Covenant Logistics Group Inc (CVLG) 2010 Q2 法說會逐字稿

Good morning and welcome to the Covenant Transport second-quarter investor conference. Please be aware that each of your lines is in a listen-only mode. (Operator Instructions). It is now my pleasure to turn this morning's conference over to Richard Cribbs. You may begin, sir.

Good morning. Welcome to our second-quarter conference call. Joining me on this call this morning is our CEO, David Parker, and our COO, Joey Hogan, along with various members of our management team. As a reminder, 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 and filings with the Securities and Exchange Commission.

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'll open up the call for questions.

In summary, the key highlights of the quarter were -- even though our tractor fleet was the same as the year-ago period, freight revenue increased 9% to $141 million, led by a 22% increase from our SRT refrigerated division.

Versus year ago, freight revenue per tractor increased 11%, led by a 16% increase from our Covenant division. The second quarter of 2010 was the second straight quarter of record-producing revenue per truck since being public in 1994. After five straight quarters of rate per loaded mile reduction versus the year-ago period, and despite an 11% increase in average length of haul, we still experienced a 2% increase versus year ago and a 3% sequential increase from the first quarter.

The asset-based divisions operating expenses, net of fuel surcharge revenues, declined almost $0.07 a mile versus the second quarter of 2009. This reduction was led by more than a $0.04 per mile reduction in our cost of fuel. This fuel reduction was achieved despite a $0.69 per gallon increase in the DOE cost of fuel in the second quarter of 2010 above the second quarter of 2009. Our fuel cost savings initiatives, as well as an approximate $0.035 per share benefit from the early termination of a portion of the future fuel hedges that were in place, and some fuel surcharge benefit from the lag effect of reducing fuel prices during the quarter, enabled us to capture this reduction.

In our brokerage subsidiary, Covenant Transport Solutions, total revenue declined by 7% versus year ago. Our gross margins were squeezed due to tightening capacity as purchased transportation was 85.5% of total revenue in the current quarter, up from 82.2% of total revenue in the prior-year quarter. Solutions' other operating expense as a percentage of revenue decreased to 11.8% of total revenue in the second quarter from just over 14% in the second quarter of last year.

Since the year end 2009, our total indebtedness net of cash and including the present value of off-balance-sheet obligations has decreased by $8.7 million. And we have borrowing availability of almost $45 million currently on our credit facility.

We were in compliance with our financial covenant at the end of the quarter. Versus year ago, our consolidated operating ratio improved by 760 basis points to a 92.9% OR, our best quarterly performance since the third quarter of 2004. We made $2.9 million after tax compared to losing $3.1 million last year.

Joey will now discuss these highlights in more detail.

Thanks, Richard. As far as the business environment is concerned, we have seen good freight volumes since March. As mentioned earlier, our SRT and Covenant Expedited franchises saw tremendous freight improvement. Freight volumes improved enough throughout the quarter that enabled all three asset divisions to begin moving not only spot pricing, but contractual pricing as well.

There is no question, though, that the bid season has slowed dramatically, and the month of July is seeing its normal seasonal pullback in freight. But it is in line with our expectations.

Leaving aside what we consider to be an unlikely possibility of an economic double-dip, the tightening driver market in combination with the looming start of the CSA 2010 initiative is probably our biggest concern right now. Our SRT subsidiary is growing, and has all its trucks full at this time, while Covenant and Star have some unseated trucks.

All three asset companies have been working diligently to address any CSA 2010 issues from a Company and an individual driver standpoint, and feel that the startup of Tennessee and Arkansas will be sometime in the winter of 2011.

Our Covenant Transport subsidiary did increase team paid by $0.02 a mile, and solo pay by $0.01 a mile effective July 1.

One item of note is that our tractor equipment plan has also changed. Our progress during the first half of the year has given us the ability to further enhance the condition of our fleet and increased our order to replace another 150 tractors during the second half of the year. Our tractor fleet is already one of the youngest in the industry at an average age of 1.8 years, and this order enables us to continue our quest to smooth out our equipment purchase timing, minimizing disruption for our drivers and customers.

In summary, we are pleased and encouraged with the process over the past couple of quarters. We had had a goal to produce a profit for the full year of 2010, and we are thankful to say that we achieved that in the first six months. A lot of planning, tough decisions, and hard work are contributing to our improvements. We would like to thank our employees for their tireless efforts and determination, and our customers and vendors for their patience as we march towards profitability.

Additionally, we like to thank our new team members, or consultants, that they would commonly be known, that have been working with us over the past couple of years in facilitating a lot of these improvements.

As for the rest of 2010, we feel that capacity has tightened to the point that rates will continue to slowly increase from our second-quarter levels. We believe our costs are in good shape, excluding bubbling pressure on the driver pay side and costs for new tractors. We expect our tractor fleet to remain around 3,100 trucks.

We will not be providing earnings guidance for the second half of the year, but we can say we expect to produce a profit. And Shantel will now open it up for any questions.

(Operator Instructions). Chaz Jones, Morgan Keegan.

Nice quarter. My first question was on utilization -- one of the best quarters I think we have seen, if I get back in my model, since maybe 2003. And certainly very impressive. Just kind of curious -- how much more could utilization improve from here?

Chaz, as I think about all three companies, quite honestly, on the Covenant side of the business, they have been humming very nicely. Call it low inventory levels or supply chain, and a lot of import business off the West Coast.

The only way that I would see the Covenant side of the business really increasing any more is going to be the increase of our teams, which they are attempting to do. They are trying their best -- they came out of the driver pay. So they wanted to increase their teams. So that's what it's going to take, I believe, on the Covenant side, because it is moving at numbers that I haven't seen since the early 1990s. So they are doing well.

I think the SRT side of it -- though it's very good, very strong, I think it could go up a little bit. We have thrown a lot of assets to SRT in the last 12 months, so they have been able to gobble up about 100 trucks. As we move them within the Companies, they have been able to gobble up about 100 trucks and keep their utilization around flat. One month it would be up one, next month it will be down one, those kind of numbers. So they are kind of flat on the utilization.

So I think as they get somewhat where their trucks are going to be, I think that SRT has got the ability to go up some.

Star has the ability to go up. The Southeast is pretty well running and clicking very nicely. Star and Covenant are the two that had some open truck issues. And it's really put a drag on the Star unit, because they run about 500 trucks. And when you have 40 open trucks -- as you know, that's a large percentage.

Even though the last week or so, they started filling those trucks very nicely -- and I think they've got a shot at having their trucks full probably in the next 10 days to two weeks. And if that's the case, then you will start seeing that they're increasing utilization, because their manned truck utilization is pretty decent. It's pretty good. So I think there's some great upside potential in the Star utilization.

So overall, flat to may be up 1 or 2% kind of numbers, Chaz, depending upon when we get our trucks full.

Sure, sure. I got it.

Chaz, we had 3% unseated trucks at the end of the quarter. And historically, we can run at 1% or just below 1%. And so you've got potential for 2% there. Star, just to give you a number, was actually for the second quarter about 4% below last year's utilization number. So they definitely have some productivity improvement opportunities, and --

And all because of open trucks.

And most of that is because of open trucks.

And then also, we have sent the same consulting group that helped Covenant with an internal initiative to improve their utilization -- are now at Star. They started about three or four weeks ago. And we are going to start seeing some productivity improvements related to that partnership that we have there coming up real soon.

Yes, is the lead time on that -- you would expect to start to see some of that at some point in the third quarter?

Yes, and it should be fully ramped up from that assistance in the fourth quarter.

Okay. And then you guys mentioned July has pulled back some, but it's in line with kind of your expectation. I guess maybe I was just looking for some clarity in terms of -- are you still seeing on a year-over-year basis in July pretty healthy gains?

Yes, Chaz. I think if you -- everybody needs to be thinking about -- last year, what you saw -- what we saw; let's say it this way. What we saw was freight stabilize late June and July. And it bottomed. It bottomed, and actually, from that point through November, you started seeing some --albeit inconsistent, you saw some signs of freight trying to move.

And so -- and in November, it moved to another level; March, it moved to an incredible level -- early March, I would say, this year. So we are starting to wrap around some changes versus year ago I would say starting in month of July.

So all that said, yes -- freight is still -- versus year ago looks very good. But it has pulled back a bit in the month of July. And so we are still feeling real good about -- still have a lot of customers talking to us about surge opportunities, pop-up opportunities, dedicated opportunities. So all that's coming and it's still very, very strong. But bids -- no question bids have slowed dramatically out in the marketplace.

Okay. And then just as far as some clarity on maybe the pricing outlook, I think you mentioned some measured increases from here. I think maybe it was David who, on the first-quarter call, said that maybe the expectation was pricing could potentially be up 3% to 5% by the second -- well, by the end of the year. Any changes there? I mean, it would seem like that 3% to 5% still holds pretty true.

Yes, it does, Chaz.

Okay.

I just think the thing -- when you say slowly, is you need to think -- when bids have slowed, unless you try to revisit an existing contractual relationship midstream, a lot of the bids have slowed. So it's either spot market adjustments, new business that you replace business with -- so your opportunities to affect rates from here till probably the fall are much smaller than it was in the first half of the year. So that's why -- when we say it's going to slow, the incremental moves, I believe, are going to slow between now and the end of the year versus what we have seen in the first half of the year.

And then lastly, and I'll get back in line, just on the fuel hedge -- I guess one, are there any other fuel hedges in place? And maybe a silly accounting question is -- is that something we really should be backing out?

Well, we still have quite a few -- to your first question, we still have a lot of hedge in place through the end of the year. Up to as much as 23% of our fuel purchases are hedged with contracts. And then on top of that, we have the natural hedge of fuel surcharges that covers another 70% of that or so. So we only have about 7% naked fuel purchases that still remain volatile to the market throughout -- 7% to 10% through the rest of the year.

On the accounting question, yes, that's not going to happen every quarter. We're not going to be able to sell those at that kind of a gain. So I think that it is fair to back that up. But we were -- just to let you know, we were able to basically put that same contract back in place about two weeks later at the same rate. So we got back into that same hedge position shortly thereafter, after making that nice gain of $840,000.

So we could in the future potentially see further gains, but it's not something that's likely to happen every quarter?

No, the expectation would be for that to balance out our fuel costs, then us to keep those in place. We don't buy those speculatively in order to sell them. That just looked like an opportunity that we needed to take advantage of, and we did. And like I said, we got back in place with our hedge program not very long after -- really, almost two weeks. So that's not something you should expect. But the hedges that we do have in place keep fuel at a level that is below what we originally had budgeted for our fuel costs.

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

Jack Waldo, Stephens Inc.

Congrats on the nice turn around you've had. It's got to feel good.

Thanks, Jack. It does.

I understand -- and correct if I'm wrong, but it sounds like July is progressing like you would -- a normal July. Is that a fair statement?

Yes.

Do you think you can be profitable in July?

Yes.

Okay. So you expect profitability in July.

Yes.

Could you also maybe talk a little bit about the contract breakdown? How many contracts come up maybe in the first half of the year relative to the second-half of the year?

You know, I don't know if Joey has the exact number, but the vast majority of large contracts are in the first four months of the year, Jack. And if I was going to throw a percentage out there, I would say 80% kind of numbers that will happen the first four months of the year. So we are past that. And the remainder of them will be through the second half. But it really starts slowing down pretty dramatically. I mean, onesie, twosie kind of deals the last seven or eight months of the year.

I think, Jack, the way -- and these numbers are a little off, but our bid activity -- and this is measured where there's at least 10 lanes on a bid, so that can be -- that can catch some small bids and supplemental bids and things of that nature.

So that volume was down about -- this is just for the transport piece, but this just gives you a flavor. The volume has been down 60% -- no, that's wrong -- 40% in the first quarter. The bid activity was down another 30% in the second quarter. And I can say so far in the month of July, it's trickling in.

So it's a big -- and I agree with David. It is normally front-half weighted. Shippers tend to try to lock in pricing in the winter. And when freights [soften]. But nevertheless, the volume is slowing dramatically.

And you know, Joey, it seemed like there was this overall thesis that the bids were down because shippers were, to their benefit, I guess, realizing the market had shifted and they didn't want to put things out to bid, and were kind putting the impetus on carriers to force the issue. Do you think that's still the case, or do you think that bids aren't being put out now? You talk about those year-over-year declines -- because there's not a business there to be bid?

Oh, no, that's not the business in there. The business is there. It's just the volume, the amount of activity throughout 2009 was huge. And some of those are one-year contracts. Some of them are two-year contracts.

And so as those came back around, there will be another -- there usually is a smaller flurry in the fall, and then it will start back up again next year.

There are some that waited, that had waited. We have got one large customer in particular that waited until this summer to revisit it. And they're a very good customer. And so we're working with them. And that could be very impactful, depending on how that goes.

But I think that the business is there. And I believe that you're not seeing, as we saw late '08 and '09, shippers bidding contracts midstream like they did then. You are not seeing that now. You are seeing it run to term. And then you are seeing a growing, at least, desire to try to capture two-year pricing, even in the first half of the year, when things are tightening up pretty quickly.

So it's interesting right now. But I think it's going to be small, because a lot of work has already been done. So you're going to have to pick your spots on where you still might need some help before a contract expires.

That's good color. Two questions here. How is spot market pricing trending in July maybe relative to June?

Still very good. I'd say it has dropped back just a little, not a lot. Actually, we have had a few weeks that have been up still, because we track that each week. And so I'd say it's still very good. It moves a little bit.

What we call spot pricing includes not only our broker freight, but also our ad hoc spot pricing, where you don't have contractual rates in with a customer and things like that, where you need a onesie, twosie load, and things of that nature.

So I'd say it's still real good, and pricing is holding. And other than the normal seasonal -- you know, you've got a few markets that might be a little soft, and you try to move some trucks during that particular week.

My last question is probably a bigger picture question. And actually, a competitor put out a really nice piece on this. But kind of the odd thing from our seat is -- typically, trucking will lead into and out of a recession or any type of slowdown. And it just doesn't seem, at least from my seat, that we've seen any material type of slowdown yet. So it's kind of contrary to what you're seeing on these macro data points that we hear every day.

My question to you guys is, what do you look at as your primary indicators of your business going forward? And why do you think that there is a disconnect, if there is a disconnect, between what you're seeing in the indicators you looked at, relative to what you are seeing in business trends?

You know, Jack, I think it -- we basically look at the same thing that everybody else does. But I think that a couple of major factors that we look at that we see kind of hand-in-hand with the operating of our companies is the [ISM]. And any time that that truly is in that 52 kind of number, trucking is feeling pretty good, is what we have came to conclusion.

As well as inventory levels -- we feel like that's definitely a leading provider for us. And as long as they are staying low, [that] we see that the business environment stays pretty good for trucking. So those are the two main -- I mean, we look at eight or 10, but those are really the main two that we really focus on on determining what we think is going to happen.

Then I think after that, trucking has been just in a position in the economy by itself and that's called capacity. Whatever number we want to say, 200,000, 300,000, 400,000 trucks -- whatever it is, it's thousands upon thousands of trucks that have left the marketplace. And there's nobody that's going out here and buying a bunch of trucks to get in this business. And nobody's definitely starting one from scratch to get into this business. Maybe some are trying to fill some open trucks that will come back into place. But it's not because of real growth that it's truly happening out there.

And so I think as long as trucking maintains the discipline not to add capacity, I think the banker is going to help us for a long, long time on that issue. I think as long as ISM is in that 52 number, and I think as long as inventory levels remain low, that trucking is going to be in pretty good shape.

I think the word to describe it is that for the first five or six months, I would call the freight environment overwhelming. And I would say today it's good. That is kind of what I'm saying is the July kind of effect -- that we expect back-to-school to start soon, and we see some glimmers, some glimpses of that starting to happen. The freight is good, but it's not overwhelming.

Got you. Fair enough. Thank you guys for your time.

Nick Farwell, Harbour Group.

I just want to follow up a bit on the question that was just asked, and that is about the nature of this recovery. When you look at how this pattern versus prior patterns -- is there anything in there, David or Joey or anybody on your team, that gives you some further sense, confidence, outlook, indication, whatever the right word is, about the durability and sustainability of this recovery?

Nick, the last two years have been just so ugly and so mean that it's hard for any of us to have total confidence. I think it's much more the capacity side of the equation. I don't think that we are going to go into a double dip, even though my percentage of not thinking we are is 70/30, so that means 30% of me still thinks we're going to go into a double dip.

But I just think that the government has shown they don't care how much money they spend, they're going to try their best to keep us out of a double dip. And so I don't think that that is the issue.

And I really believe as long as there is a 2% GDP growth in the economy, that this capacity issue is always going to be there, and that at 2% GDP, we all are going to feel good. And I think that we will have pricing ability in our corner, and I think that our business environment for trucking will continue to do well at 2% kind of numbers. So then the question is, is it going to go below 2%? And we flip a coin and look at it.

Nick, I'd like to add to David's point on capacity. You've got a tremendous amount of capacity headwinds coming that -- there's a whole list of them, from CSA 2010 -- I believe it's going to be a pretty significant issue that's going to affect capacity for every single carrier out there -- some, a larger degree than others, but a fairly -- it's going to be meaningful.

You've got equipment pricing continuing to go up. You've got wage pressure for a lot of our -- the majority of all trucking company employees that you're going to have to do something about. You've got -- financial institutions are feeling better about the world. And so actually, instead of working with you as much, because the used equipment market is pretty stinking good right now, they are not going to be willing to play as much as they have over the last couple of years. You've got regulatory -- other than CSA 2010 issues, whether it's EPA, California, you name it --

Hours of service.

Hours of service is back into discussion again. And so we've got a tremendous amount of capacity headwind coming out there that is going to further impact the freight market, which we all know sometimes moves a little bit differently than the general economic conditions.

So I'm pretty bullish as far as capacity is concerned from a freight standpoint. The economy -- and I agree with David -- if it's sluggish, twoish -- which is growth. I believe that as long as -- I predict that there are going to be some major capacity problems next year -- major. There's going to be a lot of freight sitting, in my opinion, next year.

Do you think in any degree you are seeing that at the customer base, the realization of that possible outlook amongst your customers as you went through the bidding process during the spring?

Not as much as frankly I would like. But they're definitely having awareness that's growing dramatically, mainly because of CSA 2010. I think that's probably the big thing that's pushing a lot of discussion. The other items, whether it's -- because they're feeling it. I mean, like David said, it was overwhelming -- a lot during the first half of the year. So there's not many shippers that did not feel problems moving freight -- not many of them at all.

And I think that a lot of them, I will say -- and there's several that may be on the call -- have been very respectful and understanding and cooperative in helping and thinking about the future.

So it's not as probably as much as I would like, but I think the carriers and the transportation providers are going to be very diligent in our discussions throughout this year as we go into 2011.

The wages have got to move. That's the only -- CSA 2010 is going to cause wages to move, and move meaningfully. Meaningfully. So we are going to have to move, which will affect capacity, which is going to affect pricing to help pay for that.

Yes. One other question -- since you guys see the nuances on a daily basis in your book business -- in your bookings. Is there any information content about the economy that you are seeing long-haul -- in a growth sense, long-haul versus regional? David commented earlier that the long-haul business off the coast has recovered, I think -- I can't remember the word you had, but I got the impression it was quite notably.

Yes, you know, the long-haul side of the business is very strong. I have no complaints whatsoever on the long-haul. It is doing very well, [added] by the fact that you saw the average length of haul up 50 miles or so.

11%.

11%, He average length of haul. So it gives you an indication there of what the long-haul business is doing. It is just very, very strong, Nick.

I saw that. And I was curious, David, is that telling you anything about sort of the sustainability of the economy? I tend to think of long-haul as having a fair element of inventory restocking, retailer, Asia stuff coming off the coast --

Yes.

-- moving inland.

That's all correct statements.

There's no question even inside our own models -- we look across our companies. The teams -- trucking sees changes in the economy first. It does. And then when you break that down, teams see it really first.

Yes, right. And then one last thought, and that is in the past, as we have talked of the last, say, three or four years, there's been this notion that while the industry has been shrinking, the long-haul has been shrinking exponentially more. Is that an accurate conclusion?

As I remember our discussion we had with somebody in the first-quarter conference call, I don't know that the long-haul is growing. I agree that the ports are coming back. The imports are definitely up. Whether that's over the boats or whether we're picking up airfreight that's coming off of planes, we are seeing a very nice pickup of port imports coming in.

But I also think it has something to do with -- there are just not as many players running now in the long-haul market as there were in the last five years.

Yes, that's what I'm asking about, because I've got to believe that sector has shrunk.

It has shrunk. The mom-and-pops that are part of that -- whatever number, 300,000 trucks -- (multiple speakers) part of that. They are gone. I think it's going to be a long time before they come back. They are not going to come back until the banks allow them to come back.

And then in the large fleets have, as you see, have gone more to regional. And that fits right in with our model.

Yes. (multiple speakers) So the last -- the notion there is, are you seeing that manifested in pricing? Are you getting better pricing in long-haul than you might have expected (multiple speakers) regional --

Yes.

Okay. What I would've [figured] (multiple speakers)

One point of emphasis there -- just the Covenant subsidiary alone, length of haul was actually up over 13%, with a reduced number of team trucks. And the rates were still up around 3%.

Thanks very much. I appreciate that. That's what I was looking for -- those insights. Thank you.

Tom Albrecht, BB&T.

I just want to get a few more specifics here. Within Covenant Transport, you averaged about 1,743 trucks. I know 868 were teams. Approximately how many are dedicated now -- and I know there's not very many solo OTR left, but we'd just like that breakout a little bit.

It's about -- we've got about 500 trucks running dedicated and right around 250 trucks running over the road solo.

Okay. And is the environment such that OTR solo is also profitable?

Tom, it's not where we want it yet. We are doing some new things productwise this year that -- we are still actually going through another generation as we speak.

The way I look at the solos inside of transport is that you've got the expedited franchise would not be as profitable as it is without the solos. And so frankly, I believe we have done the solos a disservice in my opinion over the last four or five years in the way we think about it.

But nevertheless, I've got to have solos for the teams to be as profitable as they are. So you can't look at it completely in a vacuum without understanding its impact to the network. So all that being said, I still think that the solos can get better. But no, it's not where we need it to be.

A lot of those solos, Tom, basically act as a dredge.

Act as a what?

As a dredge for the team -- to give you an idea. That's what Joey was kind of saying there. You know, intermodal comes into Chicago, and then a dredge takes it to Indianapolis.

So a lot of these solos, that teammate take it and run it from Los Angeles to Chicago, and then a [single] will take it to Cleveland. And so they definitely subsidize the team side of the business.

Okay. Yes, that's a good explanation. And in terms of stock options and that, how many days more are you eligible to sell and approximately -- I'm not just talking to you, David, but just -- other members of the management team, how many options might be out there? It just seems like there might be some options in the -- is it $8 price range, or is it even lower than that that might've been acting as a little bit of a deterrent to the stock recently?

The options are $8 options, and there's only about 25,000 remaining -- but those may be gone by the time we are speaking here -- that were available to sell. And there were approximately 160,000 shares that all expire on July 26, which is the only reason that this management group decided to exercise and sell. They have been holding them for 10 years.

Yes. Perfectly understandable.

Yes, but they've probably gone this morning.

Okay. And then, David, you are a pretty savvy buyer. How are you feeling about your investment at this point?

We are very, very happy.

Well, I know you're happy. But any thoughts on whether or not you might provide some additional liquidity to yourself?

No, no, I don't have that. No, Jacqueline and I do not have that on the game plan. We are 53 today, or 53 coming up. So one of these days, we'll probably do a little more. But we don't have it -- we don't see it in the next year or so, from a personal standpoint.

No, that's fine. And then lastly, let me just ask the question a little bit differently. The data points show some seasonally softening trends, but the anecdotes are good. Just simply from either a load perspective or a utilization perspective, July versus July a year ago, are the growth rates comparable to what you had in May and June, for example?

They are a little lever. We are a little above 5% utilization improvement so far in the month of July.

Okay. But still --

Still strong enough.

Yes, still strong enough.

Still overbooked in many markets.

Right, right. Okay, that's all I had, guys. Thank you.

Donald Broughton, Avondale Partners.

Good morning, and again, congratulations on a strong quarter, gentlemen. Just real quick here, one little kind of a clarification. I want to make sure I understand. The fuel hedging program -- while you were able to trade the future and certainly take advantage of it, the purpose of it is more to just mitigate risk on the gallons that you do not get fuel surcharge on that you burn. Is that the approach?

Absolutely. We are trying to fix our prices on fuel for the remainder of the year and into next year, we have some hedges as well.

I know. Joey and I used to talk about it all the time, and Richard, you and I have talked about quite a bit over the last couple of years. For years, I could just model it $0.18, $0.19 a mile, that that's what your net fuel was going to be. You got to $0.17 this quarter, which is extraordinary. But on an ongoing basis, $0.19 is a more safe number to be modeling for. Is that right, or are my expectations wrong here?

It'll be north of where we were this quarter, more than likely.

It will be more like $0.19 a mile, is a more realistic expectation long-term, right?

It still depends on fuel prices long-term.

Donald, let me jump in. I've got to thank our employees. There's a lot of things -- the hedge was a small piece of that puzzle. And there are a lot of things that we are hitting numbers that we've never -- some of them that we've never seen before, whether it out of route miles (multiple speakers) idle time for our trucks, just incredible numbers -- fuel economy.

Fuel economy in the trucks is as high as it's ever been, which it should be, because trucks are more efficient. But nevertheless (multiple speakers) fuel economy; broker freights is as low as it's ever been. (multiple speakers)

Fuel surcharge recovery could be a little bit higher for the group. We've seen periods where we've been a little bit higher than where we are now.

So I don't want anybody on the call thinking that the hedge was the reason we had $0.17 a mile. There's a lot of other things.

So to your point, Donald, I agree -- this was a great quarter. We did have a favorable lag effect for fuel, which affected everybody. As fuel did throughout the quarter. But nevertheless, I do believe, Donald, those old days are in the hunt of where I think we could be.

Great. Because yes, it was just a big difference for you, given the amount of fuel you guys burn, given your length of haul, that the difference between whatever -- whether it's $0.18, $0.19 a mile $0.22-plus a mile is -- well, often the difference between profitability and unprofitability.

So congratulations to everybody who helped achieve this quarter's number. And unless told otherwise, I'm just going to go ahead and model for about $0.19 and watch it carefully.

Well, we've taken the volatility out there quite a bit, and then also we've taken the volatility out quite a bit on the insurance line.

Yes. Well, there's another one, of course. But the hedge is really just on the gallons that are not covered by fuel surcharge, essentially. Correct?

That's right.

All right -- fantastic. I will let someone else have the floor. And again, congrats.

(Operator Instructions). Morgan Keegan.

I had two quick follow-up questions really related to modeling. I know we look at equipment costs with DNA and rent expense. But rent expense kind of continues to come down pretty dramatically. Is that going to continue to be the case moving forward?

Yes, we still have got a little room for improvement there. That will slow down somewhat in the next couple of quarters, the amount of reduction.

Okay. And then the second question is, on the insurance renewal on the deductible, I don't know if your premiums went up, but obviously the deductible went down. Does that give you any opportunity to maybe, with that lower deductible, give the insurance and claims line kind of below that $0.08, $0.09 per mile level that you've kind of average here over the last several quarters?

We didn't expect that to really decrease our costs, but it definitely took of the volatility on a quarter-to-quarter basis. So you're not going to see the $0.06 per mile quarter or an $0.11 per mile quarter going forward.

We still had a few old claims that occurred prior to April 1 that are causing a little bit of volatility still, because they [can add for] development, which we saw in this quarter for a couple of claims in particular that we noted were over additional $2 million of development increase.

But as we go forward, we will see that number probably stay closer between $0.075 and $0.09 a mile. We did pay additional premium to get the deductible down to $1 million. But it shouldn't be any more than what would have covered our claims in the past on a routine basis, or a regular basis.

Okay. That's great, Richard. Thanks.

(Operator Instructions) Well, gentlemen, at this time we have no further questions in the queue.

All right. Well, thank you, everybody, for calling in, and we will talk to next quarter.

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