Covenant Logistics Group Inc (CVLG) 2011 Q4 法說會逐字稿

Hello and welcome to the Covenant Transport fourth-quarter earnings conference call. Please be aware that each of your lines is in a listen-only mode. At the conclusion of our speaker's presentation, we will open the floor for questions. Instructions will be given at that time of the procedure to follow if you would like to ask a question.

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

Good morning. Welcome to our fourth-quarter conference call. Joining me on the call this morning are David Parker and 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 and section 21E of the Securities Exchange Act. 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 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 -- our asset-based divisions' revenue, excluding fuel, decreased 5.3% due to a 1.1% decrease in average freight revenue per truck and a 4.2% decrease in our average truck count. Versus the year-ago period, our miles per truck were down 7.1%, while average freight revenue per loaded mile was up $0.099 per mile, or 6.7%.

We also experienced a $0.03 sequential increase in freight revenue per loaded mile from the third quarter, the largest we've had in seven years. When compared to the year-ago period, all the asset-based divisions experienced a utilization decline. SRT, our refrigerated division, experienced the smallest drop versus year ago at around 2%. Covenant Transport experienced an approximately 8.5% decline due to lower demand, a lower team count, and a little bit higher unseated trucks. Star experienced an approximately 9.4% decrease, in part because of strong yield management that increased freight revenue per total mile by 11.1% compared to with the 2010 fourth quarter.

Compared to the fourth quarter of 2010, the asset-based divisions' after-tax cost per mile, net of surcharge revenue, was up approximately $0.12 per mile, mainly due to higher driver wages, maintenance expense, insurance and claims, and lower absorption of fixed costs. The asset-based operating ratio deteriorated 360 basis points to 99.3%.

Within our Solutions logistics subsidiary, as expected, overall revenue declined by 27% due to the culling of unprofitable agency partners and customers in 2010 and early 2011, while its operating margin increased slightly to 94.5%. Additionally, our minority investment in Transport Enterprise Leasing produced a $200,000 contribution to our pretax earnings.

Since year-end 2010, total indebtedness, net of cash and including the present value of off-balance sheet lease obligations, increased by approximately $33 million to $297 million. The average age of our tractor fleet continues to be very young, at 1.6 years as of the end of the fourth quarter.

We were in compliance with our financial covenants at the end of the quarter. Versus year ago, our consolidated operating ratio deteriorated by 350 basis points to 99.1%. After tax, we lost $2.2 million for the quarter compared to net income of $700,000 last year.

In summary, the fourth quarter was a disappointing end to a disappointing year. Based on industry-wide tonnage levels and prevailing rate environment, our performance should've been better. We have effectively managed a number of cost items, and our customer service is excellent in several of our niches. However, we are not generating sufficient revenue per tractor in certain of our operations to justify continued investment at the historical levels.

On asset-based side, while all units have margin improvement potential, our refrigerated, expedited, and logistics units continue to lead the Company in performance, while the dedicated and regional operations have significant ground to make up. Since the beginning of the fourth quarter, we have been taking a hard look at every aspect of our business. We are developing a plan to increase asset productivity, further reduce costs, and focus our future investments in the business units where we see the most promise of adequate returns while decreasing capital investments elsewhere.

We intend to work closely with our customers to determine their needs and which ones we can serve profitably. We believe substantial additional yield improvements must be part of the plan. In a supply/demand environment expected by many industry commentators, we expect to find markets and customers that value our capacity and services.

We'll now open up the call for questions.

(Operator Instructions) Scott Group, Wolfe Trahan.

This is actually Reena Krishnan sitting in for Scott Group. Richard, maybe -- I know you said you were in compliance with your covenants at the end of the quarter. Is there any more color you can give on that in terms of what the ratio was?

It was 1.03. That was a little over $4 million of cushion from our 1.0 for the fixed charge coverage ratio. For the leverage ratio, we had more cushion than that. It was a little over $5 million of cushion, and I think that number was around 4.08.

4.08?

Yes. Versus the target of 4.35.

Right. Okay, so it was 1.03 and 4.08?

That's correct.

Okay. Can you give us a sense of what total liquidity was at the end of the quarter?

Well, we had -- our availability was up from $23 million at the end of the third quarter up to about $27.6 million at the end of the fourth quarter.

Okay, great. And then what was the additional cash available, maybe?

Oh, cash was $3.9 million.

$3.9 million at the end of the quarter? Okay.

Yes. And if you recall, one of those items that we had -- we had net operating cash flows of about $6.2 million, and we had net CapEx of $14.2 million. So free cash flow was actually negative by about $8 million. But assets sale for sale increased from a little over -- about $6.6 million up to $16.9 million. So asset sale for sale, which is a fairly liquid asset for us, we are able to generate proceeds from that fairly quickly, and we should get most of that in the first quarter. So that should turn pretty quickly and give us more liquidity.

The $16.9 million you expect in the first quarter -- to get a major portion of that? Is that what you're saying?

A large portion of that will be turned into proceeds in the first quarter.

Okay. What were the gains on sale in fourth quarter?

Gains on sale in the fourth quarter were about $0.7 million versus $1.3 million last year. $1.0 million in the third quarter.

Moving on to utilization, maybe you could give us a sense of how much of it is -- I know you said there was lower demand in sort of the major Covenant subsidiary, but could you give us a sense of how much of that is -- if we look at it compared to some of the other TL reports, how much of it is Company-specific versus, maybe, just the general market?

This is David. As I look among the three asset companies, first of all, when -- and we are 80% through it. We are maybe 90% through it. So it is not the major issue that we had in the fourth quarter, but we are still continuing to work through our conversion that happened in July, and we spoke about it in the third quarter.

So that has been an issue, and again, we are about 80% or 90% through, and I'm feeling better about it each and every day. If I was going to throw some number out there, I would say that it affected us by a couple of percent. So it's not the largest portion of it, but as I look at the three companies, there's no doubt that the on-board computers are affecting the industry, so we are not alone. It has affected the industry somewhere around 2% or 3%, in my opinion.

So we are all going to have a negative problem on on-board computers on terms of utilization, so that was a number. Open trucks are up about 2% that we had, that we just don't have drivers on the seats. And then the other stayed 3% or 4% -- was just predominantly in our regional and in our dedicated parts of our business.

So in a nutshell, that's where it boils down to. Basically, as the printout that we had, release that we had, the refrigerated, expedited segments of the business are holding their own, and I would say that the refrigerated side of it is all related to on-board computers. And, I don't know, I think it's always going to be 2% to 3% -- that's just where we're at.

And the expedited side of the business is has been doing okay. But the regional and the dedicated is where we have to get more either miles up, or on the dedicated, every one of them, with a guaranteed revenue on those trucks. And we are working very hastily to achieve that goal.

On the regional side, rates were up about 11%, as we kind of improved our yields on certain customers and there were certain customers where we were not making enough money, and that's why the utilization decreased to the level that it did at the Star subsidiary.

And another thing to point out on the Covenant side is that our team trucks were down about 70 year over year; 70 or 75 year over year from fourth quarter '10 to fourth quarter '11. With a lower percentage of team trucks in the mix, you're going to have less utilization.

Okay. Do you guys have -- when would you expect utilization to inflect positive? Or does it seem like -- I think David mentioned that 2% to 3% -- some impact of that 2% to 3% seems to be the case ongoing?

Yes, I do think that 2% to 3% on the computer itself, is what I think, but as we think about the regional side, we are still going to probably be seeing negative utilization numbers greater than, say, the 2% or 3%, because you're going to be seeing the rates on that area going up extremely nicely on the rate side.

So we're really -- on the regional side, we're strictly looking on revenue per truck, and utilization may get down say to negative 7%, and if rates get up to 10% or 12%, for a positive 3% or 4%. That's kind of our thought processes on that.

On the dedicated side, quite honestly, I think the dedicated side is going to be -- the miles will be the miles, but you're going to be looking at the revenue per truck increasing nicely on the dedicated side.

What are you guys expecting on average for pricing in 2012, then?

Two things. I think what the street is basically saying is kind of where we are in line at with our thoughts. I think we can do better, but 3% -- just add 4% or 5%, and so our talking statements are going to that 4% to 5% range. My goal is to be greater than that.

Utilization -- probably a little bit down the first half of the year, but then you should see that inflection point where utilization improves beginning in third quarter on a consolidated basis.

And then just one last question. What are you guys targeting right now in terms of driver pay for 2012?

Our driver pay is up, what, $0.02? Our driver pay is up a couple of cents, to give you an idea, and we're just looking at the market. I think it's going to be at least $0.02. We'll just have to see how the market does.

In the last 30 days we have filled some trucks; we're not making tremendous headway, but we are making some headway, and we're just going to be measuring that on a monthly basis. But we are anticipating a couple of cents for driver pay.

Chaz Jones, Morgan Keegan.

Good morning. Actually, Nick on for Chaz this morning. Just to kind of follow up on the driver pay question, has that been more of a broad-based kind of thing, or kind of more spot application in terms of the driver pay increases?

This is Joey. It's been more targeted across the refrigerated and the regional businesses. It's been more kind of across-the-board type of approach, whereas the expedited business has been very specifically targeted to basically fund the needs around hazmat, around teams, around certain types of our student program. And I think on the expedited side that will continue throughout 2012.

Okay. So the idea is that you probably will be sticking with that approach kind of throughout 2012? You don't necessarily see a one-time, broad-based kind of increase across the board or something like that?

Each of them are going to be different. As David said, it's a month-to-month review, because the market is what the market is. So it's moving. You've got to be prepared to kind of move or specifically address any needs that you have. And that's what we see on the expedited side, as people really targeting resources around specific needs, versus kind of broad brush across the board.

If you've got hazmat license -- yes. We will pay more. Those kind of things.

Sure, sure. That makes sense. Let me move on, then, a little bit. Obviously, we talked last quarter with you about owner/operator count and how that's become a point of emphasis for you guys. Can you talk a little bit about the increase in this quarter and what your plans are sort of moving forward, as far as your owner/operator count and how you see that mix changing a little bit?

It's going to continue. A lot of the growth has come from just emphasis, I would call it. We changed our owner/operator pay program again with the Company fleet back in the summer, and I think it's just something that's going to -- it makes sense for, especially on the expedited side, it makes sense for kind of more of a volatile market, or model. And so we're going to continue to try to grow that.

We have targets to continue that. It's running about 8% of the fleet on a consolidated basis today. And I think we've got opportunities to continue to slowly move that.

We may do some things a little specific on the team side. Again, it depends on how the market's moving. The short answer is, we're going to continue to do what we are doing. You're going to see it, I think, continue to slowly grow as a percentage of the total.

That makes sense. A couple of things -- you guys had talked about in a couple of spots doing some yield management and calling out accounts that haven't necessarily been as profitable. If you could talk a little bit about -- either segment by segment, or anything specific as far as where those efforts stand? Do you see that continuing into the first half of this year? Do you have a target at which you want to be to a certain level of profitability, and then kind of move on from there?

A couple of things. We stated at the end of the third quarter that it's a second-quarter event that we see our business -- in the third quarter, as you saw a rates up very nicely from third to fourth -- excuse me, from -- in the fourth from the third quarter, you saw rates up very nicely, and that is a byproduct of the yield management system that we are utilizing, where we are literally taking -- continued to take, and we started it last year, but a lot of the contracts got done. As you may or may not know, we have a lot of contracts that come up in the first three to four months of the year, predominately in the March/April, a big portion of the business.

So we really started in that process in the summer. It's one of the great things about the new system that we came up with; it has so many more tools than what we had available to us, and you started seeing it in the fourth quarter, starting to be utilized. Well, that is continuing to be utilized, where it is literally every customer, by yield and operating ratio both, and lanes by every one of those customers.

And that's what you've got a little glimpse of the fourth quarter, and what I anticipate for the next two quarters, in the first and the second quarter, with the second quarter being the maximum working through every lane and every stripper that we've got.

Got you. So that's kind of giving you a little more leverage to get a jump start on that? Maybe can you talk a little bit just sort of what your expectations are as we ramp into bid season here, and how you think that will -- those systems and things like that will help you get ahead, and what kind of early calls you've been getting for bid season, that kind of deal?

Less bids than what we have seen in the last couple of years. Most of our major customers are doing one of two things -- they are sitting down with their carriers and negotiating agreed-upon pricing not to send it out for bids, so that is one. And number two, on anything that they cannot come to an agreement on, then they are doing some mini-bids and not a major bid. So we are seeing less bids that are happening, and I think that is a good sign.

Got you. That is very helpful, guys. I appreciate it.

(Operator Instructions) Jack Waldo, Stephens.

This is Tyler in for Jack. Any commentary -- any early commentary on January trends, utilization and given lack of harsh weather and some of the other things, just any initial thoughts there?

A couple of things. We are just coming out -- not coming out, but I guess maybe we're 70% through now the Chinese New Year out in LA, and the effect that it does have yearly on us.

As I think about the business, first of all, utilization is down; rates are up; and I think that we are starting to see the utilization side come more in line, just in the last 10 days, more in line to what my expectations were for the early part of the year.

The bad weather has definitely been a help, but we are definitely seeing negative utilization at all three companies -- again, with our model, but that is decreasing every day. So the first three weeks was more than what I anticipated, but for the last two weeks, that gap is starting to narrow nicely. So I'm pleased with what I've seen since then.

Overall, if you were to ask me how do I feel about the business environment, I feel pretty good about it. As I think about -- we've got some weakness; Texas has been weak so far this year. It has gotten better in the last week, but it is still some negative numbers. Whether that is Dallas, Houston, Laredo -- all three of those areas have not been good.

California has been better than I anticipated. California, even with the Chinese New Year, I am very happy with what I'm seeing on capacity constraints for the industry in the state of California. But Northwest has been bad -- much worse than what I anticipated the Northwest being, but I would say that -- let's say it like this. Take out the Northwest is bad and Texas is bad, I'm pretty satisfied with the rest of the United States on the freight environment for the first five, six weeks of the year.

And we've been sending a little bit less out to the West Coast. It's down a little bit. But we are sending less out there, so we have less of a capacity issue from the way that we've been managing that freight.

And utilization is -- has been overall down, like he was saying, one week to the next, but down about 1% to 3%. Not down in a large number versus last year. And then rates have continued to -- we've been able to still get rate increases, and the ones that we've had in effect throughout 2011 that are still applying to 2012, we are still seeing 4% to 6%, 7% rate increases.

Thanks for the color on that. A couple of model questions -- and I apologize if I missed this. What are you expecting for net CapEx in '12?

We haven't announced that, but I do believe it's going to be -- it will be significantly lower than this year. This year was about $49 million, $50 million of net CapEx. Next year will be significantly lower than that number.

Okay. Is 4Q interest expense a good run rate, or are there going to be any changes looking out into '12? Or should we expect a difference there?

It's pretty close. I think as we have less CapEx throughout the year, you'll start seeing that number come down a little bit, especially if we are able to generate some profits second, third quarter-ish, and start paying down some debt. You ought to see that number come down a little bit. But it's pretty close.

(Operator Instructions) Gentlemen, at this time, it looks like we have no further questions in the queue.

Thanks for being on the call, and we'll talk to you next quarter.

Thank you very much, ladies and gentlemen. At this time, this conference has now concluded. You may disconnect your phone lines and have a great rest of the week. Thank you.