Covenant Transportation Group 1st Quarter 2010 Conference Call
Mr. Cribbs – Good morning and welcome to our first quarter conference call. Joining me on the call this morning is our
CEO David Parker, our COO Joey Hogan, along with various members of our management team.
This conference call will contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ
materially from those contemplated by the forward-looking statements. Please review our disclosures in
filings with the Securities Exchange Commission.
As a reminder to everyone, a copy of our prepared comments and additional financial information is available on our
website. 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:
? Despite our tractor fleet being down 3% on average during the quarter, freight revenue increased 6% to $129
? Versus year ago, freight revenue per tractor increased 9%. The first quarter of 2010 produced the highest first
quarter revenue per truck since being public in 1994,
? Growth of no less than 8.4% tractor utilization improvement was experienced at each of our three asset-based
? The asset-based divisions’ operating expenses, net of fuel surcharge revenue, declined $.095 per mile versus the
first quarter of 2009. This improvement was achieved in spite of a $.029 per mile increase in insurance expense
and $.005 per mile increase in net fuel expense,
? Our asset-light brokerage subsidiary, Covenant Transport Solutions, total revenue declined by 5% versus year ago.
Compared to year ago, during this time of brokerage margin compression, we were able to improve its gross
margin slightly to 84.5%,
? Since yearend 2009, total indebtedness, net of cash and including the present value of off-balance sheet
obligations has decreased by $23.7 million and we have increased our borrowing availability to $45.5 million,
? We were able to lower our primary layer of self-insured retention limit on casualty claims from $4.0 million per
incident to $1.0 million,
? We were in compliance with our financial covenant at the end of the quarter,
? Versus year ago, our consolidated operating ratio improved by 560 basis points to 98.6%,
? We lost $2.2 million after tax compared to losing $5.5 million last year.
Joey will now discuss these highlights in more detail.
Mr. Hogan – Although we are not out of the woods yet, we are very excited about what the results of the first quarter
show us relative to our business improvement plan. We believe company specific initiatives combined with an improving freight environment, produced record revenue per truck. All three asset divisions contributed to the increase in revenue per truck with the three growing within a range of 5% to 11% each. The increase was not a one month phenomena either in that all three months were up 6% or more as well. In spite of a difficult weather season, we managed a 12% upsurge in average miles per tractor compared to the first quarter of 2009. The last five months have been at least a 9% increase over the comparable year ago period. On the rate side, the environment is still difficult but improving. Our loaded rates were down about 3%, despite a 10% increase in our average length of haul and we were able to offset some of that decline with an approximate 100 basis point improvement in deadhead or non-revenue miles. Historically, a one cent sequential drop from the fourth quarter is one of our better performances. The consistent improvement in utilization is allowing us to begin the yield improvement process and seek rate improvements throughout the remainder of the year.
As for the current environment across the product lines, after several years of rationalization and decline, we believe our Covenant subsidiary is poised to grow revenue and profits in 2010. The Expedited franchise is leading the way as we capitalize on an improving economy, new products, and a better relationship between supply and demand in the long haul marketplace. Our SRT refrigerated subsidiary had another strong quarter from a revenue and profit perspective. We continue to grow this fleet through asset allocation and growth through owner operators. SRT also continues to see nice growth and results within its regional operation. Star, our southeast regional subsidiary, experienced basically flat revenue during the quarter, but nice revenue per truck growth. The system conversion process that took place at Star in January is leveling out and the operation is beginning to explore efficiencies and tools presented within the system. We fully expect Star to contribute to revenue and profit growth in 2010 as well. Our non-asset based Solutions subsidiary made significant gains in the quarter compared to year ago. The contributions of our broker staff and agent network produced a slight improvement in our gross margin percentage as we battled through a tightening capacity market. We believe our rationalization process over the last three quarters has us positioned to grow this operation again in the near future.
Our cost reduction efforts continue to produce strong results. We produced another solid quarter of reductions versus year ago, highlighted by another record on trucks per non driving employees and the best first quarter DOT accident rate per mile in our history. Even with a $.66 per gallon increase in the gross cost of diesel fuel when compared to year ago, we were able to minimize the effect of that increase through reduced empty miles, reduced broker freight dependency, and improved fuel economy. Unfortunately we did have a few major accidents that impacted our overall insurance costs contributing to a $.029 increase in casualty claims. Going forward we believe our new casualty program with a lower self-retention limit of $1 million will reduce our overall volatility within the insurance area without a significant
incremental cost. As discussed last quarter, we made the decision to invest in keeping the tractor fleet as young as possible to help delay the additional costs of the new EPA 2010 emissions standards. We are fully on our way to replace another 900 tractors during the first seven to eight months of 2010, resulting in the average age of our tractor fleet has declined from 26 months 24 months since the first quarter of 2009.
In summary, although we are encouraged by our first quarter results, losing money is not an acceptable performance. The utilization improvements over the last couple of quarters are providing the impetus to focus on network refinement, capacity allocation and yield improvements with our customers. It’s time for rates to increase. On the cost side, we will
continue to scrutinize unnecessary spend, but the tightening driver market and CSA 2010 ahead of us has us focused on providing the safest and best driving environment possible for our employees. Our technology investments mentioned last quarter are in full rollout mode which we feel will help us further reduce cost going forward. Our summary statement that we mentioned last quarter is that we are continuing to focus on good, thoughtful long-term, sustainable decisions. Short term, our entire organization is focused and incentivized on producing an after-tax profit for 2010.
We will now open up the call for any questions that you may have.