Covenant Logistics Group Inc (CVLG) 2015 Q4 法說會逐字稿

Good day, everyone, and thank you for holding. (Operator Instructions)

I would now like to turn the call over to Richard Cribbs. Sir, you may begin.

Hey, good morning. Welcome to our fourth-quarter conference call. Joining me on the call this morning are David Parker and Joey Hogan, along with various members of our management team.

As a reminder, 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 view our disclosures in 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 www.ctgcompany.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 base divisions revenue, excluding fuel, increased 5.3% to $159.3 million due to a 1.7% increase in average tractors, a 2.9% increase in average freight revenue per truck, and an increase in our refrigerator intermodal freight revenues. Versus the year ago period, average freight revenue per loaded mile was up $0.22.4 per mile for 11.5% and our miles per truck were down 6.4%. Freight revenue protractor at our Covenant Transport subsidiary experienced an increase of 7.5% versus the prior year quarter while our refrigerated subsidiary, SRT, experienced a decrease of 2.2% and our Star Transportation subsidiary experienced a decrease of 2.1%.

Compared to the year-ago period, the asset base divisions operating cost per mile and other surcharge revenue were up approximately $.20 per mile, mainly due to higher employee wages, net fuel costs, and depreciation expense. These increases were partially offset by lower revenue equipment rentals and building rent. Gain on disposal of equipment was only $300,000 in the fourth quarter of 2015 versus $700,000 in the fourth quarter of 2014.

The asset base operating ratio was 87.2% in the fourth quarter of 2015 compared with 85.2% in the fourth quarter of 2014. The 2015 period included a $1.6 billion increase in fuel hedging losses compared with the 2014 quarter. Adjusting for that item, our operating margin contraction was approximately 100 basis points.

Our Solutions Logistics subsidiary increased revenue by 49.9% versus the year ago quarter. Combined purchase transportation and other operating expenses decreased as a percentage of revenue, resulting in an operating ratio expansion of 140 basis points to 87.7% from 89.1% in the year-ago quarter, the result being an increase of operating income contribution from $2.3 million in the prior year to $3.9 million in the current year quarter.

Our minority investment in Transport Enterprise Leasing contributed $0.9 million to pretax earnings or $0.03 per share. The average age of our tractor fleet continues to be very young at 1.7 years as of the end of the quarter, basically flat to a year ago.

Since December 31, 2014, total indebtedness, net of cash and including the present value of off-balance-sheet lease obligations, has increased by approximately $39 million to [$166] million. During the first quarter of 2016, we expect collection of the excess peak season accounts receivable and payments for tractors under sale contracts to generate a range of approximately $35 million to $45 million in net cash outside of cash from operating activities and normal net capital expenditures.

With available borrowing capacity of $60.6 million under our revolving credit facility, we do not expect to be required to test our fixed charge covenants in the foreseeable future.

The main positives in the fourth quarter were [more] on the 2.9% improvement in average freight revenue protractor and a materially weaker industrywide freight market. Two, stronger customer service -- that's real strong customer service that is leading to potential new opportunities entering 2016. And three, improved operating profitability from our Covenant Transport and Solutions subsidiaries.

The main negatives in the quarter were one, increased operating costs on a per mile basis, including the impact of the unfavorable fuel hedging position. Two, the deterioration of operating profitability from our SRT and Star subsidiaries. And three, an increase in our balance sheet indebtedness.

Our fleet experienced a decrease to 2,656 trucks by the end of December, a 65 truck decrease from our reported fleet size of 2,721 trucks at the end of September. Our fleet of team-driven trucks averaged 966 teams in the fourth quarter of 2015, which was equal to our number of teams in the third quarter of 2015.

Similar to what we experienced just before peak shipping season began, utilization for the first three weeks in January 2016 has underperformed the prior year. We are continuing to experience year-over-year rate per mile increases but they have decelerated from what we have experienced over the last few years. We now expect year-over-year rate per mile increases of between 2% and 3.5% for the first half of 2016. As compared to the first half of 2015, we expect our average fleet size will be 1% to 2% lower for the first half of 2016.

Absent an unexpected improvement in overall US freight market conditions, earnings-per-share may decrease compared to the first quarter 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.

Thank you. Good morning, gentlemen. A couple quick questions here. You talked that the earnings could be lower in the first part of 2016.

Based on what you are seeing, could you put some parameters around the magnitude, maybe give us a range? The market seems to have slid a little bit on the truckload side at least from the fourth quarter with some of the data points that are been coming in, so I would just see if you can put some context around those comments.

Yes, I don't think we are ready to give an estimate on that but the first quarter, what we're seeing is lower -- like we said, the lower rate increases of 2% to 3%. Expect those to be maybe a little better in the second quarter with some contractual rate increases and yet we still have the overhang of the fourth- quarter effect of any driver pay increases that we had last year that were -- ended up being for the year showing about 10%. Really the pay increases were probably around 6% or 7% taking out the effect of the committed freight volumes in the fourth quarter.

So it's kind of even-ish there. And then, there's going to be some additional depreciation related to the used truck market decreases -- value decreases that we saw August, September. There's going to be additional capital costs related to that as well as some additional interest costs on the higher overall debt.

Those are kind of the pieces that I see bigger movement in first quarter this year versus first quarter last year.

Okay, and just to clarify, when you say 2% to 3% rate increases, are you talking all in combined or are you talking just new, contractual business that you are signing right now?

Yes, all in combined.

All in combined. So on Swift's call just before yours, they were mentioning that January has been weaker in terms of their -- what they have been getting in terms of the rate. They were saying some were flat, but none were down. And some were normal.

But they thought that that was going to improve as the year went on and they were talking about I think about half of their rate increases were already locked in for the year. Could you give us a sense in terms of your overall book of business? What's already locked in for 2016 and at about what rate? And talk about what you have seen early on in this bid season.

Jason, this is David.

Hey David.

We've got a couple of large accounts that are over with. So, keep in mind the vast majority of CTG's increases are in that May, June time frame. A couple of decent ones in April. So we are -- we really get an idea of the power of the rate increase even though we have gotten a couple of rate increases so far this year and they are in that range that Richard was talking about. They are more in the 3% kind of number.

So I do think that the rates will be in that 2.5% to 3%, 3.5% number for the first six months even though I personally have been to count that the first six months of this year will be similar to what the industry felt from August through December as we saw it continuing to go down in August and September and October and inventories rise and those kinds of things and the sluggishness that was there. I think that that's maintained for the first six months, and I think it's going to be just opposite of last year and I think the last six months of the year that we're going to see it strengthen and I think that we're going to see capacity starting to tighten up once again for the latter part of the end of the year.

So I think that the first six months that you are going to be in that 2%, 3%, 3.5% kind of number. And then I do think the last six months of the year that you're going to have more of an opportunity.

That's great color. I have one more question. I don't want to hog up all the time here. You sort of mentioned that about capacity tightening that that was your expectation. On Swift's call, they said their fleet is going to be flat. You just said at least for the beginning of the year, expect about 1% to 2%.

Do you think overall at least in the first half of the year that the trucking industry in general will be at best flat from the prior year in capacity?

Yes, I do.

Okay, perfect. I will turn it over to somebody else. Gentlemen, I really appreciate the time as always.

Aaron Reames, BB&T Capital Markets.

Just a couple of questions -- good morning. First, just on SRT, I know we had the hopes about a year ago of driving margins from the high 90s to 92 or 93. Just wondering how many we [knew] we finished in 2015 and how we should be thinking about margins and refrigerated, given that supply and demand and refridge a little bit better than dry van?

The first part of that -- the improvement year over year from 2014 to 2015 was about 400 basis points of operating ratio improvement. So we did see a lot of improvement, not to the levels that we had hoped for and that we hope for next year. But we did see quite a bit of margin improvement.

And Aaron, we continue to make headway in SRT and as I look at stats just in the last couple of days, I've been looking at stats on the SRT, it's something that we have of course been looking at for two or three years but I was just refreshing myself as the year came to an end -- updating the numbers then. It's just interesting on SRT that their model -- and then there's a lot of companies, A, that have had to go through it, and B, that are getting ready to go through it. But, since 2013, when the new hours of service regulations and then ELD went into effect, SRT forever was a operations-driven company.

And they ran high utilization with rates being moderate, and they produced a 90 OR, and that was their model. And to give you an idea since the onboard computers and the new regulation of ours, their utilization has been hit over the last couple of years since July of 2013 to the tune of 30% to 40% of utilization. And so you had a cliffhanger that happened there. And at the time that miles were going down, rates were stagnant even though we started increasing them immediately because their rates have increased since that time and I just gave you a number say of 30% decrease since utilization, but their rates have gone up about 10%, 20% and since July of 2013 itself.

So their model -- and it has produced about a 400 basis point improvement in OR. We've just got to continue.

I was telling one of the SRT guys last night that, let me tell you, the vast majority of the solo operation today would take 2,000 miles a week of utilization and be extremely happy with that and we've made again an increase of about 20% increase in rates. But it needs to be another 10% or 15% increase. And that is the model that we are operating at and we expect SRT to continue to make progress. We cut about 400 basis points last year. We will continue to make progress in 2016, and that's the path of getting SRT back into the low 90s that we believe that they will get to.

All right. Thanks, David, that was helpful. I also wanted to ask about Star. Just wondering what percentage of that dedicated business is up for renewal in 2016, and I was also curious about how -- what your annual rate increases or adjustments there are tied to? Is it the CPI or something else?

Yes, you're talking about on the rate increases on Star?

Yes, kind of the dedicated.

Yes. The dedicated continues to grow. We are very, very pleased -- very happy with what is going on there. The vast majority of their business is another year away from any renewals coming up. Actually we have been winning some extra business with all our existing accounts -- there was a lot of our top existing accounts. We just actually won a 50-truck operations in the last three or four weeks ago that I'm very, very excited about. And -- so there's a lot of great things there.

There is no -- I see no negative standpoint on the contracts that's going to drive rates downward. I do think that we will continue to be able to give rate increases in 2016 on those. Most of them are under contractual agreements.

So we will be able to get whatever the contract is calling for on them. But Star is doing a very good job and the rates are not tied to CPI or anything. It was negotiated. We do a two-year deal, the rates have been negotiated for those two years. After 12 months, we get X amount percent on rate increase.

So they continue to grow. I'm very excited about what's happening on the Star side.

And that's -- on Star, they averaged about 340 trucks in the fourth quarter. That additional 50-truck expansion is not expected to go into place until -- fully until around July. So that's not an immediate 50-truck increase to our dedicated fleet, but it does start -- it should be that big by July.

And another thing that's interesting on the Star that you've got to consider when you look at the pricing there, it's like their two largest accounts, one being that it is talked about adding 50 trucks -- in the process of adding 50 trucks over the next few months. Both of our top largest accounts with Star -- to give you an idea, their fuel base is about a $0.20 a mile increase in fuel versus the rate. So like these 50 trucks are a lower rate with about a $0.20 a mile higher fuel charge that we have with them.

So their rates can be a little misleading -- flat to down, but the fuel side of it explodes. And that's where they make up -- the two together do extremely well.

Okay. That's helpful.

And then just one other question. This kind of goes back to your outlook for 2016, but with all of the operational improvements that you've done over the past couple of years and you have realigned your customer base, what is your comfort level that you can earn a profit in Q1 2016? I know in the past years, sometimes you have had a loss in the first quarter, but what's your comfort level with generating profit in Q1 of 2016?

I feel extremely confident that we absolutely will do that. I think that we talked about the first quarter and you are -- somebody was saying that Swift was saying the same thing and I agree with all that.

There's no doubt the last three or four or five months in my mind since the middle of August, whether the economy has been in an official recession. Not trucking has been in a recession. It does -- the production has been in a recession. So there's been a lot -- inventory type reasons that have caused trucking recessions. And so there's no doubt that I'm very proud of how have we been able to react. I think it shows some proof in the last three or four months of how our model has changed dramatically over the last four or five years and that it is not the same Company.

Yes and (technical difficulty) has been is that the industry is going to go through storms. It's going to rain on everybody. And the thing that I want to make sure is that when it does rain that we also go through the rain and we don't get in a hurricane. And in times past, we would get in a hurricane and not -- when everybody else is in a rainstorm. And I do think that we're there. I think that we are right there with the whole industry going through whatever we're going through. And I actually think that we've got some great opportunities out there to supersede even our expectations as it relates -- as I think about some of the e-commerce that is exploding as we all know that right in our bailiwick now these expedited team size.

When I think about the improvements that we will continue to make on the SRT side because you're right, somebody -- one of the analysts said a little while ago is that the refrigerated side is not getting beat up as bad as the dry side. And that's true. And we will continue to benefit from that.

So dry got more pressure on it then the refrigerated side and we will continue to make progress on the SRT side. So I see that as some good opportunities that could come flying through the tunnel as we exit the tunnel.

All right, thank you for your time this morning. Appreciate it.

Scott Group, Wolfe Research.

So why don't you just maybe start with just giving a little bit more color on the market? I know in the press release you talked about generally it's still soft in January but maybe can you help us think about geographically and then end market-wise, if there's anything that's doing particularly good or bad within that.

Hey, Scott, it's Joey.

I think -- I wouldn't say there's any particular geographic region right now. Any of the products that I would say is strong, which I think kind of talks to what David was mentioning about the freight market right now. There's some that we had seen that I would say is not unusual, but I would say is weaker than the others. Probably the biggest one that for us that we always watch is the West Coast and how it's doing. And -- because it's kind of critical for not only our expedited side but our refrigerated side as well. And -- so it's pretty rough there for several weeks.

This week, better. I would say better. East Coast has been okay -- I would say okay market-wise. Southeast is been pretty soft which is an unusual this time of year. The Central South has been okay to fair. And in the Midwest is kind of unpredictable I would call it, right now, would be the term I would put around it.

As we get inside the model, as we look at the three pieces between expedited, refrigerated, and dedicated. Dedicated has been -- it's dedicated. And so once you get through holidays in different times of the year, it's bounced back to where it should be, but then you will have an MLK holiday. You'll take a step back, so I would say dedicated is the most consistent, but it should be. And then as David already mentioned, the new pieces of business that we've got, we are building into that.

So we're not frankly surprised where we are based on what we saw over the last four or five months of the year. And but it is down as Richard already said a little bit versus year ago.

Okay, that's helpful. Is there any way to breakout or isolate the impact of the e-commerce changes on just utilization in pricing? Meaning, just on more of an apples to apples basis, what do you think utilization would've been down in pricing up outside of the impact that you guys talked about?

That's something that we try to look at each year, Scott, and you get into various products and build to take that nature, but we do try to watch our base business sequentially from third quarter to fourth quarter. And versus year ago, it was pretty meaningful. I would say it's 8% to 10% type of utilization decline versus fourth quarter of 2014.

And so the impact of the e-commerce business -- and here's the way that we have been saying it. Each year e-commerce -- or peak I should say. Each year, peak has its own personality. And if you look back the last four or five, each of them had a different let's call it personality about each one. And they've been different each time, whether it's service issues, whether it's paying too much, next year respond to that. Whether it's to respond to the service issues -- the continued growth of e-commerce and Amazon's impact and not only their view of the marketplace, but how their providers look at it.

And so providers, as they begin to cap, what they are willing to do with Amazon, it throws different perspectives to other providers in the marketplace. And so I would characterize this year is being an efficient as well as the underlying base freight market was just not good. Not good.

And so -- plus, you had some provider issues between the various e-commerce providers and then the carriers early in the quarter, late in the third quarter that were sorting out that did cause the fourth quarter -- beginning of the fourth quarter to be very clunky, if you will, with a few of the providers for that marketplace. And so it was -- it had its challenges of inefficiency and -- but the facts of the matter is, it's continuing to grow 12% to 15%, three to four times faster than retail, as a whole, is growing.

And it's continuing to -- I think what we're going to continue to struggle with is the peak to peak is that velocity between Thanksgiving and Christmas, more volume is being shoved into that period of time. And there's only so much capacity available to be able to haul it.

And so as that continues to grow, it's going to continue to put pressure on standby capacity, dedicated capacity, ad hoc capacity. There's only so much that the overall freight network can manage. So it's going to be real interesting how that works, but I do believe that each year, if there's a tough year in one sense and let's say this year has been efficient, next year will be better as it regards to that. What we have seen is whatever transpired, the next year gets better. The customers do things to make it better the next year.

And so I do believe it will get better but the biggest customer in that space is growing 20% a year. And so, that's going to continue to challenge the better as they -- they provide for that.

So I don't know, it was an interesting one. And I would characterize that overall as pretty inefficient. A lot of waiting, a lot of hurry up and wait. Hurry up and get there, long-haul, short-hauls. Irrespective of that, really proud of how our organization service served us all of our peak customers this year and we did all things considered, extremely well.

I'll tell you another thing that's happened there Scott is, aside from peak, year around, as I think about the e-commerce side is that because of the hours of service rules that you can't stop the clock now from two years, I'm going to tell you these teams are absolutely -- as we probably all know on this call, they are the most absolutely demand called for are team drivers because with the inability for a solo now to stop the clock, the solos can only run length to hauls of about 350 to 400, 425 miles. The days of those solos running 500 and 600 miles over with. They just cannot do it if you have any -- if they got any deadhead to origin or any wait time, they cannot run about 350 to 400 miles and this e-commerce expedited is a lot of 500, 560, 700 -- the West Coast and Texas and long-haul and steel are number one lanes, but we are growing dramatically in that 600 and 700 mile length of haul and I don't see that changing. And that stuff is just as hot and expedited as what a 2,000 mile length of haul was for all my life.

I think one other thing I would add, Scott, that I failed to mention is one of the things that for us that we are real excited about is what our solutions team was able to do to help service the incremental capacity in the marketplace. And I think that's one of the things as we look at the future from a carrier standpoint, people know that were going to have some freight at peak time. And how we treat our partner carriers throughout the year, what type of freight we're allowing the haul, their margins they are able to make and then (technical difficulty) time. And so we were able to add quite a bit of expedited -- I mean expedited, not solo, but expedited capacity during the peak here, which that frankly was one of the things -- if you go through what Richard talked about -- there was a lot of margin improvement in our solutions team because of that. And -- that contributed to CTG's overall success.

So, that was a big change for us as we look back for the last couple of years that we are excited about. We've done a lot of post peak reviews with a lot of our larger providers. All have done very well, very pleased. Our service was very strong. And already excited about what we're able to do for next year.

Scott, we've answered very long to your question but one thing to add there or try to wrap it up maybe is that our customers are extremely satisfied with the committed capacity they were provided. And they needed each of those trucks each of those days, whether or not they ran 600 miles that day as a team or ran 1,000 miles that day as a team. It was so important for them to get that freight there on time that each of those trucks was important to the customers.

And so the service was excellent, the excitement around what we were able to accomplish for them was very strong, and I think that we've seen that as a change in the way that pricing happens for peak freight is that you have committed capacity. You have a truck at a certain price for the day. And I would expect that to continue.

Yes, that's a great -- and again, we will wrap up your question here. But you're exactly right.

There's just been a lot of changing that we are seeing in the last two to three years. And we're all talking about Amazon but it's not just Amazon. It's every dotcom e-commerce shipper that's out there. Amazon may be the big gorilla, but there's a lot of small ones that are also doing the same thing and that is I think as long as somebody is absolutely dependent upon me and you getting on the computer on whatever day we decide to get on the computer and press the order button, that thing flows through to the carrier of us -- them not knowing, us not knowing, cancellations during peak season being high because they don't know that Chattanooga, Tennessee or New York City is the one that's ordering the commodity or the product until we press the button and the model is, I need trucks. I don't know where they're going, I don't know when the load is going to be ready. I need trucks.

And they are buying the truck and then we have to react to that purchase of that truck 24-7 all day long when it's ready, and then it's hot. And it won't be hot until the load is ready. So again, that's three guys answering one question.

You got another quick question, Scott?

I won't ask you guys to repeat the answer there. One last one, hopefully quicker. So we're now -- we've been in this lower oil price environment for longer now. Is it starting to have an impact on intermodal conversions and are you seeing business come back to your longer haul over the road business from the rail?

Yes. There is no doubt that we are seeing that. We are seeing some of the -- in the last few months and maybe it's a testament that you could paint a picture -- the freight environment could be worse than what it was, but we have seen some of the LTL business that we do a lot of that was intermodal, that is going OTR. And so, that has been helpful from our standpoint.

But there is a lot of freight or percentage of freight in the low environment that's been converted to OTR.

Okay, thank you, guys.

Nick Farwell, Arbor Group.

Just a quick follow-up on some of the questions that were asked. You delineated the impact for the fuel hedges in the fourth quarter. Could you remind me what the full-year impact was? Using the current tax rate, I came up with $0.14 in the fourth quarter.

That may not be accurate but if you could give me some idea if it's either aggregate dollars or earnings per share.

Yes, it was about $1.6 million. I believe we had it in our release for the year-over-year for the fourth quarter alone. It was larger than that -- each of the three previous quarters, I think north of $3 million. So I think overall for the year it was closer to around $0.30 to $0.33 a share of impact to it.

Okay. And looking out, could you talk a little bit about your exposure looking out into 2016 and beyond and tactically how you are -- if you are changing your fuel hedging program?

Well, it's basically a similar strategy where we locked those in about two years in advance of purchase. And so, in 2015, we had approximately 12.5 million gallons hedged at an average price of $3.48 per share -- $3.48 a gallon, sorry. In 2016, we have a few -- a little bit fewer gallons that at close to -- at 12.1 million gallons hedged and the price goes down from $3.48 to $3.27 a gallon. That's approximately $3 million less operating expense that is worth about $0.09 or $0.10 a share.

But then in 2017, we have 12.1 million gallons hedged and the price dropped from that $3.27 number in 2016 all the way down to $2.55. And so that's about an $8 million improvement -- operating expense improvement which is closer to $0.27 a share.

So that's the big number, it really comes in 2017. And so far in 2018, we have approximately 7.6 million gallons hedged at about $2.41 a gallon, so about $0.13 a gallon less than what we have in 2017 and some opportunities may be to lock in some more at lower prices than that.

Yes. Is there a -- to what degree have you considered either recognizing those losses and going neutral or changing the commitment looking out over time?

Well, not a whole lot of thought around locking in those and taking the losses and going neutral. Because we believe that we're still -- make a nice profit and we still have other things, improving fuel economy and things like that that make up for some of that hit. But we have looked at possibly reducing the percentage that we hedge.

We have been hedging around 25% to 26% of our fuel purchases each year since around 2006. That was relative to -- the fuel surcharge recovery percentage we get is around 72% to 78% or has been over those years. And so, we were basically saying any naked fuel purchases we wanted to put in a fixed cost on, so that we worked at the whim of the market related to fuel and we could price our services accordingly, and feel comfortable that we can make a profit on the fuel price that we had settled on for each of those years.

Looking forward and then those times are a little tougher for us. We lost some money during those years. We were closer to breakeven. Now that we feel more comfortable with our business model, we may be willing to take a little more risk on volatility from quarter to quarter. So, we may reduce the percentage of hedges that we put in place and have a little more naked percentage of our fuel that could be at the whim of the market, but not too much. We still feel comfortable having most of that fix.

And another way also on that, Nick, is that I've got to believe that probably we are vulnerable in 2016 on the number that Richard just gave. But stuff that we've got hedged in 2017 and 2018 are almost current market conditions. And I don't think there's a whole lot of -- I don't think there's a lot of downside to $28 a barrel oil.

I think it's just the opposite. I think there's more upside. It only takes one bomb going off somewhere in this world where we're not going to have $28 a barrel.

By no means I'm not being critical --

Oh no, no, believe me, we've done the exact same thing you're doing (technical difficulty). We think about all the time on that and there's no doubt two years ago when we were doing hedging in 2016 and 2017, hey, are we making the right decision? I feel -- for 2015 to 2016, I felt confident that even the market itself because we went probably seven or eight years and it was the opposite of that where it was performing at 2015 and $0.20 a positive EPS (technical difficulty) said there that it took a hit.

But I do think over the next short-term couple of years that the numbers look pretty good and give us the protection on the upside, if something goes crazy.

Yes. One other quick question on that, David, and that is to what degree do your customers look through your hedging program to look for committed capacity and stability of pricing? Is that part of the pricing decision when you discuss it with your key --?

No. None at all. None at all. Some of our customers have hedged their self on their transportation calls but none where it says, hey, let's talk about you individually. Have we ever had those conversations over -- since 2006? Two or three times, but nobody has ever really got serious with it.

Joey, you made a comment that the early part of the fourth quarter, the e-commerce for the customer base was clunky. What do you mean by clunky? What were you telling us?

That between some of the providers, there was contract negotiations going on between some of the providers and particularly Amazon and how that all sorted out. We saw some freight movement between providers.

And so, what it did early in the fourth quarter, and it's all (technical difficulty) maybe couldn't recover fast enough and it kind of got them slow and then there was a tough recovery period through that. So that's what I was meaning is it's that. That was an issue early on in the fourth quarter and seemed difficult for one of the providers to kind of get back over the hump for that as we saw it throughout --

So if I understand correctly, it might mean -- I'm not saying this is the case by any means because I don't know -- it might mean that the commitment from Amazon to UPS increased and diminished at FedEx, you had a greater commitment to FedEx and you had to reposition that equipment to the utilizer in this case in my analogy UPS?

Or just opposite and all that is true.

Okay. Whatever, I'm just throwing it out there. Okay. And then can you talk a little bit further about the impact of Amazon's decision to control more and more of its own delivery and their entire logistics strategy? And do you see that impacting patterns looking out the next couple of years given how important it is to the fourth quarter?

Nick, your question is our question. On all this and again, it's not just Amazon but it's all of them, but we're talking about Amazon because they are, again, the big gorilla. We've got a meeting up there. We've got a meeting actually this Friday and we meet all the time. But we've got a big meeting this Friday and then we've got another meeting in about three weeks up in Seattle to discuss peak.

I guess the positive side as you think about the Amazon world is that they are growing so dramatically that it's hard for anybody to keep up with what they're doing in the marketplace. And they need every truck that they can get their hands on.

That said, it makes you wonder five, 10 years down the road, what is their model and what does it look like. I think at the end of the day, they cannot have -- there's 3 million CDL drivers and I don't think they're going to have all of them. Even if they went to their private fleet and said give me 3 million trucks, then I going have all the trucks. So I think there's going to be in need, a big, big need for their providers to give them the trucks.

And to me, as long as we are the number one provider and we're the number one service provider and we are right at the top of it in terms of service as well as volume, I think that we will always have a chance to win big in that environment. So I will put us up against anybody to come through the wash, because they're not going to control everything they've got.

Now, what changes? They've got sort centers now, they've got this, they've got that. We're servicing all of that. Who knows where all that ends up and I read as much as you read and I don't have the ability to talk to Jeff Bezos direct but all the people are talking about I feel confident they need our trucks.

And it looks like so far what they're looking at doing is supplementing the capacity that there LTL providers can provide them. It doesn't seem to be impacting the long-haul carriers --

To give you an idea on those 1,000 trailers or whatever. I heard about that -- 2,000, 1,000. I've heard all those numbers.

Let me tell you, during peak, know what? They need 4,000 of them. It's either that or they need to go out like they did and rent 5,000 trailers because we cannot supply the amount of equipment that is needed for 15%, 20% cancellations and people calling us at 3 o'clock in the morning, 6 AM in the morning, 10 AM in the morning, they need five trucks, 10 trucks, 12 trucks, it's a moving target of the load is ready, your trailer on the inbound has not been delivered yet. I've got to start loading the outbound, and so the best thing they ever did is going out and buying 1,000 or 2,000 trailers.

I think, Nick, the other part to think about is for all of us, them and the carrier base is carriers run a business 52 weeks of the year and so we don't run a business for six to eight weeks of the year. And so whatever you do in those eight to have enough capacity to service that need, there's another -- whatever that is, 44 weeks of the year that you've got to make sure you got business to keep your providers busy and happy and challenged. And so that is some of the -- that's a lot of the dilemma is that as we, as consumers, continue to get evolved through this and no ramifications at all for being able to order four days, three days before Christmas and expect to still get it by Christmas, and that volume continue to grow, there's no cost to us to have that ability. It's only going to continue to compound the problem.

We're trying to shove an elephant through a water hose, if you will, and so that's going to be the ultimately the challenge. We can rally for that, but what do you do -- what do the providers do for the other 44 weeks of the year?

Yes. So that clearly bespeaks a premium pricing in how that -- whether it's Amazon, FedEx, or UPS and FedEx and UPS and others clearly understand it goes in the logistics business. Amazon is probably appreciating that to some extent. And so when you look back at your experience in the last couple of years, are you getting the premium pricing for having that -- setting aside that capacity in delivering?

We are very happy with (multiple speakers)

We've just got to make sure our drivers stay happy.

That's right. It's more of a driver -- make sure we are paying them correctly.

That's become an issue because as the network is [inefficient], drivers don't like to sit, drivers don't like to wait. They expect -- they want to work, they want to run. And so that as time goes by is becoming more of the challenge tactically is how do you keep your driving force motivated, challenged, compensated for the quote, hurry up and wait.

And we make sure and keep them compensated even when they are not running when we are getting paid for committed trucks. But they still prefer to be running. They like to work. They are great workers. And so they expect to be running to earn the money.

Yes. One other quick thought in that is you, you -- meaning the management team -- have done a magnificent job the last three or four years in improving your operating ratio and rationalizing the business in many dimensions.

How would you describe how you can continue to improve the OR in to, say, the mid to lower 80s? Is that an objective you think is reasonable or -- I should ask you different. What you think is a reasonable OR on an annualized basis looking out over time and how do you get there? Roughly speaking, how do you get there from here?

Our goal is to compete with the best in our industry. And we do see that as -- we see that as a target. But we see it as a target that we can achieve and not one that we're just hoping one day to achieve and over what we've done the last four or five years. And I think the best thing that we've ever did in our career is coming up with our strategic planning that we live by and that we operate our companies by and making good and hard decisions when they've got to be and when the numbers dictate it and looking at every decision on return on invested capital. And not just making the decision based on what we think it is but then we're looking at it on a monthly -- or quarterly basis and holding ourselves accountable to whatever the numbers are showing. Backing off, going harder, faster, and those kind of things with all those kind of decisions.

And the strategic planning of trying to make sure that we are bringing value to our customer. How do we bring value? That is what separates us from just being an ad hoc carrier in the marketplace and one of the 1,000 is that are we truly bringing value and what is our differences to our customer? Because if we are bringing value, then they will pay us for the value that we are bringing.

So (technical difficulty) we are a customer operation driven company and we do see our ability to be able to get down and compete from an OR standpoint with the best providers in this industry.

And it's going to be again -- from a topline standpoint, it's going to be focused. It's going to be return on invested capital. It's going to be looking at every cost item. We've got to be the lowest cost provider as we possibly can be. And whatever that means, whatever decisions that is from whatever, we look at -- continuously look at those.

So, it's making sure even in a market that might be tough, we already talked about 2% to 3% rate increase, those kind of things. Then -- okay, but if the market is really a 3, then let's be a 3. I don't want to be at 1 and the market is at 3. And if we're providing excellent service, then we should be able to get paid the best that we possibly can by then holding ourselves accountable in the results accountable to that. So hopefully, that helps unique.

Hey Nick, one thing I would like to say. I think that one of the things that we're trying to change paradigms on it's not as much focus on operating ratio but focus on return on invested capital. So as our solutions subsidiary grows and [HOR] did phenomenal this year, 93, 94 OR for a brokerage business is really strong. Once return on invested capital is really good. Really, really, really good at that rate.

So as that grows, it's going to put pressure on the OR, but we're excited to grow our bottom line return on capital. And so that's one perspective we're spending a lot of time focusing on, even within the asset side. Where is the returns? Grow this one, shrink that one if we have to or greatly improve that one.

But if you go back to OR for second, there's a couple things that I would point you to, all that being said, is, A, and we've already talked about it, our refrigerated product. As it continues to improve from let's call it mid-90s down there's going to be a lot of tailwinds there that will move because it's a good-sized division of group. And then B, as we already talked about, the hedging improvement is significant, especially once you get out into 2017.

So three things. A, we're going to be very focused on returns on invested capital. OR is important, but it's not the only thing. It's flat. For every dollar you invest, where is your biggest return? B, as refrigerated grows or improves, and we feel really good about our improvement plan there. That will drive some margin improvement. And then C, the hedging impact is significant which we've already talked about. But as that, quote, cost weaves its way out, it's going to be very meaningful but both to OR and margin.

So that's kind of the path that we are pushing to, to both improve the OR, but more importantly the return margin.

So Joey, just -- I'm sorry taking this time, but just to clarify that, if you use Knight, and I'm just picking a name. If you use Knight in a low 80s OR, to me, that's a much different model -- we all know that's a different model. Because you are dominated to a greater extent by long-haul.

So one of the topics we've discussed for years is that as the long-haul capacity diminishes and you guys enhance the long-haul side of your business since you are -- you could call yourself a leader in that space, you should get inordinate returns in long-haul which should dramatically be reflected in improved investment capital, which is really a balance sheet matrix, not an income statement metric.

I realize the two are connected with our -- intricately connected, but the point is the same. And that is you may not see yourself -- sorry, you may not see yourself in an OR 82, but you can see a vast improvement in invested capital as your long-haul business captures the economic returns that you deserve.

And I think -- Nick, it's that -- to your point and you've been following the Company for almost 20 years. And I think we are very -- what that -- we've talked about 20 years is now happening on that expedited team side. The returns are the best I've ever seen. And numbers we've never seen. And they are continuing to improve.

So we don't get in and disclose all the various margins of all the various products but just let me say the expedited return is finally getting -- and it's continuing to improve what it should deserve.

Okay. I've taken a lot of time. I thank you very much for your -- answering the questions.

At this time, I'm showing there are no further questions.

All right, thank you, Della. Thank you, everyone, for listening on our call today and we will talk to you next quarter. Bye.

Thank you.

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