Covenant Logistics Group Inc (CVLG) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for your patience in holding, and welcome to the first quarter 2010 Covenant Transport Group's first quarter earnings conference call. (Operator instructions.)

It is now my pleasure to turn this morning's conference over to Mr. Cribbs. You may begin, sir.

All right. Thank you, Shawntell.

Good morning. Welcome to our first quarter conference call. Joining me on this call this morning is our CEO David Parker and our Chief Operating Officer, Joey Hogan, along with 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 and Section 21E of the Securities Act of -- 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 and filings with the SEC.

As a reminder to everyone, a copy of our prepared comments and additional financial information is available on our website. As usual, our prepared comments will be brief, and then we will open up the call for questions.

To summarize, the key highlights of the quarter were, despite our tractor fleet being down 3% on average during the quarter, freight revenue increased 6% to $129 million. Versus year ago, freight revenue per tractor increased 9%. The first quarter of 2010 produced the highest first quarter revenue per truck since being public in 1994.

Growth of no less than 8.4% tractor utilization improvement was experienced at each of our three asset-based operating subsidiaries. The asset-based divisions' operating expenses, net of the fuel surcharge revenue, declined $.095 per mile versus the first quarter of 2009. This improvement was achieved in spite of a $.029 per mile increase in insurance expense and $.005 per mile increase in net fuel expense.

Our asset-light brokerage subsidiary, Covenant Transport Solutions, total revenue declined by 5% versus year ago. But, compared to year ago, during the time of brokerage -- during this time of brokerage margin compression, we were able to improve its gross margin slightly to 84.5%.

Since year-end, total indebtedness, net of cash and including the present value of off-balance sheet obligations, has decreased by almost $24 million, and we have increased our borrowing availability to $45.5 million. We were able to lower our primary layer of self-insured retention limit on casualty claims from $4 million per incident to $1 million per incident.

We were in compliance with our financial covenant at the end of the quarter. And versus year ago, our consolidated operating ratio improved by 560 full basis points to 98.6%.

We lost $2.2 million after tax compared to losing $5.5 million last year.

And Joey will now discuss these highlights in more detail.

Thank you, Richard. Although we are not out of the woods yet, we're very excited about what the results of the first quarter show us relative to our business improvement plan. We believe company specific initiatives combined with an improving freight environment produced record revenue per truck. All three asset divisions contributed to the increase in revenue per truck with the three growing within a range of 5% to 11% each. The increase was not a one-month phenomena either, in that in all three months were up 6% or more as well.

In spite of a difficult weather season, we managed a 12% upsurge in average miles per tractor compared to the first quarter of 2009. The last five months have been at least a 9% increase over the comparable period a year ago.

On the rate side, though, the environment is still difficult but it is improving. Our loaded rates were down about 3%, despite a 10% increase in our average length of haul. And we were able to offset some of that decline with an approximate 100 basis point improvement in deadhead or non-revenue miles.

Also, historically a $0.01 sequential drop from the fourth quarter is one of our better performances. The consistent improvement in utilization is allowing us to begin the yield improvement process and seek improvements throughout the remainder of the year.

As for the current environment across the product lines, after several years of rationalization and decline, we believe our Covenant subsidiary is poised to grow revenue and profits in 2010. The Expedited franchise is leading the way as we capitalize on an improving economy, new products, and a better relationship between supply and demand in the long haul marketplace.

Our SRT refrigerated subsidiary had another strong quarter from a revenue and profit perspective. We continue to grow this fleet through asset allocation and growth through owner operators. SRT also continues to see nice growth and results within its regional operation.

Star, our southeast regional subsidiary, experienced basically flat revenue during the quarter but nice revenue per truck growth. The system conversion process that took place at Star in January is leveling out, and the operation is beginning to explore efficiencies and tools presented within the system. We fully expect Star to contribute to revenue and profit growth in 2010 as well.

Our non-asset based Solutions subsidiary made significant gains in the quarter compared to year ago. The contributions of our broker staff and agent network produced a slight improvement in our gross margin percentage as we battled through a tightening capacity market. We believe our rationalization process over the last three quarters has us positioned to grow this operation again in the near future.

Our cost reduction efforts continue to produce strong results. We produced another solid quarter of reductions versus year ago, highlighted by another record on trucks per non-driving employees and the best first quarter DOT accident rate per million mile in our history.

Even with a $0.66 per gallon increase in the gross cost of diesel fuel when compared to year ago, we were able to minimize the effect of that increase through reduced empty miles, reduced broker freight dependency, and improved fuel economy. Unfortunately, though, we did have a few major accidents that impacted our overall insurance costs, contributing to a $.029 per mile increase in casualty claims. Going forward, we believe our new casualty program with a lower self-retention limit of $1 million will reduce our overall volatility within the insurance area without a significant incremental cost.

As discussed last quarter, we made the decision to invest in keeping the tractor fleet as young as possible to help delay the additional costs of the new EPA 2010 emissions standards. We are fully on our way to replace another 900 tractors during the first seven to eight months of 2010, resulting in an average age of our tractor fleet has declined from 26 months to 24 months since the first quarter of 2009.

In summary, although we are encouraged by our first quarter results, losing money is not an acceptable performance. The utilization improvements over the last couple of quarters are providing the impetus to focus on network refinement, capacity allocation, and yield improvements with our customers. It's time for rates to increase.

On the cost side, we'll continue to scrutinize unnecessary spend. But, the tightening driver market and CSA 2010 ahead of us has us focused on providing the safest and best driving environment possible for our employees. Our technology investments mentioned last quarter are in full rollout mode which we feel will help us further reduce costs going forward.

Our summary statement that we mentioned last quarter is that we are continuing to focus on good, thoughtful, long-term, sustainable decisions. Short term, our entire organization, though, is focused and incentivized on producing an after-tax profit in 2010.

And Shawntell, now we'll open it up for questions.

Thank you. (Operator instructions.) Our first question will come from Chaz Jones, Morgan Keegan

Yes. Hey, good morning, David, Joey, and Richard.

Morning, Chaz.

Hey, Chaz.

Can you guys comment on whether you were profitable during the month of March and just kind of what you're seeing in April, given that the month's already over?

Definitely we had a very strong March and we were profitable in March. And quite honestly, Chaz, it reminded me of a few years ago kind of Marches. It was a excellent March for us. All four companies produced nice profits in the month of March.

So far in April, we see that from a top line standpoint. And I believe from a bottom line standpoint, we'll continue to see very nice improvement in all those areas. We're very excited about what we're seeing the month of April and how we're ending the month.

So, the month's not over with, but we continue to believe we got costs that are -- that have gone down dramatically. And we don't see anything in the month of April or May that's going to make some big increase unless -- fuel's the wild card that's out there. Other than that, we think that we got our line items in pretty good shape and we'll continue to work on reducing them even further from that standpoint.

So, I'm happy about top line in March and I'm happy with it in April as well.

Okay. And then, I was actually a little surprised at just how strong utilization was. I think if I'd look back at my model, and if I'm correct this was like the strongest utilization quarter just from a miles per truck standpoint since like 2002 from a first quarter perspective. And I guess what surprised me is, if you go back, I mean, you guys have a regional fleet now. I didn't sense that this was probably the strongest first quarter of freight demand since 2002, and I think you even said in your release you had a few more open trucks. So, what is it that's driving this utilization improvement, and, I mean, do you expect to continue to see sequential improvement in utilization?

Yes, we do. We've very happy. First of all, the utilization is the strongest in the first quarter since 1994. And it may have been prior to that, I'm not sure. We really just kept great records after we went public. And so, we had a outstanding first quarter on utilization.

It was all three operating Companies. You had, first of all, on our smaller length of hauls -- shorter length of hauls, say to Star. The southeast awoken a little bit, it got better in the first quarter. So, therefore Star was able to contribute pretty nicely to that growth in utilization. And then, you kind of -- basically you got SRT that -- the reefer side for the last couple of years has been in pretty decent shape out there. And so, SRT just basically continued to do what they have been doing for the last couple of years in terms of utilization.

So, you got those two, and then the Expedited side of the business on Covenant has really strengthened dramatically. And we're really seeing our teams, our hazmat team drivers, that are -- continue to become a very special piece of service that we're able to offer to that customer. And we're just seeing a lot of business.

I think a lot of that is the economy is up. The economy is definitely not falling anymore. It's ticking upward. And you've got inventory levels that are all time lows, and that plays very nicely into the hurry up and get it there. And so, that's where the teams really come into play at. But, the team side of the business, Chaz, is very, very strong in terms of utilization.

On top of that, we've done some things internally to improve how quickly we turn our trucks over and get additional loads. We put some new metrics in place. We've changed a little bit of the operations structure at the larger -- at the Covenant subsidiary. SRT had done this last year. And so, we're seeing some things from our people internally to get those trucks loaded faster and have them ready to be loaded as soon as they get to a destination.

And so, I feel like, and I think it shows in the numbers, that the economy has been part of it. But, on top of that, some of the changes we've made internally have improved our utilization above just what the economy's been able to provide for us.

It's interesting, Chaz, and Richard's exactly right. We came up with a system. We call it -- Velocity is what we're calling it internally. And Joey mentioned on the conference call, or on his speech there, that the last five months that utilization was better than the previous year. And that's when we started this process, that we'd be in continuous improvement on a process called Velocity that came in in November of last year. And, I mean, it has a lot to do with it.

Well, that's it. I mean, it -- like I said, it doesn't seem like this was the strongest first quarter of freight demand in the last 10 years, but clearly you guys have done things internally that have accelerated that improvement in freight demand -- I mean in utilization.

I don't disagree at all with that.

Shifting gears a little bit, on equipment rentals, that was down quite a bit. And I guess my question is how should we be thinking about equipment cost as you bring on these 900 trucks over the course of the year? Should overall equipment costs trend up some? Do you plan on leasing that equipment, or could you just kind of help me think through the mechanics of that?

Well, as you probably saw, depreciation was up as well, though.

Right.

And so, it kind of replaced, with purchased or owned equipment, some stuff that we had leased as they came off lease. And our intention would be to purchase those. We have that financing available through the captive subsidiaries of the original equipment manufacturers. And so, we'll be replacing that with additional -- it'll show up in depreciation and interest expense rather than in leased equipment as we move forward.

Okay. And do you expect overall equipment cost to inch up as that new equipment comes on?

Yes. And first the first quarter, we kind of -- we do a little analysis that takes all capital cost into account, which is depreciation, revenue, equipment rental, interest expense, and building rent. And for the first quarter versus last year, that was up about $370 per truck. And so, in the way that we look at that, that probably was an unfavorable variance of about $0.05 a share equivalent in the first quarter. And I think that that's probably something we'll see throughout the next two to three quarters.

Last question and I'll get back in the queue. David, your sense here that rates bottomed here for Covenant in the first quarter, and kind of how quickly should we be thinking about the pricing environment improving from here.

Chaz, we went out -- all three Companies have gone out in the last 60 days in particular and have really looked at lane by lane with our customers. And lanes that just absolutely had unacceptable operating ratios, we have dealt with those particular lanes even through increasing rates that went into effect, say, in the last two to three weeks and in the next 45 days kind of timeframe.

And so, I feel like that we're going to see some positive movement in rates going forward. I can just sense it, and the meetings are going well. And the vast majority of capacity all over the country is tightening. Some areas more so than others, but it's tightening.

And our customers are understanding it. So, they're not kicking us out like they have for the last two years. We've got customers that are again concerned about capacity. And so, we are having some very nice dialog with them. And I do believe that we will start sensing in the next -- between now and the next 45 days -- by the end of the second quarter, I think we'll start sensing some nice increases in prices or in rates.

Okay. Well, great. Nice job in the quarter, guys. And it looks like all the grinding over the last couple years is finally starting to pay off for you.

Thanks, Chaz.

Our next question will come from John Mims, BB&T Capital Markets.

Hey, good morning. There's a couple things. When you're looking at -- when we look at this truck replacement program, can you comment on what impact that'll have on depreciation going forward for the rest of the year?

Well, not without necessarily any exact dollar figures or anything. But, we'll see it -- we're going to be taking on more trucks really near the end of the second quarter and into the third quarter. They've been a little bit slower to get to us than we had originally expected. So, we'll see a little bit of movement there, gradual increases to depreciation.

Used truck prices seem to be holding up fairly well, improved a bit over last year. We're starting to see a little bit of -- in our deprecation number is our gains and losses, and we're starting to see a few gains there now as we sell or dispose of that equipment. So, I don't see it being a large increase, but it'll be a fairly flat increase over the next couple of quarters.

And those are sequential you're talking about?

Yes.

Yes. Okay, great. Thank you. And looking at the interest expense, it was down $400,000 sequentially. Can you comment on your balance sheet debt, what we can look at from an interest expense point of view going forward?

Well, we've got a few things. We've got a -- I think we mentioned we had a $8.7 million tax refund in the first quarter. It came in, I think, March 28th, so it was right there at the end of March. So, that was used to pay down debt.

We also have a few things that we've done. We had some cash tied up in a like-kind exchange program throughout most of the fourth quarter that we ended up using all of that to buy new trucks that we couldn't use to pay down debt. We've got another couple things in the works to possibly bring in some additional cash from our subsidiary that -- a non-operating subsidiary that should help us pay down some debt and improve our interest expense as well.

So, from a cash flow standpoint, we're seeing ability to pay down some debt. We got some help with letters of credit during the first quarter. As we renew -- our new insurance renewal gets into place and we renew some workers comp insurance that's coming up here in about four months, we'll have to add to that letters of credit a bit. So, the availability will come down a little bit. Of course, the use of letters of credit doesn't have the same interest expense that taking on full debt does.

So, I don't know. Kind of rambling there through that. But, with the addition of the capital expenditures, you should see debt increase a little but, but not as much as it could have if we didn't have those other cash coming in.

Okay. But, so as far as you get any windfall of cash, it's going to be applied to paying down debt?

Oh, yes.

What was the cash balance for the quarter?

At the end of the quarter, $9.9 million.

Okay. So, the total debt was down about $15 million from the end of last year. Let's see. The owner operator count is up 34 sequentially, and I guess two quarters in a row that's been up. Can you give us some sense directionally where that's going?

We've seen positive signs on that, John. It's interesting. We're really taking some market share more than I'm seeing more people getting into the owner operator business. These were the survivors. And during the first quarter, we had some pretty good blessings on getting a lot of owner operators. And I'd say of lot of it has to do with how many miles that we're starting to put on these -- available to them.

So, I think the word is kind of getting out that we're putting some miles on our trucks. And so, therefore they're coming available to us.

Great. Excellent. Thank you for that. That's all I've got. I'll get back in queue.

(Operator instructions.) Our next question will come from Dick Farwell, Arbor Group.

David, good morning. This is Nick Farwell.

Hey, Nick.

I just have a very quick comment. I'm curious about your long haul economics, and that is have you observed the competitive environment has in any way dissipated this particular cycle, perhaps enhancing your pricing power?

I think that we've seen the first part in particular that has taken place in the last -- probably over the last year, but definitely as the economy has gotten stronger, Nick, in the last five or six months is that everybody -- a lot of carrier have been concentrating a lot on the short haul regional marketplace. And throughout the '90s, as we went public and everybody saw our numbers, everybody and his brother got into the long haul marketplace.

And so, there's no doubt that, though the decade of the 2000s, that you had -- a lot of folks' competition increased in the long haul marketplace. And in the last two to three years, you've seen it decrease in the marketplace. And the vast majority of our competitors are getting more involved in the regional.

So, it's kind of -- it almost feels like that the Covenant side of the business, on the team side of the business -- SRT has always been in the long haul reefer side. But, that's a lot more of a specialty kind of deal. You either got a reefer unit on or you don't.

But, on the dry van side with the teams, it's almost feeling like it was prior to the last three or four years through the decade of the '90s, is that there are just not as many players. And if you got long haul freight, Covenant is definitely going to have to be involved. I would almost -- without arrogantly saying that, but we're doing to have to be involved in the conversation.

So, that's what's happening there. It's a good feeling. And that has not translated yet into big rates like it was in the 1990s. But, utilization comes first and then pricing comes.

Well, I just -- I was asking that in a generic sense with -- seemingly from my distant perspective, the industry is focused significantly more resources on the regional marketplace, and dedicated in particular, perhaps, thereby -- and then with the rates most recently being increased certainly in the rail side, but rail had gained share for a period of time. There's been some shifting of freight from West to other coasts in the South and perhaps the East Coast such that perhaps the long haul business has gone through maybe a decade or perhaps even longer a rather substantial consolidation.

Yes.

And now, with both of those trends at least stabilizing and perhaps reversing --.

Yes.

You may be in a position where, this cycle, you may be able to actually earn rather significant economic rents because most of the rest of your competition has reallocated their resources outside of the long haul lanes.

And as of April the 28th or whatever it is today, the 29th, that's the way I feel.

Are you finding the West Coast traffic, the ports on the West Coast, are starting to pick up again? I hear that in LA, anyway. I'm not sure about the --.

Absolutely. Absolutely. It's very interesting because even during the recession of last year, our California business was pretty good. It's not like when the West Coast slumped 35% that we had no freight. We had freight. And now that it is starting to come in kind of double-digit kind of increases that they're starting to get there, now it's to a point where we're not able to cover the freight that's available to us.

And it's very interesting because there is literally, as we speak right now, I mean, there is freight that is sitting on docks out on the West Coast. And you're seeing it gravitate also into the Northwest, into Seattle and even into Portland, that there's capacity issues for expedited long haul freight.

Right. And are you therefore beginning to see some pricing?

I think that we're around -- that's kind of what I was alluding to, that we basically have gone out into the lane by lane, all three Companies, but talk about the long haul, in the last 45 days. But, I think that we're going to start seeing some decent increases in the next 45 days, because the prior 45 days, Nick, has basically been going out and saying, hey, here's what's happening. We need some help. We're getting close. We're getting ready to turn this thing around and we need some assistance here. This lane here is killing us.

And prior to now, people would slam the door in your face because they were trying to keep their own company in business. And so, now they're concerned and they're having those conversations. Do I think it's 15%? No. We're not going to get that. I mean, we're not going to go in and do our best to find out how much true competition's out there by running everything off.

But, we are going to go and I believe we got an opportunity to get some decent increases as the year continues to unfold, starting in the next 45 days and going through the rest of the year, because some of these contracts are still in place. And we're not going to -- the shippers that have been with us for two or three years through this depression and through our own depression, we're going to treat them correctly. And so, we will deal with those contracts as they come due during the course of the year.

One last quick question, and that is there's been a fair amount of discussion out here in California that the LA -- well, the Long Beach Harbor in particular has worked very hard to rationalize itself and to make the transportation of goods, primarily out, meaning, well, from the Harbor into the heartland, they've tried to improve that both for rail as well as for trucks. Is that actually the case?

They are. I mean, they are. I think maybe one of the best things that's happened to LA and Port of Long Beach in the last couple of years is that I think they've found out that some of these shippers are willing to try other ports.

Yes, absolutely.

And so, in my humble opinion, that arrogance is not as much on their shoulders. And so, they're willing now to talk to customers. They're trying a little bit better. I sense -- even though we're not involved in it but a lot of our customers are, that I sense that they're trying to be a little bit easier at the ports.

But, it's interesting. It's pitiful that they have to give in a little bit based upon customers leaving and based upon losing lawsuits.

Right.

So, I don't know. They're a -- as you know, it's California. You live there. It's a funny place.

Thank you for your time. Appreciate it.

Our next question will come from Tom Albrecht, BB&T.

Hey, David, Joey, Richard. I wanted to --.

Hi, Tom.

Hey, guys. I'm glad, David, since I saw you in January that some things are playing out.

Yes. I am, too.

I wanted to, I guess, clarify some of the statements on making money. David, when you talked about March, the four divisions being profitable, I assume you're talking about at the EBIT line. And then, going one step farther, at the consolidated line including interest and taxes, were you profitable during the month of March? And then, I have a follow on question.

Yes, we -- all four Companies were profitable on any line item you want to look at all the way down to the net on numbers that me and you would be very happy with.

Do you want to share the magnitude at the consolidated level for March, or --?

No.

Okay.

But, a lot of it reminds me of the old Covenant. The old Covenant -- SRT has not been in the doldrums as much as Covenant. But, the SRT, old Covenant kind of numbers is what the March produced.

It wasn't just breakeven. It was better than that.

Okay. And then, Joey, you made some comments about -- I forgot how you worded it, but profitability for the year. But, it sounded a little open ended. Can we start thinking about profitability for the second quarter?

Tom, what I'd -- all we've said so far is that making money for the year. Do we think it's that throughout the year that results are going to sequentially build on themselves? Yes. Can we pick up $0.15 of earnings plus some from the first quarter or the second quarter? That's pretty stout. If we have a good accident quarter, but yet the new insurance program's going to help that significantly, a little bit higher fixed cost but obviously less volatility on the upside.

So, I really don't want to get into forecasting the quarters yet. But, if you kind of go back and look at history and see kind of when the Company was producing profits on an annualized basis and kind of look sequentially from the first to the second quarter, you're going to see some, if you recall, at some times some pretty big movements. But, usually what you had with that is that you had rates moving early second quarter-ish for all of us to pay for driver pay increases. So, you had some pluses and minuses throughout that time.

But, it's very possible the operating leverage that's been inside of the Group for several years is still there. And it's just kind of whatever you think we might could do relative to David's comments on rates. That's the big question.

Absolutely. And then, what about driver availability? There's a lot of discussion on how quickly that's gotten to be challenging, and I'm wondering what your experience is on especially recruiting drivers. I guess retention isn't a big issue yet. But, can you share some thoughts on the recruitment of new drivers?

Yes, it's -- there's no question it's tightening up. We started talking about it inside the Group back last fall that we felt it was coming sooner than later, and I think we were right. I mean, it's sooner than later. And I would say we definitely started seeing it tighten up throughout the first quarter.

I think each of the Companies has different things that are going on. You're right. The retention side is still, I think, really good across the Group. And so, still turnover is still -- relatively speaking for us, still in really, really good shape.

We did some Company specific things in one of our companies back in the winter to try to manage our costs from -- specifically within the Transport side with our team count. And so, we probably peeled back the recruiting side -- well, actually, I know we did. We peeled back the recruiting side probably too far back in the winter, which opened up some trucks. We gambled and it worked in one sense, but it's hurting us now. And as the market's tightened, it's become difficult to fill those trucks again.

So, we've got more open trucks than we want right now. And I think that we're watching it. We're doing a lot of things. I don't think it's quite time yet to raise scales. But, people are already launching out out there with sign on bonuses and increasing advertising spend. That's definitely happened. And so, everybody's -- I think it's coming.

Right.

It's coming. And CSA 2010 is not going to help it. It's only going to exacerbate it. So, it's going to -- it's coming.

So, rates -- that's what I was saying in the summary. It's time for rates to move, because it's time. If you're focused just on the driver piece, increased wages and inflation on the compensation side is coming. So, you've got to the have rates to pay for that.

And I'm sorry, Joey. Did you say how many open trucks, either as a percent or an absolute number?

I didn't say.

It's around 3%.

Okay. That's all I had. Thank you, guys.

Our next question will come from Todd Fowler, KeyBanc Capital Markets.

Hey, good morning, everybody. Thanks for taking my questions.

Hey, Todd.

Hey, just a follow up on the pricing conversation earlier. David, if 15% is a little bit steep right now to go out and ask for that sort of increase in certain lanes --?

Oh, yes, yes, yes.

What's your sense of what the market can bear? I mean, what's realistic right now kind of in the near term? And also thinking a little bit longer term, where should rates go over the next couple of years?

I think that this year you could be looking at two to four, three to five, two to four. Those kind of numbers are very, very possible. And personally, I think that's what the numbers should be. So, that's where I think this year will kind of trend going to.

Probably the number I jokingly threw out of 15%, I think that's where it's got to get to. I think that rates in the next couple of years have got to have meaningful double-digit increases. And so, I mean, you can't be paying what everybody's starting to pay for trucks and trailers and all this kind of stuff that is happening out there. Fuel, who know what fuel's going to do? But, you can't continue to do that and not have double-digit increases in pricing.

So, that's kind of where I'm at. Two to four, three to five kind of number as the year progresses. And then, I think that you're going to be looking at double-digits, and it may be as close as the next 12 months.

Got it. No, that -- all that makes sense to me. And then, just a follow up on the driver issue. Is that more of a function that you've pulled back in on the recruiting function and so you just don't have as many drivers, let's say, lined up and close to the queue, or is it that really within the industry there's been some structural changes and there just isn't that pool of people that you'd want to seat in your tractors and actually have in your workforce?

Todd, I think it's both of those. I think that reducing the recruiting deal in January and February, as Joey said, it helped on one standpoint, from a cost standpoint, but it also hurt on continuing to grease the wheel in making sure they're coming in here.

It's interesting, because it is -- I see it as three asset companies. SRT is doing very good on driver hires. Can't complain at all on the driver hires. They're staying equal to their losses, so they're doing well. And I think at Covenant, they -- it's tough right now, but they made the decision right into the wind of the economy picking up.

But, the thing I struggle with, Todd, more than anything is that we still have got 16 million underemployed people out there. That has not changed. There might be a little drift of capacity that's tightened up, but we still have got a lot of unemployed people. In the last six months, it has not changed.

Now, what has changed is that you can make $400 and $500 a week drawing unemployment. And so, I know there's a balance between the government trying to take care of our people, which we have to do and I understand that. But, between two years of unemployment benefits, which way are we incentivizing somebody to get a job? And I'm struggling with that.

Got it. No, and that's actually the genesis of my question. I mean, I was surprised on the driver commentary, I mean, given the fact of where unemployment or underemployment is. And it sounds like with miles going up that there's opportunity within your business that you should be able to see drivers. And I was just trying to get a sense of is that more because you haven't been actively in the market or is it that there aren't drivers out there.

Well, you and I are on the same page.

Okay, just two last ones, then. Looking at the deadhead percentage or the empty mile percentage here in the quarter being below 10%, can you talk a little bit about how you get there, and is that -- can that go lower? And what's the opportunity with that metric and kind of the thoughts on where that's trending right now?

Yes. We're going to continue -- as I think about all three asset Companies, we're going to continue to drive that lower. I think that's another thing that we started really strong five months ago on measurements and processes is deadhead percentage. And as I think about the three Companies, they all three have made some good headwind -- headways into deadhead percentage.

Covenant has really dropped dramatically on the asset side. Those guys are doing a great job on driving. And it just comes down to measuring it and making sure that you're sending it after the right trucks. And SRT and Star both are in good position. They're in good shape on their deadhead, but I do believe that there's opportunities on both of them to reduce their deadhead even further than where they're at as we speak right now. So, I expect deadhead to continue to decrease.

Okay. And then lastly, and maybe this is a little bit more theoretical. But, have you looked at any historical patterns between seeing strength in the expedited business or the team business and a recovery? And how long you would expect to see that from a -- kind of a replenishment or restocking, and how much that could lead a recovery in just kind of more normalized freight activity?

There's no doubt that even when we're producing 90 operating ratios, CTG -- at that time just Covenant and SRT being the only two. But, the first quarter is always more difficult on us, and it's because we have X amount of teams that got a higher -- paying two drivers instead of one driver during a time that the economy always, in the first quarter, will be the slowest quarter of the year. And if you went back in history, you would see that even during great years that our first quarters would be less than most. And it's because our teams could not get out here and run.

I mean, the economy being a little slower coming out of Christmas as well as weather related deals, that they just could not run. And then, as the summer came about and the spring came about and the fall came about, they would just get wide open. And really, the teams would start coming up, and so you're really starting to run that plant three shifts instead of one shift.

And so, that's the normal, even during good times. And I think that we saw -- in '08, we saw what the depression did. The depression hurt the transcontinental, the just-in-time, because everybody spent a year reducing their inventories. Usually when inventory levels are at current numbers or even worse, instead of one-two, one-three or so, maybe they're one-six, one-seven, we continue to see good opportunities for just-in-time.

But, there's no doubt that during typical environments of the economy, the just-in-time is a player. During a depression, we learned it's not. You're having to fight. Even though, guys, '09 was horrible, we started moving. Our teams started moving some decent miles even in '09.

So, yes, I mean, it definitely helped the recovery. I think it's a leading edge on the recovery. But, I think, Todd, if I was anybody, I'd look at inventory ratios. And as long as they stay low, they're going to need just-in-time.

Well, that makes sense, and we do take a look at those. So, thanks again for the time, guys, and good luck. Thank you.

Our next question will come from Jack Waldo, Stephens.

Morning, gentlemen.

Hey, Jack.

Hey. I just wanted to get your guys' comments on what you're seeing in the refrigerated market relative to the dry van.

Reefer, it's interesting. Tony and I were talking yesterday, and number one, it's very strong. We're very happy with what we're seeing on the refrigerated side of the business. We continue to put some assets over there on trucks, the Company as well as owner operators, that we're able to put into that.

And so, the refrigerated side of the business is growing for us. And so, I'm very happy, very pleased. Most of the regions of the country are in pretty good shape. And it's interesting because the last couple of years, in my opinion, as I look at our Company, our refrigerated business really did not have much of a hiccup. And there's no doubt that the refrigerated side of the business was leading the "industry" in terms of freight, and it didn't get hit as hard as the dry van side.

But, there may be something transpiring now, as we speak, that the refrigerated side is still good, but I'm really starting to see maybe that the dry van side is starting to get equal if not better than the refrigerated side, and in terms of freight availability. So, I'm very pleased, very. So, don't take that as a negative. Oh, I'm very pleased from that standpoint, but I'm seeing maybe a resurrection of the dry side where the refrigerated side never died.

Got you. Okay. Thank you very much.

Thanks, Jack.

(Operator instructions.) Well, gentlemen, at this time it looks like we have no further questions in the queue.

All right. Thank you, guys. Look forward to talking to you again next quarter.

Thank you. Ladies and gentlemen, at this time this conference has now ended. You may disconnect your phone lines, and have a great rest of the week. Thank you.