Covenant Logistics Group Inc (CVLG) 2015 Q2 法說會逐字稿

This recording is for the Richard Cribbs teleconference for Covenant Transport, scheduled for Thursday, July 23, 2015 at 9 AM Central time.

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 as to the procedure to follow if you would like to ask a question. I would now like to turn today's call over to Mr. Richard Cribbs. Sir, you may begin.

Thank you, Cindy. Good morning. 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. This conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform 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 read our disclosures and filings with the SEC, including without limitation the risk factors 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 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 -- our asset-based divisions revenue, excluding fuel, increased 12.2% to $139.5 million due to a 5% increase in average tractors; a 6.1% increase in average freight revenue per truck; and an increase in our refrigerated intermodal freight revenue.

Versus the year-ago period, average freight revenue per loaded mile was up $08.6 cents per mile, or 5%, and our loaded miles per truck were also up 1.2%. Freight revenue per tractor at our Covenant Transport subsidiary was up 7.4% over the prior-year quarter, while our refrigerated subsidiary, SRT, experienced an increase of 5.5% and our STAR Transportation subsidiary experienced a decrease of 1.8%.

Compared to the year-ago period, the asset-based divisions operating cost per mile, net of surcharge revenue, were down approximately $0.02 per mile, mainly due to lower casualty and workers' comp insurance and reduced capital costs. These decreases are partially offset by higher employee wages and net fuel costs, a favorable $3.5 million return of previously expensed insurance premiums for the commutation of our primary auto liability policy for the period of April 1, 2013 through September 20, 2014, as well as $300,000 of reduced insurance premium expensed in the second quarter of 2015 related to the canceled rewrite of that same policy that extended coverage through March 31, 2018. Results in casualty insurance premium expense of the rewritten policy will be effectively reduced by approximately $1 million per year over the three-year policy period that began April 1, 2015.

The asset-based operating ratio was 87% in the second quarter of 2015 compared with 93.2% in the second quarter of 2014. Our Solutions logistics subsidiary decreased revenue by 5%. Although we experienced unfavorable increased purchase transportation expense percentage, other operating expenses favorably decreased as a percentage of revenue, resulting in OR improvement of 40 basis points to 95.4% from 95.8% in the year-ago quarter. Our minority investment in Transport Enterprise Leasing contributed $1.3 million to pretax earnings, or $0.04 per share. The average age of our tractor fleet continues to be very young at 1.8 years as of the end of the quarter, equal to a year ago.

Hence, December 31, 2014, total indebtedness, net of cash, and including the present value of off-balance-sheet lease obligations, has decreased by approximately $46 million to $181 million. Our Board of Directors approved a stock repurchase program authorizing our purchase of up to $5 million of our Class A common stock. With available borrowing capacity of $50 million under our revolving credit facility, we do not expect to be required to test our fixed-charge covenant in the foreseeable future.

The main positives in the second quarter were, one, significant improvement in the operating profitability at each of our three asset-based trucking subsidiaries. Two, a 5% increase in average freight revenue per loaded mile and a 1.2% increase in average miles per truck versus the same quarter of 2014. Three, a year-over-year increase in our professional driver employee headcount. Four, decreased operating costs on a per-mile basis. And, five, a nice decrease in our total indebtedness.

The main negative in the quarter was our increased net fuel costs partially related to lower fuel surcharge recovery, resulting from the lag impact of increased national fuel costs as the quarter progressed, an unfavorable fuel hedge position, as well as comparing to the prior-year quarter, which included a discrete $900,000 fuel tax credit.

Our fleet experienced a small reduction to 2,698 trucks by the end of June, a 24-truck decrease from our reported fleet size of 2,722 trucks at the end of March. However, our fleet of team-driven trucks averaged 951 teams in the second quarter of 2015, a 2.5% sequential increase over 928 teams in the first quarter. Therefore, we actually increased our overall driver count by approximately 20 professional drivers during the second quarter of 2015. As of July 18, 2015, our fleet size has increased further to 2,719 trucks.

Freight yields for the first three weeks of July 2015 continued to outpace the prior year. Similar to historical trends, truck utilization for the third quarter of 2015 is expected to be approximately equal to that of second quarter of 2015. Based on early and ongoing discussions with our customers, who have accelerated shipping needs during the peak shipping season, we were feeling more confident regarding our volume and truck utilization projections for the entire second half of 2015.

We are continuing to experience year-over-year rate-per-mile increases, though we are starting to see or experience a deceleration of the year-over-year rate-per-mile increases we experienced during the first half of 2015, when our rates per loaded mile increased 5.4% compared to the first half of 2014, even with a 6.9% year-over-year increase in our average length of haul.

Fourth-quarter pricing still remains a challenge when compared to the year-ago period, in part due to the strength of the second half of 2014 rate-per-mile increases that we did achieve. We now expect year-over-year rate-per-loaded-mile increases of between 3% and 5% for the second half of 2015.

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

(Operator Instructions) Jason Seidl, Cowen and Company.

I guess just sort of bigger picture in the back half of the year. So obviously, we have all seen the deceleration, I think, in the rate increases, but 3% to 5% historically is still pretty decent. You add on that, you're feeling a little bit more confident in terms of your expected business levels because you do have a tough comp, especially in the fourth quarter. Do you feel that you guys can grow your earnings in the back half of the year?

I think that what we are looking at is kind of similar earnings for the back half of the year. We have a larger truck count. We have good utilization. Rates are where they are. I think, overall, earnings will increase. But from an earnings-per-share standpoint, with the additional stock that we offered in November, it will be a difficult comp or challenge, at least, to meet or beat -- to meet and beat the second half of the year earnings-per-share numbers.

All right. So your forecast for the back of the year in terms of the bottom line really hasn't changed. Just trying to make sure I get all this correct.

We haven't given exact guidance on that for any part of that part of the year. So, nothing has really changed. And I would say nothing has changed, really, from our sentiment standpoint through the first half of the year, other than that we feel better about our volumes.

Okay. Now, I know it is a ways away, but looking to 2016, when you pass your more difficult comps with the stock issuance, could you talk about plans on growing the earnings from here? Is that 3% to 5% going to be enough to see you consistently grow earnings at a decent pace for investors?

From our standpoint, Jason, we think that 2016 is going to be a good year. We think that whatever is out there right now, that we think that is at good equilibrium. We see the freight environment twofold. One, to be expedited is still quite strong. Very pleased with what is going on with the expedited side of it, and we continue to grow it. I mean, we just got another large e-commerce customer in the last couple of weeks. It is going to be a big hit for us. But that side of the business is going very nicely.

The other side on the drive -- the dedicated side is doing very nicely. I am very happy with that. We are going to continue to grow it. Some great opportunities on the dedicated side of the business.

And so then, just on the OTR, which is the few singles that Transport has and then the refrigerated side of our business, we have kind of seen that kind of level off to equilibrium, down a little bit in terms of utilization as we are into July. But when you put it all in the basket, I am very, very pleased with what we are seeing from the environment.

We think that the second half of the year is going to be a good part -- a good portion -- a good piece of business from the standpoint of GDP growth. I think that GDP growth in the second half of the year is going to be in the 2.5% to 3% kind of number. I think that we will see (inaudible) production that has been in a little bit of a lull for the last three or four months. I think that we'll start seeing it pick up a little bit. Because, remember, anything that is negative now, give me any type of positive on the number, and we are going to feel it. All the truckers are going to feel that.

And I also think that you will see what has been built in the inventory side, inventories have been built over the last three or four or five months in the second quarter. I think that that will also start to come down, which will play nicely into the truck load.

So we are very upbeat. I think that we will continue to be able to add some trucks, maybe in that 2% to 3% kind of number. But I think that we will be able to add some trucks. And I think the pricing next year will be -- is going to be kind of similar to where we are at today. If I had to throw a number out there today, I am probably about 4% to 5% number. If I had to sit here in July and say, what is 2016 going to hold, that is just the way I feel.

We are still getting rate increases. We are still being very successful in that area. So it is not that we are being told no. But there is no doubt that everything I just said -- GDP is where it is at, and production is where it is at and inventories have risen, and that hurts trucking.

Guys, that is fantastic color. I guess one more and I will try to turn it over here. On the regulatory front, could you talk about what you are hearing coming out of the gates from Washington? Are we going to get the expected regulations in the trucking industry, or do you think they can push them back even further?

Number one, I sit on the executive committee of ATA. And, I tell you, from our standpoint, from the ATA's standpoint, we do believe that we will hear at the end of September that the [ELD] computers are definitely something that is going to happen. I think the chances of that happening are 95%. So I do -- I only leave out the 5% because we are dealing with the government. And it is (multiple speakers). Other than that, I would say 100%. I think it is a given that it is going to happen, and I think that that will be announced at the end of September and I think it will be phased in over a two-year period of time. Very similar to what you already know, I think that that is what it will be.

And I think that -- as it is phased in over that two-year time, I think a lot of the small carriers that are utilizing that is that as soon as it is announced and the time it is given, I think we will start -- we, the industry, will start seeing the benefit of that because it is not all going to happen on the 24th month, if it is two years. It is going to be happening on a monthly basis of carriers. It is going to be reduced those miles.

I think that that is definitely going to happen. I think that the national database for the drug testing, I think that will be in December. I expect that to be early part of 2016, and I think that that is going to have another ramification on terms of driver availability to the industry. I think it is going to continue to reduce miles. And so I think those two things -- I don't feel -- I think those two are 95%, if I throw in a number, that those two things happen. The third one would be the speed limiters, and who knows about that. (inaudible) could happen, but if I was going to put a percentage on that, I would say it is 50%.

Brad Delco, Stephens Incorporated.

David, I think you are giving the government too much credit with that 5% (multiple speakers).

(laughter) You are probably right.

David, from your perspective, when you look at the market, I think you gave good color on the last question. But how did things sort of play out for you in Q2 relative to expectations?

I was very -- I was pleased on the -- again, on the expedited side. On a scale of 1 to 10 of my expectations, they were at EBITDA 8. The port still is funky. I mean, it was still and sitting there all of April and May, and trying to figure out the feast or famine of what was going to happen on the port of California.

I will say, today -- and I would only say this just in the last couple of weeks, that I think that the port is starting to operate -- is the word normal, but pretty close to normal. Pretty close to the way you would expect it to be. And I think that whatever freight has moved out of the port -- and I do think that some customers have moved to the East Coast, and I think some of them have moved to Savannah, Georgia. In particular, in our opinion, that the West Coast port are at the lowest point of where they are going to be at, because I have already got some customers that are already making decisions now to go back to the West Coast. So I think that they are at the bottom, and it starts getting better for them. Therefore, it gets this craziness of ups and downs.

That is probably, Brad, the biggest surprise or whatever -- not necessarily a surprise because we all knew about the port. But the biggest hamper that we had on my expectations would be just the up and down of the port situation that existed out there. And, keep in mind, we are talking about our expediter that I am thrilled with. I am very happy with the second-quarter results. So we were able to maneuver very, very nicely in that arena.

So, expectations dedicated, much better. I was going to say much better, but I am excited about the dedicated. I think the dedicated has got some great opportunities out there. We saw it in the second quarter. Continued to do a lot of good things and I think are some good growth opportunities in the next couple, three months on the dedicated side. So I am happy there.

The refrigerated side is -- we have made some good headway. I mean, you know, keep in mind, when I say refrigerated, it is predominantly the SRT division that we are talking about. And it is going exactly the way we felt like and within the way we feel like it will, and that is is that SRT, a great company for so many years, got two flat tires and we jumped up to a 99 OR, 98 OR and those kind of numbers. And over the last couple of years, we have really been able to work that down and I am very happy. I mean, in the month of June, SRT had a low-90s OR. So I am very excited about what is happening there. And we believe the second half of the year on our refrigerated products will be in the low 90s. So we are just pleased with a lot of things.

So that would be my feel of expectations is that -- and let me just say one other thing, because I was happy with the expedited numbers, and I told you about that. But, also, there has definitely been -- it is at equilibrium. I don't want to use the word sluggish because I think that is too hard of a word. Freight is at equilibrium. And what does that mean? What does equilibrium mean? It means that today I need five loads and tomorrow my customer needs five trucks. That is the environment. It is not 2014; there is no doubt about that. But it is not bad out there. It is just a little sluggish -- and I don't even want to use that word. But it is equilibrium. Does that make any sense to you?

No, that does. But the reason why I ask is because we have seen a bunch of truckload of ports thus far. And you are the only one that has put up positive utilization. And I understand the dynamic with teams there. But what I think a lot of investors are wrestling with is when capacity is not as tight, people don't believe that there is as much need for team or expedited services. And to me, I don't know what you think about it, but there is something else going on for you to put up positive utilization and what you deemed as more of a balanced supply-demand dynamic. I am just trying to see if (multiple speakers). What is it driving -- what is driving it?

Well, here is what is driving it. Here is absolutely what is driving it is that we are so blessed that we never gave up on the team model. There were good times, bad times, ugly times when everybody thought every load was going to become 300 miles length of hauls and everything was going to be regional weak. Right, wrong, or stupid, we kept plugging away at the team side.

And this e-commerce -- I am not just talking about Amazon. I mean, they have been the leader. But everybody -- as you know, every company in the country is getting into it. And as long as you and I can get on that computer, and I can go to Walmart or I can go to Home -- I mean, Home Depot, or I can go to Amazon, and I can press a button that sits there and says, I am going to have this in 48 or 72 hours, let me tell you, the vast majority of that is going under expedited. And if it gets over 500 miles length of haul, it is going on team expedited.

And so that is the -- and so your question would be, how long does that last. Well, I think we have just hit the ball. I mean, I think we just hit it and we are on our way to first base. Not just (inaudible) but as the economy -- I think it is going to become more and more of what is happening. And you have got every retail company in the country, whether it is -- you know, I am not just talking about Walmarts of the world, but they are all -- whether you are selling coats or you are selling tennis shoes, you are having to catch up on the e-commerce side. And that plays wonderfully into this team expedited that we are involved in. And we are just very, very pleased with it.

It is really not the verticals that we are playing in. And on that expedited side, we are playing in verticals that are seeing over 10% double-digit growth year after year after year. That is on time-sensitive food as well as time-sensitive retail, e-commerce type stuff. And as long as you believe that is going to continue at a double-digit increase, which we do for the foreseeable future, out three, four years, then we feel comfortable that the need for our product will be greater than the need for the commodity freight market throughout that entire time period.

No, that makes sense. I kind of wanted to tie that into this last question, if you don't mind. Dave, can you give an update on what you have seen in July? And I guess where I was going with that, I am not an Amazon Prime member, but apparently there is a big day of a bunch of sales that was better than any Cyber Monday. So, did you see any impact in your business in that thus far in July?

We did. It is interesting because the magic day was July 15. And -- which was last week. And we saw some increased volume Monday or Tuesday, but nothing that you could really just say, wow, this Wednesday deal is really going to work. We didn't sense that.

But I will tell you that after Wednesday happened, Thursday, Friday, Saturday, Sunday, there were a lot of opportunities out there. And to the tune of about, just on that week, probably about 20%, 25% increase in that segment for about a five- or six-day period of time. It still -- and it is still pretty strong out there on that side of the business. I am very pleased now. I have got to believe that, A, it is not Christmas. B, I hope this thing is successful, and all of a sudden July 15 becomes the second Christmas for truckers. I hope that that truly happens. But, number three, just like Christmas, it ends on the -- first of the year kind of slows down. So I expect this big bump that we all felt for four or five, six, seven days, I mean, I think it will go back to previous days, which is fine. So, that is what I feel.

But probably for a pretty short time. July is seasonally a weak, weak month for all of trucking, and probably the second week is behind February, maybe, of all the month. So the timing could not have been better for us than to have that happen. And, again, it is not Black Friday, but it was a nice pump for us in a time period that is traditionally slow.

That sounds great, and that is perfect color. Well, thanks, guys. I will turn it over, and sorry for taking up so much time.

Tom Albrecht, BB&T Capital Markets.

Congratulations on another nice quarter. I wanted to dig into a couple of other things. So -- and not to nitpick, but the solo trucks look like they went backwards just a little bit, even though you continued to move forward with team trucks. I'm kind of talking from March 31 through June. Do you need to adjust pay? I know you have kind of described pay as premium for teams and maybe sort of average for solo. But what are your thoughts there?

Well, it is interesting, Tom. Actually, on the refrigerated solo side, we were able to increase our truck count a little bit.

In STAR also. Yes.

Yes, STAR as well. And so it is really on the Covenant solo side, which is some dedicated accounts that we had as we have kind of talked about over -- really, over a three-year period. Then slowly moving away from that less profitable service offering to some commodity dedicated that we were running some freight on. And as we have reduced that, we have reduced some of the solo trucks associated with that.

So we are happy with our pay around that. We are looking at what to do with the solos to improve their performance and profitability, which would include getting them better utilization, which should help with retention effort and those type things. We are making some strides there. That is another opportunity for us over the next year and a half to improve things.

Okay. And then a couple of other things. When you talked about utilization for Q3 being similar to Q2, that was a mileage utilization comment or revenue utilization?

That is the mileage utilization. Yield should continue to improve.

And then, I guess maybe David, you have kind of talked a little bit about the dynamics with SRT, both your internal opportunities combined with, I think you said, July, the refer market might be off slightly. Year to date, though, the drivers that we think about beginning with produce and then in the beverage season, weather has been so weird. How would you describe the influence of those two big markets? I guess you could throw in the other one, the protein market, whether that be beef or chicken.

Yes. I think you used the right word that it has been weird. In the second quarter, first of all, I guarantee you, there is nobody grilling a hamburger until the end of May or first of June. April, when the weather was cold, nobody was doing anything almost all the way up until May. And we saw our port, we saw our hamburgers and hot dogs business shippers -- they just didn't have the volume, and it was off. They just told us that we need the weather to get into the 90s. We get into the 90s, we will start selling some of this.

It is across the board that we saw that. And we also saw it on the beverage side of our business that it was the same time frame. Both of those started pumping nicely in the month of June. So there is two months out of the quarter that -- I am going to tell you, those two items right there were down -- I don't have the percentages here, Tom, in front of me but I would say they were down 15%, 20%. I mean, it was a big (technical difficulty) as we speak, excluding one major customer that we got that -- it always scares me, based upon our past, on what anybody does IT conversions. And we have a large -- one of our customers that did an IT conversion about 10 days ago, and we are having to work our way through it as they do plant to plant to plant to plant. They have got a bunch of plants. So that kind of worries me a little bit out there. And we have seen their little business being off more, but it is more because they can't get it out of the door because of the computer than it is anything.

And there was a small reduction in shipments related to the avian flu issues that were in the Midwest in the late first quarter, early second quarter. That those seem to have worked themselves out, and we are not seeing any volume decreases from that at this point.

Right. Right. The other thing, too, I think we're all just kind of parsing this. We are all probably a little more calm than the stock market is, thank goodness. But you look back to last year, you had this weird port uncertainties. And the port volumes in September and October were really large. Rail problems were an issue. When you think about your freight flows for the rest of the year, how do you think about the fact that September, October had close to double-digit inbound container volumes out West?

Yes. The way we look at that, and it is kind of one of the reasons why we are also being -- the word cautious -- I was going to say conservative, but it is probably reality of what you saw us talk a little bit about on the pricing.

But it wasn't because there was -- last year, with port business being up dramatically, like you just said, in October and November, we can supply them enough trucks, period. I mean, instead of being up whatever it was, 25%, if it had been up 7%, we still couldn't have provided the amount of trucks that they needed. So I do believe that it has hit a bottom and that it will gradually continue to go off the bottom and get better, which we will feel that. So at the end of the day, I can only pick up one load. Whether they got five in October a day or not, I can only pick up one of them. And as long as I have that one to pick up, I am going to be happy with their numbers.

Great. Okay.

And so I think that it will come back somewhat. It is not going to be like it was last year, but I think it will come back. But that tells me that pricing out of there won't be as dramatic, and you won't be able to get the rate that you were able to get last year because they had five loads instead of one. So we do believe that we are going to be able to continue to get pricing because we want to make sure that they get trucks.

Then, just kind of -- let me just look at something here, and then I will get out of the queue. So on the mileage utilization, if it is similar to Q2, then it would be close to flat year over year. Is that the message you want to convey, Richard?

Or slightly up. We were up 1.2% year over year last year, and it was similar. So --

1.2% when?

For second quarter. And so we are probably looking at similar kind of, up 1% -- flat to up 1% in the third quarter. (multiple speakers).

Right. Right. Okay, guys, thanks for the color. I will hop back in the queue.

Nick Farwell, The Arbor Group.

Just a couple of very quick questions. In your mind, what are the competitive implications of the continued federal regulatory restrictions on your long-haul segment of your business, especially from the West Coast?

I think that whether you are doing West Coast or East Coast, I think that when the regulatory stuff starts happening, Nick, that it is going to affect all of them. Because there is no doubt, if there is a -- the things I read from the analysts, I agree with them that when the computers get on the trucks, it is a number. It is a big number. It is a 7% to 15% kind of number. It is going to be a large number that -- of miles that over a two-year period are going to be reduced. And whatever region of the country you are running, it is going to have a major impact on miles. And so that is going to affect the West Coast. And then the other one is the natural database of the drug testing, and that is going to impact the drivers. So I don't think that has anything to do with West Coast or East Coast. If those are the questions that you are asking.

Yes. Well, maybe another way of asking this, are you yet seeing any greater pricing power due to your scale?

Yes. I think that we have in the last couple of years as we -- and, you know, as our strategic plan develops in 2012 and we went out there with -- you know, we are three years into it now, and that is the best thing that has ever happened to us. And I really think it took us from the entrepreneurial Company to a real major Company that runs a Company the way that we all want it to be ran. And the strategic plan has been very important to that.

And we picked the areas that we could sit there and realize what is growing faster than GDP that plays into what we had, and that was expedited teams and our refrigerated segment of our business. And we picked the e-commerce that we picked the organic -- the produce -- organic produce commodities that plays so well in that. And that said, we were able to -- we have been able -- if you look over the last three years, our rates are up very nicely. Very dramatically. And so just, in my mind, even that I said the reason why we are kind of throwing out 3% to 5% kind of numbers, say, in the second half is because of the effect of 2014 and everything that Tom Albrecht asked about, the port and all that stuff.

But rates are going up. There comes a time where we -- you can't just beat the customer to death. I don't care if they -- you have got to treat them like a partner, and you have got to make sure you keep this business long term. And so that is where it is at, is that not to go after the last screw into the coffin, but treat people -- when the deal is over, you shake hands and you keep the business out there. So we will continue to do that, but I think we are going to continue to get nice rate increases.

Just from a conceptual standpoint, you maintain your service capacity in long-haul teams -- or long-haul/team during a very challenging period of time. And given the current industry conditions, my impression is the last three or four years you have been able to leverage that capacity. Do you think that trend that may be at your back continues? And if you do, it is a two to three-year incremental timeframe? Is it (multiple speakers) 90% of that improvement already? What is left in front of you from having maintained service in the long haul?

I think, truly, with all of my heart, I mean, (inaudible), when things are going great, as we all do, we sit there and say it is never going to end the rest of our lives and those kind of things. But I think that the trucking industry and, in particular, the expedited side of it, whether you are running long-haul or you are involved in an expedited short haul, I think the next few years are going to be the most outstanding years that we have ever seen if we don't go into a recession.

The thing that thrills me is that we are all on this phone trying to figure out is the world coming to an end. Is freight getting ready to go to nothing? And we have got virtually an economy that has not done anything for the last four or five years. And here we are with supply and demand at equilibrium. And if we get any help from an economy, and one day we will, if we got a new administration or something will come about to get us an assistance on the economy, that is going to do nothing but -- that is going to give us more business.

But I find it amazing -- if this had been 15 years ago and this industry had been operating in the economic environment that it's been operating in for the last three or four years, we would all be in the grave. But it is not because of equilibrium of capacity.

So to answer your question, I do believe that as long as e-commerce continues, I believe as long as people don't want a bunch of pesticides all over their food, I believe as long as organic growth is there --. And I think that that is the question that needs to be answered, is how much longer are people going to get on the computer and order something. And you want it in a 48-hour time period. That is the question: does the consumer get happy with seven days. And if they do, then that will affect our expedited team. As long as they are getting on that computer and ordering it and wanting it quickly, then it is going to continue.

I think, for the foreseeable few years, that, along with everything I just said about regulatory and reduction of miles and reduction of driver availability, fits into the truckload segment tremendously. And, in my humble opinion, the next four to five years are going to be great years as long as the economy at least maintains. Does that mean that we are all going to get on and say, what is going on in the second quarter and thus reduction didn't quite do what we wanted? Yes, we are going to have that. We're going to have periods of time. But overall, if you your take is that the economy is flat and your take is that e-commerce is going to continue and your take is that organic produce type commodities are still going to be shipping, I feel good about our business.

So two other quick questions, and that is, I'm curious with the plunge in virtually all commodities worldwide for all the reasons we are aware of, certainly including energy and diesel, has this changed your hedging strategy? In what way and why?

Yes. Has it changed it? Maybe a little bit, but we still continue to hedge at the market. We have got some hedges that are in place in 2018, so we are still being disciplined on that side of it. There is no doubt that 2017, 2018 are at much lower pricing levels. So maybe the market comes up. We believe that, at the end of the day, that the pricing that we have got in the next few years are numbers that we can run our Company at a very sustainable level and get nice returns and -- I mean, I am not going to sit there and allow something that the market's at $3 a gallon and I am buying it at $5 a gallon. I mean, that is not happening. But I will take the risk with the market at $3 and I have to buy it at $3.30, and those kind of numbers. I will take that.

Because, I remember the days that the only thing I was doing in 2008 and 2009 is how do I protect my P&L. And one thing I knew is we can get our Company turned around when fuel, during those times -- if fuel is at $3.50 and we booked it and hedged it at $3.50, but (inaudible) and we all thought it was going there, if fuel went to $4.50, I don't know what I would have done. And so that started our hedging program, and we have reduced it more that the spreads are not as great, but there is also that possibility. I mean, I personally believe that crude is about where crude is at in that $45 to $48 to $60 range. I think that that is kind of where we are at for the next 18 months. You let a bomb go off somewhere and it is going to skyrocket. So, yes, it is a long answer, Nick, but I feel comfortable where we are at.

Nick, on the hedges, the way we have done it, we basically are fully hedged all the way through 2017 now and have some hedges in 2018. But, what we have effectively done is, from even a little bit of incremental cost savings through the second half of the year on fuel, the hedge rate that we have in place for next year are about $0.13 to $0.15 lower on that fuel repurchasing, which is 25% of our fuel or so. And so that should be incrementally a little over $2 million of cost savings next year that we have built in on fuel.

And then, going forward to the next year, the increment is a much bigger increment, down something like 50 to -- I don't have the numbers in front of me right now, but $0.50, $0.55 a gallon that we have built in as cost savings on that 22% to 25% of fuel purchases. And that is going to be a big number. That is going to be cost savings -- a year-over-year cost savings of probably $6 million or $7 million from 2015 to 2016. I mean, 2016 to 2017. Sorry. And then, 2017 to 2018, we have a very similar kind of cost structure in place.

So even though we -- depending on what the market does, we may beat the market, may not in 2017, but we have some built in cost savings, at least from our standpoint, on a year-over-year basis.

Based on current pricing.

Based on just having (multiple speakers). Yes. They are built in, but we have already purchased them so they are already (multiple speakers).

(multiple speakers) that we're going to be paying them off on the hedges.

On those hedges.

Right. Then the last thing, quickly, if maybe David or someone could talk a little bit about your expectation for this retail season. And to what degree do you think the -- although it appears in terms of big numbers, a shift to online. But we had the one-off that Amazon had, et cetera. And there are other implications of the shift to online that we are all generally aware of. What do you think the implications are trying to take all these factors together on this upcoming retail season for the September, October -- what would it be -- yes -- August, September, October?

I think the retail season will, from a trucking standpoint, be similar to what it was in 2014 from just a volume standpoint. The reason why 2014 was unbelievable because a lot of it was that surprise. And the e-commerce continued to just explode in 2014. And our expectations working with our customers is that we believe that e-commerce will continue to increase 10% kind of numbers, year-over-year expectations. And so I think -- at the end of the day, I think retail sales as a whole will be up in that 2%, 3%, 4% kind of number year over year on retail sales. But I think that e-commerce will be up another 10%. So they are going to continue to take a bigger piece of the pie -- total pie.

Thank you. Appreciate your comments.

(Operator Instructions) Donald Burton, Avondale Partners.

Congratulations on another solid, solid quarter. Let me ask you this, more of a strategic question. I know you are realizing some real frugals in fuel economy, and certainly helps with the driver situation as well. They had a newer and newer fleet. No one would argue that you don't have a new-enough fleet. But is there any thought about bringing the average age of your fleet down even more that it tends to capture some of the more efficient -- the more the efficiencies that are in newer trucks and/or (inaudible) the advantage -- even greater advantage in retaining drivers?

Donald, this is Joey. You know, if you look at our existing fleet or break it down by all the divisions, as well as what is performing well and what isn't from a fuel total cost of ownership perspective, we really worked hard. We really only have probably across the fleet a couple hundred left. So by the end of the year, we are going to be up to the most recent version -- the newest version of equipment, regardless of the OE that we may be using, still primarily (inaudible) freightliner.

We have talked about getting actually a little bit younger, to your question, on the expedited side. It is a quasi- -- it is an idea that we really haven't decided yet for sure, but it is a great question. We used to, back in the day, when we were growing our teams 15% to 20% a year, one of our marketing positions was, come work for us and you get a new truck. We are revisiting that kind of strategy that we used in the past. But there is a lot of cost involved, but we have moved over the years from moving kind of higher-miles trucks into solos that there is some cost that we may be able to save from identification costs, prep costs, things of that nature. So do we pick up a little bit on the driver side? Maybe a little bit more capital cost, but yet save it on retention, save it on fuel economy, save it on one less prep cost time.

But other than that, I think we are in pretty good shape. Our dedicated product is still a little bit old. So we are working hard to get it down closer to where our refrigerated and expedited product is. The margins are definitely there for that. And I think it will continue to pick up some operating costs as we do that.

So we are in pretty good shape. We are playing around with some ideas on the expedited side, and we still -- a little opportunity left on fuel, but it will pretty much be done by the end of the year.

And, Donald, we were early adopters as well on that. We were one of the first companies that bought into the new -- at least on the evolution side, evolution truck. And so even though 1.8 years, like Joey said, we only have a handful, really, 150 to 200 trucks that are running something other than the new engines.

And then the other part of what would be beneficial, I think, for going ahead and increasing or improving the average age a little bit is we -- basically, all the trucks that we have got with the new engines, all of them almost have stability control systems for safety purposes. We just this year started putting in (inaudible) and mitigation technology on our trucks. And so the faster that we can ramp up those purchases is the faster that we will have that extra safety equipment on the trucks that we have seen really good results from thus far.

Well, you do that (inaudible) just start modeling for your insurance and claims cost would be $0.05 a mile for (inaudible) the cows come home.

I hope you are right.

Well, let's turn to the trailer side just real quick. I know your average age of the trailers overall -- the average age of your repo trailer (technical difficulty) by now?

It is probably right at 2.5 -- two to 2.5 years.

(inaudible) thought it was significant (inaudible). All right. And then one last question, and then I will let someone else have the floor. Your brokerage business. We all saw the changes in revenue (inaudible) in that business. And (inaudible) maintain maintenance of margin. If I could get a little bit better granularity on what was going on there, was it a higher number of loads that drove the improvement in revenue? Because that is where we have seen so far the patterns from others reporting is that there is a lot more loads, and maybe a little less revenue per load. But can you tell us what you saw?

Sequentially from Q1 to Q2?

Well, both. Quite frankly, year-over-year growth sequentially. More importantly, sequentially.

Yes. Year-over-year was down a little bit. We still had a product, an LTL consolidation product, that we were running in the Pacific Northwest through the end of the second quarter last year. So that comp will be over. And so that is probably the reason it was down a little bit. Since that time, we have had added brokers, so we were growing the size of our offering in that brokerage area, and that is a big reason. So it is more loads. I don't think that the average avenue revenue per load is down all that much even though you are looking at including fuel and what you are seeing in the revenues there. And maybe even up a little bit. So I think that is what we are seeing as we continue to grow our brokerage with new employees and good employees that are taking care of that.

Tom Albrecht, BB&T Capital Markets.

Just a quick follow-up. Richard, I know this was a year to have smaller gains, but they're still quite a bit smaller than what we thought, about $160,000, I think, in the second quarter. Barely $100,000 in the first quarter. What is your outlook for gains the second half of the year?

We have some larger gains coming. We have some equipment that a good bit of it on the trailer side, actually, that we are going to be disposing of over the next six months that should increase that back up to more normalized levels, anywhere from $600,000 to $1.1 million.

Per quarter or total?

Per quarter. Yes. Per quarter.

(Operator Instructions)

Well, no more questions. We appreciate your time and look forward to talking to you again next quarter. Thank you.

Thank you. This concludes today's presentation. You may disconnect at this time.