Covenant Logistics Group Inc (CVLG) 2010 Q3 法說會逐字稿

Welcome to the Covenant Transportation Group third-quarter conference call. Please be aware that each of your lines is in a listen-only mode. At the conclusion of the presentation, we will open the floor for questions and at that time instructions will be given if you would like to ask a question.

I would now like to turn the conference over to Richard Cribbs. Sir, you may begin.

Thank you, Dusty. Good morning and welcome to our third-quarter conference call. Joining me on the call this morning is our CEO, David Parker; 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 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 SEC.

A copy of our prepared comments and additional financial information is available on our website at ctginvestor.com, and our prepared comments will be brief and then we will open up the call for questions.

In summary, the key highlights of the quarter were as follows. Our asset-based divisions revenue increased 7.2%, led by 6.5% increase in revenue per truck. Versus the year ago period, our miles per truck were up 1.4% while rates were up 5.1%. These rate increases were achieved despite a 13.2% increase in our average length of haul.

We were very encouraged that despite a 3% sequential reduction in miles per truck from the second quarter, our rates were up sequentially 1.5% from the second quarter.

Compared to the third quarter of 2009, the asset-based division's operating expenses net of surcharge revenue were up a little under $0.01 a mile, mainly due to higher insurance expense as a result of unfavorable claims activity late in the quarter impacting our results by approximately $0.04 per share and higher depreciation costs as we replaced almost 400 tractors in the fleet during the quarter.

Additionally, fuel costs net of surcharge revenue impacted our results by approximately $0.10 per share when compared sequentially to the second quarter of 2010. The asset-based operating income increased 239% to $8.0 million. Our brokerage subsidiary continued its profit improvement plan, improving its operating income by 650 basis points despite a 25% reduction in freight revenue. Purchase transportation margin improvement, the elimination of underperforming agents and tighter cost control contributed to these results.

Since year-end 2009, total indebtedness net of cash and including the present value of off-balance sheet obligations has decreased by $1.5 million. We were in compliance with our loan financial covenant at the end of the quarter. We were able to extend our credit facility until September 2014 at more favorable terms. And versus year ago, our consolidated operating ratio improved by 450 basis points to 94.1%.

We made $1.9 million after tax compared to losing $2 million excluding the Transplace impairment charge last year.

Joey will now discuss these highlights in more detail.

Thanks, Richard. Now to sum up the quarter, (technical difficulty) any of the excitement about our progress but we are still not quote unquote there yet. We did make money after tax in all three months of the quarter, which is also very encouraging.

As compared to the second quarter, three items impacted our results. First of all, freight for the quarter was not as robust as the second quarter with a definite step backwards on freight throughout the (technical difficulty) of September.

Second, we did have an unfavorable insurance claim activity late in the quarter that impacted our results by about $0.04 per share. And three, our net fuel costs negatively impacted the results by about $0.10 a share.

David has described our freight volumes in the second quarter as overwhelming. July and August volumes were good and September was okay. The increase in revenue per truck was mainly due to improved pricing and lower deadhead at all three asset subsidiaries in the range of plus 3% to plus 8% in rates per total mile.

As expected, we are seeing slightly improved freight volumes in October but remain cautious on expectations as we head into the first quarter of 2011.

As we discussed in our second-quarter call, besides concerns regarding the strength of the economy, the tightening driver market continues to be our primary concern. We do believe that we are making progress within our people, processes and technology though. CSA 2010 internal education and evaluation is a top shelf item for all carriers today as we develop plans to keep our top talent and challenge those employees that need improvement.

Overall, although game changing and stressful, we are excited about the impact of the new regulation will bring to the industry. One thing is for sure though, in 2011, compensation costs for drivers will continue to move up but the extent is uncertain at this point.

We do believe that the supply/demand equation will remain favorable enough for us to offset any needed compensation increases with better freight pricing.

Quickly regarding our fleet, it continues to be one of the youngest in the industry and we have just recently completed our 2011 equipment plan. Our current 2011 plan is to replace about 850 tractors and 520 trailers. Orders have already been negotiated and placed for the majority of the tractor spend and we will begin taking the new 2010 emission-compliant engine beginning in January of 2011. The tractors will predominantly be SCR engines for 2011.

In summary, our employees continue to work tirelessly to improve our operation through continuous improvement. Our profitable results are the results of their determination and resolve. We have turned the corner as an organization and we expect to produce another profit in the fourth quarter with the prospect of a nice profitable year in 2011.

Dusty will now open up the call for any questions.

(Operator Instructions). Thom Albrecht.

Good morning, a couple of different questions. As we move into that time of the year where the demand for expedited services moderates and as we look at your financials the next quarter or two, given that that's helped lengthen your length of haul, isn't it probable that we are going to see your reported rate per mile advance a little bit quicker? I think it has been advancing nicely when you factor in length but just the next couple quarters, shouldn't that be something that we think about?

You mean sequentially, Thom?

Yes, sequentially.

Yes, typically we do -- we have several project type work in the fourth quarter and within our expedited fleet that's very time sensitive, very service-sensitive that we get what I would call paid well for. And without being arrogant about it, I would say deservedly so.

So I do think that historically we do see a nice sequential move from the third to the fourth quarter. It does drop back a little bit in the first quarter depending on how much spot market freight we have to bid on as the expedited market does typically slow down a little bit. But we don't believe it will drop back as much as it normally does this first quarter relative to the past just because of what we are doing some things internally. So yes, it does improve nicely from the third to the fourth quarter.

I guess I was little confused on your freight comments. You mentioned October is a bit better. I assume that means versus September. But are you trying to say that your utilization is up sequentially and year-over-year for each of your three key divisions?

No, that was rate per total mile. So I apologize for that. The comment about freight, October, yes, that was meant to imply relative to September. And then the comment about the 3% to 8% improvement was in rate per total mile, the combination of rate per loaded mile and the reduced deadhead did produce -- what I was trying to say is all three asset divisions contributed to the improved rate per total mile in a range of 3% to 8% in the case of one of the divisions.

For the September quarter?

That's right.

What about mileage utilization since that's the biggest indicator of how busy or not any fleet is as we look into October?

Well, here's what you have. When you compare third quarter to fourth quarter, July and August were pretty good freight environments, that's what I said. September was okay. So relatively speaking, September backed up relative to July and August and so produced the results that we had for the full quarter.

Typically November, December are less freight months even though they are project-related, they are less utilization. And so we are not giving forecasts but we are -- we are not expecting a big freight build from third quarter to fourth quarter.

I think it's true, Thom, on what we've seen the last couple of weeks. September, which was a -- freight was okay. That's kind of where it ended up going. October to me is similar to the month of August, which August is not a bad month but it's definitely not the seasonal Christmas coming, load all these trailers. California is booming. California is doing great. The things that you would expect, but there is some weakness throughout the United States.

Right.

It's not '08, but it's not -- last year at this time freight was really starting to pick up.

Yes, I remember that.

And I'm just not sensing that. I mean, do I think it's okay? Yes, it's okay, but it's not anything to write a letter about.

Okay, last question and I will get back in the queue. Gain on sale of equipment, Richard, I know that's usually in the Q. I don't know if you have it in front of you right now.

Yes, it was about $1.6 million for the quarter.

Okay, thank you.

Donald Broughton.

Good morning, gentlemen. Fuel was a headwind for the quarter, certainly sequentially speaking. I know you had the gain last quarter. You didn't have the benefit of but I know you've also hedged fuel. We ran almost $0.20 a mile net. Is that going to come back down to, say, an $0.18, $0.19 range in the coming quarters or what were the headwinds there?

Yes, I expect fuel to be fairly similar to this quarter. I don't see it moving a lot. We have recently in the month of October sold our hedge positions for the rest of the year, which locks in the gains on those hedges for the quarter. And so should help us, but we are seeing rates, fuel cost is continuing to increase. And so I think it will be fairly similar to the third quarter.

Do you have hedges -- any hedges in place for next year?

We do not currently. We sold those positions in October.

All right. Insurance and claims.

Those positions, though, what we sold we will record those gains against the fuel purchases during the same time period is the way the accounting works.

Right, so there will be some benefit.

Yes.

Okay. Insurance and claims, line had been improving, coming down. We saw it blip back up this quarter. Can you give us a little bit more detail as to -- was it a rise in incidence? Was it a rise in severity? Is this a one quarter thing? Are we going to trend back towards $0.09 a mile or is this the new normal?

I expect us to trend back toward $0.09 a mile but at least below the $0.10, but it was related primarily to a few accidents, one of which was more severe late in the quarter and we also had -- not to get into too much of the technical side of actuarial calculations, we did have a small -- an increase in our loss development factor from quarter to quarter that also caused us to post additional accruals against our reserves during the quarter. And I expect that to come back down. There were some reasons for that that I won't go into into detail, but I expect that loss development factor to decrease back down a little bit over the next two or three quarters.

Very good. I will get back in the queue and let someone ask a question.

Hey Donald, also on that, just to let you know, we continued to on the accident side, we continued last year basically to set records on or at least records since I've been keeping the paperwork on accidents per million miles as well as DOT reportable accidents. And this year we are either matching or better, bettering those numbers that we set last year. So we will continue to have very good numbers on the amount of accidents that we are having.

That's great, David. That prompts actually another question, if I might. CSA 2010, can you give us an update on your preparedness for CSA 2010 and are you planning on installing EOBRs in your trucks?

Well, the new Qualcomm unit that we are putting in as well as the engine units that we've got in with Detroit really has all that and we are in the process of going to paperless logs. But that is going to be a process. I think we've got about 700 or 800 units in today out of 3000. So that's going to take a process to be able to get there. But eventually we will go to paperless logs.

I think that the CSA 2010, we are hitting it in all areas. I think there's going to -- most carriers are going to have one or two items that they've got to correct and we've got one or two items in each one of our companies that we have got to correct. And we are -- we have got processes in place to do that as we are taking drivers throughout the network and seeing how many are getting too many speeding tickets. Keep in mind that our trucks are basically fed at 62 to 65 miles an hour, but like us probably similar to what all of us on this phone get, I do see a lot of 45 mile an hour tickets in a 35 mile an hour zone. And, you know, those kind of things hit the driver and they hit the company. And so it is more those kind of areas that we have got to really attack.

I was looking at numbers yesterday and we've got to attack those kind of areas. It's not 80 in a 50, it's 45 in a 35. So we really believe that it's more just getting dollars to the drivers and their responsibility. Again, very similar to us in a car, I think most of us in a car go 40 or 45 in a 35 and we just can't do it as a truck.

And so it's going to take a lot of talking and discussing and getting them in place. And I think that that is a process over the next 12 months that's going to get us there.

Certainly, certainly. Well, I will let someone else have the floor and get back in the queue.

Chaz Jones.

Good morning, guys. I wanted to ask a little about trailers. The fleet count has been pretty steady since the beginning of '09 but I guess the last couple quarters here we have started to see the trailer count come down pretty dramatically.

Is that reflective of the used equipment market improving? Are you booking gains on those trailer sales? And I guess the final part of that would be where would you like to see that kind of flatten out at?

Chaz, basically as you saw, the tractor fleet downsize over the last two or three years, you did not see the trailer fleet downsize. And so that's what you are starting to see. A lot of those trailers had long-term leases attached to them and so it took us a little while to work out of those arrangements.

So as we have been able to do that, we are bringing the trailer fleet down to a more appropriate level for our tractor fleet size. So I think it's got a little bit more to come in the fourth quarter but it's going to start flattening out around 3100 (multiple speakers).

You're not booking gains on those?

No.

Okay, okay. Then on the CapEx side, I think I had in my notes you guys had kind of forecasted CapEx $68 million to $78 million. I don't remember if that was all cash. It seems like you are kind of already there at the end of the third quarter. Do you have any updated guidance for full year CapEx?

And then if we assume everything is on balance sheet next year, given what you talked about earlier, is there kind of a range we could expect for 2011?

I don't have a ranged for 2011 just yet, although for the rest of the year, I expect to be kind of flattish. So I think we're still $74 million to $82 million for CapEx, net CapEx for the year.

We did have a lot of purchases or buying off notes, etc. at the end of the quarter, the last couple of weeks for which we didn't get the proceeds on turning them in or selling them until the first couple of weeks of October which is reflective in our availability. It was only at $31 million or so at the end of the quarter, but back up to $42 million by October 22, because we've got the money in to pay down the line.

So it was just kind of an odd timing situation with that. So I kind of expect the fourth quarter to be fairly flattish from a CapEx net number.

So I guess without getting into your 2011 CapEx budget, would it be safe to assume that it will be marginally lower next year? Or is there something going on on the trailer side?

It should be. Joey mentioned that we just finished our 2011 plan and we're looking at replacing about 850 tractors and we are at about 1050 this year. And there's a few more trailers than this year but not a whole lot.

Okay, that's helpful, just directionally. And then at the brokerage revenue, should we expect that to stabilize moving forward or is there still some work to be done there in terms of culling out some freight and some agents?

I think we've got that part of it pretty well done. So I would expect that it has stabilized and that you will start seeing it into 2011 starting to increase.

Okay, and then last one, I know you talked a little bit with Thom just about rates, but if freight sort of flattens out, if that's a fair way to characterize it over the next six months, obviously I would think your rate expectations would be somewhat more tempered for 2011. You said in the release that you are still getting rate increases.

If freight doesn't pick up a whole lot the next six months, would your expectation be for 2% to 4% type rate increases in 2011 or even below that?

Chaz, I think again, what is GDP going to do? If GDP is around 2% number of GDP growth, then I think that it's going to be in that 2% to 4% kind of range. I think that as I think about all three asset companies, I think that 3% to 4% kind of number is a very attainable number.

Because remember, Chaz, you've got two things. Besides whatever your view on the economy next year is number one. But two, you got the full year effect of what happened this year. And so unless -- so you're going to get the effect of that as a base to build off of for next year, and so those two things together I think dependent on how you flow rates sequentially, it's -- and the shipping community has been very understanding of CSA 2010 and what the potential impact of that is. And so it's not smoke and mirrors. It's very real. It's very intense from the carrier side and a very large concern.

So the shipping community understands that. So those three things, full-year effective this year's plus any kind of growth in the economy next year, which most people say there will be some. And then three, the effect of CSA 2010 will bring enough discussion to the table, I believe. We have to because we just have to because the driver side needs and we will have to have higher wages. There's just no questions about it.

Right. I guess if freight shifts back into a higher gear come springtime and we have driver issues, obviously that rate expectation I would think would be much higher. Is that fair?

You're saying if in first quarter freight really started picking up, was that what you said?

I said kind of springtime, if freight starts picking back up and we have another --

I don't disagree with that, yes.

Okay, great. Thanks again. Good quarter.

Nick Farwell.

David, I'm just curious, how do you interpret the current pattern of weakness and what does this say about your sort of expectations not only for the fourth quarter but going into next year? For example, does it reflect in your mind the fact that Christmas falls on a Saturday in any way?

Is there anything by region or type of service or customer be it long-haul, retail, anyway you want to cut it that would give us some insight into sort of the general level of activity and why we haven't seen a more seasonal bump in business?

First of all, yes, I love Christmas on Saturday. If you remember one day that we hate Christmas is on a Wednesday. I don't know if you remember that or not.

Yes, I do.

But Wednesdays are just a mean day. But yes, Christmas, Saturday is fine. We have been having internal discussions trying to figure out Christmas season and when and how and why in the month of October and all the stuff that you and I have lived with for multiple years. And it's going to be interesting to see if there's any type of purchasing processes going in place with customers throughout the United States.

And I think that we might start getting an answer to that -- this is something I'm going to be looking at -- when inventory levels come out in the next couple of weeks because I think that we all believe that most of us -- 90% of the people that are employed, most of us are spending money more than we did in the last two years. I believe we all are. I believe that we are the ones that are propelling 2% GDP growth and I think that we have loosened up the purse strings a little bit.

And so you should be [fencing] that filling that and freight should be better than okay. Freight is not pitiful, but freight is okay and we should be sensing what we all typically believe is the Christmas season.

And I am starting to believe that customers are watching these inventory levels closer today than they have ever since I've been in business and we have seen the last two or three years. But I believe that they are so concerned about taking 50% write-downs in December and those kind of things that they have come to conclusion that they're going to let inventory levels drop to whatever they deem is acceptable, which is lower than what it has been. And that they will then start ordering for the Christmas season, whether it's on Thanksgiving day or the day after Thanksgiving, which if it happens it propels a wonderful November and a very strong up to December 15 especially from the team standpoint because we know what the teams did. We saw that when they were restocking back in the second quarter.

And I think I personally believe that that's what will happen and I believe that some parts of November and some parts of December are going to be strong and we will sense the Christmas rush during those times.

I think that January will be a good month as it was last year from a standpoint of the cards, the Christmas seasonal cards that people purchase. And I believe that that started four or five years ago propelling that January is usually a pretty decent month for people excluding the weather. So I think that that will happen and what I'm saying is true, then it's going to be sometime in the -- whether its March, April, May, we are going to sense another restocking that's got to happen as long as we maintain 2% GDP growth.

And I'm just not so sure that we have not entered into a new realm of seasonality being taken out of the process. I don't know that it's going to be the feast and the famine that we have sensed. I'm not so sure that we are not headed into an environment that is going to be restocking, which is overwhelming, and then the rest of the year becomes good. It becomes okay to good and not where is the freight and then in three months, it's just absolutely overwhelming.

So that's my theory that I am interested to see if it develops. Our teams are continuing to run very good and again, freight is good. So our teams are running good and quite honestly even though we all would like to get on here and we all get happy about using the word overwhelming, but really overwhelming is not that great because my trucks can only handle a few hundred loads, a few thousand loads a week.

And if I got 3000 loads and I can only handle 2000, then that's not good for nobody. So I would rather have it where I am consistently loading whenever, 2000 loads that I need. And that's kind of the environment that we are in now.

Just one last thought on that, David. Is there a timeline? In the past, it used to be around Thanksgiving in terms of reorders and making sure that product gets into the stores in a timely fashion even if Christmas is on a Saturday.

Yes.

So if it's December by December roughly 10 to 14, that's a little late to be seeing this last-minute surge other than of course airfreight and perhaps a short haul.

That's right. For years, Nick, the magical date was December 15. Usually if it's not in by December 15, then Christmas is here and it's over with. Even thought I've got to tell you last year we really experienced that going into the round up, 18th or 20th of the month, we still had a lot of late orders that were coming in.

So -- but typically the 15th of December is a date that we have always lived with.

Okay, I appreciate it.

Barry Haimes.

Yes, good morning. I had three quick questions. One is -- and I know this will vary by season -- but what's typically your mix between spot and contract?

And my second question is you mentioned that you had no hedges currently but I wonder if you could just sort of outline generally what your hedging strategy is?

And then thirdly, as you look at 2011 versus 2010 in your lines of business, do you expect to shift the mix where one of your prior clients might be greater or less than this year or will the mix be pretty constant between the years? Thank you.

Sure, Joey, you may have to help me on the percentages of spot. Spot typically, Barry, is going to be first quarter, you are going out to the spot market much greater than you to the rest of the year, because freight has a tendency to slow down. So therefore you're going after the spot market. That spot market can be one of two things. Either it's your existing shipper base that you don't have lanes in or rates in and those kind of things and that becomes a spot market opportunity.

Or spot market is considered brokerage, going out to third parties or brokerage. And so those are the two definitions of the spot market. Our spot market only runs us about 7% or 8% -- 6%.

Yes, brokers right now for the group is around 4% or 5% and then there's another 5% to 6% on top of that that is non-broker -- that's quoted with regular customers either rates that we don't have in specific clients or a special project for a customer, things like that.

So that's kind of on a daily basis, that's kind of about where we are running today. And so as David said, first quarter, it will move up a little bit and then it comes down throughout the year.

So it is as good as it has ever been, really, frankly, with us for the group. And I don't think it's going to get -- it may move up a little bit the first quarter just depending on your freight use, but I think it's in real good shape.

Mix 2010 versus 2011?

Mix 2010 to 2011, I think what you've seen with the group over the last two or three years is moving assets to where the assets are making money, and so you have seen downsizing on the long haul on the regional side to the refrigerated side of the business throughout the last two years.

Also what has been a component of that is any particular divisions that are -- have a better access to drivers than the other, which again in the last year or so, our refrigerated side has done a better job or has been more fortunate, whatever you want to call it, relative to keeping more of their trucks full.

I don't expect that maybe to be as aggressive as it has been the last couple of years and into next year, but because we are still in the planning cycle for 2011. So all that hasn't been worked out yet.

But if we do move, I would expect it's going to be -- it would be the same type, maybe not as much, because it's the last couple of years. Hedging, Rich, I will let you talk to the (inaudible) hedging.

On the hedging strategy, we are basically trying to take advantage of any time there is moderation in the fuel market, we hedge against heating oil futures and what we typically look at is we kind of have a certain number in mind about what would be acceptable for us on a cost per mile basis or cost per gallon basis.

And so we try to take that into account in determining whether or not we're going to layer in some hedges in the future.

If we get the opportunity to sell those hedges, in order to lock in the amount of gains that we can use, we will go ahead and sell those in order to lock in the amount of help that we get from those months that we need the help.

And so going forward we just -- as the price comes down we try to layer it in as it continues to decrease and we take advantage of it.

At the end of the day, it really just boils down to we want to protect our P&L. Our goal is whatever we believe the fuel cost is going to be, then we develop a program around that in order to protect it. We are trying our best to eliminate the wild swings. Yes, it may go up a penny or down a penny or two pennies up or two pennies down on cost per mile, but our desire is not for it to go $0.04 and $0.05 and $0.06 a mile quarter-over-quarter if we can help that.

So that's the way in which we look at our hedging strategy.

We are taking out the volatility not only through those hedges but also through the fuel surcharge programs that we have in place.

Got it. Just one other question on another topic, if I could. Just on the rate increases, when you look at your contracts in terms of when they come up throughout the year, is it fairly even across the year or are there certain quarters where you're going to see more negotiations than other quarters? Thanks.

Yes, it's heavier in the first and second quarter and shippers typically want to do it earlier in the year when freight is softer and carriers want to do it later in the year when freight is tighter. And that's the way it has always been since time began.

But you typically have a lot heavier bid process in the first half of the year.

Great. Thank you very much.

Ed Wolfe.

Good morning. I know you've talked about this, but I just want to get a little clarification. David, you talked about July and August as good and September as okay. When you are saying that, are you thinking about that relative to your expectations, seasonally adjusted in those months? Or are you talking kind of relative to each other?

And then on that same basis, how does October feel relative to September and past Octobers?

Yes, to answer your questions, there's no doubt that as you are looking at the year, some months are going to be stronger than other months and you plan for those months to do that. I think a good example, Ed, would be this. Is that you take the month of June because the second quarter was overwhelming, it really was including the month of June that I think we all can look back and say it was a solid, solid quarter for the whole transportation companies.

And June was overwhelming. We were turning down freight, couldn't pick up freight, and those kind of things. And in the month of August, we used the word that freight was good. And the difference was because as you look back at June and August, they had the same amount of working days for the two months and August ended up beating July by a couple of hundred thousand dollars on revenue.

The difference being June was overwhelming and we literally were answering the telephone and taking orders and then trying to figure out how we are going to pick up the freight. But in the month of August, we were literally either answering the phone or having to dial our customers to make sure that we were getting the proper amount of freight. We had to work a little bit harder in the month of August than we did in the month of July in order to overachieve revenue by a couple of hundred thousand dollars in the month of August.

So -- but it was a good month and the revenue was better than it was in our overwhelming month, but we had to work a lot hard -- it wasn't just coming to us. And that's the same way that it was for the first couple of weeks excluding the holiday in the month of September. We were working but we were moving all our trucks virtually every day. And freight was good and we were getting the freight.

And then I saw the last two weeks of September where the quarter should have been building, the quarter did not build. The third and fourth week of September were like the first and second week of September. It was okay but we never experienced the build that it should have.

And now the month of October is going to be similar to the month of August and that is that it is a good month and we will be happy, I believe, at the end of the day, we will be happy with the revenue that we produce in the month of October. But we have had like August, we have had to work at it and in October in previous years, October would have been like June, our overwhelming time. But it's not overwhelming.

Are we moving our trucks virtually every day? The vast majority of them we are. Some we are having to lay over on a daily basis but we are moving most of them and I think it's going to be a good month for us, but it's not going to be overwhelmingly like Christmas should be.

That's great. Thank you for the clarity. When I think back a couple months back at our conference in May and hearing you and some of the other private long-haul guys talking about how for the first time in awhile rates are coming easier in the long-haul business than in the regional business and some other things. Have you seen that side of the business slow down more than the regional business or is it kind of at the similar pace?

It's similar pace. You see -- the thing I don't want to go unnoticed because it is a big, big number. When our average length of hauls increased what, 13% or 12% or whatever it was, around 13%, it still had increases in rates of about 5%. As you know, that's a big, big number.

And we continue to be able to increase the long-haul side of the business. And so I am very pleased with what I am seeing and I think it all boils down to inventory controls by these customers. And some of these customers, they've got to have a load whether it's a 1000 mile length of haul or a 2000 length of haul, if they need a team on it, they are willing to pay adequate returns for that.

So I am very pleased with what I am seeing on the long-haul side in terms of pricing and what I expect to continue to see in terms of pricing.

Can you tell us where yields revenue per loaded mile net of fuel, which ended the quarter at 1.460 or averaged for the quarter 1.460, where did they end the quarter? I'm guessing higher than that.

Yes, month of September, I don't if I've got it here but it was about -- let me look here. It was 1.47.

Okay, so directionally if I look at that number, you are already up 1.5 points relative to a year ago. Going into 2011, if you just kept it where it was, and you referred to that before. But do you see any potential at all where you have to give back some rate going into next year the way things are looking if the economy went to zero, 1% kind of GDP?

Yes, if they go to zero GDP, then customers are going to do what customers do. So yes, I do believe, yes, we will all be under some pressure.

Now I will say, though, that probably the best thing that has happened to our industry a long time is that restocking that happened in the second quarter because they really made some eyes open from a standpoint for the first time -- I've been preaching it for 15 years about capacity, capacity, and it's getting harder and all that stuff.

They realized in the second quarter there are not enough trucks in the marketplace when things are going okay. There's not enough and it really opened their eyes and I guess the only positive that I would say out of your question would be is that they realized that CSA 2010 is real. They realized that that restocking was real and that they could not get some of their freight moved. And I believe that they will at least be more open to conversations of trying to protect their business.

I think that is kind of where they are at now is that there's a difference between sitting here every three months sending out a bid versus when I can't move the loads, the president of the company is going to be coming to my office as the traffic manager want to know what's going on.

I think that they are -- have a tendency to protect -- it's probably in the middle. Part of me says that and part of me, Ed, says zero GDP, a customer is going to do what a customer does.

Okay, so if you are thinking on a 2% type GDP, you get 2% to 4% rate. In your head is that 2% to 4% in addition to what you got right now starting now going forward? Or is it include what you've already got year-over-year?

No, I think that we can take current rates and increase current rates.

Okay, so in that kind of scenario, where you are increasing rates let's call it 3% and they are already up 1.5 points, is there any reason in your head why the operating ratio which has been in that 94.5%, 95% level for two quarters can't stay there at least in the non-first quarter part of the year going forward?

That is absolutely our goal. That is our goal and the talks that we have internally all the time, even during the days as you remember, Ed, when CTG operated at 90 ORs, our first-quarter would always -- even during those days would be a 95 because of the slowness of the team.

So -- and the weather and two people to a trunk and they just can't get the miles in the first truck so you're always going to have that, but I would like to see us get back to those days.

How many years away is that getting to a 90 and a 95 in first quarter let's call it?

Well, it depends on what GDP is going to do.

2% for a couple of years.

I think we are getting closer.

Could that be 2011?

Ed, you're looking at somebody right now that we have -- we just now starting to look at our first 2011 budget. What is fuel going to do? I think I know where our tractors and trailers and -- am I going to have to increase driver pay $0.01 or $0.05? I just got a lot of wild cards out there.

If I was to simply say that I'm in great shape on my calls and I am going to get 4%, well you could run that model and it looks pretty nice. But is there any other --? That may be the case. Maybe that is the case.

But I do believe there's going to be some pressure on -- where is fuel going to go and where is driver pay? Even though I will tell you that in my opinion, speaking off the top of my head right now, those two line items are my biggest concern out of every line item on the P&L statement are those two line items, fuel and driver pay. I don't see other things going crazy on the P&L statement.

Okay, one last one. The 850 tractors, those are all replacement or can you slow down your trade-ins and grow the fleet if you wanted to?

We can do either one. All those are all replacements but we can do what ever we needed to do.

Okay, thanks for the time. I appreciate it.

Donald Broughton.

See, I promised I would back in the queue. There was quite a bit of variance and this is a minor item but there's quite a bit of variance on the general supplies and expenses line, about $0.008 variance sequentially. And, gosh, well over a $0.013 a mile year-over-year.

What all is included in the line and what drove the positive variance for you guys?

A couple of items that are in there, Donald, are -- one is the commissions that were paid to agents for solutions. And as we said, we kind of culled out some underperforming agents there and got some benefit from that as well as one of the areas that we have improved on year-over-year is bad debt expense.

As the economy has improved, I think you see less companies in trouble and so that has improved as well. Those are two major items there.

Okay, and you said at the conference with us a couple weeks ago that -- in our conference -- that you were currently testing 10 of the SCR engines. Can you kind of update us on those and how many more you are buying of both SCR and EGR in the coming quarter or two?

David Hughes is here with us. I will let him answer that question for you.

Yes, the 10 SCR engines that we are testing, we have had no issues from a maintenance perspective. We have started to see -- we don't have enough miles on them for a break in period to get a true comparison on the miles per gallon. But we do see the miles per gallon improving over like engines.

As Joey said earlier, in 2011 the majority of the orders for next year will be the SCR engines. We are testing some of the advanced EGR engines. We will be getting deliveries of in late December and early January and we have high hopes for those engines. We are running a couple of them right out but we will be getting the new version some 13 liter and some 15 liter engines.

And those are the 0.5 emission engines, correct?

Yes, the 2010 compliance engines, yes.

But they are 0.5 emissions with credits?

Yes, (multiple speakers)

I would agree with that. That's correct.

All right, great. Thank you, gentlemen.

Jack Waldo.

Guys, this is Brad Delco in for Jack. First question, most of them have been answered, but on the balance sheet just trying to put a figure as to maybe what the amended credit agreement did to you guys on the interest expense line item? How much that benefited you, and what maybe we should expect going forward?

It was about -- it started -- it was effective August 1 and helped us approximately $110,000 a month in the first two months.

Got you, and then just to touch on the September commentary in your press release or go into a little bit more detail in your business segments, any major differences between refrigerated regional or a longer length of haul in terms of your slow down versus your expectations? Or how was that trending?

It's really -- the trends in all three of them are virtually the same really definitely for the second and the third quarter, the last six months. We did some changes and added some trucks down on the refrigeration side. In the first quarter, first three or four months, but the last couple of quarters kind of same patterns have been there.

And it's actually something that of course we look at that on a virtually all the time every month basis but we are going into 2011 with basically it being where it is at today.

Hey, guys, it's Jack Waldo. I'm sorry, I was on a different conference call and I just had two questions. I thought maybe you could -- I apologize in advance if you have answered these before. On the fourth quarter -- well, on the third quarter specifically, I'm sorry about the I guess higher-than-expected or higher than usual insurance expense. How much did that impact that quarter?

I believe it was about $0.01 a mile and impacted us about $0.04 a share.

Okay, and then the fourth quarter, did you mention any expectations of profitability?

Just that we expect to be profitable in the fourth quarter. That's all we've said so far.

Okay. And I don't -- I know you don't like to give forward-looking guidance, but having said that, you have tons of operating leverage and over the last couple of years looking at your sequential trends and things of that nature become a little bit muddy considering all the big operational improvements you've made. If I look at what you did in the second quarter of $0.20 and the third quarter of $0.17 if you want to normalize the insurance, that's a pretty good run rate.

I look at consensus of next year of $0.71, so kind of suggesting that you would double your earnings. I am just wondering what kind of environment, macro environment does it take for you guys to double your earnings?

Well, our sensitivity analysis is that each 1% improvement in OR is about $0.22 a share. A $0.01 mile improvement in rates is about $0.16 a share and so if you look at some of the -- you weren't on the call earlier but talking 2% to 4% rate improvement, given that and then trying to determine where driver pay would have to go in that environment as well as what fuel is going to do, you can see where that could lead to.

With our low share count, it's just there's a lot of [sensitivity], like you said a lot of leverage there with any bit of improvement especially in rates. And then utilization improvement if there was any utilization improvement, each 1% of that is about $0.06 a share. And so there's definitely some availability to improve this coming year, 2011, over 2010.

And how far is your operating ratio relative to where it was the last peak? You mentioned $0.22 of improvement for every hundred basis point improvement in OR. I am just trying to figure out the potency on an EPS basis.

I would have to look back at that personally to see where our quarters used to range. Back in '04, yes, it's been awhile with all the peak.

Okay, well, I think I've got enough. Thank you guys very much for your time.

There are no more questions at this time.

All right, thank you to each of you for your continued support in Covenant Transportation Group and we look forward to talking to you next quarter.

This concludes our conference call. You may now disconnect your lines.