Covenant Logistics Group Inc (CVLG) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for your patience in holding. We now have your speakers in conference. (Operator Instructions) It is now my pleasure to turn today's conference over to Richard Cribbs. Sir, you may begin.

Thank you, Brandon. Good morning. Welcome to our fourth quarter conference call. Joining me this morning are David Parker and Joey Hogan.

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 review 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 statement 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 for the quarter were our asset-based divisions' revenue, excluding fuel, decreased 2% to $144.8 million, due primarily to a 1.1% decrease in average freight revenue per tractor. Versus the year-ago period, average freight revenue per total mile was up $0.06 per mile or 3.3%, and our miles per tractor per week were down 4.2%. Freight revenue per tractor at our Covenant Transport subsidiary experienced a decrease of 1.8% versus the prior year quarter, and our Star subsidiary experienced a decrease of 5.4%, while our refrigerated subsidiary, SRT, experienced an increase of 4.8%.

The asset-based division's operating costs per mile, net of surcharge revenue, were up approximately $0.013 per mile compared to the year-ago period. This was mainly attributable to higher employee wages and purchased transportation expense. These increases were partially offset by lower net fuel and insurance costs.

We recognized a loss on disposal of equipment of $0.8 million in the fourth quarter of 2017 versus a loss of $0.7 million in the fourth quarter of 2016.

The asset-based operating ratio was 91.9% in the fourth quarter of 2017 compared with 93.4% in the fourth quarter of 2016.

Our Solutions logistics subsidiary increased revenue by 42.6% versus the year-ago quarter. Purchased transportation increased as a percentage of revenue, while other operating expenses decreased as a percentage of revenue, resulting in an operating ratio contraction to 91.5% from 90.4% in the year-ago quarter. With the increased revenue, the result was an increase of operating income contribution to $3.1 million in the current year quarter from $2.5 million in the prior year quarter.

Our minority investment in Transport Enterprise Leasing contributed $0.8 million to pretax earnings or $0.03 per share. The average age of our tractor fleet continues to be young at 2.1 years as the end of -- as of the end of the quarter.

For the year ended December 31, 2017, total indebtedness, net of cash and including the present value of off-balance sheet lease obligations, has decreased by approximately $6.7 million to $220.1 million.

The main positives in the fourth quarter were SRT operating profitably for the quarter; two, a 10.4% year-over-year increase in the average tractor fleet at our Star subsidiary; three, year-over-year revenue and operating income growth from our Solutions subsidiary; and four, our tangible book value per basic share increased 24.4% to $16.11 from $12.95 a year ago.

The main negatives in the quarter were, one, a 1.1% decrease in average freight revenue per truck versus the same quarter of 2017; and two, the net operating costs increase on a per mile basis.

Our fleet experienced an increase to 2,559 trucks by the end of December, a 9 truck increase from our reported fleet size of 2,550 trucks at the end of September. Our fleet of team-driven trucks averaged 912 teams in the fourth quarter of 2017, a 5.7% decrease from 967 average teams in the third quarter of 2017.

Although freight demand was extremely strong throughout the quarter, the 460 basis point decline in the team percentage of our truck fleet to 35.7% in the fourth quarter of 2017 compared to 40.3% in the fourth quarter of 2016 resulted in a year-over-year reduction in our overall truck utilization during the quarter.

Earlier this month, to combat about our declining team fleet, we announced a new $40,000 Teaming Bonus program at our Covenant Transport expedited subsidiary aimed at teams and solo drivers willing to convert to teams. The bonus is payable upon driver teams reaching certain mileage milestones over their tenure, and we expect it to assist with both the formation of teams and retention over time.

Although the new program does not go into effect until February 1, we are encouraged by the initial response from both our current and potential professional drivers.

We continue to evaluate the most effective level of participation in the peak season and the manner of allocating our assets and coordinating third-party capacity. As logistics needs continue to evolve related to e-commerce and omnichannel growth, the duration of what is considered peak season has shortened over the last 2 years and now is approximately a 5-week period beginning the week of Thanksgiving and ending on Christmas Eve. The shortened duration reduces the revenue opportunity versus previous years.

Additional peak season challenges include procurement of temporarily increased trailer pool needs as well as additional logistics costs for transition and placement of trailers, unpredictability of shipper cancellations; expanded operational employee staffing and the volatile pricing of acquiring outside carrier capacity. Even though remaining our most profitable quarter of each year, the results of the past 2 peak seasons have been disappointing, especially considering the planning time and strain this period places on our organization and creating carryover expenses into our first quarter each year.

As we plan our 2018 peak season, we remain committed to provide peak capacity for our customers. However, we'll need to challenge our pricing models to ensure we are appropriately rewarded for our efforts related to this valuable annual shipping time.

For 2018, we are forecasting sequential operating income improvement throughout the year. We believe the combination of an improving economy; tightening truckload supply dynamics; industry regulatory changes, including the ELD mandate and its enforcement; depleting inventories; year-over-year net fuel expense savings from our improved fuel hedge position; and further operational progress at SRT should deliver increased pretax earnings for the full year of 2018.

In addition, we expect earnings improvement from the estimated favorable effective tax rate impact from the Tax Cuts and Jobs Act. We are currently estimating our 2018 effective income tax rate to be in the range of 24% to 27%. We expect year-over-year average freight revenue per truck to be positive by a mid- to high single-digit percentage, inflecting more positively later in the year as a large portion of annual contractual rate revisions are implemented during the second quarter of 2018.

Our expectation of positive year-over-year pretax income includes higher employee wages for each quarter. We also expect a decline in the operating income of our nonasset-based logistics service offering to partially offset the forecasted operating income improvement for our truckload service offering.

Within the nonasset-based logistics service offering, we expect some margin deterioration resulting from higher purchased transportation expense, and we have planned investments in strategic employees as well as a new transport management system to enhance our supply chain services and growth potential.

From a balance sheet perspective, with net CapEx scheduled to be below normal replacement cycle, along with positive operating cash flow, we expect to further reduce combined balance sheet and off-balance sheet debt over the course of fiscal 2018.

Thank you for your time. We'll now open up the call for any questions.

(Operator Instructions) The first question will come from Jason Seidl with Cowen.

A couple of quick ones from me this morning. If you look back at peak season, obviously you've been trying to get it right, especially with your one big customer who likes to try to take a lot of capacity. Where would you have pushed rates to in June versus where you did? What would be that differential in terms of having an acceptable return for all the work that you guys put in?

Well, that's a good question. We got -- we probably, Jason, got about 1/3 of our business committed I think, in the -- probably the second quarter call. Anyway, back in May-ish time frame, we had probably 30% to 40% of it committed at that time. Keep in mind, we all didn't know that the freight environment was getting better until that July/August time frame, when we said maybe something is happening out here. And so we were able to take about 30% or 40% and get it done in the second quarter. And we didn't get the other, let's just say, 60%; we didn't get the other 60% done. We had the load volume committed and an idea of what capacity was going to be needed, but pricing came about and committed around the end of October, the 1st of November.

So it wasn't like that we were waiting until June, July to determine what the rates were going to be. We were able to get the rate. And quite honestly, as we look at August, we felt like things were picking up. September, the hurricane hit and capacity tightened very, very deeply at that time. And then we went through October with the hurricanes, still the aftermath of the hurricane. And at that time, even though the last billing we had was that August, we think something -- I'll never forget sitting in August saying, "Guys, I think that we can go out and I think the opportunity is about a 3% rate increase in the month of August." So that was the radar that we went on thinking that we could get that. And then the hurricanes hit, and who knows? Outside capacity went to x and things just continue to get tightened.

At the same time, we were still committing the volume and the pricing to our customers in the, say, first week of November, and we were using that September thinking the hurricanes would be over with by the time that Thanksgiving got here. And they were mostly. We still actually had some trucks running during hurricane season in November, but most of it was out. And then you really saw the aftereffects of, I think, a bunch, a bunch of different items from the effects of the hurricane to ELD being 3 weeks away, from the economy starting to produce consecutive quarters of 3% GDP and trucks just tightening that -- all coming in effect in the month of November.

And so it was then that we went out to the marketplace around the 20th, 15th, 20th of November after everything was set in stone and agreed upon. And at that time, we realized that the capacity -- to be able to get the capacity that we were going to need during the peak season was dramatically up, much greater than what we had ever anticipated and actually were hauling quite a few of our peak loads at losses to make sure that we were taking the commitment that we just made 3 or 4 weeks ago.

Now that said, I'm going to tell you, that game won't fly no more. That game -- and when I say that, Jason, let's make sure we realize that e-commerce believed that omnichannel follow -- the big guys, the big box guys trying to figure out how to attack somebody getting on the computer and ordering something to come to their house, I mean, this is kind of -- been growing every year. But kind of the 4, 5 year effect that we started off really 4 years ago, 3 years ago dramatically in that -- in the "e-commerce" that we're calling it. And it has just been something that has absolutely been evolving.

And so for the -- this year, we missed the pricing versus what the capacity that we were going to have to go out into the outside and get. And we basically spelled out in our release there the issues that we really saw. And there's no doubt that you can absolutely, during the course of this year, grade us on that couple of paragraphs that we got in this release. And that is there's a lot of cost that has evolved in the last 3 or 4 years as a relation -- as it relates to the time frame of Thanksgiving to Christmas has gone down to that 4.5, 5-week period of time, where they are trying to throw a lot of freight into that environment, and there is just a lot of cost that we have got to capture -- recapture from our customers.

And I think most of the other -- our e-commerce partners that we do business with, our customers, a lot of them have reacted in the last couple of years to their own e-commerce world and said pricing is going to be x during this time, and we got to do things better during this time. And we got to evolve also, not just us, but the entire truckload industry has got to evolve. We're probably, if not the largest, we're definitely the top 3 largest, I would say, during the peak season. And we just got to make that happen, and I think that we'll be very successful. So I know that was a long answer. I hope I answered a lot of your questions.

I think, Jason -- this is Joey. I think the rates, if we would have waited to price closer to the season -- if we could have. And that's a big question. If we could have, I think our rates would have been 5% to 10% higher.

5% to 10%? Okay. Well, listen, David, that was great color and, Joey, thanks for adding that in.

I guess my next question is going to be you called out I think a bunch of some ongoing costs, right? So you increased your team peak season compensation. Is that going to carry over into 1Q?

And then you said that there's going to be some additional carryover expenses into 1Q as well. And then you just had a new bonus sign-on. So I'm trying to think how we should look at the year as it progresses. Is this going to be a first quarter where it's positive, but in terms of the year-over-year growth, that it's most likely is, if the market stays like it is, not going to have anywhere near the growth of, say, like the second half of the year that should have, because you're not going to really grab some of those contractual rate increases until afterwards, and you're seeing some upfront expense in the first half of the year?

Jason, on -- this is Richard. On the peak cost being -- kind of trailing into the first quarter, what we do for teams in that time period is we do a special bonus for keeping them -- basically keeping them on the road during the heaviest time periods that we need them for the peak season. So that's something we do each and every year. That cost doesn't really trail into the first quarter.

The costs that do trail are some of the operational headcount increases that we do for the peak season that usually doesn't find its way completely out of the system until late January. Also trailer -- the additional trailers that we have in place for our customers during that time period, it takes us a little while to get them transitioned out of our system. Especially when freight is as strong as it is right now, it's even harder to move the trailers and get them in position to trade or sell or what have you, or turn back in to companies that we lease them from. And so that's the kind of trailing costs that flow into the first quarter that we were talking about there.

As it relates to the driver pay increases, you have already seen the Teaming Bonus that we announced. That goes into effect February 1. And so there is some additional driver wage increases that'll take effect really before we get all the contractual rate increase that we expect to get as those get put in place in the second quarter. However, we also announced today there's a release out this morning, you probably haven't seen it yet, that we increased driver pay at SRT, the largest driver pay increase we've had in its history. And we're excited about that and excited what that will do for our driver force there. But that cost will again hit us a little before some of the contractual rate increases that we expect to see in the second quarter.

So there is a bigger expectation for improvement as the back half of the year comes along. We also noted that we expected some margin deterioration at our Solutions brokerage business. That's especially true in the first half of the year, again before we can pass those costs on to the customers as well as we expect to do in the back half of the year.

So all those things said, it is lining up for a stronger back half than it is for the first half. But we still expect improvement in the first half of the year beyond what we made last year and to a pretty heavy degree, even without taking into account the impact of the Tax Cuts and Jobs Act.

Okay. I want to drill down on 2 things, and then I'll turn it over to somebody else here. You said the SRT pay increase was the largest in its history. Percentage-wise, what was it?

Well, I don't have a percent, but it will be up to $0.06 a mile for the drivers but not $0.06 a mile across the board.

Different buckets, Jason, regional and OTR, dedicated, et cetera.

Okay. And did you -- you increased team, you increase SRT. Did you increase any of your non-team, non-SRT drivers or no?

They will be increased as the year goes along. There's other things that we're looking at for all the fleets, so there'll be additional changes to the ones not affected in these first 2.

A couple other things, Jason, to keep in mind. As we know, the driver market is moving rapidly. And so typically, what most carriers do is address the issue with your customers, ascertain what your increase is going to be, and then you make changes to your compensation. Very rarely in the industry do the carriers go out ahead of that. This is one of those times where you're seeing carriers do that. The reason is, a, the market's moving, and so you've got to respond and decide what you're going to do; but, b, I think that what it's telling you is the market's doing very good about being able to "cover that."

Best of all, I would say our customers have been very receptive to what we're trying to accomplish. And so I think as -- obviously we're on the 30th of January and the year's green, but as we start out the year, we're very encouraged by how our customers are responding to that initiative for all our companies. And I think that we're going to be able to at least get those increases covered, plus some, as we move throughout the year. So again, this is rare, what's happening right now as far as the driver market, and it's only happened twice in 20 years for us. So it's rare that we're doing this. But I think some of it is twofold: a, you need to because the market's moving; and, b, I think we feel very good about the prospects to be able to "cover that cost."

I think the -- I think your customers are starting to realize that the asset you provide is actually the driver, not the truck itself, at least in this market.

Richard, on the Solutions side, could you remind us what percent you guys are contractual versus transactional?

Well, yes, part of our business that we do there is -- probably about 40% or so of that is actually, we call it throwing it over the wall, from our asset-based businesses. And it's freight that already has a contractual price, and then they work to find the best price they can to run that freight. So there's a large piece of it that's that. So I'd say probably 40% to 50% ends up being contractual, and the rest is not.

The next question will come from Scott Group with Wolfe Research.

So if we just take everything that you just went through with Jason, what do you think all-in sort of driver pay is up in '18? And then what do you think your rate per mile is up in '18?

Jason -- I mean, Scott, I think driver wages are going to be up 6% to 8% in total. If you kind of think about it on a per mile basis, what it is and what we're -- our estimates are and what we've just approved and what I think will happen, and so it's large as far as how it impacts it. Truckers think in per mile, but if you think about what it is relative to what your base cost is, it's going to be I think on the low side 5%, and it could get as high as 7% or 8%. I think we need 3 or 4 years of that in a row to "make an impact for the future." But we'll see if we're able to continue to do that.

We participate in a lot surveys as far as the truckload contractual pricing for this year. I think I agree with -- personally with what you're starting to read. I think you're going to see high single digits on the contractual side. And I think it's going to -- the key was going to be how the first of the year starts out. And everything kind of builds sequentially off of that, again, excluding any major changes in the market throughout the year. And so I think how we're starting out the year is encouraging, and I think it gives us some confidence that we're going to go on [and] push the higher end of that. And I tend to believe that rates are going to be up in that 6% -- I'm going to put a wide range around it, 6% to 10% range for the year. It needs to be higher and gives us some ample room to continue to move it forward and adjust the wages as we need to adjust it and still improve our margins.

So if we get 6% to 10% pricing, call it we get 8% price, and we get 6% to 8% driver pay, what do you think is a realistic margin improvement for '18? I know you've got some headwinds on the brokerage side that you talk about. So what do you think is realistic kind of full year margin improvement?

Yes. I think on the asset-based side, we're -- we have a good shot of 250 to 350 basis point improvement, a little contraction on the brokerage side. So it probably gets us to 200 to 300 kind of numbers.

And do you expect to grow the fleet at all this year?

Very small.

Very small.

If at all, very small, and just because we're seeing some opportunities on the dedicated side especially. And then we hope to get our team count back up to where it was earlier in '17.

I mean, where the growth is going to come, I think, if we just sit here today, practically speaking, is the dedicated opportunities are just falling out of the sky. So how fast we grow and which ones and what's a good long-term opportunity. So I think that we're going to keep -- or continue to keep our pedal down because it addresses 2 issues, volatility of earnings, number one; and driver needs, number two. So that's a sweet spot, and we're going to find the capital if we have a good, long-term piece of business that makes sense for us. So that's going to continue to grow.

As Richard said, we'd like to grow our team fleet some more, kind of get back to where we were in '16 would be a good goal. So if we're able to do that, let's call it 100 trucks. If we're able to do that, we'll find the capital. Other than that, you'll see us moving capital around inside the fleets to achieve those first 2.

We are seeing some good positive results from -- in our class sizes for our recruiting. So early in the year, probably too early to make a call on whether or not that has to do with what's going on with ELD regulations. But so far, the class sizes have been good.

Okay. And then just last thing real quick. Werner in their press release talked about January much stronger than normal. How would you guys characterize January?

Yes, I agree with that. I'm very, very happy with what I'm seeing out there, Scott. January is a good month. We got a lot of great things that are happening out there. And I couldn't be any more excited than I am for 2018.

And can you tell if it's weather, if it's demand, if it's ELD, and do you have any view on that?

No, I don't. I mean, I don't. It's not weather. The weather had 1 week -- a couple of weeks ago a negative effect, as we all know. But other than that, I really believe it's just the economy is doing extremely well. And as I've said before, there's a lot of freight in a 3% GDP versus a 1.5%. And I think we've all found that out in the last couple, 3 quarters, is that there is a lot of freight. And then -- so we've got an uptick in GDP, which I think is going to get greater in GDP as we go forward. And on top of that, we've got a reduction of miles on whatever it is, whether it's 2% or 15% of ELD reduction of miles. And those 2 things are going to keep a tight capacity.

I was out on the road last week, and I think I saw 15 customers, from gigantic customers to small customers, and I'm here to tell you that you couldn't get 5 minutes into the meeting where they are just absolutely concerned and deeply -- I don't want to use the word begging, but deeply wanting capacity. And so it's just very, very interesting what is happening out there, but that is really the mood. I never like to say the word never, but I don't know -- it's been many years since I sensed what I sensed last week from a lot of customers.

The next question will come from Brad Delco with Stephens. (Operator Instructions)

Maybe first question -- a lot of questions have been answered. But Richard, for you, you mentioned a little bit of reduction -- or less optimistic capital budget plan -- I shouldn't have said optimistic, but should give you an opportunity to pay down debt. Can you quantify what kind of debt paydown you would like to accomplish this year?

I think we have good shot, barring any outside additional investments or anything that can come up, I think we have a good shot to pay $40 million to $60 million of debt down in the 2018 year.

And all on balance sheet?

Well, some of it could be off balance sheet. So we just kind of look at that all together. And I think in 2019, that's about to all be on balance sheet anyway. So we just kind of look at it as one.

And then when you think about your fuel hedging program, 2018 relative to '17, how much of a tailwind should that be for you from an EBIT perspective?

Yes, it should be about $2 million across the year, and that's pretty evenly distributed across each of the quarters. So it's about $0.08 a share of positive impact to us. We reduced -- we only have about 17% -- 16% to 17% of our fuel purchases hedged in '18 versus the 27%, 28% that we had in the previous years, probably for the last 5 to 6 years. But we still get a nice benefit on the cost that we have those hedged at.

Okay. And then, David, in terms of the strength we've seen in January, how do you think relative to how the calendar falls with Chinese New Year, how is that impacting first quarter? And would you expect things to lighten up a little bit here before we see spring activity start to pick up? And based on I guess that travel that you've had with customers lately, when do you think we start seeing lawn and garden and then beverage and then produce season really pick up this year versus maybe what we saw last year?

Yes, that's a good question. This year, there's no doubt that Chinese New Year -- it's either the 16th or 17th. I think it's the 17th of February. And so I do think that, that -- here in about another week or so that, that will start putting a little damper out of the state of California. It does every year. And then when Chinese New Year is over with, it takes about 10 days for that. So to me, here in about a week, California will start sensing pressure out there and -- on the freight coming out of there. And that will last until about the 1st of March. And I do believe that I don't think it's going to -- based on what I see out there today and based upon our freight flows out there today, I don't think that the Chinese New Year is going to have as major effect on us this year as it has in the past, predominantly because of some of the refrigerated side of the business that has grown for us out of there as well as some retail freight that we've got coming out of there, more so than we did 12 months ago.

So even though it's going to affect us, I don't think that it will be as bad. There's no doubt that Chinese New Year, weather typically in the month of February is going to be the worst time of the quarter, will be February. So I expect some major snowstorms that will come into play there. The lawn and garden type freight starts coming out around the 20th of February and goes throughout the month of March. And beverage, though, is usually about the end of the -- not the end of the second quarter but about the beginning to middle of second quarter. It's really an April, May event. And then the produce side is also -- a magic day is kind of May 15 on the produce side off the West Coast.

Florida will be the first one that starts, and it starts in the month of April. And so that -- from that standpoint -- I'll tell you another thing, though, as it relates just to freight, Brad, on that is that we're seeing a couple of things. We're seeing this what we call tweener freight, and that is that's kind of over 500 miles, even though 500 miles is almost the max on what a solo driver can do today, it's really more in that 450 kind of number. And honestly, on a 450, only allows about 50 miles of deadhead, so you better be all over the origin and not have to deadhead very far to be able to satisfactory get the 500 miles.

And so that 450 miles is becoming a number that a solo can do for next-day delivery, and we're absolutely seeing our customers that are asking about 600 miles, 700-mile length of hauls for our teams. And it's something that I think is going to continue to get stronger.

To give you an example. One of those customers I was with last week, they have freight from Birmingham to Chicago, which we do not do currently. But they have Birmingham to Chicago, which is about a 650-mile length of haul. They were paying $1,300. And today, they're paying $2,500. And that's one example that he gave us sitting there and saying, "I can't get no trucks to haul this," because it used to -- let me tell you, 45 days ago that was an overnight run. Today, it will not be an overnight run or in the next couple of months, April 1, it's not going to be an overnight run. If you want it next day, it's going to absolutely be with a team driver.

And so we just all got to make sure that we're pricing the freight correctly, because at the end of the day, our drivers are going to have to be paid. If they're going to spend 600 miles, 24 hours to go 600 miles, or 15 hours to go it, they're going to have to be paid like they're going 1,000 miles. And so the market is going to run to that kind of flow. And so the pricing is going to have to make sure that it's paying there.

I'll tell you another thing that I'm seeing just in this last month is that the smaller carriers are absolutely starting to ask the questions about time management and what is the tension. And these days of 4 hours free and $50 after 4 hours -- it may not be now -- it's starting to change, but it's going to change a lot in the next few months, because these drivers are now realizing that I'm out of hours, I'm out of hours, and I'm sitting at a grocery store warehouse or at any warehouse, and I'm running out of hours sitting here.

We're seeing in our market, from a standpoint of our Solutions group, on the freight that they are handling, and these trucks, they are just getting used to it and -- I mean, not used to it, but they're getting the realization of this thing happening. And so I'm seeing time management measurements that are starting by these guys. And I'm seeing the tweener freight that is really starting to raise its head. And anyway -- I can keep going. I just got to shut up.

I appreciate that color, David. Back to -- oh, I guess, the one other follow-up I had was for Richard. Richard, you made a comment before to Scott's question about potentially 200 to 300 basis points of OR improvement this year. I just want to make sure we understand the right base. I have a [$95.4 million] OR x fuel surcharge for '17. What are you using?

Yes. For the whole year, yes, [$95.4 million], same thing.

(Operator Instructions) The next question will come from Kevin Sterling with Seaport Global Securities.

You guys have done a fabulous job kind of describing the freight environment and what you're seeing out there. I could definitely tell the enthusiasm in your voice, so I won't dwell on that. But maybe outside of driver pay and bonuses, what are some of the other triggers you can pull to really help attract drivers? I know your -- it sounds like the average age of your equipment is just around 2 years. I'm sure that helps. But are there some other triggers that you can look to activate maybe to help attract drivers as well in addition to pay and bonuses?

Well, Kevin, if we -- if I could rattle off 2 or 3, I'd be doing something else in trucking besides this job. I think that there's a whole bunch of things. Since you asked, I was at a conference last week, and there were 6 or 7 leaders of different trucking companies having breakfast together, and we were talking about this issue. And each of us have different things that we're working on. And -- because each culture is different. Each model is a little different. A regional guy to a regional guy does different things. And so I'm not trying not to answer your question but to say we're all trying to do whatever we can do to lower -- to improve your retention and increase your quality hires.

And we've got some folks externally that are in as we speak, kind of helping us kind of look at our situation and helping us look at it maybe a little bit differently. And we'll see how that goes. It's real early in the process. But the common things -- here's the things that we know that are changing. Pay is important, but it's not as high as it used to be. I'm not saying it's #10, it's still in the top 3 or 4. And so there are other things that are extremely important that we're all focused on.

There's a generational changes. There's freight changes. So we know respect is a huge issue. Fleet manager relationship is a huge issue. We know getting home is much more important than it used to be. And so quality of life, life balance is critical.

So Kevin, I can't tell you any one thing. Specs of equipment have always been important, especially in a team operation. I think trying to make the conveniences at home more home, because they are away from home more. And so trying to bringing home to them is very important. Balancing cost and convenience is something that you do. So Kevin, it's a whole bunch of things. I wish I knew every single one of them, because I think we're encouraged by what we've seen the last couple of weeks, some of the announcements we've made. As Richard has already said, our -- we've seated probably across the enterprise about 50 trucks in the last 2 weeks. So I'm encouraged by that. I won't say it's a trend yet, but I'll take it, at a time when we need some more seated trucks. And so I think it's a combination of several things.

And to add onto that, I think if I had to pick just one item besides driver pay, which in my mind I agree with Joey that it's top 3 kind of deals, not necessarily #1, but we got to continue making strides in the driver pay. But I think what we've done in the last -- in the fourth quarter and so far in January on automatics, I think that, that's a major, a major deal. And I would -- I'd say that's #1 for us. And I think that we're probably -- with the latest trucks that we've brought in, Joey, somebody, 50%? Are we at...

By June we'll be 50%.

By June we'll be at about 50% of our fleet will be automatics. And we are seeing weekly hires on a weekly basis in the name of -- only in the name of automatics. So we're very pleased. That would be the #1 thing that I would say.

Okay. No, that's great. Really appreciate that. It just sounds like -- sounds like you guys are leaving no stone unturned to get drivers in the door, which is kind of a big part of the secret sauce that may be solving this problem.

(inaudible) Kevin. You tripped over a soapbox. It's more important (inaudible) you've got than it is to get folks in the door. You need to do both, but your cheapest cost is to keep the one you have. And so -- by far. It's not even close. And so I think if we all can get better on the retention side, it saves us a lot of money and helps us service the freight that we need to service. So if you're trying to play the recruiting game, it's extremely expensive, and you don't know what you're getting. And so if you can keep -- and that's common sense, not only driver but nondrivers. It's much, much, much cheaper to keep the one you got than to try to find a new one.

Yes, no, makes sense.

Kind of shifting gears here to my second question. Sounds like you guys had a small loss on disposal of equipment. How would you characterize the used truck market today? It seems like it's still challenged to me with maybe a little excess supply out there. And do you anticipate the used truck market improving throughout 2018, particularly if the freight environment continues to improve?

Yes, I think the used equipment market, I mean, I wish I could give you some answers, but right now we're pretty pleased with what we're seeing in that market. The folks that help us with that for us "feel as good now as they've ever felt." So that's a little concerning as far as what that means.

But as far as moving equipment, we're in pretty good shape. Our capital costs are calming. We don't anticipate huge increases and, in fact, some decreases for '18. So we've been over the hump and hopefully we're not going to go back to where we were in '16 -- or '15, I should say. But I think it's stabilized, and we've got a good shot to reduce it this year because the market is improving, a, and as we continue to rationalize our trailer fleet, we've been carrying a little extra over the last 2 or 3 years, so we're very hopeful to kind of get that rationalized throughout 2018.

So -- and then I would say, as far as the trailer market, one of the things that we are seeing and feeling ourselves because we sell a lot of our own trailing equipment, I think the reefer side has figured it out, because what David just mentioned as far as time, you're going to need a whole lot more trailers to operate in that market. And so if you have reefers to sell in the marketplace, it's hopping. And I think those that are in it, regardless of who they're trying to serve -- and we've seen it ourselves over the last couple of years. We've increased our refrigerated trailer ratio as the used market for reefers is really improving rapidly. And it's probably just because of that issue.

Time is now getting emphasized, not that it ever has, but it's getting extra emphasized by the smaller carriers. And they -- now they need more trailers to operate their business. So the trailer side is looking very strong right now. I'm pleasantly -- cautiously optimistic about the truck side right now.

The next question will come from Brad Delco with Stephens.

It just came to mind with some of those last comments, Joey. But you talked high level about kind of rate expectation. Contractual rate expectation is up 6% to 10%. I assume that was for your entire book of business. But I imagine there's quite a big difference between the expectations for rates on the refrigerated side versus dry van. So can you just elaborate on maybe the differences in the markets and what you think is driving that?

Yes, this is David. I agree with that statement you just said. You're exactly correct. The refrigerated side is -- it has got some very good double-digit numbers of increase there. And I'd say there's some great opportunity because, as we all know, the refrigerated side is predominantly, a, very fragmented; b, a lot of a small carriers are in that market; I would say, c, that the refrigerated side is being impacted by ELD much greater than the dry van side. So we are absolutely out there seeing some double-digit increases, and that's what I expect. I expect that, and I think that we will be successful in doing that.

I think on your standard long-term, committed good business that have been partners with you, I personally think that 7%, 8% kind of number is the low bar. I think that the rest of the customers after that, depending upon their operating ratio and the characteristics of their freight, I think that, that is from 9% to low double-digit numbers, whether that's 9% to 11%. And I think that equates to -- in my mind, Brad, I think that equates to somewhere in that 8.5%, 9% to 11% kind of numbers. And I think that that's what we can be successful in getting.

There are no further questions in the queue at this time. (Operator Instructions)

We'll go and wrap up the call. Thank you, everyone, for being on our quarterly call this quarter. And we'll talk to you again next quarter.

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect your lines. Have a great morning.