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Celadon
Group, Inc.
Second
Quarter 2010 Earnings Conference Call
January
26, 2010, 10:00AM EST
Operator
Good day,
ladies and gentlemen, and welcome to the second-quarter 2010 Celadon Group
earnings conference call. My name is Jasmine and I will be your
coordinator for today.
At this
time, all participants are in a listen-only mode. We will conduct a
question-and-answer session towards the end of this presentation. You
may press star one on your touchtone telephone at any time to pose a
question. If at any time during this call you require assistance,
please press star followed by zero and a coordinator will assist
you.
I would
now like to turn the presentation over to your host for today, Mr. Steve
Russell, Chairman and CEO.
Steve Russell – Celadon Group – Chairman,
CEO
Thank
you, Jasmine. Welcome to the second-quarter fiscal quarter 2010 press
release teleconference. I am joined here in Indianapolis by Paul
Will, our Vice Chairman and CFO, and Chris Hines, our President and
COO. Jon Russell, our Executive Vice President in charge of our
non-asset-based businesses, is calling in from a conference.
I'd like
to remind you that my comments and those of others representing Celadon may
contain forward-looking statements, which are subject to risks and
uncertainties. Our SEC filings contain additional information about
factors that could cause actual results to differ from management
expectations.
We earned
$0.05 in the December 2009 quarter, down from $0.08 in the December 2008
quarter. Several factors accounted for the change. Fuel
was $0.09 negative compared to the December '08 quarter. It went down
significantly during the December '08 quarter, went up somewhat in the December
'09 quarter, but that accounted for $0.09 negative impact.
Significantly,
our average rate per loaded mile was $1.385, down from $1.485 in the December
'08 quarter and a decline of about $0.10 a mile. This change on
roughly 65 million loaded miles adversely impacted earnings by $6.5 million
pretax or $0.18 per share after tax.
Offsetting
these negatives were several factors. First, we achieved a 16.9%
improvement in loaded miles in the December '09 quarter compared with December
'08. The addition of new customers largely accounted for this
improvement. Those included Home Depot, Coca-Cola, FedEx, Con-way and
several other customers. The new customers were a result of a more
effective sales force, excellent service, and the impact of customers brought on
by the Continental Express transaction of December 2008. Gains were
achieved in domestic lanes as well as an increase in our business between US and
Mexico.
1
For the
Mexican gains, it is evident that the devaluation of the peso, which occurred in
late 2008, resulted in a shift of production from China to Mexico by various
manufacturers. The peso, which was at $0.10, ten U.S. cents, dropped
to $0.077 or about 23%, which effectively enabled Mexico to achieve cost
reductions when compared with the Chinese yuan or renminbi in various
areas. We have seen companies like Sharp, Samsung, Sony, LG, but also
companies like Whirlpool, John Deere, etc. that have moved production to
Mexico.
Second,
we were able to achieve cost reductions in various areas. In our
trucking operations, non–driver headcount was reduced by about 12% December '09
versus December '08. Other steps were taken in the first and second
quarters of the 2009 calendar year that also contributed to meaningful
savings. Improved fuel economy was also a factor in reducing
costs.
We as a
company, and not only the management team but all our employees, including our
drivers, truly leaned into the pain; we didn't run from it. Because
of that, we were able to achieve significant cost
reductions. Improved fuel economy was also a factor in reducing
costs.
Interestingly,
if we chose to compare our results in the December '09 quarter with those of
December '06, three prior years – three years ago – which was prior to the
decline in truck load freight that occurred in 2007 through 2009, certain
metrics changed significantly. Compared with the $0.05 that we earned
in the December '09 quarter, we earned $0.26 per share in December
'06. First, between December '06 and December '09, our average rate
per loaded mile declined from $1.55 to $1.385, or $0.165 per mile, or a 10.6%
decline. We would have earned $0.29 per share more in the quarter if
we had the same rates as we had in December of '06. That is not
reflective of any inflation; that's just the same rate as we had in December
'06; that would've been worth $0.29 a share more in earnings.
Second,
utilization or miles per week per tractor declined from 2047 to 1894, or about
153 miles. If utilization was higher by 153 miles per week, loaded
miles would have been 5.8 million more for the quarter and we would have earned
an additional $0.16 per share. Hence the impact of the weaker economy
both on depressed rates and utilization amounted to a difference of $0.45 in
earnings-per-share. Although one could call this daydreaming, if
rates in utilization in December '09 were comparable to those of December '06,
December of '09 earnings-per-share would have been $0.50.
Non-asset-based
businesses continued to grow at the TruckersB2B, which has experienced a modest
decline in earnings due to issues that midsized fleets and smaller fleets are
experiencing. Of the 20,000 member fleets, the number that failed in
the past three months was about 820 compared to a previous running rate of about
400. Celadon Dedicated Services, our warehousing division, and
Celadon Logistics, our truck brokerage division, have experienced significant
growth.
Financially,
at December 31, '09 with a $40 million bank line, borrowings were
zero. We had letters of credit of $259,000, down from about $4
million a year ago, and a cash balance of $6.6 million. Compared with
other carriers, our letters of credit are significantly less because, in 2002,
we were approved by the US Department of Transportation to be self–insured,
therefore requiring much fewer letters of credit than others.
2
Further,
at the end of December, our average tractor was 1.3 years old. We
have no plans to purchase new tractors or new trailers in 2010 and most of
2011. As a consequence, we expect to produce meaningful cash flow
during that period.
Basically,
I’d be happy to answer any questions that the floor may have in terms of where
the Company is at this point. Jasmine, if you'll open the floor to
questions, that would be great.
Operator
Ladies
and gentleman, if you wish to ask a question, please press star one on your
touchtone telephone. If your question is answered or you wish to
withdraw your question, please press star two. Please press star one
to begin and please standby for your first question. Your first
question comes from the line of Jason Seidl with Dahlman Rose. Please
proceed.
Jason Seidl – Dahlman Rose & Co. –
Analyst
Hey,
Steve.
Unknown
Good
morning.
Steve Russell – Celadon Group – Chairman,
CEO
Good
morning, Jason.
Jason Seidl – Dahlman Rose & Co. –
Analyst
A couple
of quick questions – you mentioned sort of the near-sourcing phenomenon really
helping you guys out in Mexico. When you break out the decline in
sort of revenue per loaded mile between the US and Mexico, were the Mexican
rates stronger because you've seen sort of a pickup in demand?
Steve Russell – Celadon Group – Chairman,
CEO
Frankly,
the Mexican business has improved, but in the relatively near term, over the
last six months or so, so we really haven't seen a rate increase
yet. We think there are opportunities for that, but at this point, we
haven't achieved that.
Jason Seidl – Dahlman Rose & Co. –
Analyst
And in
terms of the near–sourcing continuing, are you seeing more and more
opportunities to get additional business and for companies to
relocate?
Steve Russell – Celadon Group – Chairman,
CEO
Chris, do
you want to answer that?
3
Chris Hines – Celadon Group – President,
COO
Near–sourcing
does take time from the decision to move the manufacturing to Mexico, to get the
plant ready and actually have freight start moving, so we are starting to see
the tail of that begin and you continue to see more and more plants, say, in
Monterrey area coming online. So yes, we expect that to
continue.
Jason Seidl – Dahlman Rose & Co. –
Analyst
Okay. And
in terms of just overall, in terms of the price discussions you're having now on
renewals on contracts, where are you at, Steve? What does it look
like present day?
Steve Russell – Celadon Group – Chairman,
CEO
Basically,
rates going forward are going to be based on two things. One is
demand – what happens to demand within the US or Mexico or
Canada. And that's going to certainly be based on the state of the US
economy.
Second is
supply or capacity. Frankly, there have been some meaningful fleet
failures in the last couple of months. A company called Arrow
Trucking, a flatbed carrier, went out of business three days before Christmas in
probably one of the most significant collapses that has been achieved in the
industry in many, many years. What happened was the credit cards were
turned off, which meant the driver for Arrow – and they had between 1100 and
1400 trucks – I'm not sure of the exact number – but a driver would pull into a
truck stop in Scranton, Pennsylvania three days before Christmas, they wouldn't
honor his credit cards so he couldn't buy fuel. And if that driver
lived in Cotulla, Texas or Kansas City, Kansas, to get home was a major
challenge. Frankly, many of them didn't, and that certainly totally
impacted the state of the driver community because so many drivers were impacted
by it.
As to
capacity, the March quarter, the one we are in now, is when fleets have to buy
license plates. Banks aren't lending to weak fleets, and a license
plate is roughly $2000 and the collateral value of a license plate is no more
than the value of the metal in the 16 inch by 5 inch size of the plate or
whatever that plate size may be. So it's likely that there will be an
increase in fleet failures during this period, in addition to get insurance,
which is generally the most fleets in this quarter as well where significant
cash payments are required.
We expect
capacity to decline. There have been various reports put out by
analysts, some of whom are on the phone now, about what's likely to
happen. I think customers or shippers are expecting that to
happen.
The
reality is what's going to happen to pricing is going to be based on those two
factors. Adam Smith was right; supply and demand determine
rates. This industry has been cyclical, as I've often said, since the
Phoenicians invented the cart. Certainly, we have had a negative
cyclicality in the last four years. And the issue is at what point
does positive cyclicality come back? But certainly the factors seem
to be in place to make that highly likely.
4
Jason Seidl – Dahlman Rose & Co. –
Analyst
So
net–net, Steve, if we see the economy slowly recover and some of these fleets
continue to fail, you would say you have a fairly positive view that pricing can
improve and at least help you get back some of what you lost over the last few
years?
Steve Russell – Celadon Group – Chairman,
CEO
We
believe that the speed at which it happens is not particularly overnight because
it is generally keep rates and terms and prices firm for a year. They
don't end all overnight; they are not ending all January 31 or something like
that, so that the period of time it will take to get the rates up won't be an
overnight factor.
Jason Seidl – Dahlman Rose & Co. –
Analyst
Sounds
fair. I will let someone else have at it. Thanks again for
the time. I appreciate it.
Steve Russell – Celadon Group – Chairman,
CEO
Thank
you, Jason.
Operator
Your next
question comes from the line of Edward Wolfe with Wolfe
Research. Please proceed.
Steve Russell – Celadon Group – Chairman,
CEO
Good
morning, Ed.
Edward Wolfe – Wolfe Research –
Analyst
Hey, good
morning, Steve. So, it feels like capacity should be tightening but
it has felt this way for a long time. We can go back a long way and
it feels like the smaller guys shouldn't be relicensing every
year. What can you do? It feels like, since 2006, I think
you gave a stat, your revenue per loaded mile is down 10.6%. I pulled
up Werner and they are down 5% during that same period.
Is it
possible that you can do something specific, you can go to your volume and say
"I'm going to give up some miles and call out the lower-hanging fruit or the
lower-paying people within your own network and start to move rates up
regardless of what's going on in supply and demand? Is that a quiver
that you're considering or is out there?
5
Steve Russell – Celadon Group – Chairman,
CEO
If you
look at Werner for a moment, Werner has cut the number of over-the-road trucks
that they’re running very substantially and have shifted more to their VAS or
brokerage business. We started a brokerage business about two years
ago and it is growing rapidly, but they are quite small compared to
Werner's. We are prepared to do that in terms of walking away from
customers that are not responsive to the realities of this
industry. In fact, we've been very successful at adding
customers.
If you go
back three years ago, I would say 90% of our sales force were gatherers and 10%
were hunters. I would say, right now, it's 90% hunters and 10%
gatherers. So the reality is we do have the cus – the
strong customer base that will allow us to do that. We've taken a lot
of costs out of the business. I think that, from here on, the key is
getting rates up, and that may require being willing to move from first call to
third or fourth call by a shipper. If that first call goes out of
business, then it increases our chance of getting the freight at the new higher
level. So those are being managed by our people on a day-to-day basis
and a customer-by-customer basis.
Edward Wolfe – Wolfe Research –
Analyst
When you
look out at the year, you talked about gradual improvement as capacity comes
out. When do you expect rates to turn positive for you, and when do
you expect to see enough bids to be out that – is it an end of second
quarter? Is it second half? How do you think about
that?
Steve Russell – Celadon Group – Chairman,
CEO
I would
say yes and yes to both of them. We really don't know,
Ed. It's going to be – what we expect varies on a day-to-day basis
because it is so based on what's happening to the demand and the US
economy. Certainly, Mexico has improved because it has taken over
business that had been in China. It's sort of a different parallel,
but the reality is it's – the factors look very positive but to say it's going
to happen on March 1 or May 1 I think is a pure guess and I would rather not
guess.
Edward Wolfe – Wolfe Research –
Analyst
Fair
enough.
Steve Russell – Celadon Group – Chairman,
CEO
I know we
are in a strong position. We have zero bank debt. We're
going to throw off a lot of cash the next two years because of the fact that our
fleet is very young and we are positioned well. I wish I knew the
answer to the question you are asking.
6
Edward Wolfe – Wolfe Research –
Analyst
Sure. Things
you can control that you're doing a great job on the expense side – can we talk
a little bit about that? What do you see on the expense side this
year where there might be inflation? Do you expect driver pay at some
point to start going up again? Is there anything else you can take
out and what are the inflation – you know, do you expect less than normal
inflation, or at some point are drivers tight again? How do we think
about that and other costs?
Steve Russell – Celadon Group – Chairman,
CEO
The
driver situation has been quite decent from our standpoint. A lot of
that relates to the fact that many fleets who are surviving have been parking
trucks. Many of the drivers that we've been hiring – we have very
high hiring standards. We don't hire trainees; we don't hire
ex–felons. But the reality is good drivers are being laid off by
fleets because they need to generate cash by parking the trucks. So
the driver situation at this point seems okay.
In terms
of headcount in the trucking part of our business – I'm excluding non-asset
based – we went from 785 people at the end of '08 to 690 people, down 95 people
between the end of '08 and '09. We don't feel any pressure on that
side to increase the number of people. We are going to retain it
where it is now, which we think is very efficient.
Other
cost elements, Paul, do you want to add something?
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
This is
Paul. As far as one thing I would add as far as the drivers, because
of the miles that we have created with additional business that we've brought
on, if you look at our drivers, they are actually making more money this year
than they did last year, predicated off the additional miles they are running,
although they are getting a little less in cents per mile. There was
basically for the most part a pay freeze for the majority of our
fleet. New drivers are coming forward no different than other
competitive fleets, but because the miles are getting actually
more. So from a driver standpoint, we feel pretty comfortable that
we're going to continue to maintain the fleet and that is not going to have to
change. It's not imminent that that's going to change.
As far as
our fleet and the tractors/trailers that Steve mentioned, that's pretty much
locked in now, which is a major cost component. Drivers are a major
cost component.
Then the
other costs, there is still some efficiency that could be generated based on
things we are doing internally, so we can still take out some costs through the
efficiencies, not necessarily through pure cost as a reduction in what we're
paying suppliers for goods and services. So we feel pretty
comfortable that expenses shouldn't edge up over the next 12 months, but yet we
are hopeful that there will be some rate increases down the
road.
7
Steve Russell – Celadon Group – Chairman,
CEO
The other
aspect is fuel economy where we've improved that about 6%
year-over-year. And we are certainly – and that's due to reduced
idling; it's due to management of the drivers from an idling standpoint; it's
due to more aerodynamic trucks; and it is due to the S-bar heaters which we've
put in basically – about 95% of our trucks have that now so the driver does not
need to idle in the wintertime. And regardless of what happens to the
economy, regardless of what happens to supply and demand, we are not going to
give up those benefits that we've achieved.
Edward Wolfe – Wolfe Research –
Analyst
Paul,
when you say the fleet is locked in, I think you ended at 3059. Is
that kind of where the tractor fleet, we should model it out for the foreseeable
future?
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
Yes, I
think we looked at that and obviously that would imply 125 open
trucks. We believe somewhere in that range between trucks that are
in–service going to the class, etc., so 3100 is probably a good
number.
Edward Wolfe – Wolfe Research –
Analyst
Perfect. And
then can you do cash flow, Paul? I've got you for the
quarter. Can you give us cash from operations and CapEx?
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
If we
still get – pure EBITDA that's running right around the $42 million level based
on the first six months this year. Last fiscal year, it was $46
million. We expect the current run rate to be comparable to the $10
million to $11 million level per quarter.
Edward Wolfe – Wolfe Research –
Analyst
And how
about CapEx?
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
CapEx, we
have no – from this point forward, we have no expected CapEx.
Edward Wolfe – Wolfe Research –
Analyst
What was
it in –
8
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
–maybe $1
million, $2 million type thing just for whether it be for computers,
etc.
Edward Wolfe – Wolfe Research –
Analyst
That is
going forward. What was there in fiscal second quarter for
CapEx?
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
Fiscal
second quarter would have been $24 million.
Edward Wolfe – Wolfe Research –
Analyst
How much
was that? $24 million?
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
$24
million.
Edward Wolfe – Wolfe Research –
Analyst
Thanks,
both of you guys, for the time. I appreciate it.
Steve Russell – Celadon Group – Chairman,
CEO
Thank
you, Ed. Next question, Jasmine?
Operator
Your next
question comes from the line of Jack Waldo with Stephens Inc. Please
proceed.
Jack Waldo – Stephens Inc. –
Analyst
Good
morning, gentlemen. Congrats on a good quarter in a challenging
environment.
Steve Russell – Celadon Group – Chairman,
CEO
Thank
you, Jack.
9
Jack Waldo – Stephens Inc. –
Analyst
Could you
guys talk a little bit about how the quarter and how you saw things progress,
both in terms of utilization and rates?
Steve Russell – Celadon Group – Chairman,
CEO
Basically,
it actually improved somewhat throughout the quarter.
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
Other
than the normal season.
Steve Russell – Celadon Group – Chairman,
CEO
Part of
that was, if you look on an annual, year-over-year basis, when Lehman imploded
or the stock market imploded beginning in mid September of '08, miles continued
decent in October. They really started to fall off in November and
December. So certainly year–over–year, we saw significant gains
throughout the quarter. But overall demand was, frankly, surprising
and, frankly, early January demand is surprisingly better than
historical.
Jack Waldo – Stephens Inc. –
Analyst
Okay. Maybe
could you talk a little bit – if your overall rates were down, what,
6.7%?
Steve Russell – Celadon Group – Chairman,
CEO
Yes
–
Jack Waldo – Stephens Inc. –
Analyst
How did
that compare between the spot market and between bids?
Steve Russell – Celadon Group – Chairman,
CEO
The spot
market rates began to go up, I would say, in the beginning of November, maybe
the end of October. This is confirmed by customers and then by
brokers that we deal with, spot market rates in certain areas
particularly. In terms of overall rates there was very little bidding
in November–December, so it is tough to say that our rates went up or went down
or anything like that.
10
If you
look at – if you compare our average rate per billed mile in the September
quarter, it was about $1.407. If you look at the rate in the December
quarter, it had dropped to $1.385, but that represented mix changes as opposed
to rate changes. Our average length of haul increased about 40 miles
between the September and December quarter. And historically, in this
industry, an increase in average length of haul always results in a reduction in
average rate because, basically, the trucks are more efficient,
etc. We did see an increase in our average length of
haul. That accounted for a chunk of that $0.025 to a $0.022
decline.
The other
factor is our average rates to and from Canada exceed our average domestic rates
or rates to and from Mexico. We saw a decline in Canada miles in the
December quarter compared with the September quarter. We did, between
the US and Canada, 5.8 million miles in the September quarter. That
dropped to 5.1 million miles, so that also contributed to the decline in that
average rate per mile. But if you look at, were there rate reductions
in the December quarter to customers – Wayne? – essentially there were
not. It was really a mix change that affected that.
Jack Waldo – Stephens Inc. –
Analyst
When you
talk about the spot rate market being up in November and October, is that on a
year-over-year basis? The thing I'm trying to get at, Steve, I was
just looking at the transcript from your last conference call and you would have
thought rates were probably going to be pretty flat on a sequential
basis.
Steve Russell – Celadon Group – Chairman,
CEO
Yes. They
were.
Jack Waldo – Stephens Inc. –
Analyst
They
were. It's just a mix change?
Steve Russell – Celadon Group – Chairman,
CEO
Yes.
Jack Waldo – Stephens Inc. –
Analyst
Okay. Then
what I'm trying to get out – and I think this question was kind of alluded to
earlier, or the point was alluded to earlier – when I look at expectations going
forward, we have some pretty good growth built in, particularly in the second
half of this calendar year. And, you know, most of that is driven, at
least in my model, by rates. I was just trying to figure out, is a 3%
to 5% increase in rate something that you think you can see in this environment
in the second half of the year, or is that a little too
over–optimistic?
11
Steve Russell – Celadon Group – Chairman,
CEO
Well, we
don't make forecasts; we never have. But we expect to see an
improvement, certainly by the second half of this year. But how much
that improvement will be will be based on supply and demand.
Jack Waldo – Stephens Inc. –
Analyst
Okay,
fair enough. Thank you, guys, for your time.
Steve Russell – Celadon Group – Chairman,
CEO
Thank
you, Jack. Next question, Jasmine?
Operator
Your next
question comes from the line of Todd Flower with KeyBanc Capital
Markets. Please proceed.
Todd Fowler – KeyBanc Capital Markets –
Analyst
Hey, good
morning everybody, that’s Todd Fowler.
Steve Russell – Celadon Group – Chariman,
CEO
Yeah, I
didn’t realize you were that sweet and pretty.
Todd Fowler – KeyBanc Capital Markets –
Analyst
I’ll
leave it at that.
One last
question, I guess, on the rate side, Steve or maybe Chris – have you guys at
this point seen any bids for 2010 that you've actually signed on? And
if you have, can you talk a little bit about what the rates did on an
apples–to–apples basis in those bid packages?
Chris Hines – Celadon Group – President,
COO
It's
Chris. We are kind of in the midst of bids right
now. There hasn't been much awarded yet. We'll probably
have a much better view of that in the next four to six weeks, so there really
haven't been any large awards out there yet.
12
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
This is
Paul. I think what's interesting is, we were looking at that and the
majority of the larger bids that we have in-house, only a couple of them are
existing customers. Most of them are new opportunities, which is a
good sign.
Todd Fowler – KeyBanc Capital Markets –
Analyst
So, is
the reason there, Paul, that your existing customers aren't bidding their
freight at this point?
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
The
larger bids that we have in–house, they are not with our existing
customers.
Todd Fowler – KeyBanc Capital Markets –
Analyst
Okay. Then
Chris, have you seen anything different in how the bid packages are put
together? I mean, is there anything with regards to, if its fuel
surcharge, if it's looking at pricing things differently? Is there
anything that is unique this year compared to what you've seen in the
past?
Steve Russell – Celadon Group – Chairman,
CEO
Wayne
Deno, who had run pricing and actually works for Chris in overseas customer
service, in those areas – Wayne, do you want to answer that?
Wayne Deno – Celadon Group – Leasing
Manager
Todd,
this is Wayne. Yes, we have seen – with every bid, it seems like they
are wanting to go to their fuel surcharge versus yours. There's
always pressure, and this hasn't changed in the last year. There's
always pressure on the fuel surcharge; there's always pressure on the
accessorials, the detention billing, things like that as part of the bid
package, bid packages. In addition, we are starting to see some
levels being longer-length again, with more than a year contract, so those are
just the changes in contract that we are starting to see.
Steve Russell – Celadon Group – Chairman,
CEO
Which
would imply a feeling by shippers that they would rather lock in for two years
instead of one year, because of the likelihood of rates changing.
Todd Fowler – KeyBanc Capital Markets –
Analyst
Sure. That
makes sense and thanks, Wayne.
Paul, can
you talk a little bit about, on the equipment side, I would thought that you
would have taken some tractors here in the quarter. It looks like the
balance sheet debt is down, capital leases are down. Was most of that
operating leases?
13
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
Yes, most
of what was financed in the fourth quarter was operating leases.
Todd Fowler – KeyBanc Capital Markets –
Analyst
Okay. Then
at this point, with no more equipment coming on, the expectation would be that
capital leases shouldn't change and even once we see the Q, the operating leases
won't move much after this quarter here?
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
Correct,
that's correct.
Todd Fowler – KeyBanc Capital Markets –
Analyst
Then just
the last one – do you have any comments about what's going on in the used truck
market? I know you guys have a tendency to sell a lot of equipment,
or at least see what's going on in the used truck market. Any feel
for what's happening with used truck pricing or used truck demand?
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
As far as
the used truck – price on used truck demand?
Todd Fowler – KeyBanc Capital Markets –
Analyst
Yes,
either what's happening with used truck pricing or if you've seen a change in
overall demand for used vehicles, used equipment?
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
We have
not. The biggest issue that's driving – I can kind of reach the
bottom so to speak, but financing – the small fleets trying to get financing is
the biggest thing that's holding up truck sales right now. But we
don't see necessarily truck prices going down. We are still – we've
moved a lot of equipment at pricing that makes sense for us, but for the most
part, I don't think the environment is still good for used truck
pricing.
14
Steve Russell – Celadon Group – Chairman,
CEO
The
reality is that the number of new trucks expected to be built in '10 is
something like 95,000, which compares with 300,000 back in '05 and
'06. What's happening now is the '10s are up significantly in price
from an '07 or an '06, either $20,000 or $25,000, and fleets can't get
financing. There have been a reduction in the number of willing
lenders to the industry. As a consequence, the average age truck has
moved up significantly. One of the people who I believe is on the
phone estimated that the average age truck right now is 6.5 years old, up from
3.5 to 4 years, 3 or 4 years ago. Well, maintenance costs on a truck
that is 6.5 years old is up significantly. It is $0.15 a mile versus
$0.06 a mile for a three-year-old truck, which means that's putting cost
pressure on a lot of fleets that can't afford to buy new trucks or can't get
financing for new trucks.
So, I
think it would appear at this point – and we have our own retail used truck
facility called Quality Equipment – and it certainly seems to have
stabilized. But again, lack of financing ability by small fleets has
kept the availability of used trucks at a level above what one would expect it
to be.
Todd Fowler – KeyBanc Capital Markets –
Analyst
Okay, no,
that helps. That all makes sense. I guess lastly, thinking
through some of that, Paul, did you actually – were you able to recognize gains
on equipment sales here in the quarter?
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
Between
equipment disposals, trades and so forth, those – it is basically a
breakeven.
Todd Fowler – KeyBanc Capital Markets –
Analyst
Okay, so
really –
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
There's
no gains or losses.
Todd Fowler – KeyBanc Capital Markets –
Analyst
Okay, got
you. All right, thanks a lot, guys. I will talk to you
soon.
Steve Russell – Celadon Group – Chairman,
CEO
The other
thing, Todd, in the purchase of trucks which we took a significant number of
during calendar '09, we had trade-backs on roughly two-thirds of
those. Those trade backs were set back a couple of years
ago. That was beneficial. I believe Heartland did the same
thing that we did, which therefore meant the number that we had to sell in the
open market was only a third of those that were being replaced.
15
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
I think a
big thing, too, from what we've done, it shows that, since there is no gain or
losses, that would imply that what we've done through the P&L is depreciate
the equipment or taken the equipment down to a reasonable realistic residuals
where there's a lot of other fleets out there that have not been able to refresh
their fleets because they can't dispose of the equipment or they have it on the
books for too much. So I think it's a very good sign, the fact that
we have refreshed our fleet and you haven't seen losses come through the
P&L.
Todd Fowler – KeyBanc Capital Markets –
Analyst
And some
good work in negotiating those residual values.
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
Yes.
Todd Fowler – KeyBanc Capital Markets –
Analyst
All
right, guys, thanks a lot.
Steve Russell – Celadon Group – Chairman,
CEO
Next
question, Jasmine?
Operator
Your next
question comes from the line of John Larkin with Stifel
Nicolaus. Please proceed.
John Larkin – Stifel Nicolaus –
Analyst
A couple
of questions –
Steve Russell – Celadon Group – Chairman,
CEO
It's
better than being called flower.
John Larkin – Stifel Nicolaus –
Analyst
Although
there is an analyst with that last name, so be careful.
Steve Russell – Celadon Group – Chairman,
CEO
Okay,
that's true.
16
John Larkin – Stifel Nicolaus –
Analyst
With
respect to the demand, which never seems to really strongly rebound, although
there was a nice sequential improvement in the second half of last year, when
you talk to customers – and maybe this is really for Chris – to what extent did
inventory destocking or restocking play a role in making the second half a
little better than it otherwise might have been? How do you think
that's going to play out in the first part of this year, calendar year that
is?
Chris Hines – Celadon Group – President,
COO
John,
it's not hard to see that very few – there's not a lot of sales growth, so a lot
of that sequential improvement is inventory movement.
What
extent January and February will continue to see it, Steve mentioned, that in
January so far, we are seeing decent volumes compared to the past Januarys, but
I think that is still some inventory movement going on.
Steve Russell – Celadon Group – Chairman,
CEO
I think
also in our case, John, it is heavily driven by the growth with existing
customers and the addition of customers. I mean, we have added a
meaningful number of customers. We've grown significantly with the
customers we took on when we acquired Continental. And that has been
a major driver. I mean, if you compare December quarter of '08 with
December quarter of '09, looking purely only at domestic US freight, not
international freight, our customer business was up 37% year-over-year, whereas
broker business was down 68%, so we have benefited from the additional customers
very importantly.
Mexico
business was up about 16%. Canadian business was down about 9%, not
any loss of customers, it's just less trade between the US and
Canada.
John Larkin – Stifel Nicolaus –
Analyst
That's
very helpful. Could you talk a little bit about the change in, kind
of, geographic mix with respect to what percentage of your business is
transborder into or out of Mexico, transborder into or out of
Canada? Then if the remainder would be captive US business, where you
originate and terminate the freight inside the US – how much different is that
from, say, a year ago and then maybe relative to four or five years
ago?
Steve Russell – Celadon Group – Chairman,
CEO
US,
domestic US freight was up meaningfully about 37% year–over–year, 26% if you
include brokers. We were up 26%. Mexico up 16% and Canada
down 10%.
John Larkin – Stifel Nicolaus –
Analyst
What's
driving the weakness in Canada? Is that a currency
issue?
17
Steve Russell – Celadon Group – Chairman,
CEO
I think
it's largely a currency issue. The Canadian dollar went from about
$0.80 in the November–December period a year ago to $0.95 or $0.96 this
year. I mean, if one were to sort of quantify the effect of that, it
was probably $0.03 negative because of our Canadian operations, but at the end
of the day, Canada is doing better than the US is from the standpoint of overall
economy.
John Larkin – Stifel Nicolaus –
Analyst
But
there's no strategic decision on your part to deemphasize Canada, per
se?
Steve Russell – Celadon Group – Chairman,
CEO
None at
all.
John Larkin – Stifel Nicolaus –
Analyst
Okay. The
tax rate remains kind of up in the upper 40% range, I guess due to your per diem
treatment. Is that where you would expect it to remain for the next
few quarters, Paul?
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
Yes, if
you look at for where it's at today, kind of what we've modeled out is, from
this point, as a baseline, it should be about 40% effective from
here.
John Larkin – Stifel Nicolaus –
Analyst
40% from
here, going forward.
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
Yes, so
if you had $1 million, it's $400,000, that type of thing.
John Larkin – Stifel Nicolaus –
Analyst
Okay,
okay. Then with your nearly brand-new tractor fleet with an average
age, I guess you said, of 1.3 years, if you don't plan to buy anything this year
and perhaps very little next year, does that put you in a position in 2012 where
you have a big surge of equipment that will have to be replaced? Is
that at all a concern? Would you rather at some point start spreading
that replacement out?
18
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
Well,
what we've done – talked internally. As Steve said earlier, it's not
in 2010 and not a lot in 2011, which gives us the opportunity to do just exactly
what you're saying – is maybe in the back half of 2011 start to bring them in,
so that you're spreading out over maybe a 2.5 to 3-year trade cycle in that
sense. That's trade time as opposed to a two-year trade time, which
is just what we did.
We were
able to do our refresh in two years, so it's very feasible to do that
again. That's not our intention; it is more along the lines of what
you're suggesting.
John Larkin – Stifel Nicolaus –
Analyst
Okay. Then
I noticed, on the income statement, that purchased transportation increased
dramatically. Is that due to a higher percentage of owner-operators
in this system?
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
That's
correct.
John Larkin – Stifel Nicolaus –
Analyst
Are they
being used in any particular application, or are you just finding that, for
whatever reason, you are able to attract more high-quality owner-operators than
some of the other fleets are?
Steve Russell – Celadon Group – Chairman,
CEO
We
actually initiated a lease purchase program with our own
drivers. That is a large part of the increase –
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
–that's
correct–
Steve Russell – Celadon Group – Chairman,
CEO
–where a
driver basically signs on as an owner–operator but he has been a company
driver. So we've seen an increase related to that. It has
certain benefits. There is no health program required, etc., because
the driver ceases to be an employee. For the driver, we see better
utilization with an owner–operator than with a company driver because you've got
to cover his mortgage payments. So we started that program about a
year and a half ago, and it has been the largest driving factor in increasing
that purchased transportation number.
19
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
It's a
shift mix but it allows the driver to obviously be an independent
contractor. From our standpoint, it allows us to dispose of some of
the equipment, so that gives us an opportunity to dispose of equipment that way
– wholesale, retail through our retail yards, as well as the trades that we have
done. So we have tried to maximize the dollars that we've gotten for
our equipment with those means.
Steve Russell – Celadon Group – Chairman,
CEO
A
transaction with that driver is certainly profitable for the Company and we are
finding is quite satisfactory for the driver.
I
remember about six years ago when Swift booked the present value of those
profits with it – like a 20% reserve or so. But Paul wouldn't let me
do that, so we didn't do it. (laughter)
John Larkin – Stifel Nicolaus –
Analyst
There you
go. Then just maybe one last question on the Mexican border – it
really does – I mean you're the first company that has had sort of concrete
examples of companies that are really moving back into Mexico and away from
China. That's a trend that people were talking about last year but
you've got some specifics to hang on that theory. The volume looks
like it is trending pretty well.
At this
point, we were supposed to be in a position where Mexican trucks would run north
of the border, US trucks could run south of the border. That pilot
program I guess has been shelved. With all of the focus on security
now after the Christmas bomber, etc., how do you see this playing
out? Is the cross-border program basically dead? Are we
going to be – being more stringent border-crossing initiatives? How
do you see that whole market playing out here over the next year or
two?
Steve Russell – Celadon Group – Chairman,
CEO
I
actually testified in Congress in the middle of November on this
subject. I think that the Obama administration, particularly
Secretary LaHood who is the Secretary of Transportation, have indicated they are
going to move towards opening the border. I think it's not been a
priority for the Obama administration; it's 7 zillion years behind the
healthcare program. There is perhaps a modest reason to be a little
bit optimistic.
What
happened when the pilot program was stopped, Mexico raised tariffs on a whole
bunch of goods that they import from the US, including things like
apples. The governor of Washington got very upset over that because
they lost a lot of exports to Mexico. Obama has said and he said this
to Calderon, who is President of Mexico, that the border will
open. But I wouldn't hold my breath to expect that to
happen.
We have
internally modified our approach in certain areas. Chris and Paul and
I visited with Chrysler a few months ago. With Chrysler now
increasing production in Mexico, they plan to build the Fiat in
Mexico. We have started to do business with Chrysler again, which we
had fully stopped in 2006, because we see that as an
opportunity. We're not doing a lot of business with them today, but
we are doing some business. We think those are good opportunities for
growth in the future.
20
John Larkin – Stifel Nicolaus –
Analyst
Alright,
I really appreciate the time. Thank you very much.
Steve Russell – Celadon Group – Chairman,
CEO
Thank
you, John.
Operator
Your next
question comes from the line of Chaz Jones with Morgan Keegan. Please
proceed.
Chaz Jones – Morgan Keegan & Co. –
Analyst
Hey, good
morning, guys.
Steve Russell – Celadon Group – Chairman,
CEO
Good
morning, Chaz.
Chaz Jones – Morgan Keegan & Co. –
Analyst
Maybe a
question for Paul here – in terms of free cash flow, Paul, over the next 18
months, I mean how should we be thinking about that? Are you going to
be building cash on the balance sheet, or are you going to be trying to pay down
some of your obligations?
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
Through
the first quarter, we had trucks that were purchased first of the month, the
first week of this year, so we believe that the bank debt will still be zero at
the end of March but we won't start accumulating cash until the third and fourth
quarters of the year. But because most stuff is on operating leases,
we have the option, though, on some of the operating leases, to buy those out
early if we elect to do so. So we have not concluded internally on
when to do it, but we should build cash in the second half of this year
(multiple speakers) year.
Steve Russell – Celadon Group – Chairman,
CEO
Bring up
to our board at the end of April, at our next board meeting, the various
alternatives we would have regarding that.
Chaz Jones – Morgan Keegan & Co. –
Analyst
Okay. Then,
not to beat pricing into the ground, but certainly the comments are pricing is
stabilized, January so far has been a little bit better than historical but,
historically, pricing does move down sequentially in the first
quarter. Maybe any color you could shed on that would be
helpful.
21
Steve Russell – Celadon Group – Chairman,
CEO
Wayne?
It's hard
to say. At this point, mix is playing a greater role than price
change.
Wayne Deno – Celadon Group – Leasing
Manager
We don't
intend to take our prices down.
Steve Russell – Celadon Group – Chairman,
CEO
We don't
intend –
Wayne Deno – Celadon Group – Leasing
Manager
It will
be mix. It should all be mix.
Chaz Jones – Morgan Keegan & Co. –
Analyst
I guess
what I'm getting at is you would be surprised, given what you know out in the
market, given the trends that you're seeing, that pricing would be down
sequentially even though that is typically seasonally what we see out there in
the calendar first quarter.
Steve Russell – Celadon Group – Chairman,
CEO
I think
that's a fair statement.
Chaz Jones – Morgan Keegan & Co. –
Analyst
Okay,
that's helpful. Then, going back to the owner-operator growth, that's
been up, gosh, almost 90% year-over-year. What should we be thinking
about in terms of continued growth there? Is there an internal target
to get to 500 owner–operators, or is that just kind of a function of what's out
there in the market?
Chris Hines – Celadon Group – President,
COO
Our
expectation that is currently between the lease purchase and owner-operators but
all independent contractors, approximately 200 in the US and call it 100 in
Canada, so 300. Could that grow to 500? That's
possible. It just depends if we were intending to grow
it. Whether it gets to 500 or not is really going to be a function of
what we think the mix between company and owner-operator – what works best on
our freight mix, but it's possible to go up to 500.
22
Steve Russell – Celadon Group – Chairman,
CEO
The
Landstar model has worked pretty well for a long time. Going to even
500 is not a significant percent of our business, but we are pleased with how
the program has gone to date. I think we have executed it very
well.
The
driver turnover of the owner–operator fleet is very low. They are
doing fine, and we like the concept. We will continue to grow
it. We don't have a target internally of to what level.
Chaz Jones – Morgan Keegan & Co. –
Analyst
Okay, and
then two other quick ones – you know, it appears the Logistics Brokerage growth,
you mentioned it earlier, has been fairly nice, here recently. Just
internally – and maybe this is for Jon if he is still on the call – is there any
type of targeted growth in that area?
Steve Russell – Celadon Group – Chairman,
CEO
Jon, are
you on?
Jon Russell – Celadon Group –
EVP
I
am. Our internal goal is – because we are a new division, we have the
capability to at least hopefully target a doubling of our brokerage division
each year. We have a lot of opportunity with existing customers, as
well as for new customers. So, our hope is to continue to double the
business for a couple of years at least until obviously rate of growth will
slow, but we certainly think the opportunity is there at this
point. We are starting to see a much greater crossover between
customers just from a capacity support perspective than we did in the first
couple of years of the business.
Steve Russell – Celadon Group – Chairman,
CEO
That
growth, we're doing about $15 million or $16 million of business in the
brokerage business. That's up from I think $8 million a year
ago. We just started it two years ago. It is a pure
brokerage business; it's not an agent–driven business. We've added
customers and are growing and see real opportunity.
About
two-thirds of the brokerage business is given to third-party truckers, about
one-third is given to Celadon. That gets reviewed every day by the
brokerage folks in those – that decision process.
On the
negative side in the non-asset-based business, when I mentioned in the call that
TruckersB2B had a modest decline, it was actually, went from about $300,000
profit to about $260,000 profit – not a significant number but it does relate to
the weakness of the small fleets out there.
23
Chaz Jones – Morgan Keegan & Co. –
Analyst
Okay,
that's all I had, guys. Thanks.
Steve Russell – Celadon Group – Chairman,
CEO
Next
question, Jasmine?
Operator
Your next
question comes from the line of Jeff Kauffman with Sterne
Agee. Please proceed.
Steve Russell – Celadon Group – Chairman,
CEO
Good
morning, Jeff.
Jeff Kauffman – Sterne Agee & Leach Inc. –
Analyst
Good
morning. I guess that beats flower and Steve Nicolaus,
right?
First of
all, congratulations – solid operating environment. Most of my
questions have really been answered at this point. But Steve, if I
could ask – I want to follow-up on two aspects. I mean, your
utilization is way up, and I think you alluded to the length of haul increasing,
some of which may have been related to new business. But if you had
to look at how much of that is maybe you're driving fewer miles to get the next
load of freight, or you are getting more backhauls than you used to versus new
business routes, extending your existing mileage, how is the utilization
improving and where are you seeing most of the gains?
Steve Russell – Celadon Group – Chairman,
CEO
Well,
length of haul is helping. I think the operations of the company is
better than it had been two or three or four years ago, and I think service is
better, utilization is improved in part because of that. I think also
the movement by many of our peers away from long-haul – for example, USA Truck
shifted from an 860-mile average length of haul down to 520. That is
similarly taking place in other companies; that's created a better market for
us.
A driver
who wants a 900-mile length of haul doesn't want a 400-mile length of haul
because they can't make as much money because it takes a lot longer to do two
400-mile loads than one 800-mile load.
So there
have been no railroads, no rail lines built over the last 30 or 40 years or
something, so there will always be a long-haul segment. I think our
position in that segment is improving, our market position. We
continue – we intend to continue that. Our drivers like
it. As Paul indicated, driver pay went up because their miles per
week improved despite the fact that we reduced their pay by probably 7% or
something like that on a per-mile basis. So we are staying focused in
that area and hope to continue to do that, Jeff.
24
Jeff Kauffman – Sterne Agee & Leach Inc. –
Analyst
Okay,
thanks. You know, it's interesting. I was talking to the
folks at Kansas City Southern and they were talking about the new intermodal
services they plan on offering out of Monterrey and Mexico City now that they've
got their rail line built and it's all under one roof. They were
talking about some of the other players in the intermodal market in terms of
Mexico to US. Is this, in the long run, an opportunity for you, or is
this, in the long run, a threat, or is it two different markets?
Steve Russell – Celadon Group – Chairman,
CEO
We know
the folks at Kansas City Southern very well, top–down, and we've been talking
and dealing with them. We are doing, in the intermodal business, not
to and from Mexico but basically domestic US, about 6 million a year, now from
zero.
But we
understand it – we are doing the TOFC, trailer on flat car. But
certainly, to the extent that some lanes might make sense intermodally, I
wouldn't exclude the possibility of working with Kansas City Southern to make
that work.
Jeff Kauffman – Sterne Agee & Leach Inc. –
Analyst
Okay,
thanks. And final question – you know, good things are
happening. It's still a tough rate environment, but it seems like you
guys are seeing mileage increase, utilization increase, P&L getting a little
bit better. You talked about pricing discussion starting to
change.
From
10,000 feet, do you characterize yourself as cautiously
optimistic? What kind of keeps you awake at night right
now?
Steve Russell – Celadon Group – Chairman,
CEO
Cautiously
optimistic is a valid statement. We are – and these kind of
conference calls keep me up at night! (laughter) I lost
about three hours of sleep after reading some of the write–ups,
etc.
Jeff Kauffman – Sterne Agee & Leach Inc. –
Analyst
Alright,
very well. Guys, thanks so much.
Steve Russell – Celadon Group – Chairman,
CEO
Thanks,
Jeff.
Next
question, Jasmine?
Operator
Your next
question comes from the line of Thom Albrecht with BB&T. Please
proceed.
25
Thom Albrecht – Stephens Inc. –
Analyst
I've only
got one question after the call. You know, for illustrative purposes,
how much do you, will you be paying for your licensing and renewals, just to put
that into perspective in the earlier discussion?
Steve Russell – Celadon Group – Chairman,
CEO
I think
plates are now, what, about $1800? Times 3000, well, if you back out
Canada.
Paul Will – Celadon Group – Vice Chairman,
CFO, EVP, Treasurer, Principal Accounting Officer
We spread
out over the course of the year though. The way we buy plates, we
don't have to buy them all at one time because how large we are relative to
other fleets, especially largest in Indiana. So – but the whole year
will wind up being around $4.9 million to $5 million.
Thom Albrecht – Stephens Inc. –
Analyst
Okay. That's
all I had, guys. Thanks very much.
Steve Russell – Celadon Group – Chairman,
CEO
Thanks,
Thom.
Last
question?
Operator
Your next
question comes from the line of Donald Broughton with
Avondale. Please proceed.
Donald Broughton – Avondale Partners –
Analyst
Hey,
Steve. Hey, Paul.
Steve Russell – Celadon Group – Chairman,
CEO
Good
morning, Donald.
Donald Broughton – Avondale Partners –
Analyst
Good
morning. A couple of things real quick – you talked earlier about
your high standards for hiring drivers. Steve, I've seen you give
your speech to your drivers in which you tell them if you've been hired here,
you could work anywhere. Obviously, it's instills a sense of pride
with them but also it reflects upon what your driver standards are.
CSA –
would it be a stretch or is it reasonable for me to suggest that you're going to
be one of the carriers that's going to see less negative impact from the
enactment or – I know it's been tested in a number of states, but in the
push–out of nationwide CSA standards? What do you see the negative
impact being for your competitors?
26
Steve Russell – Celadon Group – Chairman,
CEO
I think
that's a great question, Donald. For those on the call, what CSA is,
is basically the DOT and FMCSA, the Washington agencies, will start to manage
safety performance partly by company, but now largely by driver. In
other words, each driver will get a grade based on tickets and based on
accidents, etc. I believe that is going to reduce the number of
drivers.
I asked
that specifically of the folks at the American Trucking Association, which I'm
on the executive committee and the nominating committee. That could
be 4%; it could be 8%. It is not irrelevant because drivers who are
basically barely squeaking by and not particularly good drivers, in this
environment, they've never been scored before, they didn't have to take their
SAT exam every month.
Well,
going forward, with the CSA program – CVSA, whatever the title was – it will
result in drivers being essentially put on probation or being told they can't be
drivers anymore. Our quality of driver is, Donald, you indicated I
think it is above average level significantly. Frankly, if your – our
average driver is 47 years old. At 47 years old, you don't care about
being home every night; you don't care about a 200–mile length of
haul. You are driven, you are personally driven by long length of
haul. Our drivers get home three nights a month or something like
that. But it's their living; it's their
livelihood. They've been drivers for 20 years or 25
years. So I think we will benefit from that new CVSA compared to many
fleets, including smaller fleets.
Donald Broughton – Avondale Partners –
Analyst
I
appreciate that insight, Steve. One other question and then I will
let somebody else have the floor, if there's anybody left. There is a
difference between your data and mine in that I reported 405; you reported 820
companies dropping out of the database you have. Was that a quarterly
number? If so, did that include guys that were one truck, two trucks,
three trucks and hence would not have been captured in my data, or do you have
any other insights into what you're seeing and I'm seeing? Obviously,
we are both seeing companies leaving the industry. The question is
how many?
Steve Russell – Celadon Group – Chairman,
CEO
Jon, do
you want to comment on that? Are you still on?
Jon Russell – Celadon Group –
EVP
Sure. If
the background noise is too much, let me know. Yes, our 820 is in the
quarter. It does include one, two and three truck
fleets. For us, it is difficult because we are not using the pope
data or some of the registration data. We are simply knowing when
phone lines get disconnected, fleets tell us they are out of business or even
checks that from our rebate programs are returned not deliverable.
So we've
seen our numbers uptick quite dramatically in the last 4 to 5
months. Again, it is more anecdotal and feedback from fleets as
opposed to just the hard registration and plating and licensing and
stuff.
27
Donald Broughton – Avondale Partners –
Analyst
As you
know, mine is bad debt data, so – but I don't capture the onsie, twosie,
threesie guys as you obviously can, given your system. So we are both
in the same direction. I just wanted to make sure I had a grasp on
what the differences were between what you were seeing and what I was
seeing.
So thank
you, Jon, and I will let someone have the floor.
Steve Russell – Celadon Group – Chairman,
CEO
Let me
ask you a question, Donald.
Donald Broughton – Avondale Partners –
Analyst
Sure.
Steve Russell – Celadon Group – Chairman,
CEO
You, in
your recent report, you talked about zombie fleets.
Donald Broughton – Avondale Partners –
Analyst
Yes.
Steve Russell – Celadon Group – Chairman,
CEO
Would you
define what a zombie fleet is?
Donald Broughton – Avondale Partners –
Analyst
Well,
they should have been dead were it not for the windfall in cash flow and working
capital they got when fuel came down so dramatically last year. They
would be dead if it weren't for the fact that creditors had extended 2, 3 and
even 40, 90 day forbearances who've got guys out there running that haven't made
a truck payment or – well, they've made two, three truck payments in the last
year. They would be dead if they hadn't forestalled, canceled
preventative maintenance schedules and gone to only catastrophic
maintenance. They would be dead if they hadn't shut down 10%, 20% of
the fleet and begun to cannibalize those trucks for parts. But at
some point, all of those things have allowed them to remain on life
support. They run out of options. They are zombies;
they're walking dead. They just don't know it, or they know it and no
one has pulled the final plug.
I think
you're right, Steve, the number of – the cash demands of relicensing, the slow,
steady creep of fuel back up, and creditors who just have run out of patience –
all of those things combined. They fail because the creditors are out
of patience or because they have an accident that can't post a letter of credit
or bond to cover, or they've had catastrophic maintenance that they can't afford
to have fixed.
28
Steve Russell – Celadon Group – Chairman,
CEO
Thank
you, Donald.
Donald Broughton – Avondale Partners –
Analyst
You're
welcome, Steve. Good luck, guys.
Steve Russell – Celadon Group – Chairman,
CEO
Jasmine,
any other questions?
Operator
At this
time, there are no further questions. I would now like to turn the
call back over to Mr. Steve Russell. Please proceed.
Steve Russell – Celadon Group – Chairman,
CEO
Thank you
very much for being on the call, everybody. Thanks for the
questions. As always, feel free to call anybody who talked
today. Let's hope that this industry continues cyclical and – which
we define as going uphill for a change instead of going downhill from a rate
standpoint. Thank you all for being on the call and have a good
day. Bye-bye. Thank you,
Jasmine. Bye.
Operator
Ladies
and gentlemen, that concludes today's conference. Thank you for your
participation. You may now disconnect. Have a great
day.
29