Covenant Logistics Group Inc (CVLG) 2012 Q2 法說會逐字稿

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

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

Thank you, Jennifer. Good morning and welcome to our second-quarter conference call. Joining me on the call this morning are David Parker and Joey Hogan, along with various members of our management team.

As a reminder, this conference call will contain forward-looking statements within the meaning of Section 27-A of the Securities Act and Section 21-E of the Securities Exchange Act, 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 new website at CTGcompanies.com, under our investor relations tab. 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 after five consecutive quarters of year-over-year quarterly revenue decline, our Asset-Based divisions revenue, excluding fuel, increased 0.4% due to a 4.3% increase in average rate revenue per tractor, somewhat offset by a 3.7% decrease in average tractors. Average freight revenue per total mile was up $0.074 per mile or 5.4%, while average miles per tractor decreased by only approximately 1%. Average freight revenue per tractor increased sequentially in 2012 by 9.6% from first quarter to second quarter. That's the largest sequential increase we've had over the last 10 years. The ten-year average sequential increase is around 6.9%. All the asset-based divisions experienced a year-over-year average freight revenue per tractor increase with our largest division, Covenant Transport, experiencing the largest increase of 5.4%. Compared to the year-ago period, the Asset-Based division's operating cost per mile net of surcharge revenue was up approximately $0.02 per mile, mainly due to higher driver wages, maintenance expense, growth of our owner-operator fleet and significantly lower gain on sale of equipment. These increases were partially offset by lower net fuel expense and lower insurance cost. The Asset-Based operating ratio improved 330 basis points to 91.2.

Also, after 12 consecutive quarters of year-over-year quarter revenue decline, our Solutions logistics subsidiary increased revenue by 1.3% while our overall gross margin decreased slightly to 19.5%. SG&A expenses at Solutions increased 510 basis points to 21.6% of revenue, due to investment in additional personnel to expand the capacity and range of services offered to our customers and carrier base in our Solutions division.

Additionally, our minority investment in Transport Enterprise Leasing produced a $425,000 pre-tax contribution to earnings or approximately $0.02 per share. Since year-end 2011, total indebtedness net of cash and including the present value of off-balance sheet lease obligations decreased by approximately $49 million to $248 million. We have accumulated approximately $38 million of available borrowing capacity under our revolving credit facility at the end of the second quarter.

The average age of our tractor fleet continues to be very young at 1.9 years as of the end of the second quarter. We were in compliance with our financial covenants at the end of the quarter. Versus the second quarter last year, our consolidated operating ratio improved by 280 basis points to 91.8. After tax, we earned income of $4.3 million compared to income of $1.7 million last year.

In summary, we are very pleased with the results for the quarter. There were many more positives than negatives. One, strong average freight revenue per tractor growth gives us increasing confidence that the reduced efficiencies resulting from the system conversions that the Covenant Transport division undertook midway through 2011 are now behind us. Our employee base has done a fantastic job restoring service standards and customer confidence through a difficult implementation and we are looking forward to achieving further efficiencies and enhancements over the near future.

Two, our safety efforts produced our second lowest quarterly DOT accident rate per million miles, and the results of our safety program over the last policy year allowed us to benefit financially as well.

Three, we have worked diligently over the years to minimize the impact of volatile fuel cost to our financials, and we intend to continue pursuing a multifaceted approach for the foreseeable future.

Four, our drive to create a cash culture is beginning to show benefits as we deleveraged the balance sheet.

The largest negative for the quarter continues to be the impact of a tightening driver market. We ended the quarter with about 5% of our trucks unmanned, improved slightly from year-end 2011 at 6%. Besides any potential weakness in the freight market, we see the driver issue as the main headwind for us and the industry.

For the quarter, we would have characterized freight as solid. Compared to the normal seasonal patterns, all regions performed at or above expectations, except the Midwest area. It was weaker than expected and still remains somewhat muted today.

Considering our team count was down about 5% compared to a year ago and our fleet was basically 100% electronic on-board recorder equipped this quarter compared to only approximately 50% for the 2011 quarter, we were fairly pleased with our utilization results. Even with the solid performance, we still have capacity for utilization gains, especially within our solo fleets. The combination of a solid freight market and good service by all our divisions enabled us to improve our freight revenue per total mile by 5.4% following a 6.4% year-over-year increase in the first quarter.

We feel that long-term pricing needs to continue to increase in that range in order to attract and retain qualified drivers for the industry and hope to continue achievement of year-over-year rights by at least 4% each of the remaining 2012 quarters.

We continue to feel that our costs stabilizing, service improving and coordinated execution of our continuous improvement initiatives across the enterprise, we have the opportunity for additional year-over-year earnings increases. That said, one quarter does not make a trend. As one of our employees said last week, our challenge is now to do it again.

With our results thus far, we are confident that we will be profitable for the second half of 2012, setting up a very interesting year in 2013.

Thank you for your time, and we will now open the call for any questions.

(Operator instructions) Jack Waldo, Stephens, Inc.

Congrats on the quarter. I wanted to ask this you mentioned the IT system integration and the impact that it had, and now we are anniversarying it. Could you talk a little bit about what, now that you are fully implemented and have had a year to use it, what type of improvements you seem from that new system?

Hey, Jack, this is Joey. I'd say the main way to think about our new platform versus our old platform is the breadth and depth of information. It's significant, and it's much more available. The challenge has been to digest it, and it's significant. And digest it, make the right decisions with the information that you see -- is it change, habits and practices? Do you need to re-examine paradigms? All that -- so it's the depth and breadth of the information at your fingertips is huge.

And so swallowing that, I would say, has been the big challenge. As we've, like you said, wrapped across -- around the anniversary of that, every week that goes by, you can see the incremental improvements relative to the speed of digesting of the information. Just a few weeks ago, frankly, we've been able to push through the visibility of hours of service all the way up to the -- what we call the planning screen. And so we've been kind of piece-mealing that between old system and new system for a while. So that's one that we really haven't had as quick a visibility on that, that we wanted, and now we have that. Now, that's been here in the last 2 or 3 weeks, and we know that's helping quite a bit still on the rework side and re-powers and things of that nature.

So that's the main issue. Going from an old green screen look to Windows-based, that's one move as you transition tenured employees. But then, once you get over there and get used to that, it's just the mounds of information at your fingertips is significant. So you've got to -- what information do I need; what do I do with it; does it change the way I've worked in the past? If it does, is that a good move? And so moving through that path has been the big part. So I'm excited that a year later, I believe we're through that. And now it's moving through the technology enhancements and really starting to dial in some further efficiencies as we move forward.

I guess part of what I'm getting at is, with the improvements that we are seeing now, is this improvements on the old, the traditional Covenant model? Or is this new system that you have in place more geared toward identifying different lanes for you to operate in or different customers? Are we going to see a migration of Covenant into areas where they have not been before?

I think the model hasn't changed. Have we opened up additional geographies or service offerings? Yes. We were planning on doing that anyway. I would say, frankly, some of the enhancements that you mention on the lane management, visibility at the load level on which load to take and things of that nature -- that's out there, but we really haven't turned that on yet. And so we're still operating under our old -- not platform, but our old processes of education, training, evaluation at the customer service level. So the real-time visibility decision-making of this new system has been turned on at one of our smaller subsidiaries, Star, but not on the transport side. And so I think that that is one of the improvements that I see coming forward, but I don't think that's going to change, okay, stop doing this long-haul lane and go do all these short-haul lanes. I don't see that happening on the transport side.

Now, in an overbooked area or an underbooked area -- do I see that CSR planner having more real-time tools to make a better decision at that point? Yes, I think that it could help that nicely. Am I going to put a number on it? No, at this point. But I know that's one of the things that I think we're going to be able to take advantage of.

It's really improvements more at a granular level than it is at the business model that we've seen with the system.

Fair enough, and then on the rate side, is the 4% growth -- is that what you're seeing? I guess I'm wondering how much of that is already baked in through the rate process that you've already been through and how much of it is more a function of what lies ahead, be it negotiations of new contracts or be it the spot market?

Jack, for us to put that in there, we have to feel, frankly, pretty confident about that number. I will say we'll be disappointed, frankly, if it's that low. But that's a number we feel confident enough about as far as where we are in our rate increase yield management -- let's back up and call it more global yield management initiatives, and that includes not only talking with our customers about lanes that we feel we have some pricing opportunity as well as providing great service, but also which loads to take, and maximizing some of the spot market opportunities that we have. So we feel good about that 4% number. I think it could be higher as we move throughout this year. But nevertheless, what we wanted to do was we've had a strong first-half movement on rates versus year ago, and probably signal that that is, relative to the marketplace, both quarters have been high. And we feel that we will continue to be on the upper end of the range, but maybe wanted to point it down to a little bit lower just because we've been through the majority of our larger customers already. And there are some opportunities in some of our other businesses, but nevertheless kind of pointed to two strong quarters. I think it could slow little bit, but I can tell you we're still keeping the pedal down. But we feel very, very confident that the rest of the year will be at least 4% growth versus the year-ago period.

Got you. Well, thanks very much for the time and congrats again.

Scott Group, Wolfe Trahan.

So with the unseated tractor cab, I'm just trying to -- wondering, are you thinking about cutting the fleet some more, or are you thinking about putting in some driver pay increases? How are you planning to address the unseated tractor count?

Scott, we already have. Several -- basically, especially the transport and SRT subsidiary, the reefer subsidiary, started raising compensation, let's call it, last summer. The summer of 2011 we started moving, and since that time we've had various other tweaks and/or movements since then. Our latest round went into effect the first week of July, focused on different targeted areas within some of the subsidiaries. And so I do believe, frankly, compensation is a big piece of it. There's no question that all fleets are struggling with utilization as we push through all the regulatory issues that we're all dealing with. We are at CSA and safety and demographics and all those things, paperless logs, all that. And so the drivers, in essence, are taking a pay cut and the industry is taking a pay cut because utilization is getting challenged. And so we have no place to respond, frankly, and -- meaningful. We can all work on various retention efforts that we are all -- each company is a little bit different and they do their own thing and have their own culture. But the main driver is going to be compensation. That is what has got to drive the movement for these drivers in order to get them closer to where they need to be, to where it's worth being out two, three, four weeks at a time, if that's part of your model.

So I think compensation is going to continue to move. That's why we said that. We are prepared to continue to manage the fleet size if we aren't able to fill the trucks and we aren't able to get the returns on the assets that we need. We don't love shrinking the fleet, and our customers are asking us to give them more capacity. And so at the end of the day, I've got to have a driver for that seat, but I've got to be safe. We have to be safe with that and make sure that we're putting the right person in that seat.

So to answer your question, we are prepared to continue to manage the fleet if we have to if we're not getting the margin for the overall business or we don't have people in the seat. And we are going to continue to be very targeted and specific on where we feel like we can get the biggest bang for the buck, if you will, relative to our driving forces. And I think it's a market that's moving, and I think it's going to continue to move. And I don't think it's going to be once a year; I think everybody is going to continue to manage it periodically throughout the year. If I was to pick a number, I would say a minimum of 3% and as high as 8% to 10% is where -- ours is up almost 8% year-over-year. And I think you're going to continue -- it's going to have to continue to move in that range to have a shot at getting and keeping the people that you want to keep.

To give you an idea from a modeling standpoint, if you look at -- the average tractors for the period were 2923, and the tractors at the end of the period ended at about 2868. And I can tell you, we're a little bit down from that at this point, in the end of July.

That's helpful. Are you continuing to see that trend a little bit more on the owner-operator side? And can you talk about that? It feels like some other guys are struggling to add owner-operators, and you guys seem to be doing okay there. How are you getting the owner-operators and how should we think about the financial impact of that mix shift?

I think, Scott, one of the things that -- probably the biggest impact for us on the owner-operator side is we've had a lease purchase program for a long time. Frankly, we probably got distracted for various reasons. That was a mistake -- just because of our leverage that we have inside the Company. We have aggressively been able to grow our lease purchase program, and that's with a lessor that is not CTG. And so we've been able to grow our lease purchase program pretty aggressively. We've got an attractive program, we're pushing it hard. The people who are coming in are seeing good miles and we're having some successes with it.

Growing external owner operators, what we call it, or, quote, bring your own truck owner-operator -- that has been slow and it's continuing to be challenged. I think really to have a shot at growing an owner-operator fleet, we really have to be focused on the lease purchase side. So that's kind of where the growth is coming from, and we're going to continue to look for those people that have their own truck. If they want to be a part of our group, that's very attractive to us as well as we'll continue to be interested in growing the lease purchase side.

The financials of it, obviously, is, all things equal, it does impact your operating ratio as you shift the financing cost above the line. But we're pleased with the program. All things net-net, we feel it's -- once you get down to the pre-tax basis, it's kind of a push relative to the overall profits. And that's kind of why we structured to where we're going to continue to push that needle or push that pedal, if you will, pretty aggressively. We have a very (multiple speakers) target that we've put in place, that we're trying to get to the next couple of years.

Got you -- Joey, I heard you say you'd be disappointed if you only got to 4% of the pricing side in the back half. If I look at -- if I assume 4% revenue per loaded mile in the third quarter, that actually says that my yields are down sequentially from second to third. What's the environment wherein that's going to happen?

Well, I think, Scott, we live -- let's back up. There's a question out there, and I think we we've all concluded in the market it is freight or the economy slowing. And there's a lot of global issues that's affecting -- is it affecting freight? Is it affecting fuel? All those things that are out there -- so I just think that we just said, for planning purposes for the year, if it does slow or doesn't grow, we felt like we needed to be a little conservative. And that's why, you're exactly right on point -- sequentially it would be down slightly. And that, absent a major shift in economics from one quarter to the next, that hasn't happened from second to third quarter. But for planning purposes, as we move throughout this year, we wanted to be a little conservative.

Right. So then the follow-up is, what are you actually seeing on the demand side? What's your sense on -- maybe give us a sense on each of the months in second quarter and what you're seeing in July from a demand standpoint?

April was very good. We were very pleased with April. May, interestingly, kind of felt a little -- kind of stepped back a bit, I would call it, stepped back just a little bit. June was good; June was a good month. June was a good, strong month for us. As we sit here on July 26, I can say, for a July we're okay. We're pretty pleased with it thus far. And our rates are continuing, our yield is continuing to be very good. So as we sit here today, I'm pleased as we sit here right now in July.

Okay, good to hear. And last thing, Richard, the cash flow has looked real good in the first couple of quarters of the year. Can you give us an update on what you are expecting for CapEx and maybe free cash flow for the year?

Well, I think we mentioned that we had already took on about 120 of the 350 new tractors this year, and that -- so we're going to be adding about 230 additional tractors throughout the year. And we have disposed of about 350 of the 500. So it will be a positive, should be a positive CapEx number for the rest of the year. Right now, we're sitting at about negative -- about the proceeds -- our net proceeds of about $27 million. I'm not so sure that we will have CapEx equal to that amount, net CapEx, in the second half. So my prediction is that we'll be, still, somewhere between zero and $10 million of net CapEx for the full year.

Okay, very helpful, thanks a lot.

Donald Broughton, Avondale Partners.

Record revenue per truck per week was set this quarter. That's the obvious. The question is, is it sustainable? And what, in particular, helped you get to $3300 in revenue per truck per week?

Well, I think, Donald, we -- let's back up for a second. We started our yield. As we came through 2011, there's no question we weren't happy with where our company was. We haven't been happy for several years, for that matter. And I think, as we came through last year with the system conversion and we were seeing pretty meaningful improvements throughout that period, albeit extremely difficult, we had gotten our service back to the point on the transport side where we felt like that we weren't getting paid enough for what we were doing.

And so the organization launched a pretty aggressive yield improvement initiative earlier in the year than we normally do. And so we hit the ground running in January, pretty aggressively across all the companies, to try to improve our pricing. Obviously, we know customers and which pieces of freight we are making money and we're not making money on, the lanes and all that. So we hit it earlier, I would say. So that was one factor. And I think the first-quarter results showed that. Second-quarter results we've been able to maintain that. And so that's one thing, and it's pretty much across all the companies. And it's one of those things where David played a very, very, very strong role in, and jumping in and leading that initiative. And we were able to push the needle there. And obviously, it was a negotiation; if we're not providing the service, we're not going to get it. And so, I think that we were able to do that.

I think managing the fleet capacity was a big part of that as well. And we had too many unseated trucks earlier part of the year. So it's still not where we wanted and we've managed that fleet size down, which has helped revenue per truck some.

Our debt heads up a little bit because the length of haul shrunk a little bit. So those have kind of moved hand-in-hand, but our length of haul continues to drop. One of the things, too, [we had] in there is that we were -- we've been able to do some things within some of our operations teams to really focus on capitalizing on where we have capacity and where customers have needs in that spot market. And it's small, but it's becoming impactful as we manage that. And very responsive and across our asset-based customers. And I think that's been able to supply some yield benefit. Additionally, as we've grown our -- even though Mexico and Canada is small for us, we've really pushed hard there to try to grow in those marketplaces. And so that's -- all things equal, length of haul for length of haul has a little bit higher length of haul relative to some of the domestic lanes, similar length of haul. So I think that's helping the yield as well.

So all those of things together has really a good spot from moving our overall yield.

Because what I'm thinking, Joey, is I look at it and I say, look, at $3300 of revenue per truck per week and 5% of the -- a little over 5% of the fleet still unseated, you can bring that down by a couple hundred basis points still. That means revenue per seated truck is even higher. That's a point at which you should arguably be focused on trying to grow the fleet again. At $3300, $3350 of revenue per truck per week, am I missing something? Or is that a point at which -- and you've certainly got your costs under control. And you've spent a couple of years working hard at that. Or am I putting the cart too far in front of the horse here?

Well, I think -- no, you are right at it, Donald. If you were to break down the pieces of the fleet, really, our dedicated fleet is where the largest truck decline came from. It was down almost 30%. And that's where we took a lot of capacity out because we weren't happy with the overall yields and profits within that unit. If you look at our expedited group, which I would define as our drive reefer teams, as well as a small OTR fleet, that had 3% truck growth in the quarter year-over-year. Our SRT, our reefer division, was up almost 2% in truck growth, and then our regional fleet, Star, was down 4%.

So if you look at the capacity that we are managing inside of the group, a lot of that, the large majority of that was in the dedicated fleet, which we've been focused on taking capacity out of, nonprofitable or less profitable units and giving that capacity and that capital to the ones that are making the money. And we've been able to grow that expedited fleet 3% has been a big accomplishment for us. Even though the total fleet is down, that expedited fleet was able to grow this quarter as well as our reefer fleet continues to grow. So we're excited about both of those, and we'll continue to keep pushing those.

Thank you, that's insightful.

(Operator instructions) Nick Farwell, Arbor Group.

Good morning. David, I'm curious if you would comment on demand trends in the long-haul, perhaps by major regions. And then just give us a little flavor of your regional and dedicated traffic patterns.

Yes, Nick. I had to write those down real quick. On the demand side, on the expedited long-haul excluding the Northwest, which I haven't been happy with the Northwest all year long, excluding the Northwest -- it's not a big player, but it's up 150 trucks a week or so that we put up there. But excluding the Northwest, the West Coast has been very strong. Virtually all year long -- I don't want to sit here and say in January we had more than we knew what to do it, but it wasn't bad in January and February coming off the West Coast. I'm very happy, very pleased with it. And I don't see that changing. Whether it's on the dry side or whether it's on the refrigerated side, coming off the West Coast is very good and it's leading a lot of pricing coming off the West Coast. We could probably load -- between the dry and refrigerated, we could probably load 40 or 50 extra loads a day coming off of the West Coast. And because the West Coast is leading the effort on the pricing, the east to west is an area that we continue to grow in and continue to take some market share east to west. And even with our rates being up very, very nicely, I could not be any more pleased on what pricing is doing on the long-haul side of our business. The east to west, we are very competitive on the rates to down. We are -- you can call it buying freight or whatever you want to call it, but we're finding the freight going east to west at whatever rate we can find it at and -- not at whatever rate, but at lower rates than it needs to be, because the West Coast pricing is being able to increase so dramatically.

So demand I'm very, very pleased with. As Joey said, the Mexico -- we're just into it. We're just kind of laying the foundations for Mexico, 40-50 loads a week, to give you an idea. But it's a very small piece of the pie, but it's long-haul freight. It's running 1200 to 1400 miles length of haul, so that fits in very nicely also with our long-haul. So that's the long-haul. As well as we continue to grow -- before I get off long-haul, though, Nick, we continue to grow thousand-mile length of haul. That's a major focal point that we are doing, so it's not just all California is still a major player for us. But think Chicago to Dallas and New Jersey to Dallas and New Jersey to Miami and those kinds of things are also very attractive lanes. Anything that we can run these teams on with a 1000-mile opportunity per day is what we're looking at. And we have been for the last year and a half, looking at that as it continues to grow.

On the regional side of the business, the Midwest is an area that we saw in May starting to flow, and we're basically loading our trucks on a daily basis. But prior to May, the Midwest was an area where we had an abundance of freight out of the Midwest, be it from Ohio to Chicago up to Minnesota area, Detroit, that Midwest, Indiana. But we have definitely seen a slowdown in the area. We are loading our trucks basically on a daily basis, but that regional side has slowed there.

The Southeast -- I'm very happy with the regional side. It's not doing bad. The Southeast has really picked up. You definitely can see and see us -- that housing has definitely hit a bottom. And we've seen that, I think, in the last year with 500,000 new starts kind of being a number, from 2 million down to 500,000. But it has at least stopped shrinking. And so we are [sifting] that in the southeastern United States from textiles and carpet and tile, and those kind of commodities that just got hammered for the last four years -- the bleeding has stopped and we are pretty encouraged about what we're seeing in the Southeast that is coming back of the old days, prior to 2006 is kind of what we're seeing in the Southeast. So it's becoming a major -- it's always been a major player for us, but it's had a couple of flat tires for the last few years. And it's up pumping pretty nicely as we speak.

The dedicated side of the business -- you know, for CTG, we are running 500 trucks, in that area. But as Joey said, that's one that has taken over 100 trucks out of that market. And quite honestly, we're just looking at every account we've got, and it's going to produce a certain margin for us or we're not going to haul it. And we've had some very, very good, nice straight talk with a lot of customers in that area. And so far, I've been pretty happy with what we have seen there.

We're also looking at what kind of dedicated accounts we're interested in bringing on. We've been looking at that for the last seven or eight months, and they've got to hit a certain profile or we're not even going after it. We're not going after this thing just to figure out if we can put 20 trucks somewhere. It's got to produce an acceptable return for us on the dedicated, or we're not going to be in it. And so far, I don't see any more bleeding there. I think that we've made the adjustments that we need to make and we're starting to -- actually, on that side, we're starting to have some opportunities for growth in the dedicated side at some very acceptable margins.

Just quick -- I'm curious on the long-haul. Have you noticed a diminished level of trailers dedicated to long-haul, given the sort of poor or terrible operating environment and returns over probably last decade at least? (multiple speakers) Is that why you think the long-haul is performing better and the rates you are getting are the kind of rates you're depicting?

Yes. I think there's a couple of things that have happened there. Number one, whatever number you want to use, 300,000 to 400,000 trucks -- Donald does a great job in keeping up with that, but 300,000 to 400,000 trucks from the last few years since 2007 that have come out of the market, and so that's 20% or 25%. I mean, a big number. A lot of that has been led, especially on that refrigerated small mom-and-pop -- so fragmented, we just think the dry van is fragmented. The refrigerated side is fragmented, and a lot of those guys will run dry plate to the West Coast to haul the produce coming off the West Coast. So it's not that the reefer is running 24/7. So a lot of those guys have simply just disappeared.

So, when you take that along with the difficulty that a lot of companies are having on the driver side, we are very blessed that our long-haul segment that Joey was talking about that has grown for us, it is our culture. It's what we have been since 1986. And even though the driver situation is difficult, we still have good opportunity that we've been able to bring team drivers to that segment. And we've been able to grow the owner-operator base that we are attempting to, and we're going after -- to me, I think we've got the best pay scale on the owner-operators.

So it has been slammed. It has been hit on the owner-operator. But our pay is very competitive; it's on the top end of it. And we just need to get every one of them. If they want to run as a team owner-operator, they need to be ours. And that's the focus that we are really putting on that there.

So yes, I think that has been because a lot of companies have gone out of business, I think it has been because of the difficulty of getting teams. So there's just not as many folks that are running the transcontinental as there used to be.

One last quick thought. I'm curious; remind me why you're shifting capacity, given what you've depicted today, and your mix from owner to owner-operator, from company to owner-operator. And how much further do you intend to shift that mix?

You know, we really don't have a number there, Nick. To us, it is capacity. There is not very little difference, maybe an owner-operator -- excuse me, and OR ratio, but a net margin is virtually a push on company truck versus owner-operator. So we are simply and strict -- simply just looking at it from how we add capacity or fill trucks. And there is no doubt about 4000 truck drivers, there's X amount of them that want to be an owner-operator. And under our lease purchase program, instead of those guys quitting us, that gives us an opportunity to keep them or let them go through their lease purchase program. But our goal is to grow it, and there's no number that says we want it to be 20% or 30% or anything. We want it to be however we can get drivers in these trucks.

Thank you, I appreciate it, David.

Jack Waldo, Stephens Inc.

Just a few modeling questions -- you said that the -- I'm sorry, Richard. What did you say that the average total tractors was at the end of June?

Well, the ending tractor count was 2868, and the average was 2923 for the quarter.

Okay.

And that 2868 is actually down a little bit here at the end of July.

Got you, okay. And with the decline there, what would you expect on the utilization front?

That's a little bit of a tough answer only from the standpoint that we are wrapping around the third quarter last year, where we had really poor utilization related to the implementation. And so the percentages are very large kind of numbers, and so it's not typical and above -- probably above 5% kind of numbers is what we're looking at, really, because of the poor quarter, third quarter of last year.

So you are expecting utilization to be up 5% on a year-over-year basis?

At least, yes.

Okay, so pretty flat on a sequential basis?

That's probably right, yes.

Okay. How did you were hedges impact fuel expense this quarter, and what type of impact would you expect them to have going forward?

We only recorded about 590 -- about $600,000 of positive hedge gains in the quarter. We did lock in and, back in April, we saw the prices starting to decrease and we locked our hedges in at that point and unwound them for the rest of the quarter. And so those were a little higher than they would have been, had we not unwound them at that point. And part of our policy or our discipline on this is that we try not to unwind anything out past three or four months because you just don't have that good a visibility on it, and we've seen how it jumps around; very volatile.

Going forward, where we were, we still have about 23% to 24% of our fuel purchases hedged for the rest of the year. We've got those hedged at a retail equivalent of right around $3.78 a gallon, and the price of fuel at the start of the week that was used for setting fuel surcharges, etc., was $3.78. So basically flat at that point. That is an improvement from a standpoint of our hedge position only since June 30, and you will see that we had $2.5 million-$3 million of unrecognized hedge losses in our equity on the balance sheet at the end of June, when the 10-Q comes out. So that's improved from that standpoint as prices have increased on fuel. But it's basically flat at $3.78, and that's where we are.

Got you, okay. And then with all these moving pieces here, Richard, how about on the D&A side? Are you able to get a pretty good guess on what it should be for the year?

I don't have that, really, in front of me right this minute. I think that it's probably somewhere between $42 million and $46 million this year. And part of that depends on what we do with the remaining tractor purchases this year, if we bring them on balance sheet or off. But it's probably in that range. And then with our CapEx, like I said, if it's zero to $10 million, and that's a pretty favorable cash flow to be able to pay down debt.

Got you, okay, thank you very much.

(Operator instructions)

Well, it sounds like we don't have any more questions so thank you for calling in this quarter, and we will talk to you in about three months. Thank you.

This concludes today's teleconference. You may now disconnect.