Covenant Logistics Group Inc (CVLG) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for your patience in holding and welcome to the Covenant Transportation Group's fourth-quarter conference call.

Please be aware each of your lines is in a listen-only mode. At the conclusion of the presentation we will open the floor for your questions. At that time instructions will be given as to the procedure to follow if you would like to ask a question.

It is now my pleasure to introduce Mr. Richard Cribbs. Mr. Cribbs, you may begin, sir.

Good morning and welcome to our fourth-quarter conference call. Joining me on the call this morning is our CEO David Parker, 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 Act of 1934 as amended. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. Please review our disclosures and 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 at CTGinvestor.com. 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 that our asset-based division's revenue increased 3.5% led by a 3% increase in revenue per truck. Versus the year-ago period our miles per truck were down 2.1% while rates were up 5.2%. Rates were up despite a 6.3% increase in our average length of haul.

We are very encouraged that, despite a 2.4% sequential reduction in miles per truck from the third quarter, our rates were up sequentially by $.011 per mile. Compared to the fourth quarter of 2009 the asset-based divisions operating expenses, net of surcharge revenue, were down slightly by about $0.005 per mile mainly due to lower fixed costs. Sequentially compared to the third quarter of 2010 our asset-based division's operating expenses were up about $0.03 per mile mainly due to the higher compensation, employee benefits, and fuel costs.

The asset-based operating ratio improved 530 basis points to 95.7%. Our brokerage subsidiary continued its profit improvement plan by improving its operating income by 250 basis points despite a 28% reduction in freight revenue. Purchased transportation margin improvement was the primary driver for those results.

Since year-end 2009 our total indebtedness, net of cash and including present value of off-balance-sheet obligations, has decreased by $16 million dollars to $260 million despite reducing our young tractor fleet age to only 1.6 years at the end of the quarter. We were in compliance with our financial covenant at the end of the quarter and versus year-ago our consolidated operating ratio improved by 500 basis points to 95.6%.

We earned almost $700,000 after tax in the quarter compared to losing more than $2.7 million last year. Joey will now discuss these highlights in more detail.

Thanks, Richard. As we said in the release, we are pleased and thankful to report a profitable fourth quarter and full year 2010. 2010 was significant for our organization in that we are able to return the enterprise to profitability, but we still have much work to be done to achieve acceptable margins and returns for our shareholders.

While our revenue per truck increase versus year ago was primarily driven by our covenant franchise, freight volumes in the fourth quarter were what we would call okay with a dramatic drop off late in December, especially within our team franchise. Thus far in January we are loading our trucks again okay across the country, except for California and Texas. Additionally, winter weather across the country, particularly in the South, has been extra challenging.

Pricing continues to move directionally up and we are optimistic that we will receive fair and reasonable price increases in 2011. While we made money after tax in all three months of the quarter, our costs were comparable to the fourth quarter year ago but did increase sequentially from the third quarter. Our organization is very focused on maintaining a low cost, high service philosophy with the additional emphasis being placed currently on reducing our insurance and claims expense across the entire organization.

Fuel costs are also concerning but we are pleased with the efforts and results of all our companies in minimizing the impact of rising fuel costs.

Last, the new CSA initiative and proposed hours of service rule changes will put pressure on attracting and retaining the best drivers within all our organizations. Thus far our driver turnover has improved nicely versus year ago. However, recruiting new hires has already become a challenge as the industry's compensation costs are already rising and will continue to increase throughout 2011.

In summary, we want to thank our customers and vendors for their support over the last year. Additionally, we would be remiss not to thank our employees who continue to strive to simply improve. We are focusing on sustainable, positive continuous improvement.

For 2011, assuming a 3% GDP growth, we expect to continue our turnaround story and our management team has solid plans and strategies in place to continue our progress. Thanks a lot and we will now open up the call for any questions.

(Operator Instructions) Tyler Bozynski, Stephens.

Hi, guys. It's Jack Waldo and Tyler. I wanted to ask you first a little bit on the impact of your improving financial position on issues going forward, be it the insurance, be it interest expense, be it lease arrangements and things on that nature, and what we should expect on a year-over-year basis.

We have been able to improve our technology a lot to help us with the insurance area. We have put in about 1,000 Qualcomm units since early this past year and we plan to have all of the trucks fitted with Qualcomm units by the end of 2011.

That helps us with a couple areas. One, with out-of-route miles that will help our fuel economy as we have the text-to-voice GPS on those units. As well as it should drive down our safety costs a little bit as we are not in locations where we are not supposed to be with our trucks.

We have seen -- we have kind of been following the trucks where we have had accidents over the last four or five months. We are finding that it has been very beneficial to have those Qualcomm units on our trucks as they are not the trucks that have been involved in the accident. And because of that, we are actually speeding up the retrofitting of our trucks that don't have them and putting those Qualcomm units on a little earlier than we expected on the older trucks instead of just the new ones that are coming in.

So I have got -- in 2010, if my data is right, I have got about $0.098 per mile. Do you think that you will see that improve in 2011?

I expect it to. We are making a big push with safety. Part of that comes from the CSA standard that is out there now has had us really talking to drivers that have had more issues in the past; there is a big education push there to help with that.

As well as we decreased our deductible from $4 million to $1 million starting April 1 on our insurance. But we still had some claims from prior to March 31, 2010, that increased and we had some reserve changes or actually paid out additional claims than what we had originally reserved during this past year that caused that to be up higher than normal. So I do expect that to come down some.

I also think that that is down to -- the exposure on that $4 million is down just to one or two claims that we feel good about. But other than that all the other ones are on the $1 million.

That is right. There is only a couple of claims out there from prior to March 31 that have a potential even to grow, but even those that are out there we feel pretty good about what we have reserved and the way that we are fighting those claims currently.

So the change in self-insurance from $4 million to $1 million, the big impact will be you have less risk going forward? Is that the right way to think about it?

Well, there is less volatility, that is right. And whereas we had quarters in the past where we might have had a $0.065 quarter and then we would have a $0.135 per mile quarter, we are probably closer in a range where we should be between $0.085 and $0.10 per quarter.

But this quarter we had additional physical damage claims, which is basically -- most of it was preparing trucks for trade in or for sale, trucks and trailers. That was up about $0.01 a mile higher than our average, so it was about $0.045 a mile on just that type of work when that is averaging about $0.036.

And that was unusual. That was the highest quarter we have had since I have been here on physical damage claims. And that was because of the large number of units that we were disposing of, which you can kind of see from the $1.3 million we had in gains as well as the trailer reduction that we had.

Got you. Then as your balance sheet or as your financial strength strengthens how does that impact your interest rates or any type of leases you might have and any potential savings there?

Well, on the interest rate side on our debt back in August we redid our line of credit and we had improved pricing at that time. And so going into 2011 we will get a full-year impact of that.

We did receive some benefit for that partially in the third quarter and for the full fourth quarter, and we are going to see more impact on that because it actually even improved pricing on -- slightly on our letters of credit that we have outstanding. So we should see improvement in the interest expense line, especially if we are able to pay down more debt.

On the lease side, as we pointed out in our operating lease, the present value of operating leases is down substantially from the beginning of 2010 as well as we renegotiated lease contract on a large portion of our trailers that extended it out that reduces our lease expense over the course of 2011 by quite a bit of money.

Do you have any idea on the impact of those savings year-over-year, what we should be looking for in 2011?

The combination -- this is Joey -- the combination of those is pretty significant because what happens is on an annualized basis, once we get through the full schedule replacement on the trailers and a full year effect of the line of credit renegotiations, about $3 million on an annualized basis. So it's going to take us throughout pretty much the full year of 2011 before we get to all of that. So it was a big transaction between renegotiation of the lease agreement and the line of credit.

So it would be a run rate near the end of the year of about $3 million. I think year-over-year the lease was about $1.2 million and the interest was something close to that, so a couple million dollars year-over-year in 2011 versus 2010.

Okay. And then what about any consulting agreements or anything? Is there any change there that should save you money this year?

Yes, as we have talked about in previous calls, we have used a consulting group at SRT in 2008, or 2009, and then at Covenant in 2010 and then they started at Star in June of 2010. They are finishing up here in the next month or so.

The amortization of that actually goes through June, but just on the very small portion of time that we used them at Star. So we should see an impact of probably a little over -- right around $1 million of reduction in consulting expenses from 2010 to 2011 as well as we are not planning on continuing that consulting agreement.

Okay, so in summary, $1 million there, a run rate of $3 million from the interest improving your balance sheet, and then there should be some savings on the insurance side as well? Is that right?

That is right and then negatives include fuel if fuel continues to increase, as well as we are still looking at driver pay is increasing in the industry. So the expectation is that that will continue as well to increase as well. But on the salaries line of the non-driver piece, we have continued to keep our headcount low.

We have also -- this year we did have some pretty good incentive pay going from a $0.96 loss to a $0.23 earnings per share in the year, but of course caused some bonuses and incentives to be paid and accrued in 2010. And so I don't know that I expect it to be quite as good, hopefully it will be, but not quite as good in 2011 as it was in 2010.

Got you. Then on maybe some more operational issues. Your utilization, I think we are looking for like a 1.5% increase in 2011 and then on rates we are looking for about a 4% increase. I am just wondering, I know that there is choppy business happening right now but are those -- what would your expectations be for utilization and rates in 2011?

I think, Jack, from our standpoint if we can -- if you look at our utilization, we have some opportunities in it. But if you look at 2010 as a whole, it's a pretty good year, historically speaking, across the Group. Opportunities to improve, but it was -- all things considered, it was a pretty strong year.

We are thinking with the CSA initiative and proposed hours of service rule changes, which probably won't be effective until 2012, but the combination of those flattish utilization is kind of our goal. Obviously we are pushing to exceed that but kind of flat on a utilization standpoint. And I think that the big question of that as it flows throughout the year is going to be another challenge.

The inventory replenishment last year in the second quarter, we don't believe it's going to be as frothy as it was last year but we do believe, as the economy continues to stabilize, that the second half will be a little better in 2011 than it was in 2010. So full year kind of flat.

Now rates, we do believe that rates will continue to improve. I think the customer base has been very supportive and understanding of the issues facing the industry. I would be remiss to give a tight range and so I am going to give you a wide range. It's probably 3% to 6% or 7%, depending on the industry the customer participates in and the area of the country that that customer has freight in. So it's somewhere in that range.

It needs to be higher. Our drivers across the industry has taken it on the chin, frankly, more than they should have, but nevertheless it was a necessity, unfortunately, to help weather the recession for a lot of companies. And so we need to pay our drivers more and we are going to be trying to pay our drivers more to keep the best one.

So I think the rate increases need to be there and I think as long as you continue to provide a good service you will be able to get that. So I think kind of in my mind 3% to 6% is probably what 2011 looks like.

The comps are easier in the first two quarters because rates really weren't increasing until second quarter of 2010, and so they were still a little lower. So you got some room there to show a pretty nice comp versus the first half of the year.

Got you. Okay. Well, thanks and congrats on the improvement this year.

Chaz Jones, Morgan Keegan.

Good morning, guys. I think I have an easy one to start out with. I apologize if I missed this in any of the information you put out.

CapEx expectations for 2011, assuming that it's all on balance sheet, do you guys have a number for that yet?

We don't. We are still working on that although we did put out that we are planning on replacing about 850 trucks next year -- in 2011 and we did about 1,050 in 2010. Although if the used equipment market continues to stay strong and we can see some nice gains on some disposal of equipment, then we may increase that a little bit, maybe even up to 1,000 trucks. We are just being real flexible about it right now and so any range I would give would be very, very wide.

Sure.

I do expect it to be -- this year CapEx, net CapEx was about $30 million over depreciation for the year, depreciation and amortization. Next year I do expect that to be a closer number, maybe $10 million to $20 million.

Okay. And is the bias to do that at this point? I mean are you in enough financial strength to do it all on balance sheet? I know that the lease expense has come down pretty dramatically, or are you still debating whether to use leases as well?

Well, we use leases for most of the trailers but we do plan on buying all of our tractors on balance sheet. And then a new account rules that are coming out, I don't think they will be in effect in 2011. But I think in 2012 you are probably going to see on balance sheet -- everything is going to be on balance sheet, even the operating leases.

Right, right. I guess kind of following up on that the net equipment cost, if you look at D&A rental, has continued to show nice improvement year over year as well as sequentially, even with the fleet age coming down. I would just kind of ask here is the $16.6 million, if I am looking at the right number, is that a sustainable run rate or as you bring newer equipment on in 2011 should we start to see net equipment costs come back up some?

And you included the lease expense and the depreciation?

Right, that is $3.5 million of rental expense and the $13.1 million on D&A.

Well, I think D&A is going to remain about what it is even with the increased cost of trucks. We have extended the trade cycle a bit as the equipment runs longer and better now than it did in the past, as well as we have extended some warranties related to that. So our maintenance expense should not increase substantially, although we will be doing some refurbishment on the equipment to make sure it does last as long as we want it to and run as well as we want it to with no customer service issues.

On the lease expense side we did have the reduction from the change in terms regarding a lot of the trailers and so we should see that come down as well. We won't see quiet as rapid a decline in lease expense as we have in the last two years as we were taking out a lot of trailers when we could. We would have probably reduced our trailer count earlier than we did if lease terms had allowed for it.

Now we are kind of at a pretty point, a pretty good level of trailers. So you saw a large reduction in trailers that we had on lease and that was what was driving the reduced lease expense, as well as when tractors that we had on lease came off of lease and we put them on balance sheet when we purchased them.

But it sounds like, Richard -- I mean that is an area where we potentially see additional cost savings in 2011?

Well, overall yes, because we always include interest when we look at capital costs. And overall I would say yes because we do have the new financing arrangement as well as the change in the lease agreement. (multiple speakers) Not as dramatic as it has been though.

Right, right. Then shifting gears to utilization being off year-over-year, I guess if you could help me think about that. I know you guys mentioned in your prepared remarks that freight demand was okay, but when I look at utilization being down -- and that is the first quarter that it has been down in a while. Weather was an issue maybe late in the quarter.

But I guess my question is was freight demand softer than it was in 2009 in the fourth quarter for you guys or are there other issues in that number, whether it be related to mix or weather or something like that?

I will start just that little mix was a little bit of it. We had -- if you looked at our financial stats, we had about 920 teams running in the fourth quarter, at the end of the fourth quarter in 2009 and we only had about 879 running this year. And so a little bit of it was mix between having team trucks that run the extra miles versus solo.

Then freight demand, October was off. October wasn't what we would have expected going into the season and then it did pick up as November and Black Friday approached.

After Black Friday, I think retail sales were excellent and during the first couple or really 2.5 to three weeks of December freight was running great and was well ahead of 2009 from that standpoint. Then in the last week to 10 days of December it really slowed back down again. And, frankly, we needed to get our drivers out away from holiday a little quicker than they were, because there was a little more freight that we could have gotten.

Right, right.

And then weather has also been tough, as you know. Even in December weather was a little tougher this year and that slowed us down as well and then that has continued into January.

But then I guess looking at the first half of 2011, the answers you gave to Jack, it sounds like looking at the first half of the year that the comps are going to stay pretty tough from a utilization standpoint.

Yes.

Okay. And then last thing I had was maybe you touched a little bit on it in your prepared remarks, but just differentiating and maybe giving a little color on the various divisions, whether it's reefer or Star or expedited, are any of those divisions showing relative strength or weakness as compared to the other ones?

Chaz, this is David. As we think about the three asset companies, the reefer segment of the business continues to be good. It's truly -- for the last couple of years has just not been a major issue in terms of available freight and opportunities that our reefer segment has. So I am very pleased where we are at on that and I expect that in 2011 to continue to do well.

We have added quite a bit of trucks over there in the last couple of years, a couple hundred trucks that is in there so the profitability of that division has kept up to pace. And as you know, when you add 100 trucks in two or three months they will have a little pause in the utilization and the utilization comes back. And then they will have a little bit more pause.

But in terms of a freight environment they are doing extremely well. They continue to increase their regional business, which has helped the rates and hurts the utilization overall, but reefer is doing well.

The Southeast for the Star on the regional business, they had a very, very tough year in 2010 but we are seeing some southeast part of the country that is starting to, at least, wake up for the first time in a couple of years. And so I am seeing some improvement opportunities that we have got on Star.

I would say the Southeast -- because about 90%, 95% of what they do is in the Southeast they have brought on some nice freight just in the last 30, 45 days that I believe is going to help and assist Star very nicely for 2011.

There is no doubt that so far in January the South has been hammered for some of us that live down here. It has been hammered tremendously on the weather standpoint, but the business environment in the South has improved better than it has been in the last three or four years as we run right now.

Then on the Covenant side of the business, the long haul, they are doing well. The snow has hammered them very dramatically and there is no doubt that the teams, will always suffer in the first quarter versus a regional segment, it's just the way that the team market is at. But they are doing okay; they need to fill some trucks.

They have got some open trucks they have got to get filled, but they got some processes in place that I am very impressed with and they are starting to make some headway on that. But they have probably got over 100 open trucks that got to get filled and I think that they will get filled. So when you look at the utilization numbers you got 100 open trucks that, quite honestly, is dragging it -- dragging your numbers down.

If you were looking at your [seated] trucks, I am pretty impressed with the revenue per truck and utilization that we are getting on our [seated] trucks. We just have too many open trucks in there that they are working very hard to get filled and I think they will get them filled. If they were filled, I would be much happier with what I am seeing in terms of utilization if you take the weather out of the process.

Okay. Is there any one area in the Southeast that you see further economic recovery that would help, whether it be auto or housing?

We have seen the auto industry that has -- we have seen what you have seen in the papers of going from 9 million cars to 12 million or 13 million cars being produced. We have seen the effect of that. I mean it's not back to 16 million and 17 million where we used to be, but we have seen that increase on the auto side of the business throughout the South. And so that is one portion of it.

I can't say that I am really seeing the housing industry do a whole lot. More than anything, we have just been able to capture more business out of the South. So when the automobile industry went down the last couple of years we were really scrambling on that side of the business. But since it has picked up and we have been able to take on some more that is the reason why we are feeling a lot better now about the Southeast.

Okay, great. That is all I had. Thanks for taking my questions and best of luck in 2011, guys.

Scott Group, Wolfe Trahan.

Good morning, guys. So I just want to follow up on the last question. Within the expectations for 3% to 6% pricing this year, how do you think that breaks out between the van and the reefer business and then maybe between regional and long haul?

I think that all of those groups will have price increases, rate increases there is no question. I do believe that we have got mix changes going on within our -- as our refrigerator business has grown, we are growing our regional product quite nicely and we are real pleased with how that is doing. We are going to continue to look for opportunities to grow that.

So we might continue to see the link of haul continue to shrink, but we will move pricing at a faster pace than, say, the dry van business, per se, because of that. So I think we will continue to see reefer side as it continues to grow its regional business move into the upper end of that because of that shift change.

On the dry van side, I think it's more -- our regional dry van business is more consumer staples type products. We have got some company-specific things there that as we move to battle out of the Southeast, if you will, and get freight and put on freight, you might see that side a little on the lower end of that spectrum as it continues to battle for freight and improve its utilization.

On the long-haul side, now that is interesting. The long-haul side is, I believe, long-term is just a great opportunity. That is just my opinion. As the economy continues to improve, whenever housing continues to start improving, as our customers continue to watch the supply chain and tighten supply chain and react to slight movements in the supply chain, I think it's going to feed the team franchise.

Going to be a little bit different than it has been in the past historically speaking, and so for that reason I think, frankly, it's going to be a little bit more volatile than it has been historically over the long term. So I think that segment, because it's real high end -- I mean ours in particular -- we have a high hazmat team base and, frankly, we are not getting paid as much as we should to have that service offering. And so we are going to push that to make sure that we are getting compensated for that service offering.

So I expect that piece of the business to be at the upper end of that pricing range. And so I ramble to say regional I think it might be on the lower end still fighting the business. Reefer, mix is changing; regional is driving that which will push its price into the upper end. And I think the long-haul team side will be at the upper end as it continues to participate in more and more project-type freight as well as high value hazmat type freight.

Okay, thanks. That is great color. Just one thing to add though, if you try to ignore mix would you expect better rates, rate increases in van or reefer?

Ignoring mix -- more consistent rate increases in the reefer. Maybe I will answer the question a little different; I think it will be more consistent on the reefer side because we still eat. That is a truism that still happens.

And as the reefer market continues to evolve into more and more regional business, I think it's going to promote more consistency because, frankly, there is more freight [a shorter length] to haul. So I think it will be more consistent, but also it should be a little bit better than average over the long term.

The dry van market is still large, it's huge and I think that it's going to be to remain competitive. So reefer should get a little bit better, should be a little bit more consistent than the dry van side.

Great, thanks. Joey, in your prepared comments when you were talking about the start of the year in January, I think I heard you say that pricing is moving up. Were you talking about on a year-over-year basis? Are you actually seeing sequential price improvement in January over fourth quarter?

That is a great question, thanks for asking that. No, what I am saying is the movement has continued up. We don't see typically rates go from fourth to first quarter on a gross basis up. You typically see more flattish.

If you look at how the bids flow, first quarter is pretty heavy but actually our biggest bid volumes or the impact of that is to the second and third quarter, and then it drops back down again in the fourth quarter. So you don't see a lot of pricing move on a gross basis from fourth to first. But directionally speaking, we are talking with our customers, we are putting in plans for 2011 and we are continuing to see the discussion up with our customers.

Whether it's due in April or May or June, there is budgets that we see that are least we are in the ballpark to where we can work together on what satisfies the shipper needs as well as what needs we have. So that is what I meant by that saying rates are continuing to move up. But I wouldn't try to comment on sequentially from fourth to first quarter, I apologize for that.

They generally back up a little bit from fourth to first as you have a lot -- fewer projects that you don't have that you have around Christmas time. And then February utilization being a little weaker, you see the spot market reduce a little bit.

Great, that is helpful. And then just two quick ones on the cost side. Richard, I think I heard you say that incentive comp won't be as big this year versus last year. I am guessing you were talking about the year-over-year and not the absolute?

And then on the driver pay side, can you talk about just the timing for when you think you might take up driver pay again and what magnitude of increase you are thinking? Thanks, guys.

Regarding the incentive comp, I think it was both. It's probably smaller in absolute dollars as well as -- at least in the original plan, if we bust out that plan incentives could be as large as they were this year. But on the original plan we could be looking at a reduced incentive comp year-over-year and in absolute dollar terms.

Then on the driver wage issue, we don't have any plans currently of when we would do that. It's just how the market and how capacity comes out and how the CSA impact runs and when that happens. So we haven't had any across-the-board driver increases in the last six months or so.

We saw driver pay increase a little bit as we improved some incentives. Retention bonus got put back in place at the Covenant subsidiary and things like that, but we don't have a date in mind of when those driver wage increases would be.

I think the best way to understand it, in our opinion, is that -- two things. Because of CSA and whatever the hours are going to end up doing, driver pay the next couple of years is going up. Whether that is in March or two years from March and whether it's in segments or a little bit here or a big number driver, pay over the next couple of years is going up.

If you want to throw some number in there, I think it's going to be 15%, 20% kind of numbers. It's going to have to be in order to get the drivers. But as Richard said, we don't have anything on the books that says February 1 or March 1 let's raise driver pay $0.01.

We are just watching everything and listening and knowing that it's going to end up going up. And we will react when we think it's the proper time to do so.

Great. Thanks, guys.

Tom Albrecht, BB&T.

Good morning. When you look at Star what is the biggest need there? Is it utilization or rates because of their traditional customer mix? And what is the approximate exposure to the auto industry at this juncture? And I have a couple of follow-ups.

Well, I think we probably can say that utilization is the number one key because of the Southeast that has really been hurting them so dramatically over the last couple of years, Tom. So if I was going to say which one of the two, utilization -- there is no doubt there is more power in the rates, but to get higher rates, their rates are satisfactory, but to get higher rates we got to get higher utilization.

And so -- but just in the last two weeks Star has brought on a considerable amount of new business that has came up there, and so we are pleased with that. We have started already seeing utilization starting to increase nicely at Star. So to answer your question, even though I am a rate-rate guy, utilization is what they need first and then the rate will follow it.

They have got automobile and automobile products type stuff, it is down to about 20%.

Okay.

It's 20% to 25% of the total.

20% to 25% of the total, Tom.

And so like back in October of 2006 when you bought Star, what would have auto have been at that point?

It was -- well, there is two things. Star was a lot larger; I would say it was $20 million on $80 million. (multiple speakers)

A few of their larger customers were auto related. One of those doesn't ship much at all right now and the other one has picked up some pretty -- a little bit better business in the last half of the last year as we saw automobile production increase.

So it's probably in the 30%s -- 32%, 33% -- at one time and now it's down to about 20%.

Okay. And so, Joey, when you say auto and related, do you mean other suppliers or are you talking about an aftermarket focus there with the Pep Boys and that?

It's suppliers.

Okay.

But keep in mind, if automotive picks up in the South and carriers that were previously providing to those suppliers are going to increase their business then they won't be fighting for other business. It's all related.

Absolutely. And so, Joey, when you made a comment -- I must have missed which division you were alluding to, but you talked about the opportunities for project freight, high value, hazmat, etc. Was that the dedicated business?

That is the team franchise.

Okay. And so within the refrigerated arena approximately how many trucks, or however you look at your miles now, are coming out of the regional market?

We have got between both companies -- Covenant still runs a few reefers as well -- it's about one-third of the overall Group's fleet is reefer trucks. So let's say that is 1,000 and of those 1,000 we have got 160 that are region, dedicated -- not dedicated but are focused on the regional marketplace. So say 20% of the reefer business is regional right now.

So do you have, for lack of a better term, one or two markets that are sort of the home base to have a regional operation?

Southwest is number one.

The Southwest is the majority of it right now but it's --.

[We are seeing] Arkansas or Texas?

That is really -- in between Texas, Oklahoma, Arkansas, Louisiana, Mississippi that is really the -- that is probably 90% of that 20% or so.

Okay. Then last question, it seems like the owner/operator recruitment momentum has begun to stall a little bit. Is that by design because of CSA or can you talk about other factors that might be at work there?

I think, Tom, is that -- A), you are right; B), I think it's just because the owner/operator. It's not out of a lack of trying to get them, but it just seems like that we have hit a plateau on the amount of owner/operators and we are kind of in the replacement mode currently.

Okay.

Remember, these are true owner/operators. They are not lease purchase people. We have not opened that door. We used to have quite a few but it has basically shrunk to almost nothing, less than 30 trucks I want to say. So that is just pure real owner/operators.

And so we have hit a little ceiling and -- I don't know. We are still looking for them. There is probably between all the companies there were five or six that were added last week so it's -- but it's stalled, there is no question.

No, I agree. And I think that is sort of the general experience. If you don't have a lease purchase program, you are stalling; you are going backwards a little bit. And if you do have that program then you are probably still having success.

But a lot of those folks -- I don't even know if I should call them an owner/operator until they get to their second truck.

Right.

I don't disagree. (multiple speakers)

Frankly, that is part of the reason we haven't really pushed that so hard is for a fairness to the drivers trying to start a business.

In our opinion.

Yes, that is right.

With $3.58 gallon for fuel.

Right.

People are being successful with it but we don't see it currently. But it is an avenue.

Okay. Well, guys, that is all I had. Thank you.

At this time we have no further questions.

We just want to thank everybody for joining us and we will be talking to you next quarter. Thank you.