Covenant Logistics Group Inc (CVLG) 2009 Q4 法說會逐字稿

Welcome to the Covenant Transportation Group's Fourth Quarter 2009 Conference Call. We now have our speakers in conference. (Operator Instructions). I would now like to turn the conference over to Richard Cribbs. You may begin.

Thank you, Dusty. Thank you, everyone. Good morning and welcome to our fourth quarter conference call. Joining me on this call this morning is our CEO David Parker, our Chief Operating Officer, Joey Hogan, along with various members of our management team.

As we must always begin, this conference call will contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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 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 will be brief and then we will open up the call for questions.

In summary the key highlights of the fourth quarter were; freight revenue declined 6% to $136 million versus the fourth quarter of 2008, versus year ago while the average tractor fleet declined 8% freight revenue per tractor increased 4%. Sequentially versus the third quarter, revenue per tractor increased almost 2%.

Excluding the impairment charges in the fourth quarter of last year, the asset based divisions operating expenses, net of fuel surcharge revenue, declined $0.13 per mile versus the fourth quarter of 2008. This improvement was achieved in spite of a $0.03 per mile increase in net fuel expense compared to a year ago.

Our non-asset subsidiary, Covenant Transport Solutions, went through a rigorous rationalization in 2009. After a 49% drop versus a year ago in the third quarter, the division's net revenue declined by only 2% in the fourth quarter versus last year. This contributed to a 400 basis point improvement in its operating ratio versus the fourth quarter of 2008.

Since year end 2008, total indebtedness net of cash and including off balance sheet obligations has increased by $18 million. And we have increased our borrowing availability to $28 million. We were in compliance with our financial covenant at the end of the quarter. We recorded an $111,000 non-cash recovery related to the receipt of the proceeds of the completed sale of our investment in Transplace in December.

Excluding the impairment charges in the fourth quarter of last year, our consolidated operating ratio improved by 330 basis points versus a year ago. Excluding the non-cash impairment charges, we lost $2.9 million after tax compared to losing $6.2 million last year.

And Joey will now discuss these highlights in more detail.

Thank you, Richard. Our results for the quarter do reflect continued sequential improvement in overall freight volumes relative to the size of our fleet. We were very pleased with our utilization trends and at the fourth quarter miles per truck were the highest since fiscal 2003.

The last seven months had positive utilization trends versus the respective year ago period. An 11% increase versus year ago in the quarter gives us confidence to begin moving our focus to improving the yield of our overall freight base. On the rate side, although still very competitive, we did see rates bottom during the late summer of 2009. And we're pleased to see a slight sequential increase versus the third quarter.

Overall we still see the first half of 2010 as very competitive on the rate side with rates beginning to move up in the second half of this year. As for the current environment across the product lines, our SRT refrigerated subsidiary had another solid quarter overall and is starting out 2010 seeing some opportunities to begin increasing rates.

Our Covenant Transport subsidiary expedited service offering saw a 9% increase in revenue per truck in the fourth quarter. But January is starting out very strong for the seasonally slow month. Our Covenant Dedicated operation is stable with a volume of new opportunities beginning to increase.

Our Star subsidiary also had a very nice increase in revenue per truck versus year ago during the fourth quarter. In addition, we have begun the enterprise-wide transition to our new operating system with Star being the first division to go live on the first of January. Our personnel have dealt swiftly with the issues that arise from a system implementation of this magnitude though momentum has significantly picked back up at Star over the last few weeks after a short-lived drop in activity there.

Our cost reduction efforts continue and are firmly rooted throughout the organization. We produced another solid quarter of reductions versus a year ago highlighted by record results on trucks per non-driving employees and the best DOT accident rate per mile in our history.

Even with a $0.03 per mile increase in net fuel expense versus a year ago, we were able to reduce our asset-based operating cost by $0.13 a mile. In 2009 we made the decision to invest in keeping the tractor fleet as young as possible to help delay the additional cost of a new EPA 2010 Emission Standards. Although total indebtedness did increase during the year, the average age of our tractor fleet declined from 25 months at the end of 2008 to 22 months at the end of 2009.

Our current plans are to replace another 900 tractors during 2010. In summary we were not happy with our results for 2009 but are encouraged by what we are seeing today. We believe you will see operating costs continue to decline with improving revenue per truck trends.

We're making significant technology enhancement investments for which implementation will occur during 2010 with expectations of immediate and future benefits. Our summary statement is that we are continuing to focus on good, thoughtful, long-term sustainable decisions. Short-term, though, our entire organization is focused and incentivized on producing a profit for 2010.

And now we'll open up the call for any questions.

Thank you. At this time we will open the floor for questions. (Operator Instructions). Our first question comes from Chaz Jones.

Yes, good morning, guys. How are you doing?

Good morning, Chaz.

Hi, Chaz.

Can you talk a little bit maybe about the new operating system that you're implementing and what type of benefits you expect to gain from it as you implement that throughout the year?

Yes. We made -- we went almost through a two year process on evaluating our current system, our current systems across all our entities thinking about how -- when we begin growing again, how we need to operate the companies from a system standpoint, a financial reporting standpoint, control standpoint. We basically made a decision that what we had, we needed to make a change mainly for the future. We were having some problems, really all the entities; let's call it working easily together from sharing opportunities across the entities. And it was kind of bottlenecking in our Solutions subsidiary. So if you think about the future and what we feel freight and capacity will do. We felt like we needed to make a change.

And so again part of that two year process was not only evaluating what we were doing, but what's out in the marketplace? What are people using? Who's investing in technology? So anyway we went through a long search and decided to -- we chose TMW's platform as the platform to change to.

It's about an 18 monthish transition period. Star went on live in January. SRT is currently scheduled sometime in the summer. Solutions may move around a little bit, maybe sometime this year with Transport being early part of next year. Basically the objectives are to operate more efficiently, which means at a lower cost.

It's - as well as be able to do business more easily with each other. And so I believe we - the project was researched well, was planned well. No implementation is easy, that's why people don't do them often. Hopefully, that's a once in a lifetime thing. And so some of the things we have gone through have been difficult, but I would say not unexpected.

I do believe that we'll do some of the other companies coming through a little bit better, and we should because you have the experience of the past to reflect on and help you on in the future. So we're excited about it and it's going to help us as far as gaining information throughout the organization faster, quicker, more customizable. We feel the long term is going to give us some benefits for our customers in being able to share some things with them a little bit easier and faster. And so that's a quick summary, but that's what we're doing.

No, that's real helpful, Joey. In terms of the fleet, obviously that's stabilized the last three quarter. But it sounds like with freight volumes starting to pick up here that you guys are probably pretty comfortable with the fleet count?

Yes, this is David, Chaz. Yes, we are. We feel like it's really right-sided from a corporate standpoint among all three asset companies. And we're just looking among that to see where the biggest opportunity is between the three companies on adding or subtraction within the three. But we do feel like the total overall is where it should be.

Okay. And the equipment you're buying in 2010, are those all pre-2010 engines? Or are those going to be the --

They're all pre.

Okay.

Yes, between now and July 1st.

And should that continue to maybe slightly lower the age of the fleet maybe down to something like 20 months?

Yes.

Yes. Up through June, July we'll continue to see the fleet age decrease and then the current plan is not to make any additional purchases past July through the end of the year. So you'll see it start going a little back up. But through the first half of the year, you should see a real decrease in our average age.

And I guess if you can remind us, Richard, in terms of maybe how much debt matures over the next 12 months? If you have that available.

Yes, but most of our debt is with the captive financing companies. And it's all replaced by new debt as you make new purchases. So it's -- our revolver is not up this year. And so all the debt that comes due will be replaced with new debt. I don't have the exact dollar amount.

No, that's fine, I just was curious if there's anything outside of the equipments and anything that was going to roll off ion 2010.

No. There's a few operating leases that are going to be completed, but that's it.

Okay. And maybe one more and I'll get back in line. It sounded like from the prepared comments that maybe pricing stays flattish in the first half of the year before maybe we'd start to see some more favorable pricing trends. How is Covenant going to approach the bid season? Do you feel like you can be aggressive yet? Do you feel like you have to be proactive in going after bids or -- I guess we've heard some conversations here recently on other conference calls that it sounds like that perhaps customers aren't going to come to the market as aggressively as they did last year from a bidding standpoint. So maybe if you could just help us on that.

I think, Chaz, that Covenant as a group -- we feel that our biggest opportunity as we move throughout 2010 and '11 is improving our yield of our freight. And when I say -- I use that -- I'd rather use that than talk about rates. Rates are a part of that.

Sure.

But you can't move the market. So we said and I believe that rates will kind of be flattish throughout the first half of the year. They'll -- arguably they'll be down versus a year ago in the first quarter. But overall from where they are now, I don't think they're going to move much.

So you see revenue per truck improvement driven more through utilization.

That's right. But on the other hand I think as a company specific related to our group is our utilization has moved to the point, and actually quite good, where you're going to see us as these bids come through be a lot more selective on what we want to, one, keep and two, what we want to go after. And we'll let that fall where it may.

So again you can't really address yield unless you have some decent amount of utilization in the lanes that you want. And I feel as a group all the companies have done a good job of addressing that as best as they could in this downturn. So I think that's what I said, is you'll see our focus turn from gaining business to improving the margins on the business.

And so as far as bids are concerned it's been pretty busy for the last few weeks. And I think each carrier's customer base is a little different. Our group has a large exposure to the transportation marketplace relatively speaking. And so -- it's -- so we are a little different in that regard. But I do think it's going to be busy. I don't think it's going to be as busy as it's been. I think there's going to be a lot of testing from both the carrier side as well as the shipper side to really see where the market is. It'll shake out however it's going to shake out. But I think we're going to be a lot more selective on what we bid on and how we bid on it as well as what we choose to keep.

Okay. That's helpful. I'll get back in the queue. Thanks, guys.

Thanks, Chaz.

(Operator Instructions). Our next question comes from Todd Fowler.

Hi, good morning, guys. Thank you for taking my question.

Good morning, Todd.

David, could you talk a little bit more about what you're seeing here in January? Specifically relative to where you ended the quarter in December from a trends standpoint?

Todd, we have seen a very nice uptick in business among all three assets. Companies we're very, very encouraged about what we saw in January and what we're seeing in the early part of February. If you take away the first couple of weeks on the Star because of the implementation of the new software package, which had just a couple of glips, expected but it happened. After those first couple of weeks, they've also been right there with the SRT and the Covenant side. And utilization wise both -- so far in the first five weeks is above our expectations.

And I know it's always difficult to pinpoint what drives that. But do guys have any thoughts? Is it just -- from volume with existing customers? Is it something that's happening within capacity in the marketplace? Or do you have any other thoughts about really what's driving the strength here at the start of the year?

I think it's all of the above. It's everything you just said. I mean I think that -- I think that customers are sensing a tightening of capacity. I think that -- whatever carriers have exited the marketplace -- one of the analysts does a great job, Donald Broughton, on the keeping up with the bankruptcies throughout the industry and we know that it's -- whatever it is, it's a number. But there is a lot of carriers that don't actually file bankruptcy. They just run in and turn their keys in to the finance company or to the manufacturer. And those numbers kind of just get lost in the number.

But there is a lot of capacity that has left the marketplace in the last 12, 18 months. And the only problem you had up until now is that you had an economy that every quarter -- every month for 18 months, as capacity was leaving the economy was going worse and worse so you could never see it. And I just truly believe that you're now starting to see the economy starting to pick back up. I believe it's going to be in the 1.5% to 2% kind of range. It's not going to be 5.7%, but it's going to be in this 1% or 2%. But I think that that's enough to show that there's a lot of trucks that have been taken out of the market.

So I think it is that. I think it's shortening of capacity. And I think the economy is starting to pick up. I think that we have had in the last two or three weeks a little bit more bid activity than even what I would have thought that we would have had. But quite honestly I believe that our customers are able to see what's going on in the marketplace and they're trying to make a last ditch effort of reduction or keeping rates flat and those kind of things as we speak right now.

But as I told the management team a couple of days ago, I'm very encouraged. This is the most encouraged I've been in three years from a CTG standpoint.

That's good to hear. I guess as a follow-up to all of that. When you see freight come your way or from -- for whatever reason it is at this point and this a little bit of a follow-up to Chaz's question earlier. What is the opportunity right now on the rate side? Where does that freight come in at from a rate perspective? Is it higher than where you've been? Is it at the same point? Or is it still aggressive from the standpoint that you really don't have the opportunity to move the rate up on incoming freight?

We're putting into our budget quite honestly, as you can see reading -- hearing from the analysts, that we're saying that rates are flatish and start moving up a little bit in the second half. And that's a company story that we believe is there. But I'd be crazy to say that I don't think there's some opportunity there. And I do. And as Joey was saying that -- and it's not just going out to the customers and saying here's a 5% rate increase across the board. Even though quite honestly I -- I don't know that we're not far off from being able to do that one of these months based upon utilization increasing.

But we'll never go and just say here's 5% because you've got lanes that are operating -- that we're operating well in today. And so we want to take as we've improved our opti-yield ability in the last 12 months, we want to take that and make sure that we're not running off good freight. That we're making 90 ORs or 88 ORs on and do stuff stupid.

So we are truly operating the company today by customer and by lane-by-lane situations. So we may have lanes, and there will be -- there'll be lanes that we'll go into our customers and say we want out of the lane because we don't think that we can increase the rate high enough to make any money on it. But then there's going to other ones that we might say we want a reduction, would you give me two times the amount of volume that I've got on this lane and I'll give you 2% off it. So that's the way in which we are looking at the model of all three companies today. And I think as you look at that that there are some opportunities if the economy stays in this 1.5% to 2% GDP growth.

Okay. Got it. And then lastly, where was the average length of haul for the quarter?

912 or so?

It was a little smaller than that. For the quarter it was 846, which was up from 831. 912 would have been Covenant subsidiary alone.

Okay, and is that essentially the right place where that should be going forward? Or do you see that shifting as you get into 2010 based on some of the comments about the lanes and where you want to be and what you're doing with the freight base?

It is close. It's close to where it is. As Covenant continues to get larger and more teams and those kind of things, it may go up. But, quite honestly it may go up 10 or 15 miles, but it's not going up a lot.

Okay. Great. Thanks a lot for the time. Good luck.

Thanks, Todd.

Our next question comes from Chaz Jones.

I had one follow-up, guys, just on the expense side. I know you guys have done a really good job throughout the year on bringing down cost. Two questions; one, it seemed like operating licenses and tags, or taxes, excuse me, jumped up a little bit sequentially. Was there anything there specific to maybe why that happened?

It was just a -- we have a Tennessee State audit going on. And related to a smaller subsidiary, a non-operating subsidiary that we had in place on a real strange rule. And there's a couple hundred thousand dollars that got added to that. But that makes a big difference in that number.

Okay. So that pretty much goes away though?

Yes.

Okay.

Yes. That should be fully accrued at this point.

And then the other, I guess, as I look at equipment cost, taking D&A, lease, interest expense, operation and some maintenance and kind of bundling that all together, year-over-year it's flat but relative to where we were the first three quarters of 2009 there's quite a bit of jump there. It looks to be more on the D&A side and interest side. Obviously I know as you guys bring on more and more new equipment, equipment costs will probably start to move up. I think Joey even eluded to it on the last call that maybe that we should expect equipment costs to move a little bit higher over the near term. Is that kind of still the case? And that's what's going on there?

It is. And interest will go up a little bit as we have a little more debt load. But one thing that we did have in the fourth quarter, we had quite a bit of write offs of some of our older software as we do the implementation for the new system we went ahead and wrote off a large portion of software that will not be used, will be replaced by the new TMW system.

So is that captured in D&A, Richard?

It is. That's captured in D&A. And then -- you will see that the costs go up a little bit on capital costs related to the new equipment as well.

And the last question I had, I guess is in relation to teams. Typically with a seasonally slower first quarter maybe you guys struggle sometimes with the number of team drivers that you have because the expedited market tends to be a lot softer. But it sounds like from what you're saying that maybe volumes have held up enough and have started out strong enough that maybe that isn't as much of a headwind this quarter so far?

Well, it's not. We are doing something a little different this year relative to the operation of our expedited group. Basically, Chaz, we're working into a model of flexing our teams up and down within a year. And this is our first year to aggressively do that. And so as far as our teams are concerned that we have right now, we're down a little bit from where we were in the fourth quarter. We consciously did that. And our teams that we have for winter time are moving really well right now. And if you go back and look at a year ago versus on a revenue per truck basis or utilization basis, it's very, very encouraging.

I think the operations group has done a fantastic job. Our turnover so far started off the lowest quarter we've ever had. And I think it's going to help everything. It's going to help the marketplace from how we manage the marketplace. It's going to help our drivers that are still here. It's going to help us save some money in the early part of the year because we have less trucks laid over. We have two people in the truck. So it's an aggressive move, but I think it's going to be a good move. And there'll be some learning that we'll have through it, but the objective is to help us manage our profits throughout the first half of the year when freights, as you said, typically seasonally slower.

Now where we sit today on February the --

Third, fourth, fifth --

Whatever it is. We're very encouraged by how it started out. To the point that where operations is starting to say, I need some more teams. And so I'm going to hold it here for a few more weeks and we'll go from there. But that's a good sign. That's what I was hoping to hear. And so we'll -- the plan was to start growing teams early part of the spring, hold it, see where July is, how the economy is doing and then take the lid off. And then really grow them in the back half of the year. So that's what we're doing.

Okay.

Chaz, a quick follow-up. One more item to note in our -- as our average age has decreased, our operation and maintenance costs have decreased as well. It's about a penny, a little over a penny fourth quarter this year versus fourth quarter last year. And that's not only due to the age of the equipment, we've also made some decisions including combining Covenant and Star's maintenance management group to reduce some costs there as well.

Okay. I appreciate all the time this morning, guys. Good luck in 2010.

Thanks, Chaz.

Our next question comes from Jack Waldo.

Good morning, gentlemen.

Hi, Jack.

I wanted to ask you about your rates and what's the -- I guess a few questions. One, what's the premise for you guys thinking that rates will be up in the second half of the year? Two -- i.e. is it more demand or supply driven? Two, are you seeing any signs recently of contraction in supply? And three, in a best case scenario, how much do you think rates could be up in the second half of the year?

Jack, again on all those, I think that we're seeing a little bit on the first two answers you gave there, I think we're seeing a little bit on both. And that is I do believe as I look out over -- especially over the refrigerated side of the business, capacity there for the last 12, 14 months has been -- it's starting to get tight. It's starting -- it's not like it was in '05, but capacity in the refrigerated side is starting to get tight. And I think that that is going to continue. I think that they were the first wave in the last couple of years of people exiting the marketplace was the mom and pops in the refrigerated side of the business. And I think that SRT has seen that. So from that capacity there, then when I get into the long haul market, I truly believe that you've had a lot of carriers that said we all better run to the regional markets. And I think they've all run to the regional markets that feeds right into what expedited is all about.

I think that we are the premier guys running the expedited marketplace and I think that we have seen that in the last six, seven months that has been very nice in growing and relationships with customers growing. I think that that's going to continue. So in a way that's a little bit of a capacity situation that is there. The regional side on our Star business, being 95% of what they do is from the southeast. The best thing to say there is that we have seen in the last probably August, September timeframe, the best way to describe it is that the south at least came from the dead. It started waking up, which is what Star does. And so it helped vary utilization dramatically. But I don't think that it was as much of a capacity situation necessarily in the regional southeast market as it has been that it just started breathing again.

And so that has helped Star a lot in the last four months. Then on top of that, give me a 1.5% or 2% GDP growth and I think if it maintains that, then I think that it's going to allow the truckers a opportunity to get pricing back that they've given away in the last two or three years. The only equation that I've got there is I don't know if it's going to maintain. None of us on this phone, we've all got opinions if it's going to maintain 1.5% or 2% and so we're trying to judge our 2010 and manage our 2010 internal expectations on flattish to up a little bit on rate. But if it does maintain 2% and everything I just said there I think there's some opportunities that will help our internal expectations.

And you've also seen the evidence of the capacity reductions. We see it in our Solutions brokerage group. But on a bigger scale, as you saw CH Robinson come out and say that they had some pressure on the cost side, their purchase transportation -- as they're going out and buying freight for their customers, they're seeing that those rates are increased a little bit because capacity is tightening.

I think there's evidence there of it from that side as well. And we see that on the Solutions side as well.

And then lastly it's just -- I know we're only five weeks into the year, but the same thing that we were seeing in the month of December, we're also seeing in the first five weeks of the year. And that's very encouraging.

Good points there. And what do you think is the -- David, the maximum potential for rate increases in the second half of the year?

I don't know, Jack? What does the industry need? $0.15 a mile. That's what -- what will the industry eventually get? $0.15 a mile. That will happen. I just don't know if it's July this year or July next year. But there is a number out there that people have got to start -- you can't have trucks becoming $100,000, $110,000 and this and that, environmental this and not one day increase your pricing. And that has to happen. I just don't know when it's going to happen. And so we're going to keep cutting cost. We think we're going to cut cost another $0.04, $0.05 a mile. And we're going to figure out how we can cut more cost. That's the avenue we've got. But the thing that we're very encouraged about is that our rates have quit going down. It's pitiful when you're cutting cost $0.13, $0.15, $0.17 a mile but your rates are going down and you can't see much of the benefit. You see some but not much. But the best thing is now that we believe we're going to keep cutting costs $0.04 or $0.05 a mile and our rates are going to become flat to up.

And so when you throw that in the calculator it gets you encouraged.

And then last question. How much LTL line haul business do you guys do?

About 30 plus percent of our business is with the other transportation companies. With probably 90% of that 30% is going to be with LTL companies, Freight Forwarders, Consolidators, LTL, Pure LTL companies.

Got it. Okay. Well, thank you, guys for your time.

Okay, Jack.

(Operator Instructions).

Okay, Dusty, it doesn't sound like we have any more questions. I'd just like to thank everybody for their time on the call this morning and we look forward to talking to you after the first quarter. Thanks a lot.