Covenant Logistics Group Inc (CVLG) 2012 Q1 法說會逐字稿

The following is recorded at the Richard Cribbs teleconference with Covenant Transport on Thursday, April 26, 2012, at 10 a.m. Central Time. Excuse me, everyone. We now have our speakers in conference.

We would like to welcome you today to the first-quarter Covenant Transportation conference, which will be conducted today by Mr. Joey Hogan, Mr. Richard Cribbs, and Mr. David Parker.

Please be aware that each of your lines is now in a listen-only mode. At the conclusion of the presentation we will open the floor for questions. 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 Mr. Richard Cribbs. Please begin.

All right. Thank you, Taylor. As always this conference call will contain forward-looking statements within the meaning of Section 27A of the Securities Act and 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 in 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 -- our asset-based divisions' revenue, excluding fuel, decreased only 0.6% due to a 3.7% decrease in average truck count, offset by a favorable 3.3% increase in average freight revenue per truck.

Our revenue per truck increased versus year-ago for the first time in five quarters. Versus the year-ago period, our miles per truck were down 2.4%, while average freight revenue per total mile was up $.077 a mile or 5.8%.

Also, even though our miles per tractor were down versus year-ago, it was the lowest percentage sequential decrease for CTG from the fourth quarter to the first quarter in the last 10 or 11 years. The 10-year sequential decrease average was 6.2%, while this year decreased only 1.1% to 1.2%.

When compared to the year-ago period, all the asset-based divisions experienced a utilization decline, with SRT, our refrigerated division, being the smallest drop versus year-ago at around a 1.1%. Compared to the year-ago period, the asset-based division's pre-tax cost per mile, net of surcharge revenue, was up approximately $.04 per mile mainly due to higher driver wages, maintenance expense, and insurance and claims.

These increases were offset by lower net fuel expense and overall capital costs, both depreciation and interest expense. The asset-based operating ratio improved 220 basis points to 98.0%.

Within our Solutions logistics subsidiary, overall revenue declined by 29% due to the loss of a large agency in January and a difficult comparison to the first quarter of year-ago, when Solutions handled the nationwide launch of Allegra to the over-the-counter market. Our overall gross margin continued to be strong at 77%, while we have invested in some additional SG&A expenses to support a wider range of services within the division.

Additionally, our new minority investment in Transport Enterprise Leasing produced a $245,000 contribution to pre-tax earnings.

Since year-end 2011, total indebtedness, net of cash and including the present value of off-balance sheet lease obligations, decreased by approximately $30 million to $267 million. The average age of our tractor fleet continues to be very young, at 1.8 years as of the end of the first quarter.

We were in compliance with our financial covenants at the end of the quarter. Versus year-ago, our consolidated operating ratio improved by 170 basis points to 98.1%. After tax, we lost $640,000 compared to a loss of $2.5 million last year.

In summary, we had more positives than negatives in the quarter. The positives include freight; rates; general cost control, especially net fuel costs; low first-quarter accident incident rate; the sale of our terminal; and reduced indebtedness. The negatives included a higher number of settlements with unfavorable reserve movements of prior insurance claims; a reduced gain on sales of revenue equipment.

For a winter quarter, freight was solid, aided by good weather and continued positive momentum in our application of the relatively new operating system at the Covenant Transport subsidiary. We became basically 100% compliant with paperless logs by the end of the fourth quarter of 2011, which negatively impacts our utilization. However, we now see opportunities in the use of the electronic on-board recorders for efficiency gains as we progress through the next three or four quarters.

A first-quarter 2012 year-over-year 5.8% increase in rates, following a 5.7% increase for the full fiscal 2011 year over fiscal 2010, will continue to be a focus as we move through 2012, while we balance capacity across our network. All asset-based divisions increased their respective rates by at least 5%.

Why? The difficulty recruiting and retaining qualified drivers continues to be a challenge, and we have not been paid commensurately for the services we provide. From a driver standpoint, we are encouraged by our progress during the quarter, where we began the quarter with over 7% of the fleet unseated, including the wrecked units, and finished the quarter with only 5% of the fleet open.

Although our industry still faces a variety of challenges, we believe proper execution of the opportunities in front of us could make for an interesting year. Our costs are stabilizing; our service is continuing to sequentially improve; and we are focused on transitioning our assets and related capital to the areas that provide the best long-term return.

Thank you for your time, and we will now turn the call over for questions.

(Operator Instructions) Jack Waldo, Stephens Inc.

Morning, gentlemen. I wanted to ask a little bit about your pricing versus volume relationship and how you guys think about it. Are we at the point now, David and Richard and Joey, where you feel that pricing today -- a high enough level, I guess, where the focus is now turning more on the utilization or volume front?

I think, Jack, the mathematical calculation of that is that rates is about 3 times more impactful to the bottom line than utilization. But we all know utilization is extremely important. If you don't have good utilization, you don't have a driver to provide the service to help you get the rates.

So the way I see it, today rates are more impactful to bottom line today, but utilization is more important over the long run. Because again, at the end of the day our most valuable asset, frankly, is our drivers.

That being said, directionally we still have some opportunity, we feel, in our rates with each of our operating divisions. If you look across the products that we have, I believe our expedited product is priced pretty well in the marketplace and probably has the least amount of upside across the group. We feel that we still have some opportunity still yet in our regional and our refrigerated product as well as our dedicated product.

So that is kind of how those lay out. As far as the utilization front, there is no question that the big focus to improve our utilization.

I think that we are seeing some new business come on. Early in the quarter our bid volume was busy-busy. It has gotten a little slower the last few weeks. So it has been slower.

But I think the thing through that is, remember, we really saw the increase in our paperless logs installation. It was going on throughout 2011, but we really didn't get it completed until the end of 2011. So that is an impact; there is no question about it.

And still the majority of the overall CTG fleet is solos. And so that knowledge base and growing with that, as well as, on our biggest division [on] the operating system at the same time, it has been a challenge. But I am very pleased with where we are, relatively speaking.

We did see -- we have seen some really nice improvement in utilization throughout the first quarter, and it continues into the second quarter. So it is a balance. Tastes great, less filling; rates or utilization.

And I think that we are going to keep pushing to get paid for what we do, as well as we agree we need to continue to bring on business. But we are not cutting rates right now for that. We are not in a position to do that, nor are we inclined to do that.

What are you seeing -- you mentioned the bid season. What are you seeing in terms of pricing? And how is it differentiated between your dry-van and refrigerated divisions?

I think that the refrigerated division versus let's call (technical difficulty) for the month of -- as we move through the end of the first quarter, we started really seeing our refrigerated rates really starting to grow dramatically. We are very pleased with that, and we think we have some continued opportunities there.

Towards the end of the first quarter, you start to see in the dry side, especially in the expedited side -- not the regional, the expedited side, that difference versus year-ago starting to shrink a little bit.

But I am not really -- if you are concerned about us pricing ourself out of the market to affect utilization, we really don't believe that's the issue. We really don't believe that's the issue.

I think that we have got some opportunities to continue to add capacity -- I mean add utilization into the fleet. The expedited group is probably the highest relative to the marketplace that we have to watch, but we have got nice opportunities across the remainder of the fleet. And we need to continue to improve our knowledge base and efficiencies with paperless logs, as well as the new operating system on the transport side.

So I think it is fair. The service is good. It is not on the transport side back where it was quite yet, but it is right at it. It is right at it.

So two-four quarters, three-four quarters after the installation, I am very pleased with that. I think I see some really neat opportunities to improve that. But nevertheless, we need some business, so that is where we are.

Got you. Then how did profitability trend throughout the quarter? I'm guessing it is fair to say you guys were profitable in March?

Yes, yes. Down heavier, and January and February were very similar in losses; and then March was a pretty nice profit for us.

And how has April trended?

April is trending about like March. It may have been positively, just probably a small positive.

Got you, got you. Well, I greatly appreciate your time and I'll pass it along. Thank you.

Thank you, Jack.

Scott Group, Wolfe Trahan.

Hey, thanks. Good morning, guys. So, just to follow up on some of those last questions, when you add it all up, when are you thinking at this point for pricing and for utilization for the year -- when do you think utilization can turn positive?

And is it fair to think that we can keep up this 6% yield growth? Or at some point does it have to slow down like the rest of the industry?

Scott, I think right now we are still looking at maybe improving a little bit on a year-over-year basis in second quarter, but not being positive on the utilization front yet. As you guys noted in your notes this morning, it should definitely turn positive in the third quarter -- against an easy comp; we acknowledge that. But we really see some improvements coming up, and see that happening and definitely in third and fourth quarter.

And then on the rate front it will slow down a little bit. We had such nice rate increases last year.

We are probably looking more of the 4 to 5.5, 4.5 to 5.5 kind of range instead of 5 to 6.5 on a year-over-year basis. So that is probably close to where we are. So it will probably moderate just a tad, but not much.

We have still got a lot of good rate increases that got put in late -- as Joey mentioned, late first quarter. Then even at our Star subsidiary, two of their largest customers, we had some nice rate increases going into effect in April. So that should still continue, but just maybe not quite at the same pace.

That's helpful. How about plans for the fleet going forward?

The fleet is going to be, Scott, about where it is. That is probably -- the big issues that I see today are -- it has already come up with Jack's question -- continue to build business freight, but we are going to do it profitably. If we can't, we will continue to rationalize the size of the fleet.

And then the second part is drivers. We opened up the first quarter as we said 7% of the fleet unmanned. It is down to about 5% today.

It seems to be kind of holding its own. It is not getting any worse, but it is not getting any better. We need to continue to try to do more to fill some trucks.

I think, though, some of the rate increases, as we mentioned, is that our drivers need to be paid more. So our driver base has contributed a lot as well as all of our employees have over the last two or three years.

So finding ways to smartly add value and compensation (technical difficulty) driving force is very important. So we need our yield to continue to be strong because we need to continue to reward our driving force for the jobs that they do.

Hey, Joey, just to follow up on that. Can you give a little bit more color what you are talking about in terms of driver pay? How much of this is broad-based? How much of it -- is it specific to one of the subsidiaries, a region? Any more color on what exactly you're doing with driver pay.

I think if you look back over the last year, we've been focusing our dollars in our refrigerated business as well as our specialized services, mainly our hazmat operation. So they have been getting increased compensation expense inside of those two pieces, refrigerated and our expedited group.

Our regional and dedicated Group has been kind of flattish. It is up a little bit, but it is not up as much as those two are. I think that is kind of where you are going to continue to see the spend is in those two pieces of businesses.

We have a very specialized fleet on the expedited side. Well, almost three-quarters of our drivers are hazmat endorsed. We are growing that and have been growing that.

But that is a very competitive marketplace. It is very specialized. But we think for our model and what we are selling, it is important that we continue to push that and reward for that if our drivers do that and provide good service.

So that is kind of where the dollars have been focused is refrigerated and expedited.

Okay, that's helpful. I want to turn to cash flow for a little bit. What were the proceeds from the sale of the Long Beach property? And then what was net CapEx in the quarter excluding that, and what are you expecting for the year?

The proceeds on the Long Beach property were about $5.5 million. The gain on that was $2.4 million of our total $3 million of gains this year -- I mean in the first quarter.

The net CapEx was net cash provided or net disposals of $14.4 million including the sale of Long Beach. I can see that continuing to trend favorably for the second quarter. We are only adding approximately 100 tractors in the second quarter and a handful of trailers as well.

And still had about $12 million of assets held for sale at the end of the first quarter versus $16 million at the end of fourth quarter that will be being sold over the course of the second quarter. So I see proceeds still outweighing asset acquisitions through the second quarter.

We should see a very favorable net CapEx for the year. I haven't given absolute guidance on that, but I definitely foresee it being below $20 million of net CapEx.

I think, if I could add a couple things on that, Scott, is that one, Richard said add tractors. I just want to make sure, just to clarify, we are replacing tractors, not adding to the fleet right now. Number one.

And then number two is we have a very young fleet, and -- on the tractor side. And we have an older fleet on the trailer side. So there's a couple things that people need to understand.

One is we have been testing for two or three years now, can we run our fleet longer? We have a -- you don't see it in the numbers yet, but we have made that decision, so you are going to start to see the tractor fleet starting to age somewhat relative to where it's been.

We have treated it very seriously. We have stated it till we are blue in the face. And so it is time to go. So we think that it is a net positive for the organization as we run our tractor fleet a little longer.

I don't think you're going to see it go -- you're going to see it move into that 2.2-ish range over the next year or so. It's designed; it is not a result of something other than we feel it should save us some money and help us to utilize our capital a little bit more efficiently. So that is the tractor side.

The trailer side, we haven't really replace a dry van in seven, eight years. So we are beginning this month with about a four-year transition, the next four years about 100 trailers a month, let's say. We are going to be replacing our trailer fleet.

So that process is going to start now and be going on for a while as we upgrade our trailer fleet. I believe that also will help. This is something we needed to do, and so it is time to do that.

A lot of those trailers were on lease, and so they are coming off lease, so it is time to upgrade that fleet. So I think that will help us from an operating cost basis as well as refreshing (technical difficulty). So you're going to see the tractor fleet get a little older, and you're going to see (technical difficulty)

With this plan to age the fleet a little bit, where do you think the maintenance CapEx goes to? Or how do you think about that in the next couple years?

It will on just the operating and maintenance side, we think it will add a little cost on the maintenance side. There is no question.

But the CapEx spend -- oh, I see where you are going. The CapEx spend. Why don't you go ahead, Richard?

Yes, going forward, we will be back to maintenance of -- instead of purchasing only 350 tractors this year, we will be back up to probably purchasing more like 750 to 800 a year going forward. So you will be in between; the last two years we were closer to 1,050 and 1,000 tractors purchased.

The trailer spend obviously will be higher over the next few years starting this year, probably closer to 80 trailers a month that we are going to start taking. Really starting that in May. So you're going to see that go back up, but not quite to the spend level that we've had over the last two to three years.

Then as well, we are really working hard to increase our owner/operator fleet. And when we add owner/operators, we are not adding to our overall fleet. So that is coming out of -- that is selling another Company truck when we add an owner/operator.

Over the last year, Covenant subsidiary alone added 80 owner/operators. We feel good about our progress there and some things that we are doing that are coming up to even significantly improve that further. So that could change our plans on how many Company tractors that we have to purchase over the next two years.

Okay, that's great. Just last quick thing and then I will pass it along. Richard, can you just give us an update on where you stand at the end of the quarter covenant-wise and any changes in covenants coming up?

Yes, we don't have any real changes coming up. The leverage ratio was around 3.65, much improved.

We had some decreases in some debt. Obviously we paid down $30 million of debt in the first quarter, as we stated, so that helps a lot. Then we don't have a whole lot of increases coming up, so I feel very comfortable about the leverage ratio.

The fixed charge coverage ratio is our bigger hurdle. As you have seen, it was about 1.03 as we responded at the end of fourth quarter. And it maintained that same level at the end of the first quarter, very close, same type of cushion number.

Second quarter has -- again not looking at just any kind of giant earnings per share for second quarter versus making $0.11 last year. So there is a -- it's tight. We feel -- I feel good about it, but it is tight and so we need to make sure we manage that.

After the second quarter, I see real improvement. It is a trailing 12 months calculation and versus third quarter of last year, with what we hope to see this year and being so far removed from the implementation of the system at Covenant subsidiary, I feel really good that as that wraps around we are going to see that significantly improve, or at least slowly improve, and not be as tight.

So really the hurdle would be this quarter. And right now it looks fine, but it is tight.

Are you in discussions with the banks about it? Because I think to your point -- I mean, clearly the comps for the trailing 12 months get a lot easier once you get to third quarter. Do the banks seem flexible if you need to get a temporary release just for a quarter?

Yes, very much so and I think that has been shown. We have great banking partners with Bank of America and JPMorgan on the line as well as with the captive companies, Navistar, PACCAR, Daimler on the truck purchase side.

The banks have been great partners and have continued to -- anytime we have run into any issues given us the flexibility to continue operating as we have been before. And they see the same thing; coming up third, fourth quarter that is going to improve greatly. So if there was any issues I feel strongly that they are going to continue to be a good partner for us.

All right. Thanks a lot for the time. Appreciate it.

We have no further questions at this time.

Yes, that will wrap us up. Thank you very much for your interest in calling in, and we will talk to you in July on the second quarter.

Thank you, ladies and gentlemen. That concludes today's teleconference. Please disconnect at this time.