U.S. Markets open in 2 hrs 4 mins

Edited Transcript of CVTI earnings conference call or presentation 25-Apr-18 2:00pm GMT

Q1 2018 Covenant Transportation Group Inc Earnings Call

Chattanooga Apr 30, 2018 (Thomson StreetEvents) -- Edited Transcript of Covenant Transportation Group Inc earnings conference call or presentation Wednesday, April 25, 2018 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David Ray Parker

Covenant Transportation Group, Inc. - Chairman of the Board & CEO

* Joey B. Hogan

Covenant Transportation Group, Inc. - President

* Richard B. Cribbs

Covenant Transportation Group, Inc. - Executive VP & CFO

================================================================================

Conference Call Participants

================================================================================

* Albert Brad Delco

Stephens Inc., Research Division - MD

* David Griffith Ross

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics

* Jason H. Seidl

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Scott H. Group

Wolfe Research, LLC - MD & Senior Transportation Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Excuse me, everyone, we now have our presenters in conference. (Operator Instructions)

I would like to now turn the conference over to Mr. Richard Cribbs.

--------------------------------------------------------------------------------

Richard B. Cribbs, Covenant Transportation Group, Inc. - Executive VP & CFO [2]

--------------------------------------------------------------------------------

Hey, thank you, Debbie. Good morning and welcome to our First Quarter Conference Call. Joining me on the call this morning are David Parker and Joey Hogan.

As a reminder, this conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risk and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statement. Please review our disclosures and filings with the SEC including, without limitation, the Risk Factors section in our most recent Form 10-K. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances.

A copy of our prepared comments and additional financial information is available on our website at covenanttransport.com under our Investors tab. Our prepared comments will be brief, and then we will open up the call for questions.

In summary, the key highlights of the quarter were: Our asset-based division's revenue, excluding fuel, increased 3.5% to $131.4 million, due primarily to a 6.3% increase in average freight revenue per tractor, partially offset by a $3.2 million year-over-year reduction in intermodal revenues.

Versus the year-ago period, average freight revenue per total mile was $0.154 per mile (sic) [up $0.154 per mile] or 9.5%, and our average miles per tractor were down 2.9%.

Versus the prior year quarter, freight revenue per tractor at our Covenant Transport subsidiary increased an increase of 6.5% and our Southern Refrigerated Transport, SRT subsidiary, experienced an increase of 9.2%, while our Star Transportation subsidiary experienced a decrease of 1.1%.

The asset-based division's operating cost per mile, net of surcharge revenue, were up approximately $0.026 per mile compared to the year-ago period. This was mainly attributable to higher employee wages. These increases were partially offset by lower net fuel cost.

We recognized a loss on disposal of equipment of $1.1 million in the first quarter of 2018 versus a loss of only $400,000 in the first quarter of 2017.

The asset-based operating ratio was 95.9% in the first quarter of 2018 compared with 100.9% in the first quarter of 2017.

Our Solutions logistics subsidiary increased revenue by 45% 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 OR contraction to 94.4% from the 89.0% in the year-ago quarter. This result was a decrease of operating income contribution to $1.1 million in the current-year quarter from $1.4 million in the prior year quarter.

Our minority investment in Transport Enterprise Leasing contributed $1.5 million to pretax earnings or $0.06 per share.

The average age of our tractor fleet continues to be young at 2.1 years as of the end of the quarter, although up slightly from 2.0 years a year ago.

Since December 31 of 2017, total indebtedness, net of cash and including the present value of off-balance lease obligations, has decreased by approximately $24.9 million to $195.2 million.

The main positives in the first quarter were: One, significant improvement in the operating profitability at each of our 3 asset-based truckload subsidiaries; two, a 6.3% increase in average freight revenue per truck versus the same quarter of 2017; three, deleveraging with a $24.9 million decrease in our total net indebtedness; four, improved year-over-year earnings from our investment in Transport Enterprise Leasing; and five, our tangible book value per basic share increased 27.5% to $16.46 from $12.91 a year ago.

The main negatives in the quarter were: One, the operating income declined from our Solutions subsidiary; and two, increased truckload operating cost on a per mile basis, including the unfavorable employee wages, partially offset by lower net fuel cost.

Our fleet experienced an increase to 2,576 trucks by the end of March, a 17-truck increase from our reported fleet size of 2,559 trucks at the end of December. Our fleet of team-driven trucks averaged 894 teams in the first quarter of 2018, which is a 2% decrease from 912 average teams in the fourth quarter of 2017.

From a financial perspective, we are forecasting sequential operating income improvement in each of the remaining quarters of 2018. Based on our expectation of a continuation of recent U.S. economic growth as well as continued regulatory and demographic capacity constraints on driver availability, we expect year-over-year average freight revenue per total mile to be positive over the remainder of the year by a high single-digit percentage. The percentage may be greatest in the second quarter, when a large portion of our annual contractual rate revisions are scheduled and the comparison to last year's quarter is most favorable.

The expected increase in yield will be offset in part by higher employee wages, the potential for miles per tractor to remain lower than last year and inflationary factors. All in all, we expect meaningful year-over-year improvements in earnings per share each quarter of 2018.

In terms of strategic and operating considerations, we remain focused on positioning our service offerings for extended success in their respective markets and continuing to develop and grow our professional driver employee base.

A key initiative for our business in 2018 is becoming closer to our customers. As we allocate our capacity in the currently robust freight market, we are seeking to partner with customers that will integrate us deeper into their supply chains, offer operationally friendly and seasonally manageable volumes and respect our drivers' time and value.

We expect to increase our capital allocation to our dedicated 3PL and other managed freight solutions to become the go-to partner for our customers' most critical transportation and logistics needs. In this regard, we believe our diverse service offerings provide a valuable asset that we can leverage to achieve this goal, while our enterprise-wide sales effort will make it easier to do business with us.

We continue to expect significant earnings contribution from peak shipments in November-December of each year. However, the focus on these other services is intended to reduce the seasonal volatility we have experienced in previous years.

As we pursue our goals, we expect the professional driver environment to continue to offer significant challenges as well as the opportunity to differentiate the Covenant group of companies as the carrier of choice for many drivers. Many small competitors face the prospect of network disruption and substantially lower paid miles for their drivers due to the enforcement of mandatory electronic log requirements. Our network has been built on years of electronic log compliance, and we are actively working with our customers to maximize the efficiency and utility of our drivers' hours of service.

We expect to continue to reward our drivers with pay increases to maintain or improve our seated truck percentage. In addition, we will continue to be highly focused on all aspects of our drivers' experience, giving them the resources they need to enjoy their time with us, spend more time with their families, provide excellent customer service and view us as a safe and rewarding home.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from David Ross.

--------------------------------------------------------------------------------

David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [2]

--------------------------------------------------------------------------------

Your unseated truck count rose a little bit. What's a good normal level for you guys? Where do you want it to be? Is it closer to 2% or 3%? Do you want to get back to the 4%? And how do you think about getting there?

--------------------------------------------------------------------------------

Richard B. Cribbs, Covenant Transportation Group, Inc. - Executive VP & CFO [3]

--------------------------------------------------------------------------------

We'd love to get it to the 2% or 3%. Actually, as the quarter closed out and as we've gotten into April with some of the changes we've made, that unseated percentage is down closer to 4% to 4.5%. That's where we've been most quarters each quarter the last year or 1.5 years. And so we kind of think we can kind of keep it there the rest of the year.

--------------------------------------------------------------------------------

Joey B. Hogan, Covenant Transportation Group, Inc. - President [4]

--------------------------------------------------------------------------------

David, this is Joey. I think kind of the way to think about it, for us anyway, is 5% is kind of the danger zone. When it starts approaching 5%, it's telling us we got to do something. Either we need to adjust to something, either the markets is changing for pay, retention efforts. But if we can kind of keep it under 5%, I would say we are "happy." And obviously, the lower, the better.

--------------------------------------------------------------------------------

David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [5]

--------------------------------------------------------------------------------

And then in the team-driven trucks, you mentioned that, that has fallen a little bit year-over-year. And when we think about that in terms of supply and demand in the marketplace, teams seem to be in high demand right now.

Is there anything unique at Covenant that's taking supply out? Or is it just hard to find teams everywhere? And are you being rewarded for that in pricing more than the solo fleet?

--------------------------------------------------------------------------------

Joey B. Hogan, Covenant Transportation Group, Inc. - President [6]

--------------------------------------------------------------------------------

David, yes on the latter part. I mean, there is no question that in this market, if you've got a team, you're going to -- you should do well. We also see in these types of markets historically is that everybody wants them. And so the competition for teams gets -- it's already strong, and it gets intense as the marketplace sees that opportunity and people that traditionally don't run teams jump in and try to add a few teams and -- to try and capitalize on that opportunity.

So we've seen this before. We don't like it. We've seen it before. When the market really tightens up, our team count kind of slows, some markets, it kind of can drop. We're working our tail off to hold it, wouldn't mind growing it a little bit. But it's not -- this is not unusual, but we're not one for excuses.

So probably, our rates have moved more than we expected. And so we're evaluating that, too. Because with an expectation of what we think our pricing will be, there's also an expectation of what we can pass along to our workforce.

And so with rates moving more than expected, we're reviewing our plans again for our compensation for our workforce as we speak. So it's kind of at minimum, you got to move with the market, and then at least from that, how much you think you can afford beyond that. So extremely intense market for teams right now, there's no question.

--------------------------------------------------------------------------------

Richard B. Cribbs, Covenant Transportation Group, Inc. - Executive VP & CFO [7]

--------------------------------------------------------------------------------

Yes Dave, this is Richard. On top of increase in the driver pay and some additional amounts that we're looking at right now, we've also opened up a new orientation group in Pennsylvania. And we've added to our headcount of our recruiting staff. And so there's a lot of different areas that we're trying to improve on.

--------------------------------------------------------------------------------

David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [8]

--------------------------------------------------------------------------------

And would you say that the teams that were lost went to competitors or to retirement? How would you bucket those?

--------------------------------------------------------------------------------

Joey B. Hogan, Covenant Transportation Group, Inc. - President [9]

--------------------------------------------------------------------------------

Yes. This -- David, so it's all the above. It's all the above. Because we still hire, quite a few of our hires on the expedited side are new students. We know a high portion of those just didn't work out, not interested in the industry.

And so there's kind of 2 buckets, there's a student bucket and an experienced bucket. And on the expedited side again, it's a tough job. It's a tough job, and they should be paid the most, in our opinion, and it is in our model, besides our trainers, which is also an extremely difficult job.

And folks that want to team get kind of seduced for the W2 potential, but then -- even experienced people. But then they find a partner and it doesn't quite work out. I can't sleep while the truck's running. So it's a tough job. And so some people stick and some don't.

--------------------------------------------------------------------------------

David Ray Parker, Covenant Transportation Group, Inc. - Chairman of the Board & CEO [10]

--------------------------------------------------------------------------------

As well, David, unemployment being where it's at, oil patch doing what it's doing, I mean, I read Wall Street yesterday on, who was it? BNSF? It's now up to, whatever, $20,000 for recruiting bonuses.

And it's cause there's just not enough people wanting to work. And so we got to attack it based upon just the pressure that we've got with a full employment that's going on right now in the United States.

--------------------------------------------------------------------------------

Joey B. Hogan, Covenant Transportation Group, Inc. - President [11]

--------------------------------------------------------------------------------

And I think part of the strategy that Richard mentioned in the outlook section, once we get a driver in any of the doors within the enterprise, the challenge is to keep them, assuming they want to stay and they're doing a good job.

So the growth of dedicated service offering is really critical right now because, a, it allows us to minimize or lower volatility on the expedited side; and then, b, the returns are significant enough that it's not too far off what the expedited is. And we just think that's a good place to be as if drivers don't want to team but like the enterprise, like the equipment, the benefits, the culture, so dedicated is a great place to be.

So you're seeing us kind of pedal down in that regard, not by any stretch, taking any eye off the ball on the expedited side. But in this market, it's giving us a good opportunity to grow our dedicated service offering.

--------------------------------------------------------------------------------

David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [12]

--------------------------------------------------------------------------------

And how big is that dedicated service offering now, either in terms of revenue or number of trucks?

--------------------------------------------------------------------------------

Joey B. Hogan, Covenant Transportation Group, Inc. - President [13]

--------------------------------------------------------------------------------

It's approaching the same size as the expedited side. We don't really disclose that in detail as far as -- we disclose by company, not by service offering because all 3 of the companies have dedicated service offerings. So when you combine all 3 of those, let's call it 900-ish trucks, approaching 1,000. And expedited is around 1,000 to 1,100. So it's approaching the expedited side really quickly.

--------------------------------------------------------------------------------

David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [14]

--------------------------------------------------------------------------------

All right. So over 1/3 of the business, that's a good way to look at it.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Brad Delco.

--------------------------------------------------------------------------------

Albert Brad Delco, Stephens Inc., Research Division - MD [16]

--------------------------------------------------------------------------------

David, wanted you to talk a little bit, Richard provided us a lot of detail with his comments. But as you think about the cadence of rate, what you've been able to accomplish thus far and how it sort of folds into the mix in second quarter and third quarter, can you just sort of touch on that? How much have you already seen versus how much we are going to see in the second and third quarter?

--------------------------------------------------------------------------------

David Ray Parker, Covenant Transportation Group, Inc. - Chairman of the Board & CEO [17]

--------------------------------------------------------------------------------

Yes. I was very happy with what we were able to accomplish in the first quarter, and I think that you'll see numbers north of those that we reported in the first quarter. Keep in mind, we still got -- we have a lot of our accounts that are a May, June time frame kind of deal.

And so second quarter is always a big quarter for us from a rate standpoint. And I'm very encouraged with what I'm seeing on the rate side out there, Brad. So I think you're going to still continue to see nice improvement in both second and third quarter on pricing.

--------------------------------------------------------------------------------

Albert Brad Delco, Stephens Inc., Research Division - MD [18]

--------------------------------------------------------------------------------

And when you say improvement, are you saying -- I guess I'm showing...

--------------------------------------------------------------------------------

David Ray Parker, Covenant Transportation Group, Inc. - Chairman of the Board & CEO [19]

--------------------------------------------------------------------------------

Over last year. Yes.

--------------------------------------------------------------------------------

Albert Brad Delco, Stephens Inc., Research Division - MD [20]

--------------------------------------------------------------------------------

9.5% on rate per total mile. You think it's going to be greater than a 9.5% increase? Or you think on an absolute basis, this is going to be higher in the second quarter?

--------------------------------------------------------------------------------

David Ray Parker, Covenant Transportation Group, Inc. - Chairman of the Board & CEO [21]

--------------------------------------------------------------------------------

Well, both. I think it's going to be -- I think that we will continue to build upon the 9% or whatever first quarter was, 9.5% in the first quarter. I think the second quarter will be higher than that number by a decent number. So I think that -- yes, we will -- sequential, we will continue to grow the rates.

--------------------------------------------------------------------------------

Albert Brad Delco, Stephens Inc., Research Division - MD [22]

--------------------------------------------------------------------------------

And then maybe kind of -- then the point of the question really though was, in terms of what you were able to show us with your first quarter results, have you touched 30% of your contractual business, 10%, 20%? Like, how does the cadence of that play out through first, second and third quarter?

--------------------------------------------------------------------------------

David Ray Parker, Covenant Transportation Group, Inc. - Chairman of the Board & CEO [23]

--------------------------------------------------------------------------------

Yes. I would say that goes into 2 different buckets. I would say that from a customer standpoint, that we've probably have attacked 70% or 80% of them. From a volume standpoint, we got some major accounts in the second quarter that are coming online from a rate standpoint.

And then it kind of flattens, not as much opportunities, in the third quarter from a contractual basis. So I think that the second quarter is really going to be where we'll see some improvement on just because of the big customers.

--------------------------------------------------------------------------------

Richard B. Cribbs, Covenant Transportation Group, Inc. - Executive VP & CFO [24]

--------------------------------------------------------------------------------

And when he says 70%, 80% have been touched, that hasn't necessarily all gone into effect. Probably about 1/2 of our rate increases go into effect during the second quarter, at some point between April and June.

--------------------------------------------------------------------------------

Albert Brad Delco, Stephens Inc., Research Division - MD [25]

--------------------------------------------------------------------------------

Okay, so Richard, like then -- have -- is 30% the right number for first quarter, and you're getting an additional 50%? So by the end of second quarter, 80% of your contractual pricing is effective? That's kind of the question I'm asking.

--------------------------------------------------------------------------------

David Ray Parker, Covenant Transportation Group, Inc. - Chairman of the Board & CEO [26]

--------------------------------------------------------------------------------

I would agree with that, that's about right.

--------------------------------------------------------------------------------

Albert Brad Delco, Stephens Inc., Research Division - MD [27]

--------------------------------------------------------------------------------

Okay. And then just the next question, David. I get the sense that we're shifting a little bit of the strategy here more to dedicated. I understand, given how tight the market is and how willing shippers are willing to lock up capacity. Sounds -- you're not necessarily de-emphasizing, it sounds like, the expedited. So I imagine the regular cast of characters or customers are going still be relying on you in fourth quarter for that capacity.

When did those conversations start? Because just based on what we're seeing now, it seems like those should be starting sooner than later. And if so, can you provide any color on what those conversations are like with those customers?

--------------------------------------------------------------------------------

David Ray Parker, Covenant Transportation Group, Inc. - Chairman of the Board & CEO [28]

--------------------------------------------------------------------------------

So your 2 questions. Number one, on the dedicated side, we are definitely seeing great opportunities out there because of the environment that we've got. And keep in mind, we have got a question up here that's really driving our processes, and that is how do we get deeper into supply chain? How do we do that?

And that can come across as what Solutions is doing on the 3PL side. Or what Solutions is doing even on the brokerage side. But the 3PL side, in particular, how do we get deeper? How do we eliminate from making sure that we never become just an OTR, you call, we haul, kind of carrier? And we look at it and said, "One way is to get deeper, one way is the 3PL side, one way is the dedicated side, because those are long-term contracts that we've got in place."

And what I mean by long term, so you don't get fooled about it, is that's at least 2 years. So there's 2-, 3-, 4-year type arrangements there that we are putting in place and to make sure that our customers don't have the ability to use you and abuse you during a tight market, that we've put into the contracts that if you get rid of the trucks, then it's over a period of time.

So x percent can come out per quarter on both sides, that's us and them, if we wanted to exit it, so there's protections on both sides. And what we have seen in the past, Brad, is that during "a slowdown" out there, the customer will keep their dedicated, the OTR is the first one to get hit. The second -- but and the last one that gets hit is their dedicated side of the world. And so we want to do that.

The expedited is absolutely roaring. I could not be happier with the expedited. We got to figure out how to get us another 100 teams or so into the bucket. And so I think that as we're forming the company with the question up there of how to get deeper into supply chain, that opens up a lot of different avenues for us. And expedited is absolutely one of those. Just because we're growing the other one, not at the sake of expedited.

Because right now, what I see in the next -- 2, 3, 4 years -- 2 to 3 years, expedited is going to be unbelievable opportunities. I could not be any more excited than I am right now. It feels like 1994 to me. And I think that the opportunities are just wonderful out there. And I don't see it happening.

With a slowdown of -- the possibility -- because the thing that I've told our folks as well as Wall Street is that nobody can predict if a bomb goes off somewhere. And we all were -- have been concerned about the North Korea world, but it's even looking like, and hopefully, that the stuff is not going to happen over there that's going to put a damper into whatever we're doing in the United States.

And I'm just here to tell you that the economy is going very strong. I don't care if Caterpillar came out and said industrials are going to sink and all that stuff. We're not industrials. And I'm very proud of what I see in the trucking.

And what we have been seeing for the last 10 years and what we've all been talking about from a capacity standpoint and a tough driver market and an EDL -- ELD standpoint, we are seeing it. We are absolutely seeing it now, and I just -- I see it, for the next couple of years, being a very exciting time for trucking. Did that answer your question?

--------------------------------------------------------------------------------

Albert Brad Delco, Stephens Inc., Research Division - MD [29]

--------------------------------------------------------------------------------

It does, I could tell you're enthused, David. Maybe last question, very quickly for Richard. A loss of $1.1 million on equipment this quarter. Was that trucks, trailers? Is that because they're manual transmissions and not AMT? What was the reason for the loss on sale of equipment?

--------------------------------------------------------------------------------

Richard B. Cribbs, Covenant Transportation Group, Inc. - Executive VP & CFO [30]

--------------------------------------------------------------------------------

One of the things that we've talked about is some additional investment in IT equipment. And so as we're upgrading some technology, actually, there's some write-down or write-off of some older-technology equipment that's being replaced. And so I think that, that's primarily done. And so we've got -- we should see that number drop below $0.5 million each quarter the rest of way this year.

--------------------------------------------------------------------------------

Albert Brad Delco, Stephens Inc., Research Division - MD [31]

--------------------------------------------------------------------------------

So you expect a $0.5 million loss on equipment for the rest of the year? Or per quarter?

--------------------------------------------------------------------------------

Richard B. Cribbs, Covenant Transportation Group, Inc. - Executive VP & CFO [32]

--------------------------------------------------------------------------------

For each quarter. That's right.

--------------------------------------------------------------------------------

David Ray Parker, Covenant Transportation Group, Inc. - Chairman of the Board & CEO [33]

--------------------------------------------------------------------------------

And like he said, a lot of that is not around the tractor-trailer deal. We had a bunch of Qualcomms that we've had for 147 years that we've been in business that we went ahead and wrote them off because the new models that everybody's coming out with, Brad.

--------------------------------------------------------------------------------

Albert Brad Delco, Stephens Inc., Research Division - MD [34]

--------------------------------------------------------------------------------

Okay. Got you. So it has less to do with what your equipment's on the books for versus...

--------------------------------------------------------------------------------

Richard B. Cribbs, Covenant Transportation Group, Inc. - Executive VP & CFO [35]

--------------------------------------------------------------------------------

Right. The used truck market has improved. The accelerated depreciation we started back in '15 has got us with good book value. So we're comfortable where we are book value-wise on trucks. We did dispose of a pretty large number of trailers in the first quarter, and you saw some of that. But it wasn't -- those weren't large losses, that was very close to fair value.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

Our next question comes from Scott Group.

--------------------------------------------------------------------------------

Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [37]

--------------------------------------------------------------------------------

David, could you just give us some thoughts on what you're seeing so far in April? So it feels like hasn't gotten hot yet, but we've had the ELD take effect. What are you seeing in April? What does it tell you about ELD's market?

--------------------------------------------------------------------------------

David Ray Parker, Covenant Transportation Group, Inc. - Chairman of the Board & CEO [38]

--------------------------------------------------------------------------------

Yes. Yes. I think, April, I'm very, very happy. I'm very pleased. April, as we all know, can be one of those months that can be a up- or down-type month for the month of April because you're coming off the first quarter in March. And we had Easter also in April.

And -- but I couldn't -- business is outstanding. And for a month of April that kind of pauses as I look at Major League Baseball and I look at all the weather, the cancellations, that doesn't help. That doesn't help trucking. There's no doubt about it.

When people are not grilling and people have not started in the beverage season and all those kind of things, and it's been worse in the month of April than it has been in years past. So we've had some headwind on that, but our numbers are extremely strong. And I'm very happy with what I'm seeing, freight.

Matter of fact, from a standpoint of just the business environment, I'm glad that we had a little bit weather going on in the Midwest in particular, because we're still overbooked. I mean, there might be a state here and a state there every day that maybe that we're not overbooked, but I'm here to tell you that we're 95% overbooked in the month of April.

And probably a positive sign is that instead of being overbooked 125% like we have been, maybe we're overbooked 110%. But which reduces the butt chewings and reduces the pressure that you've got on your -- from the customers to at least get it to manageability kind of deal, you can manage it. But I'm very happy.

We are -- I believe some of that is also the ELD. There is no doubt that we are seeing customers with the same thing we've all been preaching for 2 years. That freight is 550 to 650 miles, 700 miles, lift to haul, they are wanting to get on teams. They're asking, we are seeing it on our Solutions side that not that we advocate anybody cheating, but I'm just here to tell you that we got a lot of trucks that run out of hours, that are running solo on our Solutions group that, 6 months ago, were not running out of hours. And today, they're having to take rest breaks.

And so that in itself is what I believe is making April the month it is. And to me, Lord just help us when beverage season gets here and the cookout season gets here and those kind of things, I think it's going to be outstanding.

--------------------------------------------------------------------------------

Richard B. Cribbs, Covenant Transportation Group, Inc. - Executive VP & CFO [39]

--------------------------------------------------------------------------------

Yes, Scott, just for the first 3 weeks of April, utilization's actually turned just slightly positive, coming out of flat to positive, versus being down 3% in the first quarter. And some of that comes from, as we talked about, our seated truck percentage improving and a few more teams than what we had on average in the first quarter.

But overall, freight mix is really strong. And then some of that's the dedicated accounts that we brought on in the last 45 days have really good utilization.

--------------------------------------------------------------------------------

David Ray Parker, Covenant Transportation Group, Inc. - Chairman of the Board & CEO [40]

--------------------------------------------------------------------------------

But at the same time, some of that dedicated though, Richard, has poor utilization. And the rate, I mean, it's a mix of all of it. It's a mix of all of that.

--------------------------------------------------------------------------------

Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [41]

--------------------------------------------------------------------------------

Okay. Very helpful. The pricing comment about second quarter maybe being the biggest year-over-year increase this year, is that entirely just the comps get tougher in the back half of the year? Or is that sort of any view about the direction of spot rates or anything like that? I just want to understand the point. I think it's just comps, but I just want to...

--------------------------------------------------------------------------------

David Ray Parker, Covenant Transportation Group, Inc. - Chairman of the Board & CEO [42]

--------------------------------------------------------------------------------

I think a lot of it has to do also with the end of the year. The hurricane season, no doubt, that happened in the month of September, but it went till November 1. I mean, we were still doing some billing in the middle of November on maybe 25% of the September-October numbers. So we still had some of that.

But the hurricane season, unless there's -- hopefully no death, unless there's some more hurricane season, storms, that's going to be an obstacle that we got to overcome because that pricing is so dramatic, as you know. If you were to strip the hurricane out last year and compare it to this year, you would see second quarter results, that I think you'll see from a rate standpoint, to continue to carry on into that third quarter. But September will be a headwind.

--------------------------------------------------------------------------------

Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [43]

--------------------------------------------------------------------------------

Okay, so not just the comps. Okay, that's fair.

--------------------------------------------------------------------------------

Richard B. Cribbs, Covenant Transportation Group, Inc. - Executive VP & CFO [44]

--------------------------------------------------------------------------------

It is. Joey's saying something.

--------------------------------------------------------------------------------

Joey B. Hogan, Covenant Transportation Group, Inc. - President [45]

--------------------------------------------------------------------------------

Scott, and also just remember, we talked about it last year, but the second quarter last year, we had a large, large account, top 10 account, that we rationalized throughout the second quarter. So that was a pretty big impact on the overall rate structure from first to second quarter. So we're wrapping back around that difference.

So one of the things when you're comparing quarters-to-quarters, that was a big kind of negative last year that we don't expect, obviously, this year. So from a quarter-to-quarter basis, that's probably one of the main reasons, besides the market, where you're going to see it probably the most favorable.

And then you move into the impact of hurricanes and the FEMA work that we did in the third quarter as a headwind. So those are 2 big issues when you compare, move from first to second to third.

--------------------------------------------------------------------------------

Richard B. Cribbs, Covenant Transportation Group, Inc. - Executive VP & CFO [46]

--------------------------------------------------------------------------------

And then in the fourth quarter, we have a lot more dedicated accounts where the rates are going to be set versus taking on quite a big a percentage of our freight that will be the peak freight for the month of December. So it really is just a comp issue.

--------------------------------------------------------------------------------

Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [47]

--------------------------------------------------------------------------------

Okay. And then final question. So if we're getting high single-digit pricing for the year, what do you think is a realistic level of OR improvement to see this year?

--------------------------------------------------------------------------------

Richard B. Cribbs, Covenant Transportation Group, Inc. - Executive VP & CFO [48]

--------------------------------------------------------------------------------

I think we talked about that at the -- during the fourth quarter call. And I think we're still tracking at -- I think at that time, I said 250 to 300 basis points of improvement. I think that's still a reasonable estimate at this point.

--------------------------------------------------------------------------------

Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [49]

--------------------------------------------------------------------------------

Does it change because the pricing expectation's higher now? Or not necessarily.

--------------------------------------------------------------------------------

Richard B. Cribbs, Covenant Transportation Group, Inc. - Executive VP & CFO [50]

--------------------------------------------------------------------------------

I mean, I think it changed possibly a little bit. You saw that in our first quarter results. But we also have the wage increase pressures as well. And then we're still getting through our investment into our managed capacity business with additional software and people.

And still aren't sure when that spot rate will stop the squeeze on our margins in that business as well. So overall, it's probably higher end of that than it was lower end at the time we talked a quarter ago. But not moved too substantially since then.

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Jason Seidl.

--------------------------------------------------------------------------------

Jason H. Seidl, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [52]

--------------------------------------------------------------------------------

Just a couple quick ones for me. On the fuel hedges that you guys have here in 2018, could you remind us how they run throughout the year? And given where fuel prices are now, what type of a gain would you expect to book in 2Q?

--------------------------------------------------------------------------------

Richard B. Cribbs, Covenant Transportation Group, Inc. - Executive VP & CFO [53]

--------------------------------------------------------------------------------

I think the fuel hedges, we basically have the same percentage hedged and at the same prices the whole year. So it could change a little bit, year-over-year basis.

But what we're showing as fuel hedge income in the first quarter is probably pretty similar to what we'll see the rest of the year, unless the price of fuel goes up, and then it's just we're going to have higher fuel cost, but we'll have improved fuel hedge to balance that out. So it's -- there's no change throughout the rest of the year. And then next year, we have no fuel hedges.

--------------------------------------------------------------------------------

Jason H. Seidl, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [54]

--------------------------------------------------------------------------------

Okay. No, no. I knew that. Okay. I just wanted to make sure that there wasn't any changes as you move throughout the quarters.

I want to talk about Solutions for a little bit, and I don't think you mentioned this. Could you remind us what percentage is spot versus what percentage is contract? And also what percent of the business that they do is from existing customers versus just out in the marketplace?

--------------------------------------------------------------------------------

Joey B. Hogan, Covenant Transportation Group, Inc. - President [55]

--------------------------------------------------------------------------------

Jason, that's a great question. Thank you. Historically, we're in a -- the way I would say '18 for our managed freight service offering is it's a year of transition.

Historically, to answer your first question, has been huge contractual rates, a complement to the asset side of the enterprise. And so the market has been, let's call it, balanced enough to where margins will do it. And we have a small but growing [freeze/chill] business in there also.

I think with where we are, investment in people, we're trying to push the, let's call it, spot or customers that will allow us to price a cost-plus-type situation. So we're trying to really, really move that as well as growing our 3PL business, the systems with a -- as a hindrance for us.

And so right now, it's very large contractual. I've been very pleased with some of the new business that Solutions has brought on in the first quarter of this year that we think has -- it gives them ability to act more like a, I'll call it, a true intermediary. And so we'll see. But it's very early in that process. So it's a big year for managed freight. You're seeing the revenue results are significant, and so we're excited about that.

But obviously, the margin contraction is probably more than we expected. We expected quite a bit of that. I think Richard did a good job of setting expectations for that for the year. But we still achieved -- we still exceeded our goal for the first quarter. And a lot of that was helped by the revenue improvement. So year of transition, high contractual, trying to add a mix of more spot-ish type customers with it and trying to aggressively grow our 3PL business.

--------------------------------------------------------------------------------

Jason H. Seidl, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [56]

--------------------------------------------------------------------------------

Okay, that's a great color. I really appreciate that. Richard, I want to get back to one of your comments and then I'll turn it over to somebody else. You mentioned additional driver wage increases coming. To what magnitude? And when should we expect them to hit?

--------------------------------------------------------------------------------

Richard B. Cribbs, Covenant Transportation Group, Inc. - Executive VP & CFO [57]

--------------------------------------------------------------------------------

Well, a couple of things. In the first quarter, the expedited Team Bonus that we put in place didn't go into place until February 1. So we only had 2 months effect of that. At SRT, we had approximately a 10% driver pay increase that went into effect March 12 or 14, somewhere in there, so we only had 2 or 3 weeks' worth of that in the numbers.

And then there's some additional pay increases going into place within the dedicated accounts as well as on the team expedited side to help us continue to seat those trucks, as we talked about, trying to grow that back again. I don't know the magnitude, but it could be another $0.02 to $0.04 a mile of employee pay increase moving from Q1 into Q2, Q3 kind of time frame, all in.

--------------------------------------------------------------------------------

Jason H. Seidl, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [58]

--------------------------------------------------------------------------------

Nice job in the quarter.

--------------------------------------------------------------------------------

Operator [59]

--------------------------------------------------------------------------------

Next is a follow-up question from David Ross.

--------------------------------------------------------------------------------

David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [60]

--------------------------------------------------------------------------------

Just wanted to touch on dedicated briefly. The annual contracts, I guess when you sign up a dedicated customer, are these 2-year deals? 2- to 3-year deals? 3- to 5-year deals? How would you describe the contract in the dedicated side?

--------------------------------------------------------------------------------

David Ray Parker, Covenant Transportation Group, Inc. - Chairman of the Board & CEO [61]

--------------------------------------------------------------------------------

They're a minimum of 2. It's a minimum, and we try to get it out as far as we can. I don't know, David, if we got any 5-year deals. But I would say 2 to 3 is 80% of them. And then the other, say, 20% would be 1 or 4., if that helps on there.

And yes -- but we do -- that said, that's just the contract. But we do have the ability every year to sit down and discuss pricing with our customers. So we don't have it where it's a, say, a 2-year contract that we can't talk rates for 2 years. Every one of them are -- has the ability to be able to discuss rates.

--------------------------------------------------------------------------------

David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [62]

--------------------------------------------------------------------------------

Especially on the driver side. I suppose the drivers there are going to want their fleet to still operate.

--------------------------------------------------------------------------------

David Ray Parker, Covenant Transportation Group, Inc. - Chairman of the Board & CEO [63]

--------------------------------------------------------------------------------

Yes, that's right. That's exactly correct. And that said, because I'm sitting here thinking why you said that, we did have -- we do have 1 that is a 2-year contract without a rate. And we have had great talks with that customer in the last 2 to 3 weeks, and they are very open to a midterm rate strictly because of the driver situation. So we do have 1 account that is like that.

But I do believe that we will have success all in the name of the driver because our thing is, is that we've got a situation, good on the driver world, that is not common. And we've got to get help. Do you want to help us on this or do you want us to reduce the amount of trucks that we're running for you? So those are the conversations, I think, will be successful.

--------------------------------------------------------------------------------

David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [64]

--------------------------------------------------------------------------------

And when you sign up new contracts or when you go out and bid on dedicated business, are you targeting any specific OR? I mean, is that something where you'd want an 88% OR on it? A 90% OR? How do you look at that with the rest of your business in this environment?

--------------------------------------------------------------------------------

David Ray Parker, Covenant Transportation Group, Inc. - Chairman of the Board & CEO [65]

--------------------------------------------------------------------------------

Yes. We do that as it relates, say, to our SRT division, where we got, whatever, 200 trucks or so that are running on the dedicated world. Well, as you know, when our turnaround for the last 2 or 3 years on the SRT, there is no doubt that a 91% or 92% OR is better than 101% OR.

And so we do have some of those. But I would say that of the almost 1,000 trucks that we're running in the dedicated environment, I would say that average OR is probably sub-90%. Yes. Joey is saying even better than that. So it's a good number.

--------------------------------------------------------------------------------

David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [66]

--------------------------------------------------------------------------------

Okay. And then if you think about that operating sub-90% and expedited really being hot right now, what's preventing the overall truckload business from getting to the sub-90% range?

--------------------------------------------------------------------------------

David Ray Parker, Covenant Transportation Group, Inc. - Chairman of the Board & CEO [67]

--------------------------------------------------------------------------------

We're making -- with SRT still being 1/3 of our business, but those guys have done an unbelievable job, not just in the -- not just since the fourth quarter when the world changed from a tightness. I mean, they were doing a good job 12 months ago at this time and it just continue to build.

And so as I look at their first quarter, I think their first quarter was, Richard, was 106% OR or something last year, if I remember. And this year, it was profitable. And so they have made great strides, they're taking out about 800 basis points or so, 700 to 800 basis points year-over-year. And I think that's what they will continue to do this year.

So there's 1/3 of your business that's making great headway and will continue to make great headway. But right now a 95% OR, we're very pleased with, from 105% OR. And I believe by the end of this year, that SRT will be in the low 90s.

--------------------------------------------------------------------------------

Richard B. Cribbs, Covenant Transportation Group, Inc. - Executive VP & CFO [68]

--------------------------------------------------------------------------------

Yes. They were a little better than that last year, and they improved about 500 basis points year-over-year in the first quarter. But they are trending down to, I think, we are hoping to get to a nice run rate in the low 90s by the end of the year.

--------------------------------------------------------------------------------

David Ray Parker, Covenant Transportation Group, Inc. - Chairman of the Board & CEO [69]

--------------------------------------------------------------------------------

Solo refrigerated business. Non-dedicated.

--------------------------------------------------------------------------------

Richard B. Cribbs, Covenant Transportation Group, Inc. - Executive VP & CFO [70]

--------------------------------------------------------------------------------

Yes, non-dedicated, solo refrigerated business.

--------------------------------------------------------------------------------

David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [71]

--------------------------------------------------------------------------------

And last question is just on the trailer count, down 9% year-over-year. Could you remind me or explain what's going on there?

--------------------------------------------------------------------------------

David Ray Parker, Covenant Transportation Group, Inc. - Chairman of the Board & CEO [72]

--------------------------------------------------------------------------------

Just too many trailers.

--------------------------------------------------------------------------------

Joey B. Hogan, Covenant Transportation Group, Inc. - President [73]

--------------------------------------------------------------------------------

Just too many trailers. And so we've been carrying -- and because of the, I'll call it the weak-ish market, everybody went into on the trailer side -- wait, let me back up.

'15 and '16 was the first markets that we can recall where the reefer trailer used market was weak. And I think a lot of our secondary market on the reefer side kind of sat on their hands waiting on, what am I going to do? Is ELDs going to get passed or not? What's the effect to me going to be? Do I need to shrink? Do I need [VAT]? So everybody in that market really stalled as we were reducing our investment in refrigerated market. So in time, we ended up with too many trailers.

And then also, the expedited side has been slowly drifting. And so we've been wanting to rationalize our trailer fleet for a couple of years. And basically here in the last 6 months or so, it's now the market's kind of moved to the point to where we can.

We're not quite done yet. I think you'll see a little bit more reduction in the second quarter. But the big chunk happened kind of fourth quarter, first quarter.

--------------------------------------------------------------------------------

Operator [74]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Brad Delco.

--------------------------------------------------------------------------------

Albert Brad Delco, Stephens Inc., Research Division - MD [75]

--------------------------------------------------------------------------------

A quick follow-up. Richard, just kind of trying to understand seasonality. To the extent you could provide us a number, did the weather hurt you at all? Was it noticeable? Was it a lot worse on a year-over-year basis?

Because I kind of sense that we're hearing it a little bit from some other truckers, that it had a negative impact on first quarter. So to the extent you could provide us a number, that would be helpful.

--------------------------------------------------------------------------------

David Ray Parker, Covenant Transportation Group, Inc. - Chairman of the Board & CEO [76]

--------------------------------------------------------------------------------

There is no doubt that February -- January didn't, February had some issues in there, in particular the eastern section of the country. That, along with one state, the state of Wyoming, that's just horrible. And we put a lot of trucks running through the state of Wyoming going east and west. But it did affect.

Donner's Pass, which is Reno, Nevada out there, was actually in great shape until about the 1st of March. And then it went about 3 weeks there where they just got -- just got flooded with snow up there. But I would say, if you were to look at first quarter overall, that it was pretty normal. But it just -- with January being good and February hurting, on particular, the eastern section of the country.

--------------------------------------------------------------------------------

Joey B. Hogan, Covenant Transportation Group, Inc. - President [77]

--------------------------------------------------------------------------------

March -- for the month of March, we had the most shutdowns we've had in 5 years. So it was impactful in the month of March also. So...

--------------------------------------------------------------------------------

Albert Brad Delco, Stephens Inc., Research Division - MD [78]

--------------------------------------------------------------------------------

Okay. But no idea in terms of it cost $1 million? Or it's about in line with what it normally costs you for a first quarter?

--------------------------------------------------------------------------------

Joey B. Hogan, Covenant Transportation Group, Inc. - President [79]

--------------------------------------------------------------------------------

Yes, if you look at the cost, it was about the same. So we did a good job that we had more shutdowns with the same cost. So I think we did a better job managing through that. But with a little bit less miles, our incident rate for weather-related accidents was up slightly.

So I think, all things considered, from the group, we did a pretty good a job muscling our way through a pretty difficult winter from a weather standpoint.

--------------------------------------------------------------------------------

Albert Brad Delco, Stephens Inc., Research Division - MD [80]

--------------------------------------------------------------------------------

Okay. And then maybe, Richard, I want to circle that back to one of Scott's questions about sort of your OR expectations. Because if you look historically, you typically improve second quarter by 400 or 500 basis points, which would imply you're going to improve margins by 500 to 600 basis points in the second quarter. So sort of out of the gate, you're performing a lot better than that annual guidance.

So should we be thinking that guidance is a little maybe conservative? Or do things get just a lot more challenged in the back half of the year? Which seems counterintuitive because you're going to have a lot more rate embedded in the business.

--------------------------------------------------------------------------------

Richard B. Cribbs, Covenant Transportation Group, Inc. - Executive VP & CFO [81]

--------------------------------------------------------------------------------

Well, I think what we said is we're going to see -- continue to see sequential improvement. I think that due to the increase in the dedicated piece of our business, that you're going to see some flattening of seasonality, although we're picking up new business right now.

So from a seasonality basis, I hope what we're going to see is continuing to climb in our earnings through the end of the year, and then not see the kind of drop-off that we generally have seen from Q4 to Q1 as we improve our fixed business on that dedicated and 3PL space and grow that around the teams.

--------------------------------------------------------------------------------

David Ray Parker, Covenant Transportation Group, Inc. - Chairman of the Board & CEO [82]

--------------------------------------------------------------------------------

Brad, did I ever tell you that -- I've got a question here. Did I ever answer your second question earlier on peak or not?

--------------------------------------------------------------------------------

Albert Brad Delco, Stephens Inc., Research Division - MD [83]

--------------------------------------------------------------------------------

Maybe not. So I was really curious if those peak season guys have already reached out to you hoping to lock up capacity. I don't think you really answered that though.

--------------------------------------------------------------------------------

David Ray Parker, Covenant Transportation Group, Inc. - Chairman of the Board & CEO [84]

--------------------------------------------------------------------------------

Yes, I was too busy answering number one, I remember now.

--------------------------------------------------------------------------------

Albert Brad Delco, Stephens Inc., Research Division - MD [85]

--------------------------------------------------------------------------------

We got off talking about North Korea and Caterpillar. I don't know how we got there, but...

--------------------------------------------------------------------------------

David Ray Parker, Covenant Transportation Group, Inc. - Chairman of the Board & CEO [86]

--------------------------------------------------------------------------------

Right. I'll take you many places, buddy. Yes, we've had numerous, numerous, meetings. We started in January with those meetings. And we had one last week with those meetings. And they are coming along very nicely.

And that said, I think that peak will be a good year. The thing that has not been established is that we have told our peak customers that we will never allow to happen, going forward, that happened to us -- nobody's fault. We didn't know where the spot market was 3 weeks prior, it just kept building, as we all know, after the hurricane. The spot market just kept building.

And we agreed upon pricing around the 1st of November. And by Thanksgiving, pricing was x and spot market was y and it cost us a couple of million dollars, if I remember. It was a big number that it cost us, and we're never going to allow that to happen.

Now that said, we've met with all of our peak customers and told them basically what I just said to you. And we're about 50% there, I think, on the Solutions side. We've kind of guided, implemented on what the trigger point is. But we got to make sure that we get it on the Transport Covenant side as it relates to the spot market. And we have not finalized that part yet, but I think that we will.

And all of our peak customers and us are going down the same road that they want our trucks, they want us to do as much or more than we did last year. And where it's actually, in our corner, from a standpoint of what can we do with the economy as great as it is right now? Are we going to be successful going out to the spot market and getting trucks? And what is the price going to be?

So could we wrap it up today with one phone call? But we're not willing to do that until we get more of an idea of what our costs are going to be. So if that helps you.

--------------------------------------------------------------------------------

Albert Brad Delco, Stephens Inc., Research Division - MD [87]

--------------------------------------------------------------------------------

That does. That puts it into context. Good results.

--------------------------------------------------------------------------------

Operator [88]

--------------------------------------------------------------------------------

(Operator Instructions)

--------------------------------------------------------------------------------

Richard B. Cribbs, Covenant Transportation Group, Inc. - Executive VP & CFO [89]

--------------------------------------------------------------------------------

Okay, if we have no more questions, then thank you guys for being on this call. And we will talk to you again next quarter.

--------------------------------------------------------------------------------

David Ray Parker, Covenant Transportation Group, Inc. - Chairman of the Board & CEO [90]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [91]

--------------------------------------------------------------------------------

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.