Covenant Logistics Group Inc (CVLG) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for your patience in holding. We now have our speakers in conference. Please be aware that each of your lines are in a listen-only mode. At the conclusion of today's presentation, we will open the floor for your questions. At that time, instructions will be given as to the procedure to follow if you'd like to ask a question.

It is now my pleasure to introduce today's first speaker Mr. Richard Cribbs.

Thank you, Dave. Good morning and welcome to all our third-quarter conference call for Covenant Transportation Group. Joining me on this call this morning are David Parker, Joey Hogan along with various members of our Management team.

Just a reminder, this conference call will contain forward-looking statements within the meaning of Section 27A of the Securities Act as amended and Section 21E of the Securities Exchange 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 SEC.

As a reminder to everyone, a copy of our prepared comments and additional financial information is available on our website at www.ctginvestor.com. Due to the depth of the disclosure within our release, particularly in regard to the goodwill impairment charge, 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-- our asset-based divisions revenue, excluding fuel, decreased 7.7% due to a 4.6% decrease in average freight revenue per truck and a 3.3% decrease in average truck count. Versus the year-ago period, our miles per truck were down 9.7% while average freight revenue per loaded mile was up $0.087 a mile, or 6%. When compared to the year-ago period, all the asset-based divisions experienced a utilization decline with the Groups largest division, Covenant Transport, experiencing the largest decline of 12% versus the third quarter of 2010. Compared to the third quarter of 2010, the asset-based divisions after-tax cost per mile, net of surcharge revenue and excluding the goodwill impairment charge was up approximately $0.10 per mile, mainly due to higher driver wages, net fuel cost, maintenance expense and lower absorption of fixed costs with the lower utilization. The asset-based operating ratio, excluding the impact of the non-cash goodwill impairment charge, deteriorated 500 basis points to 98.9%.

Our Solutions Logistics subsidiary had a strong quarter profit wise. As expected, overall revenue declined by 27% due to our previously discussed [cooling] of unprofitable agency partners in 2010, while Solutions' operating ratio improved by 500 basis points to 92.7%. Additionally our new minority investment in Transport Enterprise leasing produced a $350,000 contribution to pre-tax earnings.

Since year end 2010, total indebtedness, net of cash and including the present value of off balance sheet lease obligations, increased by approximately $15 million to $279 million. The average age of our tractor fleet continues to be very young at just over 1.5 years as of the end of the third quarter. We were in compliance with our amended financial covenant at the end of the quarter. Versus year ago, our consolidated operating ratio, excluding the impact of the goodwill impairment charge, deteriorated by 450 basis points to 98.6%. After tax, we lost $11.2 million, which excluding the impact of the non-cash goodwill impairment charge, was a net loss of $1.8 million compared to net income of $1.9 million last year.

In summary, we were not pleased with our results for the quarter, period. We did have a few bright spots. Our pricing continued to improve nicely. In fact it was the largest Q2 to Q3 sequential move over the last 10 years, but obviously needs to move more. After dramatic increase in driver turnover and unseated trucks in July, our open truck situation improved throughout the quarter to approximately 5% of the fleet by the end of October which is better than last year at this time. And our accident rate continues to improve, producing our safest third quarter in 8 years but needs to be even better.

We primarily had 1 big challenge during the quarter, lack of profitable freight. Our system conversion at our Covenant subsidiary in early July was more challenging than anticipated and combined with a slowing long-haul freight environment produced a large negative for the quarter. Visibility across the network was affected, impacting customer service, driver retention and network execution. The visibility has been restored, driver turnover has dropped dramatically, flexibility and responsiveness for freight opportunities have rebounded. However, providing top shelf service is still a couple of points from where we were prior to the conversion. We expect that final gap to be closed by the end of the fourth quarter. The result is that we did lose some freight including one profitable account, but our customers have been very patient and most of the freight has been returned to us already.

As we sit here today though, freight across all of our asset companies is fair at best relative to our historical expectations for the months of October and November. Our reefer business has improved but is still down versus year ago. Our team franchise was weak for October and our regional business would be characterized as fair. We continue to [cool] through existing and new opportunities for freight that fits our network and can produce an acceptable margin. Our yield optimization tools are beginning to impact our decision-making process across all companies and we can see positive opportunities ahead as our confidence grows using this information.

Our pricing continues to move up in the fourth quarter as compared to the third quarter and dead head or non-revenue miles are dropping, which we view as an indicator of growing discipline within the businesses and networks. Additionally we are always examining the size of the overall tractor fleet relative to where appropriate returns of capital are, and could again reduce the size of the fleet if margins and results do not improve quickly. We are satisfied with the recent amendment to our $85 million credit facility including the related covenant definition adjustments. In closing, the third quarter was a step back for our organization. However, our staff remains resolved, focused and optimistic about the plans in front of us. Thank you, and we will now open up the call for any questions.

(Operator Instructions) Scott Group with Wolfe Trahan.

Thanks, good morning, guys.

Good morning, Scott.

I was wondering if you can give us the break out of the utilization by month and what you saw in October and if there's any kind of early commentary on November?

There's no doubt. Excuse me my voice, it's kind of leaving me today, this is David. First of all, all three companies had a July that whether it was a long-haul, the reefer or the short-haul, we saw a big reduction in utilization at all three companies in the month of July. And SRT and Star as the month of August came, they improved dramatically. To give you an idea, all three companies were down about 10% in the month of July with Covenant being the worst at around 15% to give you an idea, but all of them were at about a 10% number in the month of July. As the month of August came about, Covenant with it's new operating system got a little bit better, a couple of points better, but the other two companies went to almost flat, about 1% to 2% or 3% down on reefer and short-haul, so they rebounded pretty nicely in the month of August. And then Covenant in the month of September cut it down to around 8% in the month of September getting more used to the system and those kind of things, so they saw pretty nice improvement in the month of September. Reefer was basically down about 2% and our short-haul was even. So hopefully, Scott that gives you--

So on a consolidated basis, it was-- we were down 13 % in July, down 9.5% in August, and down 6% in September. And then looking at October, the consolidated basis is down about 8% with again Star and SRT being even to down 2% and Covenant being closer to the down 9% to 10% in the long-haul market.

So what's your sense on why Covenant's taking a step back in October? Is that demand or is that issues with some of the changes?

This is Joey. Historically, October again was a disappointment relative to what we typically see from the third quarter into October. October is usually for the long-haul market the best month of the year from a utilization standpoint. It was a disappointment, it took a step backwards. What we saw was even though West Coast started improving, I would say kind of the middle of September into October, we started seeing some weakness in other parts of the area that slowed the network down, particularly in the Northeast is probably the biggest area that I would say. And so October was a disappointment. California was-- like I said, California was better, but a couple of other geographic regions got soft relative to where it was even in the summer.

November on the other hand as it stands here today feels better than October which is hardly-- we don't see that, that's very unusual. And so are we in the middle of a little peak? Possibly. We could be in the middle of a little peak season here November through December. I think what we're seeing is a tremendous amount of spot activity, ad hoc activity as we move through kind of late October into November, it's getting very busy from a spot ad hoc market, so that's encouraging. I think it's probably nothing more, like I said, than a small mini peak season, but it's still not what I would call a strong freight market by any stretch in the long-haul side.

As it stands, the Covenant subsidiary right now, they're looking at the first 10 days of November here. They're looking like they'll have utilization down between 5% and 6% versus last year and quite possibly that'll be the best month year-over-year utilization that we'll have so far this year.

That's great color guys, thanks. The issue that you talked about in terms of just the lack of profitable freight, how quickly does that get corrected? Is there a chance to be profitable in fourth quarter or do we have to think about maybe starting second quarter next year is when we should think about returning to profitability?

Scott, it is, I'll tell you the same thing that I've told the employees around here and actually in the last week or so as I've put on two caps and one is operating the Company and then the other is being the biggest investor of all of the companies. And actually had both caps on when I had discussions with them and told them the way in which I look at things. And it is-- the negative side that, that keeps me aggravated a lot is that CTG as a whole has done a good job since 2009 as an investor speaking. I'm happy with the job that they've done. They've cut $50 million of cost out, some costs have gone up, but its been a big process in the last 2 or 3 years of getting this Company turned around.

Now where CTG got turned around to is a breakeven. We've gone from the losses that you know about over the years 2008 and 2009 to getting the Company basically to breakeven. But the thing is that a breakeven is one month I'm happy and the next month I'm not happy. And whether we made $2 million last year or lose $2 million this year, it's just that's the definition of a breakeven. And as I look at the fourth and first quarter it's going to be difficult. We know first quarter that one's going to be difficult. And we're not projecting a big loss in the fourth quarter but I think it would take a big, big improvement for the next six weeks to have a profit in the fourth quarter. So I don't think it's going to be big but I don't think it will be profitable. And then the first quarter is going to be our typical first quarter of weather and those kind of things. So to answer your question, I think you're correct that it's the second quarter kind of event.

Thanks, David. Just a couple last things on balance sheet cash flow. Richard, am I thinking about this right that there's now the goodwill is all gone and that there's no more write downs to come, is that right?

That is correct. All the goodwill is gone. We only have just under $1 million of identifiable intangibles still on the balance sheet related to customer list and trade name when we acquired Star in 2006, so there's really-- there's no goodwill.

Got you. And then can you give the numbers on cash from ops and net CapEx in the quarter?

Cash from ops was about $10.7 million positive for the quarter. CapEx we had cash use or we spent a net of $23.2 million on CapEx. Q4 we will continue to have a CapEx number somewhere between $15 million and $18 million of net CapEx. But then in the first quarter of 2012, as we significantly reduce our spending on trucks and the number of trucks we're taking next year, you'll see that being a positive proceeds number of somewhere between $15 million and $17 million.

That's great. What are you thinking about for net CapEx for full year next year?

I don't have a dollar figure to that but the number of trucks that we're looking at purchasing is between 300 and 350 versus the 950 to 1000 that we had this year.

If you needed to, how low could you cut gross CapEx next year?

It's-- I mean even at that number, that's a significant reduction well below the amount of our depreciation on an annual basis. I haven't calculated that out fully, I would guess it somewhere between $20 million and $15 million to $30 million of CapEx all next year.

Scott, the thing that-- let me jump in, the thing that-- a couple things. 1, what we are replacing next year is low but it's intended. It's not a result of where we've been in the last 2 or 3 months. This is a reflection of the significant investment in our revenue equipment over the last couple of years. So we knew that 2012 was going to be a very low CapEx year, so that's the first thing. It's not a reflection of a knee jerk of who we are. It's-- our average age is very young. We've replaced a lot of equipment and so we don't need to buy as much.

How low could it go? Technically we could make the tractor spend zero next year but there's a negative offset to that which is growing depreciation costs because our miles, especially on our team trucks, will grow quickly throughout the year, We'll have a big catch up some time in 2013 or 2014, and so it's best to keep some flow of equipment coming in, albeit at 300 versus 1,000 is very low. So with the 1.5, 1.6 average age of our equipment, it's time, we knew it was going to be time. The maintenance spend, it's below maintenance spend for next year just because of what we bought for the last 2 years. And then you will see us start slowly changing out our dry van fleet next year, which we haven't taken any new dry vans for probably 7 or 8 years and so that's a process that we've got to begin. We'll start wading into that next year and that'll be a 4 or 5-year process, hopefully smoothing out that CapEx spend instead of trying to do it all in two or three years. So it'll take us a while.

So from where we our standpoint it's good from a management of cash flow next year. And I think you'll see in 2014, I don't know if it'll go all the way back to where it was this year as far as 1,000 trucks. It will definitely move up, but I think we've got a shot possibly at maybe having a little less in 2014 than we did even this year.

That's great color. Thanks a lot for the time guys, appreciate it.

Thanks, Scott.

Donald Broughton with Avondale Partners.

Good morning, everybody.

Hi, Donald.

I'm a little confused on the fuel expense line. The changes in all of the other expense lines on a per mile basis makes sense given what I know what happened with the TMW adoption and the drop in utilization and the driver turnover and all of the issues you've clearly outlined for us back in October when you pre-released and again today. But fuel expenses on a per mile basis net jumped all the way to almost $0.24, $23.99 if my math is right. What drove that and why is that-- I mean you guys had made such progress on that line, why is that bedeviling you again?

You got a couple of things or a few things there, Donald. 1, reefer fuel-- as the price of fuel increases there's really not much surcharge recovery on that. And so as SRT is now basically a third of our fleet, when you see increases in fuel for which you don't get recovery on that pretty big piece of reefer fuel, that does hamper the numbers a bit, so that's one piece. 2, part of-- another part of the problem of not moving your trucks and having lower utilization is that your trucks are sitting and they're idling, and we had a big increase in our idle percentage time because trucks frankly weren't moving. We didn't have the freight.

All right, that makes sense. Your hedging, any benefits at all from your hedging practices?

We're continuing to hedge greatly and we've got about 20% to 25% of our-- let's see, for the rest of the year we're about 21% hedged. And then January through June, we're around 23% hedged, and through the end of next year, we're basically another 20% hedged.

Are you seeing any disparities in pricing power or can you describe for us the disparities in pricing power between the reefer division and the rest of your business? Because in some of your first of all your public competitors but I know some of your private competitors have heard reports of pretty strong pricing in the reefer business.

Donald, this is David. We are starting to see that but I will tell you that we are-- kind of what we saw on the reefer side is that the first five or six months of the year, I did see that. I did see the gap between dry and reefer expanding very, very nicely and something I'm satisfied with. Quite frankly the last couple of months I've seen the dry side getting almost even again with the reefer side. So I do believe there's some great opportunities on the reefer side that quite frankly I think that we're $0.05 or $0.06 a mile cheaper than where we should be on the reefer side on one of our companies that's operating, that we're all happy with the way it's operating, I think there's some opportunity there.

And Donald, and on that fuel question, I think you used a number of $0.23 a mile for fuel or something like that. And what we've got, just to clarify, it did go up $0.015 over Q3 2010 but we've got $0.215 on a per Company mile basis versus $0.20 last year, $0.20 even. So we can figure that out over the phone.

Yes, we can figure that out offline Richard, but I do appreciate the granularity and I hadn't thought about the increased idling which of course makes some sense. And good luck at getting the additional pricing in the reefer division in the fourth quarter.

Okay, Donald, thank you.

Jack Waldo with Stephen Incorporated.

Good morning, gentlemen.

Hi, Jack.

My question, Richard or David, could you give us some of the terms of the new debt agreement in terms of coverage ratios, leverage ratios?

In the release, which I've got, on major items the leverage ratio which is a new ratio was set at 4.35% which is basically a total debt to EBITDAR. And so that total debt number includes the letters of credit as well as the balance sheet debt as well as the present value of operating leases.

Okay, is it a consistent 4.35%?

It's 4.35% across the-- yes, yes, going forward, it's only calculated quarterly and so it only has to be met quarterly.

Okay, and do you know the present value of your operating leases? Or what the net value is?

Yes, it's about $53 million, $53.3 million.

Okay. That was my major question. Thank you.

All right, thank you.

Chaz Jones with Morgan Keegan.

Good morning, guys. This is Nick on your Chaz this morning. How are you?

Hi, Nick.

Just a couple of quick follow ups here, obviously pricing the major bright spot for you all in this quarter. How much more rate work are you doing at Star and in the other segments? And where do you kind of see that improving sustainability in this quarter and kind of as we move into 2012?

We do see it continuing to increase, kind of what you've seen, excuse my voice, but kind of what you have seen in the second quarter on a percentage basis kind of continues. And in 2012, the proxy will continue to go up as it is a focal point and even at utilization, I believe we got some upside potential. We're still trying to figure out-- I'm starting to get into the count that the electronic on-board computers are running about a 2% negative number in my opinion to what I think they're starting to do. But I do, A, there's going to be some opportunities on utilization but we're absolutely looking at all the rates as we have been for the last 12 months but we're not taking the focus off of that, I think there's some more great opportunities on pricing. And so I expect 2012 to continue to increase very nicely for us on rates.

Got you. And you mentioned the [OBRs] a second ago. Where do you all stand on the--?

We're at about 90%, Joey-- on-board computers, I mean logs.

Oh, yes, the majority of the fleet will be done by the end of this year. There'll be a little trickle for Star I think into the first quarter. But basically, everybody is going to be done here in the next two or three--

Got you, thank you. Gains on sales in the quarter, $1 million for this quarter, down a little bit sequentially from I think around $3 million in Q2. Obviously we've heard a lot of commentary about how strong the used market is. How should we kind of think about strength that you guys are seeing in the used market and how you're thinking about how that affects the equipment you've got on hand moving forward?

It is still very strong. We should see that number bump back up to between $1.2 million and $1.5 million in Q4 of gains. But then as we've discussed going into next year, we're not going to be selling as much equipment because we're not going to be replacing as much equipment, but we'll see that number decline substantially. But it's still a really good market.

Sure. And then the last one and I'll step out of the way here. Insurance and claims also ticked down pretty significantly here, which is another kind of consistent theme we've seen. How much of this has come and do you guys think is it from more increased regulation or is it just kind of the general fluctuation we see in these lines?

Well, insurance came back down to a more manageable number this quarter as we didn't have as much of the claims settlements that we've had over the last couple of quarters, and so that really, really helped us from that standpoint. We got more normalized on the number of claims that we have out there and our reserve practices have improved as well. And then accidents have just been lower. We just have seen a wonderful improvement in a reduction in accidents including major accidents over the last really 9 months to a year and so we're continuing to see that come down and very proud of that and--

We're seeing both incidents and accidents, on the incidents and severity being lower very nicely for the last what 4 quarters?

Great.

We're having a really strong fourth quarter as well, so that's-- we're being blessed in that regard. Record quarter for the third quarter on an incident standpoint, no severe accidents in the third quarter. And so far, fourth quarters continuing that trend.

And so we're seeing the improvement in CSA scores coming in as well.

Right, perfect. All right, thanks a lot guys. Really appreciate it.

Thom Albrecht with BBT.

Hi, guys. Good morning.

Hi, Tom.

I was curious after several quarters of relatively flat owner/operator count, you saw a pretty nice percentage increase to 192 and you've been kind of 120 to 140. What lead to such a good experience there? And then I've got one or two other questions.

I think, Thom, basically-- frankly we've missed something that we should have been doing for the last 3 or 4 years obviously with our capital structure. We needed-- we should have been pushing for-- to grow a quality owner/operator fleet. That said, we're trying to do that now and one of the things that's helping us is we've started-- we've had a lease purchase program for a lot of years with our partnership with Transport Enterprise Leasing. They do a good job of buying and selling used equipment. And we've partnered up with them to manage at least purchase program for all of our CTG companies and it's really taken off. Very attractive program, about half the drivers are coming from outside the company and half are internal switches, obviously we're trying to target new drivers. And so frankly right now, we're at a point we're having to kind to hold it back a little bit just trying to get enough trucks to fuel it. So that's where it's coming from is really the gross of that lease purchase program.

And so the 41,000 in other below the line, that's the income from the transport equipment leasing stake?

No.

Or I'm sorry that's the 350, sorry, sorry.

That's all right.

But that's the TEL part?

That's our 49% ownership in that minority interest.

Okay. And then Richard, you mentioned in your opening comments, and I missed the first couple minutes, but I came in as you were commenting on a substantial drop in driver turnover and that. I don't know if I heard an approximate unmanned percentage truck count.

Well we're back down to 5% as of the end of October, and last year at this time, that number was a little over 6%. That includes deadline trucks that are in the shop getting worked on. We haven't always recorded it that way but we are now. So it's for total trucks, that's really the unmanned.

Okay, so that's everything, including stuff that's not really associated with not having a driver, is what you're saying?

Some of that's not even available for a driver because it's in the shop.

And usually that number runs about half.

Yes, so about half of that.

Dave--

We're really, quite happy with where we have gotten on the open truck situation at the end of October.

Because remember, Thom, in July that thing-- it went from a 5% number in June to about a 10% number in July.

Yes.

And then by September it got back down to-- the end of September back down to--

Below 6%.

Yes, around a 5%.

Okay, and then I don't normally ask a lot about rates, just for various reasons, but David, as you think about-- first of all, do you expect an increase in the number of bids perhaps from December through the first quarter? Do you have a feel what the shipper mentality is right now to bid or not bid? Are there going to be mini bids, entire network bids?

That's a very-- yes, that's a very interesting question because just in the last 2 weeks and in particular this week, we are having more of our major accounts that are contemplating no bids and wanting to-- have got a hold of us and asked the question of what are you thinking rates are next year because we're contemplating not doing a bid? And then B, we are seeing an uptick in mini bids and most of that is done by capacity in areas that they're concerned about or service or those kind of things. So I do believe that the customer is concerned about capacity and my gut is starting to tell me, Thom that it's not going to be just thrown it out and see what happens on the wall because they're scared about what they'd be looking at.

Okay, yes that's helpful. I mean I've got a bunch of those requests in my inbox here.

Yes, so it's going to be-- and I'm just starting to get that feel in the last couple of weeks.

Okay, thank you, guys.

Scott Group with Wolfe Trahan.

Hi, thanks for the follow up. And just to-- last thing just to follow up on Thom's question, so David knowing what you know and knowing what you just said about (inaudible), what do you think is a reasonable expectation for pricing next year, assuming we don't see any material change up or down in the economy?

It's going to be higher than this year. So that's-- So that--

Higher?

Scott, that's really-- as we're a month away from it and as you probably remember, if not, a lot of hours in all three companies are in that March/April kind of timeframe, so we're three or four months away. We are starting to have conversations with a lot of our major accounts right now, but I feel extremely confident that it's higher than this year.

When you say higher than this year, do you mean higher just on an absolute basis or bigger rate increases this year than the rate increases you're getting next year than what you're getting this year?

Well so far basically the last 2 or 3 quarters I can't in my mind, I can't remember what it was fourth quarter last year but its been in that 5% to 6% number quarter over quarter or year over year kind of number. So that's what I meant by that statement.

So bigger-- more than 5% to 6% increases next year?

Yes.

Got you. Okay, great. Thanks so much, appreciate it.

At this time, we have no other questioners in the queue.

All right, well thank you guys for calling and we look forward to talking to you as we finish out the year.