improvements. Comparisons in the fourth quarter to year ago, though, will be more difficult due to the recent rise -- decent -- run up in diesel cost, and the decline that took place last year during the fourth quarter.

Thirdly, we experienced the lowest DOT accident rate in our history, resulting in a $0.03 and $0.01 per mile reduction compared to last year, and sequentially, versus the second quarter. Finally, by reducing the size of our tractor fleet, while continuing to invest prudently in new equipment, we were able to reduce our combined fleet costs of depreciation, lease expense, interest expense and operation and maintenance by almost $0.01 a mile, compared with the 2008 quarter despite a significant decrease in total miles.

We continue to manage our fleet replacement cycle to balance operating costs, capital expenditures and customer service factors. During 2009, we have acquired 677 new tractors and kept our fleet age at an average of 1.96 years. Operating a new fleet and concentrating on efficiency helped us lower our operations and maintenance expense by approximately $0.02 per mile, as compared to the 2008 period. This more than offset the increase in depreciation, lease and interest expense associated with a more expensive new fleet.

On an ongoing basis, further reductions in these cost items in the aggregate will be more difficult to achieve given likely trends and interest rates, equipment prices and recruiting costs in a better economy. However, as a percentage of revenue, there is still room for improvement based on better asset productivity. Overall, ongoing cost savings efforts gives us confidence that our cost per mile will drop again sequentially when comparing the fourth quarter to the third quarter, again, assuming that we have no major accidents.

In summary, although the freight environment is slowly improving, we are disappointed that we were not able to get closer to breakeven results in the quarter. We do not like missing goals. Our continued goals for the future are to continue our strong safety results, continue to refresh the fleet, continue to lower cost, and lastly, look for freight opportunities to produce a profitable margin. We feel that if we continue these efforts, and with some slight help with volume and rate increases, that profits will result on the bottom line.

In our press release, we covered the facts regarding the write-down of the carrying costs of our investment in Transplace. We will not provide any more details at this given -- at this time, given confidentiality obligations, so we would appreciate it if you refrain from questions on that topic.

We will now -- Carrie, open up the call for any questions anyone may have.

Thank you.

(Operator Instructions)

Our first question comes from Chaz Jones from Morgan Keegan.

Yes, hey. Good morning, guys.

Hey, Chaz.

Is there any way you could quantify the write-down in receivables on the brokerage side, just maybe give us a better sense for how that impacted the margin in brokerage?

Chaz, basically what happened there is that we had one large account that was in the steel business, and as the year progressed, they really got similar to what happened to crude, as you know, happened to steel. And they -- it was almost a 20-year-old company that we have done business with for quite a while -- a few years, and a good company.

But their -- at the end of the day, their inventory was bought at X, and the value of the inventory six months later was X -- down. And, on top of that, in the state of California where they are located at, the commercial and housing industry went to nothing. And so they were not selling anything, and the inventory they had was basically twice what it was worth. And -- a fine company, a company that was a good, profitable company in July started having some major issues and it got us.

There was about $400,000 of write-offs and write-downs related to the stuff that we would not expect to be ongoing for the quarter related to Solutions, Chaz.

And, Richard, is that flow-through like G&A, or where does that flow-through at?

It would be, yes.

Okay, that's helpful. And then, any sense -- I know it may still be a little early, and maybe you have not got your budget together, but as we move into 2010, your equipment age looks like it is going to be just fine, but any sense for CapEx directionally as we look at 2010?

No, Chaz, what we do -- but we are not -- we are right in the middle of that as we speak. We do not anticipate the average age to go up of our tractors. In fact, it should go down slightly, but we will see. Our trailer fleet is really the big question at this time. We have a lot of trailers, arguably, could be traded next year. And so that is a big question for us -- what we do with that. So, I think it would be a little early for us to comment on what CapEx could be until we get a little further down the pike on what is going to happen with our trailer fleet.

Understood. Maybe a last one here, you kind of outlined in the prepared remarks that you expect costs to be a little bit better sequentially. It sounds like pricing has found its bottom, maybe some modest improvement here sequentially in the fourth quarter. Did you say that you expected utilization to improve sequentially, or was that year-over-year?

Year-over-year. Typically, you see our fourth quarter utilization -- forget last year because that was just last year. But typically, our utilization in the fourth quarter can be up a point or two, or down a point or two from the third quarter. But we are expecting positive trends versus year ago in utilization to actually increase throughout the fourth quarter because, as you, as we all know, freight died --

Right.

-- in October, so the comparisons are going to get much easier.

And the last one here, obviously, there is still excess capacity in the market, but certainly, we have heard on a few conference calls that there are signs that capacity is starting to tighten up some out there in the industry. Are you guys seeing that at all?

Yes, yes we are, Chaz, at all three Companies. Star for the last couple of months has started showing some very nice improvement with the South, as you know, leading the way for them. And SRTs have been in pretty good shape on capacity throughout the entire year. The [Reefer] business just has not been hit like the drive-in side. They have had their own challenges, but from a freight environment, it has been much better than the drive side.

And then, Covenant has also started showing some positive year-over-year kind of numbers and tightness of capacity as compared to last year. Probably the only area of the country that is not showing much signs of going up is probably the Ohio Valley. It seems like it has really been more --Ohio, Michigan, that part of the country has been hit more for us than any other region in the country.

Okay, great. I appreciate it, guys.

Thank you. Our next question comes from Tom Albrecht from BB&T Capital Markets.

Hey, David, Joey, Richard, how are you guys?

Hey, Tom.

Hey, Tom.

Good morning.

Good morning. Hey, a couple of different questions. I am just trying to make sure I understand the flow-through of expenses. You brought on -- let's see, this year you brought on 677 new tractors, yet your depreciation was down about 2.1%. I know the fleet is about 9% smaller year-over-year, but then your revenue equipment rentals are way down. So I am trying to figure out, are you bringing these on as leases or purchases because your interest expense is also up?

Yes, we are flipping equipment. If you -- on the website, Richard takes us -- the additional financial information, basically, you have got a flop from lease equipment to purchased equipment. And so, the trends versus year ago, you have got that change going on.

So lease revenue equipment will go down as crashing, and as we replace those with purchased trucks, either capitalized leases or financed equipment through Daimler or Navistar, whoever that might be. So especially coming from off-balance sheet to on balance sheet -- so you have got to look at the two of them together.

Right. Well, and I thought that was the case, but I think it is also exacerbated by the big drop in PT, which I assume is related to the Solutions group.

That's correct.

Have you guys given some thought to starting to break those two line items out separately -- equipment rentals and purchased transportation, so that we can get a more accurate gauge of what is happening? Because they are really driven by different dynamics now.

Yes, you can calculate it, but we do not break it out specifically. We do give the PT -- the net revenue margin and PT percentage in the release, as well as when we file the 10-Q, we have separate segment information now.

Okay, all right. I'll look at the Q then so --. And did you make any other changes to like changes for prepaid equipment, tires, things like that that might have positively impacted your results?

No.

No. If we had, we would have been required to state that specifically.

Okay, okay, good. And then on the magnitude of the mileage utilization increase, for the quarter it was up, just under 1%. You had favorable commentary verbally and in the written release, but for example, the last -- the month of September, how much was that increase up year-over-year? And what are we trending at in October?

Pretty much about the third quarter, Tom, you have got, as far as miles per truck is concerned, it was kind of, well, we were up almost 1%. So, that is pretty much the way it was throughout the quarter.

You did not have any one month driving that. You did -- you are seeing in late September -- last few weeks of September throughout October the change versus year ago is increasing dramatically. And it is dramatic --

Right.

-- especially on the -- well it's across, as David said, it is across all three asset operations. The dynamic that you are seeing inside, especially on the team side. On the team side, the freight patterns are a lot more volatile, but overall, still much better, and I think that kind of goes hand in hand with the low inventory levels out there. So, yes, it is increasing nicely. Again, we have not given fourth quarter numbers other to say it is going to be up nicely versus year ago.

Yes, I guess I couldn't tell from your comments to Chaz whether you thought they would be up sequentially; you talked about some years it is up 1% or 2%, some years it is down. But just in terms of modeling, because we have got this canyon that we are modeling against for some many companies, any additional precise comments that could offer --

Yes.

-- would be helpful.

For example, last year from the third to the fourth quarter, miles per truck dropped 8% sequentially. And, if you assume it is just flat for a second, which I think is a fair -- if it's just flat. If you have gone on back and looked through history, you can see it down 1%, up 1% -- up 2%, down 2%, so if it is flat, it is going to produce some very meaningful increase in utilization versus year ago.

Okay. All right. And then in terms of your cost per mile, I just want to make sure I am looking at it the right way I can see that you have taken cost out in that. What are looking at as your cost per mile, because your results include the Solutions group and sometimes that can skew the cost per mile. So when you talk about your cost per mile will come down X, what are you showing your cost per mile to be right now?

The cost per mile numbers that we gave were on asset-based only companies. We did pull out Solutions for that.

But what is that figure right now -- I guess what I am saying?

On a net operating basis, excluding fuel, because you know we break -

Right.

-- we net fuel against that. It is around, on the asset side, around $1.21 to $1.23. It is kind of floating around in that level. And so, that is net, a fuel surcharge revenue.

And that would have been, what, $1.30 to $1.35 a year ago?

Yes, $0.17 a mile higher.

Yes.

That's right.

Okay.

And that $0.17, as we said in the release and the script -- in the prepared comments is it is all over the place. Fuel is some of that, but it was not like it was early part of the year and the second half of last year; it is all up and down the income statement.

Fuel is more of a $0.03 to $0.05 piece of that than -

Sure.

-- than a large piece of it.

Okay.

Now, that, and again, don't forget the headwind, depending on what everybody's views on fuel are for the fourth quarter. There is no question it has gone up almost $0.30 a mile in the last six --

$0.30 a gallon.

-- $0.30 a gallon. Not mile -- sorry, a gallon, in the last six weeks or so, so that comparison to year ago is going to get interesting depending on what it does for the rest of the year.

Absolutely. Okay, and last question, do you think you will be able to post an operating income during the fourth quarter?

Chaz.

That's Tom.

Or Tom, I'm sorry.

That's all right.

Sorry about that. We -- what we tried to lead is that we are knocking that door -

Right.

-- of breakeven and making some money and we are right at it. And we are prepared to say it is a fourth quarter, we know, knocking on it. Could it happen? Yes, but basically, we did not give any specific guidance or targets when that profitability would occur. We are definitely on the right path.

And I think all the things that we are doing with continue to lower accident costs, continue to lower costs, being very strategic and smart about what freight we take, how we take it. And I think that it is continuing -- if we continue those, we will reach profitability shortly.

That's my sense, and that is why I am just asking all these questions.

No, that's fine.

I think, Tom, I think Joey is exactly right there. We are very close, and excluding a couple of major accidents that we pray that does not happen, we are close. I will say, though, that our goal, as you remember, was to breakeven for the second half of the year. And even though we made tremendous headway -- cutting $0.17 -- I told these presidents a few days ago at a president's meeting, I couldn't be more proud of some decisions and hard work that these guys have done to cut $0.17 a mile with fuel being about $0.04 of that out of these companies is -- they have done a great job.

And they are going to keep cutting costs out of the Company. And even though we made headway in the third quarter, I think it was not where I wanted it to be. It is not where I thought it would be at on a couple of -- to be honest with you, last of September like losing the $400,000 that we had to write-off on the receivable side on Solutions.

There were a couple of items there in my mind that got us for about $0.06 or $0.07 a share the last ten days September. And -- but they are knocking on the door. And it is -- whether it is now or whether it is in April, we are going -- this Company is going get back to breakeven, to making money.

Okay. All right, guys, thank you.

Okay, Tom.

Thank you.

(Operator Instructions)

Our next question comes from Nick Farwell from the Arbor Group.

I just have a quick following question. David, can you comment on any notable changes in the competitive profile in your long haul business?

Nick, excluding -- let me answer it this way. It is probably getting back to -- more the way it was for 20 years than the way it has been for the last 12 months. And what I mean by that is that we are seeing the expedited -- of a month that gets stronger as the month goes through with the fourth quarter being much greater than the first quarter, we are seeing the last quarter being much greater than the previous two quarters, two months of any quarter. We are seeing more of the uptick of whatever Christmas season we are going to have; we are seeing more of that.

So, we are seeing a lot more of normalcy happening within the expedited side of our business. From a competitive standpoint, there are not as many people running teams out there today as there was 12 months ago or 24 months ago, so there is no doubt that the competition is not at the same aggressiveness from a standpoint of availability of equipment.

We have not raised pricing because, quite honestly, we do not feel like we could raise pricing. But I do believe that once the dust settles that there is not going to be as many trucks operating in the long haul marketplace as what there was 12 to 24 months ago.

Would you guess, David, -- are you talking about a contraction of 10% to 15%, or something more notable than that?

Nick, you are just throwing darts to answer that. The big players have definitely reduced their exposure on the long haul team expedited. And the mom and pops are getting left. There is not as many of these mom and pops running today, and in 12 more months I think there will be even less mom and pops.

I do not think they can get financing. They are having major issues in that area of financing, as well as I think that on the new regulations -- for the first time ever, the new regulations that the Federal Motor Carrier that Safety is putting out is going to hurt a lot of the small companies much more than the larger companies because these guys are now not going to be able to run under the radar screen, especially starting in next June if they get stopped at scale.

There is going to be record keeping a lot better than what has been, and enforcement. And these folks that start up today, and close it down tomorrow and start under a new name the next day, that is going to become less and less. And Federal Motor Carrier believe that it probably will eliminate about 40% of small carriers that are going to be eliminated. Well, a lot of those small carriers, as you know, run transcontinental. So, we see that as an opportunity to ascent the expedited side going forward.

Thank you, David, appreciate it.

Okay.

Thank you.

(Operator Instructions)

Our next question comes from Donald Broughton.

Good morning, gentlemen.

Good morning.

Good morning, Donald.

Good morning.

I thought the insurance line was pretty decent this quarter. You said you had a couple of accidents -- but for a couple of accidents, David.

Hey, but we do not have a couple of accidents.

I was going to say, because you got back down to $0.08 a mile, which is well within the --

Yes, I'm --

-- well within the long-term range of yourself and all your competitors out there, but your severity and incidents must be really performing well then.

Yes, I couldn't be any more happier than what is going on with the safety side of the business.

Good. Glad to hear that. Splitting hairs a bit here, operating taxes and licenses on a per mile basis dropped -- also on a per truck basis, dropped faster than this is the truck count or the miles or -- what is driving that? That is like, again, splitting hairs kind of a thing, but what would drive that?

We had a Reefer credit -- refrigerated fuel credit that came -- fuel tax credit that came through this quarter.

All right, that would explain it. Great, thank you, gentlemen, and good luck.

Thank you. There seems to be no more questions at this time.

Okay, we want to thank everybody for joining us, and we look forward to next quarter getting back with you. Thank you.

Thank you, ladies and gentlemen, this concludes today's conference.