Covenant Logistics Group Inc (CVLG) 2015 Q1 法說會逐字稿

Excuse me, everyone, we now have our speakers in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of today's presentation, we will open the floor for questions. At that time instructions will be given, if you would like to ask a question.

And I would now like to turn the floor over to Mr. Cribbs. Sir, please begin.

Thank you, Katie. Good morning. Welcome to our first-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 the Private Securities Act of 1995. 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, including, without limitation, the Risk Factor section in our most recent Form 10-K and Form 10-Q.

We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. As a reminder, a copy of our prepared comments and additional financial information is available on our website at CTGcompanies.com under the 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 -- our asset-based division's revenue, excluding fuel, increased 15.4% to $133 million due to a 2.1% increase in average tractors, a 12.1% increase in average freight revenue per truck, and an increase in our refrigerated intermodal freight revenues. Versus the year-ago period, average freight revenue per total mile was up [$0.088] per mile or 5.9%, and our miles per truck were also up 5.9%.

Freight revenue per tractor at our Covenant Transport subsidiary was up 14.5% over the prior-year quarter, while our refrigerated subsidiary, SRT, experienced an increase of 10.9%, and our Star Transportation subsidiary experienced a decrease of 3.3%. Compared to the year-ago period, the asset-based division's operating cost per mile, net of surcharge revenue, were down approximately $0.019 per mile, mainly due to lower net fuel costs and reduced maintenance and capital costs.

These decreases were partially offset by higher employee wages, group health insurance and casualty insurance. The asset-based operating ratio was 92.7% in the first quarter of 2015 compared with 100.2% in the first quarter of 2014. Our solutions logistics subsidiary decreased revenue by 6.9%. Although other operating expenses favorably decreased as a percentage of revenue, we experienced unfavorable increase versus transportation expense percentage, resulting in operating ratio deterioration of 170 basis points to 96.6% from 94.9% in the year-ago quarter.

Our minority investment in transport enterprise leasing contributed $1.4 million to pretax earnings or $0.05 per share. Since 7/31 2014, total indebtedness net of cash, and including the present value of off-balance sheet lease obligations, has decreased by approximately $29 million to $198 million. The average age of our tractor fleet continues to be very young at 1.7 years as of the end of the quarter, down from 2.0 years a year ago.

With available borrowing capacity of $43.8 million under our revolving credit facility, we do not expect to be required to test our big charge covenant in the foreseeable future. The main positives in the fourth quarter were -- one, significant improvement in the operating profitability at each of our three asset-based trucking subsidiaries; two, a 5.9% increase in average freight revenue per total mile and a 5.9% increase in average miles per truck versus the same quarter of 2014; three, a sequential increase in our professional driver employee headcount; four, decreased operating costs on a per-mile basis; and five, a decrease in our total indebtedness.

The main negatives in the quarter were, one, the increased cost of our casualty insurance related to higher severity of accidents; and two, the reduced operating profit in our solutions growth subsidiary. Among asset-based service offerings, since the end of the fourth quarter, we increased capacity allocated to each of our three subsidiaries, Covenant Transport, Star Transportation and Southern Refrigerated Transport.

Our fleet experienced growth to 2,722 trucks at the end of March, a 57-truck increase from our reported fleet size of 2,665 trucks at the end of December. Our fleet of team-driven trucks averaged 928 teams in the first quarter of 2015, a 1.8% sequential increase over 912 teams in the fourth quarter of 2014. Therefore, we increased our overall driver count by approximately 75 drivers during the first quarter of 2015.

Freight yields for the first three weeks of April 2015 continued to outpace the prior year. Although at a lower percentage increase than we experienced in the first quarter, thus far utilization continues to outpace prior-year results, primarily due to the increased mix of team freight. Year-over-year rate per total mile increases have accelerated above the percentage increase we experienced in the first quarter, partially due to the improved mix of freight towards more team expedited, and partially due to prior year's rate increases from customers that went into effect after the end of April 2014.

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

(Operator Instructions). Brad Delco, Stephens.

Good morning, David. Good morning, Richard. Richard, I'm just trying to write down what you were just saying, but -- and I apologize, I missed it -- can you just repeat the comment you said about what had accelerated thus far into April?

Yes. The year-over-year rate for total mile increases have accelerated above the percentage increase we experienced in the first quarter. So that was 5.9%. So it's above the 5.9% that we experienced in the first quarter.

Okay, got you. And then, Richard, another question I had for you. When I look at some of your commentary about your operating cost, your salaries, wages and benefits line per mile was up -- total mile -- was up about 1.9%. Do you feel like that's a good number going forward? Or do you expect to see any additional driver wage fluctuations going forward in the business?

Yes, I think the driver pay piece of that was actually up a little bit more than that. And I expect that to continue. There will be a time that we will need to increase driver pay additionally. We had some kind of neat targeted ways of improving driver pay coming up over the next few months and really weeks that we haven't really announced yet to the drivers. So I won't go into these into any detail. But we are excited about those and that will increase the cost a little bit more as well.

Got you. And then just wanted to focus on your commentary about the back half of 2015. The -- I think the tax rate you don't expect to see meaningful earnings growth. Can you just put some more context around that? I mean, do you feel comfortable saying you think you could grow earnings in the back half the year yet? Or how should The Street really be digesting that? Because it appears like it's maybe misinterpreting it a little bit.

Well, we did add the word meaningful from the prerelease. That did not have that, so I guess you could say we are becoming a little more favorable towards that. We have gotten through certain meetings with certain customers that we will continue those in May and June.

It doesn't -- what it doesn't say is that we expect it to go -- you know, to decrease. So, I think The Street can read into that what they need to read into it. But again, because we haven't gotten through those May and June meetings that are particularly important for determining how much peak business we have -- and not just at the asset-based subsidiaries but also at Solutions, which was quite meaningful in the fourth quarter last year -- we are still going to keep that cautious statement there until it probably -- hopefully, we will have enough information we can be more direct with what's going to happen in the fourth quarter after we get through the second-quarter release.

And maybe David, my last question for you. Can you just generally speak about what the freight environment feels like thus far in April? And then maybe specifically what's really driving the team demand if capacity isn't as tight as it was a year ago? And does that say anything specifically about your exposure to the omni-channel that you guys have been talking about for a while?

Yes. Brad, the answer is yes on those. There's -- as I look at April as it compares to definitely 12 months ago, and two months ago on how freight feels, there is a slowdown a little bit of freight. But kind of what we are doing is basically hitting our numbers internally. Instead of blowing the numbers out, we are hitting the numbers. So I'm very satisfied and happy with that.

We are basically loading our trucks every day, so there's not an excess amount of freight that is sitting there. That said, our expedited is loading well. I mean, it's part of that statement I just made that we are loading them every day, but it is -- and it's interesting, even there in maybe a little pause that's happening, that the expedited side is still quite strong.

And I think it has something to say with the markets that we are in and I think it has a lot to say also with the supply chain inventories that they are operating under. And so our teams are -- the expedited side is really going quite strong.

So do you think the growth in that sort of omni-channel business is higher

Yes.

-- 2015 versus 2014 and 2014 versus 2013?

Yes.

Is the growth rate higher?

Yes. Yes, it's continuing -- yes. It is continuing to increase. And year-over-year, in the last couple of years. And we expect that to continue to increase. And that -- and again, it just plays into our expedited side of our business very nicely. But yes, we have a lot of opportunities out there that we've brought on, as well as a lot of opportunities out there that we are in the process of bringing on.

Got you. Well, guys, thank you for all the time and thanks for the great color.

Okay, Brad.

(Operator Instructions). Tom Albrecht, BB&T.

Hey, Richard, I wanted to just kind of clarify a couple of little expenses here. So, the depreciation now, it looks like it's going to be about $14.5 million a quarter before gains. Is that a number you're comfortable with? Or will it grow even from there?

I think it will be just slightly lower than that, actually, and I think that will continue throughout this year and be fairly even. Although I do believe that the gains will be a little better than the $100,000 gains that we had in the first quarter, I believe they will average between $600,000 and $900,000 -- or range between $600,000 and $900,000 per quarter going forward for the next three quarters.

Our proceeds were only about half of what they were last year. Of course, last year, in the first quarter, we were selling off some trucks that were underperforming from a certain vendor at that time. And so we recorded some losses at that time. But anyway, proceeds were down about half of what they have been each quarter in recent quarters.

Okay. And then the TEL -- there's some seasonality to that. I was really surprised how big that contribution was, at almost $1.4 million, the equity income. Do you have any thoughts on that going forward?

Yes, it was a little bit bigger than what we are kind of on a run rate for. If you looked at the fourth quarter was down a little bit from what we typically do, and so I think that was kind of a timing issue. When you talk about part of that business is related to truck and trailer sales, and then the other piece of it is around the equipment leasing.

And the equipment leasing run rate is going to continue to increase. We are seeing a nice increase in that. That was part of increase that we saw in the first quarter. And I believe that will continue to increase over the entirety of this year and hopefully into next year. The truck and trailer sales piece of that was a little heavy in this quarter, so I don't necessarily expect that next -- the next few quarters, but we should be above $1 million each quarter in our portion of that income.

Okay. And then, David, how is SRT performing? I know it still really lagged last year, the margins of the other two divisions, yet that represents a big opportunity this year. So what kind of margin improvement? And also any demand commentary you can give on the refrigerated space?

You know, they are -- they've made some great headways, Tom. We basically have got them from over 100 OR in the first quarter last year to a little bit lower than mid-90s in the first quarter this year. So they're making some nice headway there.

And I think that SRT from a freight standpoint, the refrigerated side is doing pretty well. There's a lot of areas of the country that is maybe some good capacity. So we haven't seen the refrigerated side really go down that much. Yes, a day here and a day there, but it's -- I am very happy, very pleased.

And there's -- we are about halfway of where we think that we will get SRT to this year. And I think over the next -- the rest of this year, the next three quarters, I think we will continue to bring them down to what were close, if not as close to what we have been in the past and what we are used to SRT operating at. So, we've made some great strides there.

Okay. And then lastly, just kind of going to Brad's demand questions in that the market is still obsessed with every uptick and downtick with freight and all that, but are you detecting, David, any change in the demand outlook from customers? I mean, are they more cautious on the economy in general? Just any insights there?

Yes. No, our costs with all of our customers, whether it's dry or refrigerated, it's still very concerned. And I think a lot of it -- they have been burned so much over the last two years, that, I mean, our rate negotiations are going extremely well. Our customers are working with us, and we are not losing freight, and those kind of things. I could not ask for better relationships with the customers.

Now on the expedited side, there is no doubt that we've got -- we really got something that they need from a team expedited standpoint. But they are working with us. And I sense that if we have an area of the country that is -- where they need some freight in, as we call our customers, they are definitely going out of their way to attempt to help us on that particular day.

So, we are in good shape from a customer standpoint, and very satisfied with that. And I think a lot of it has to do with the products that we have and the segment that we are involved in, and then how much they have been hurt. I think this first quarter, I think it's GDP. I mean, I think -- we don't have a good number. I think it's going to be an ugly number and I think that's just the environment that we are operating in.

I could almost reverse that and say here is a trucking industry that, in my opinion, has probably got a 1% GDP, and we are posting these kind of numbers? Pretty good industry. And Lord help us if they get to 1.5%. (laughter) I mean, that's about what we are starting to think about.

Right. Okay. Well, that's helpful, David. Thank you.

Jason Seidl, Cowen.

This is actually Matt for Jason. If I may go back to the second-half outlook commentary, can you elaborate on what needs to happen as far as trends and pricing in the second-half for you guys to have some upside to the cautious commentary you've made?

Well, I think one thing is if our truck count continued to grow, we are going to have more capacity to make available to these important -- let's call it eCommerce and peak customers that are searching for time-sensitive, quick-delivery freight across long distances. And right now, that has been the case; we've been able to grow that. Although the last three weeks, I will say that the trucks have basically stayed the same as what they were at the end of March.

So we hadn't seen growth in the first three weeks of April in our team count, but it is up higher than what we expected it to be at this point anyway. So we are still very happy with that. The more that we can grow that, the more ability we have to provide that capacity. And that would give us some potential upside, even if we were able to get the same kind of strong rates we got last year from the large LTL carriers, et cetera.

In addition, there's a few things we know that we have, as a good partner to our LTL carriers, that we've gone back to them and said, you know, this that you had in place that included us was a little bit much. You didn't necessarily need to have these many trucks kind of set aside for running this type of freight, they didn't run with good utilization, that we gave you almost as a dedicated type truck.

And instead, if you let us keep that truck, we believe we are going to be able to move it more and give you even better capacity as you need it for pop-up stuff. And so I think that would be basically a breakeven kind of issue for us on those trucks.

So, I don't know. There's a lot that goes into that question, Matt, and we are feeling better about, because of the kind of rate increases that we know that we are achieving through the first part of the bid season -- where it's actually getting close to the end of bid season -- that we feel good about the back-half of the year. It's just those are pretty big numbers we posted.

Yes, I also think, Matt, that another side of that is what we all think that the Christmas season is going to do? And is it going to be up over last year? Is it going to be up appreciable? That's a wildcard that no one knows.

I do think, though, that eCommerce is going to continue to grow. And so I think that it's going to grow a bigger piece of the pie than it was 12 months ago or just six months ago during this last peak season. So that is encouraging. It's just that -- and I think the word meaningful that Richard was using is probably a correct word, that we are getting more confidence in it.

We've had three or four conversations now, and meetings with all of our peak suppliers, customers. And I think that the opportunities are going to be there for us, and we are actually nailing them down. So I'm almost to the point that it's going to get close to just saying, what is your take on Christmas? And if your take is, it's going to be a blowout Christmas, then that's going to help us.

If your take is that the peak season is going to be similar to last year, then we are probably right kind of where we are at. So, that's kind of the way that we are looking at it.

I understand it's a very broad question, and your commentary is very, very helpful. Thank you very much for that. Now my other question is on the balance sheet. You guys paid some -- a good deal of debt in the quarter. Do you anticipate continuing to do that in the coming quarters?

Yes, we do, Matt. The operating cash flow that we expect over the next three quarters as well as the CapEx being -- again, I think I've given guidance $55 million to $65 million on CapEx for the year, basically the depreciation is going to allow us to continue to pay down debt with operating cash flows.

Our debt to capital ratio right now is the lowest it's been probably in over 15 years. And I believe that we will be able to continue to deleverage, which is an exciting thing for us and gives us more flexibility. That's assuming, of course -- and I am not trying to lurk anything, is that if it's the same, there's no other transactions or anything like that.

Got you. And finally, Richard, on the fuel hedging front, you guys had a $3 million negative impact related to hedging. Do you anticipate any change to your hedging practices going forward?

That's a good question. We already have in place -- so, we had 25% of our fuel purchases hedged in the first quarter of 2015, and that resulted in the $3 million hedge loss. I will say that those hedges were -- basically the fuel we purchased under those hedges were still priced a little more than $0.20 a gallon below what we paid last year.

So, you did see our net fuel cost line improve, even with having that much fuel hedged at unfavorable prices. As the year goes on, we do have 25% of our fuel hedged in place already that we purchased long ago for the rest of this year, as well as all of 2016. For 2017, we have discussed and probably will change our policy a little bit, only to the extent that we have currently 15% of our fuel hedged in 2017, and probably won't go above 20% on that number.

But each year, from 2014 to 2015, it's more than $0.20 per gallon improvement; from 2015 to 2016, it's about $0.25 per gallon improvement over 2015. And then in 2017, it's down quite a bit more than that for what we have hedged for the 2017 gallon. So we will continue -- we should continue to see improved pricing in fuel. And then with the fuel economy improvements that we are still achieving, we should still see fuel decrease overall on P&L.

Great. Very helpful. Thank you very much.

Thanks, Matt.

Reena Krishnan, Wolfe Research.

First of all, I really apologize if you may have already talked about this; my phone dropped a couple of times. But just kind of going back to your guidance on the second-half. Last year, just given some of the exposure you had to the West Coast ports, and given how you guys have changed how you're operating and how you're positioned in the markets, is there any way that you guys can maybe parse out or give us a sense of when you look at the improvement that you saw in earnings and to your margins last year, how much of that was kind of the urgency around the West Coast ports situation versus the demand you saw related to expedited capacity and your growing eCommerce exposure? Is there any way that you could maybe give us some color in terms of just understanding better the comments on the second-half?

Reena, it's impossible.

Okay. No, I understand. It's a tough question, but just wondering.

Yes. I mean, we've been around rooms trying to figure it out ourselves, and there's -- until you know what the ship bid didn't do, I mean, it's impossible to figure that out. And how much winter our LPL customers within the port with those and the containers that went to our LPL customers, it's just impossible.

Yes. I will say the West Coast ports didn't seem to have as much a -- they definitely didn't have much of an impact compared to what the eCommerce growth has. First-quarter, we all expected to see a big boom after the port situation got taken care of. And instead, we really just never saw that.

It was just frightening that it didn't feel like a natural disaster kind of situation where all of a sudden freight just boomed out of the West Coast. And that did not happen, at least not from an expedited standpoint. And instead -- but even with that, you saw our utilization improve 6%, et cetera. So freight was still really good, our earnings were still really good. And there was really, I'd say, almost no impact from the West Coast situation.

And David is agreeing with that.

Yes. No, thank you. That's really helpful, David and Richard. The question -- the comment that you made, Richard, about pricing accelerating so far on a quarter-to-date on a total mile basis, can you tell us -- are you noticing anything different in terms of the pace at which the discussions are happening? Or is it kind of following a similar pattern to last year? Or are shippers kind of trying to close the discussions earlier and log in that capacity? Can you give us some color on that?

It is the same pattern, Reena, because all of ours or our major, major accounts are basically on one year kind of contract agreements that we deal with. And so -- yes. All those have been basically the way it has been for quite a few years. In that April/May timeframe, it's when we do, I don't know, probably 70% of them by -- in the second quarter, anyway. So it's a big quarter for us from a rate movement standpoint.

And most of those will become effective really after today. Really April 15 through June 1 is when most of those new rate increases become effective, which is why we pointed out that the increase or the accelerated amount that we are seeing in the first two weeks of April is really related to the rate increases we got last year that went into effect after April. They are just coming around to this year, plus the freight mix to additional expedited freight probably from eCommerce growth at a faster pace than -- by far, a faster pace than the GDP growth.

Okay, great. And then last question -- and I apologize if you've already commented on this. Did you mention anything about where your -- if you're planning to implement another driver wage increase sometime either before the second-half? Or are you kind of following sort of an incentive program maybe and doing a wait-and-see to see what's necessary?

Hi, Reena. This is Joey. We are, right now, of all of our products, the only things we have decided on is on the expedited side, expedited team side. So, we are going to have some of that in the second quarter. Our Reefer product and our dedicated products are kind of taking the wait-and-see type approach right now. We have been able to grow the fleets to the extent that -- we don't feel it's quite necessary, but we are watching it. But we have to make (technical difficulty) the expedited side to keep fueling that product.

Okay. And how much is the increase you're planning to push through? Is it similar to last year? Or is it more?

We haven't announced that yet, so I really don't want to (technical difficulty) -- we are kind of thinking about kind of similar to what we did last year. We did two phases last year on the expedited side. I think we will do -- we'll end up probably be doing the same thing this year.

So, actually it starts -- we start talking about changes this round today, and then going on over the next three weeks, there's some different news for that. So it will be -- I think it will be similar to last year, it just depends what the capacity situation is and how we are able to fill and grow trucks to the extent we can.

Okay, great. Thank you for your time.

(Operator Instructions). Donald Broughton, Avondale Partners.

Congratulations on yet another outstanding quarter, you just beat and raise, beat and raise, beat and raise. That's a pleasant -- got to be a pleasant experience for you. I know it is for your investors and for us following you.

You've delved into most of what I wanted to talk about, but I continue to see the average monthly miles per truck continue to improve. Can you give us just some insights into -- we are looking at this quarter, we're looking at the ongoing trend -- how much of it was driven by weather? How much of it is driven by more teams? How much of it is driven by the relaxation of the 34-hour restart of hours of service? How much of it is the marketplace and opportunities demand? How much of it is technology and ongoing initiatives you have on technology and optimizing routes? And how much of it is just your operating guys figuring out how to get your lanes more in balance?

I know that's a long list of things, but I also know that all of those are at play, plus probably some other things I didn't even mention. Can you give us an idea of waiting what is it that's allowing you to continue to drive such great improvements in utilization?

Well, I've got Paul doing a spreadsheet on that right now. (laughter) No, it's -- is it --

If you need some help, let me know.

On the hours of service, it's just one of those -- we think that is at most gave us an extra percent. Bigger portion of this is related to the team mix being up to 34% from 29%, 30% last year. That's a larger piece of that and you can probably calculate that out pretty easily.

And then we are doing some neat things related to optimizing our lanes and networks, and how we get into and out of fuel stops, and where exactly the paths that we take to get into the shippers and how the shippers and those type things too. So we are seeing some improvement from all of those.

Cutting it up and giving percentages I wouldn't be able to do. I will say that weather was a little better, and especially in March this year versus last year. And so we do believe that was one of our better months on a utilization standpoint year-over-year. However, I think that is also causing us what we are seeing in April, I don't know I haven't seen many of our peers or analysts talk about that.

But last year, the weather was horrible in March, especially the last three weeks. So there was a lot of freight movement in the first three weeks of April. And I believe that that's some of what we are feeling, as people look at their year-over-year numbers, that April isn't as strong as it was the March numbers on a year-over-year basis, and people are feeling like it's a bit of a lull, although we are still seeing increases for our Company.

A bit more fluid.

Yes. And it just -- I think that that weather situation helped last year's second-quarter, and it's probably keeping us from, or as an industry, keeping the industry from being able to beat those numbers for the most part.

I think too, Donald, a couple other things. Last year, as our team was going through the (technical difficulty) conversion, so it's the comparison to a year ago, it is favorable. Still not highest, number one.

Number two, I want to make sure everybody understands that the 5.9% is not all mix. The team's utilization is up very, very nicely. So, yes, we have more, but the teams that we put on are operating better than they were a year ago. So that's a key metric for us internally as we think about how we are doing.

If we can just grow teams just to be growing teams, that's fine, but we aren't moving them. Because you know at the end of the day, if you're not moving the teams, they will not stay. So that's really one of the things we are really, really excited about, is being able to move those at better miles per truck. Actually, we did a little digging in the first quarter, our team utilization was the best quarter in 18 years. So you've got to go back into the booming 1990's, and our team utilization was better than it was back in that period of time. You've got to go way back there and find our first-quarter better than it was in the first quarter.

And so that's saying something. Between e-logs and changing markets and things of that nature -- hours of service changes and all of that. It's a pretty exciting metric for us. We're trying to swallow it as we think about it, but it was big.

And then lastly, I think as we go on, as we go forward, we completed our last company on the TMW conversion last year in the first quarter with SRT. Being able to have the whole enterprise on one system, I don't know -- we talk about baseball analogies; David is good at that. I would say we are probably somewhere between -- we are around first -- we're around second base, I would say, for the group, as far as being able to optimize opportunities inside the group across the enterprise.

And I think that will only improve. And that's going to help our utilization meaningfully, give our drivers better options as far as driving options. And so I think that as we continue to narrow down opportunities and learn, and grab those efficiencies, I think it's going to help us continue to drive business, drive service, drive utilization.

Because it just comes with knowledge and time. And then having the right people with the right skill sets to be able to help you analyze it and then actually do something about it. And so that's -- there's some in there; I can't quantify any of this, but that's just some points that I believe are -- have been impactful on our utilization side.

Well, I just -- normally, I watch carriers that are trying to push up the total what they get on a loaded mile basis; they're trying to manage their deadhead, they are trying to manage their miles per truck, to obviously see the best revenue per truck per week they can. But normally, there's puts and takes.

They get a little bit higher rate by running a few more miles deadhead to get to the next better-paying load; or they get paid a little bit less to run more miles, because it's more utilization, but it's -- because they took a lower-paying. Normally, there's some puts and takes between those three metrics. And it's just -- I think it's both equally interesting and impressive that you've gotten loaded rate per mile going up so strong, deadhead is coming down, and miles per truck are all going up, all three at the same time -- it's a bit of a trifecta. And --

Lower length of haul.

Yes. Lower length of haul coming up.

Right. Exactly. So you put all those together, you go -- what's the secret in the sauce here? And so it's impressive and noteworthy. One quick kind of a simple -- I don't know this off the top of my head but I doubt -- accounting question. Richard, how are your -- the fuel surcharge hedging -- how do you run that through the income statement?

The fuel surcharge hedging. The --?

So the losses -- do the losses just end up being -- the $3.1 million, does that just end up being a higher fuel expense? Or what --?

Yes, it ends up getting down in fuel expense. It just adds to what we actually paid at the pump.

So if it were not for the fuel hedging losses, the $31.8 million would be $3.1 million lower?

I'll look at this. That is correct. Yes, it would have been $28.9 million instead of $31 million (inaudible).

Great. Like I said, kind of a housekeeping thing, but it makes it easier to model on an ongoing basis. Thank you very much, gentlemen. I'll let someone else have the floor.

Later, Donald.

Todd Fowler, KeyBanc Capital Markets.

Thanks for taking my question. Good morning, everyone. You guys have a very good view across a couple of different businesses. And I think Tom is exactly right -- there's a bit of an obsession kind of what's happening with freight activity. So I just kind of want make sure I understand what you're seeing and what you're saying about April.

Is it more of a comparison issue with what you're seeing on a year-over-year basis? Or is your sense that there's a little bit of slowdown in freight activity? And if you can also parse it out by the businesses, expedited and maybe within the eCommerce, refrigerated, and then on the brokerage side, I think that would be helpful.

Yes. I think that it is a couple of things, I think it is year-over-year, as Richard said, I think that we can't take lightly the comments he made about March of last year, and how it filled into April. And there was definitely some pent-up demand that was there in the month of April last year.

So, you know, we are feeling this. To me this feels much more like a typical April than it does any other thing. I mean, I don't know that it's any untypical -- I don't think that it's horrible price, not horrible. We're loading our trucks and our utilization is up, and all that stuff, but it's just not overwhelming with freight sitting around and us trying to figure out how to cover it.

So, that said, that's the background. Then as I look out on the refrigerated side of the business, it has been -- for the month of April, it's been a good month. And the refrigerated side is kind of similar to the expedited side, and that is -- I think the supply chains are very fluid. And we are having to hit the windows out there, but there's -- I don't feel like the customers have got any major backups going on.

I think that they are in pretty good shape and they got inventory levels low, and they are counting on us to deliver it. But because there's no weather issues and because the rail is running a little bit better than what it has previously, some of that freight is moving on the rail that should be moving on the rail. There's no panicking that is happening from a -- that I sense from a customer standpoint.

And so I guess the best way to say it, it's more fluid. And the expedited eCommerce just continues to grow, and we sense that. We sense that in the month of April that that business is continuing to grow for us. I guess we are the only -- because I know it starts with me, it drives me crazy, we'll sit here and complain about I need some more freight and our utilization is up 5%.

But that's kind of the way that it is right now. I don't know if I did a good job answering your question, but we are moving our trucks. But is there a spot here, a spot there that I could use more freight? Yes. Is there, on another day, do I have additional freight? Yes. But it's not causing any butt-chewings from customers.

And so I've got to believe that their supply chain is moving quite nicely. Our customers are giving us the rate increases that we are negotiating with them. And we are getting to a number that makes us and them happy. They still want our trucks. And I don't sense that customers are saying where is the freight? But I also think that we are operating in a 1% or 1.5% GDP environment also.

You know, David, and all that is very helpful, and we are not trying to be nitpicky. I just think that we are wrestling with some of the same things that you guys are maybe thinking about. And maybe to paraphrase, more than anything it feels like we've been in an atypical environment for the past four or five quarters. And it feels like that we're shifting to more of a typical environment.

And we all have a short-term memory; we forget what it felt like two years ago. And we will be more into that normal environment, we're trying to make sure that we are not missing maybe a bigger inflection point or something that's dramatically different.

Yes, and I agree with everything you just said. And again, I think if we felt we needed to make sure that we -- all that is happening during an economic GDP that I don't think any of us are going to be happy with what the numbers are.

Sure, okay. That makes sense. I mean --

The other side of that is that on the Federal Reserve Transportation Board, we had a meeting two or three weeks ago, and the thing that we are all trying to figure out in those meetings is the $25 and $30 a week deals that gasoline savings that every consumer is getting, when does this start working its way into the market?

And, of course, they don't know no more than us on this phone know. But the thing is, is that they do feel very, very confident that $25 or $30 a week savings in people's pockets will work its way through the economy. And that's going to be a major deal, whenever that starts happening.

Yes. No, I would agree with that. I think that there's been some expectations to see that; maybe a little bit surprised that we haven't. And again, thinking about your different businesses. I mean, you could see it on the refrigerated side and not on the expedited side or vice versa. And so it's helpful to get your perspective on that.

Just the last one that I wanted to ask, and maybe this is for Joey. But I know the you guys have been doing a lot on the driver recruitment front. It seems like you're continuing to make progress there. Can you just talk about what you are seeing in the driver market? Is it better retention of existing drivers? Is it some success on the recruiting side? And is it just drivers from different carriers? Are you seeing people coming in from outside of the industry? What kind of your view on the driver market is at this point. Thanks.

You know, it's been really neat to be able to see the fleets starting to grow again. And first of all, that the margins get to the point to where we are comfortable with growing again first.

Second is, can you do it? And so actually being able to see the progress the last three or four quarters has been a lot of fun. I would say that sits here today, we look at both the retention side and the recruiting side. And the majority -- our retention, our turnover is up a little bit across the group. It's up about 3 percentage points.

It's a battle. All right? It's a tough, tough, tough, tough market out there. And so that's up a little bit. So obviously that tells you if that's up, then all the success that would be on the growth trucks is from the recruiting side.

And I think that -- a couple of things. Nobody likes to talk about how you're able to grow your trucks. I think that one of the things it's the student market versus the expense market, CTG historically has been a heavy kind of student company -- let's call it 40% to 60% of the new hires each week have been students versus experienced.

The schools are in a sweet spot right now. And they pretty much -- they've got the market that they would like. And so the partnership building for the marketplace is frothy from the carriers to the schools. And I don't see that slowing up at all, and probably will get a lot more competitive.

I think that we've done a few things on the expedited side to kind of help explain our product a little bit better to people that are thinking about teaming up; I think that's been impactful. And then lastly, one of the things that helps you is when somebody is thinking about a change, drivers talk and they want to talk about miles and what kind of miles you're getting, and we are getting good miles pretty much on all the fleets right now.

I mean, dedicated is dedicated, but our refrigerated product continues to improve, expedited numbers are hitting 18 years as I said. So, that helps a lot. But still at the end of the day, people want to get home, they want to get home frequently. Trucking is a tough job, and so we are chasing that issue.

So, I just think it's going to be a slug-out battle for the foreseeable future on the driver side, and you've just got to -- you've got to keep your nose down and keep doing what you think works. For a fleet to be -- I've seen some numbers and there's some pretty impressive equipment -- I mean truck gross out there, being able to grow GDP to the 5% on your capacity side, I think, is a good target.

And I think as Richard said in the script, I think we've got a good shot to do that for the group this year, but think that -- I think one of the things that's continued to really excite us is just being able to continue to grow the team, just because of all the things we talked about -- eCommerce, the organic food growth. And so that's something that we are really excited about.

Well, good. I know it's not easy, but you guys are making it look a little bit easier. So thanks for the time and perspective this morning.

(Operator Instructions). Tom Albrecht, BB&T.

Hey, Richard, on the insurance, sometimes when you have a rough quarter, it's easy to think well, it will be normalized the next quarter. What are your thoughts on that, how quickly it would be? I'm sure it's not going to be over $10 million again, but just some thoughts there.

Yes. So far, so good this quarter, thank you, Lord. And we also have been doing some negotiations with our insurance provider, and feel like that's going to help with some premiums going forward. So I feel pretty strongly that the next couple of quarters are going to be significantly better than what we had in the first quarter.

And then, David, I know you've commented on a lot of demand metrics, but what's your crystal ball saying about the produce season?

It's going to be a good one. Yes. I am -- it may be the -- to me, January and February and March was the best produce season that I have sensed in many, many years. And from Yuma into the Southern California, and now it's starting to work its way up a little bit into the valley there in Fresno and places, but we have done -- our produce has done extremely well. So I'm very happy and I think it's going to be a good year for produce.

Okay. Good to hear. That's all I had. Thank you.

Thank you, Tom.

Alex Green, Chattanooga Times.

Hey, I just had a couple of quick things about talking about drivers. It looks like here you guys had a higher seated truck percentage. Can you just kind of talk about what you think went into moving that number up? Whether it was the -- whether it was team incentives, whether it was something else.

I also see that there was an increase in average length of haul. Do you think that played into the higher seated truck percentage? And where do you see that number going forward?

Alex, I think the length of haul increased -- and actually it's not just teams. If you go study the length of haul, given our dedicated product, so quite a bit on the length of haul side.

So I think the length of haul drivers, they'd prefer to go long if they can with the least amount of stops they have, they can get, is a plus. So any time you can stretch them out a little bit, it's going to get a load off unless it's crossing a couple of days and get the next days there. So it's a good thing.

So the team side is driving a lot of that, A. B, as far as the things that are driving the seated truck count, we've kind of already talked about. But just a lot of the initiatives that we are doing across all the groups, it's mainly on the recruiting side. It's all public -- if someone wants to go dig around and find, you kind of see what one company is doing versus the next.

But I just think we are kind of doing -- getting our drivers good miles, doing what we are saying we're going to do. We try to get them home when they need to be home. But yet still run freight and that's kind of what we're doing across all the companies, is keep it pretty simple.

Appreciate it.

(Operator Instructions). At this time, I'm showing no further questions.

All right. Well, thank you, everyone, for listening in on the call and being interested. And we'll talk to you again next quarter.

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.