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Celadon Group Inc. (NASDAQ:CLDN)

F1Q09 Earnings Call

October 22, 2008 10:00 am ET

Executives

Stephen Russell - Chief Executive Officer

Paul Will - Chief Financial Officer

Chris Hines - President, Chief Operating Officer

Jon Russell - Executive Vice President, Logistics

Analysts

Edward Wolfe - Wolfe Research

John Larkin - Stifel Nicolaus & Company

Todd Fowler - Keybanc Capital Markets

Thomas Albrecht - Stephens Inc.

Chaz Jones - Morgan, Keegan & Company

Greg Olaf - BB&T Capital Markets

Tom Spiro – Spiro Capital Markets

Operator

Welcome to the first quarter 2009 Celadon Group earnings conference call. (Operator Instructions) I would now like to turn the call over to your host for today Steve Russell, Chairman and Chief Executive Officer.

Stephen Russell

Welcome to the Celadon conference call for the September 2008 quarter, the first quarter of our 2009 fiscal year. I am joined in Indianapolis by Paul Will, Vice Chairman and CFO, Chris Hines, President and COO, and John Russell, Executive Vice President that runs our Logistics businesses.

I would 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.

Before talking about the results of the quarter, let me comment on our perception of the state of the trucking industry today. About two weeks ago we were at the American Trucking Association’s annual conference and got a lot of feedback and input in terms of what the state of the industry is.

Thirty-five years ago I was President of Hertz Trucks, now called Penske Trucks, and at that time we were the largest vehicle rental and leasing company in America. I have experienced eight freight recessions since that time and I know what it takes to get through a recession, and frankly, we believe that Celadon is better positioned than almost any other company in our industry to weather these times and come out stronger.

The current environment differs from many recent recessions because the lack of freight is accompanied by higher fuel prices and almost no access to credit. Vendors to the industry, from tractor and trailer manufacturers to component manufacturers to financiers in the industry, are experiencing unprecedented reductions in demand.

The other day, as an example, Freight Liner announced it would be ceasing production of the Sterling, a line of tractors that have been around for years. Trailer manufacturing is a fraction of what it was a year ago, with all manufacturers cutting staff significantly.

Additionally, traditional significant lenders to the industry have all pulled back. Small fleets and large fleets are failing. Gainey Transportation, formerly with over 2,000 tractors, filed for Chapter 11 court protection last week. Priority America, formerly 1,100 tractors, closed its doors six weeks ago. Jim Palmer Trucking, a company that was 44- years-old, filed for Chapter 11 some weeks ago.

Additionally, almost 2,000 fleets, representing 88,000 trucks, failed in the six months ending June 2008. That trend we believe has continued and in our view, when we reach the January-March 2009 quarter, which is when fleets generally must spend $2,000 per truck for license plates, which is difficult to finance because it’s going on somebody else’s collateral, essentially the rate of failure will soar.

The number of new trucks being built is substantially below what was expected. For sleeper units only, class A sleepers, which is basically what we run, what the other public companies run and most fleets run, folks expected over 150,000 trucks to be produced in 2008, as a beginning of a pre-buy leading up to the 2010 new EPA standard. Now it is expected that less than half of that number will be built. Many fleets with weak financials and a lack of lenders to the industry have accounted for this situation.

Although used truck prices are down, used trailer prices have collapsed, further contributing to the financial condition of fleets as their ability to sell off equipment has become extremely difficult. While a depressed used-equipment market might lessen gain on sale to some degree, the trade-in agreements which we have on most of our tractor fleet, affords us downside protections that many smaller fleets don’t have.

In addition, our trailer fleet is relatively new, about 7,500 trailers were built in the last 2 ½ years so we’re not under any pressure to trade trailers in a depressed market.

Events in the past two months regarding bank weaknesses, financial stress in America, and a weakening economy driven by uncertainty throughout the country, has clearly impacted the industry. The general perception at the ATA meetings was that demand was well below expectations in the September quarter and the month of September itself showed no sign of the usual pick up from July and August.

In this environment let me now turn to how Celadon’s performing. We earned $0.13 per share in the September 2008 quarter, up from $0.11 in September 2007 period and $0.10 in the June 2008 quarter. Pre-tax income in September 2008 was $5.9 million, up 27% from the prior year comparable quarter and 34% from the June 2008 quarter. The percentage improvement from June to September was the best we’ve had in many years, as traditionally June and September quarters are fairly similar.

Our operating ratio, excluding fuel surcharge, improved to 93.6% in September 2008 compared to September 2007 of 94.8% and June 2008 of 95.1%. These gains were achieved despite a weak freight demand environment. Miles per truck declined by about 1.3% as we have become more selective in load acceptance. Further, truck count is down about 75 units, or close to 3%, largely related to a reduction in owner-operators, both in the U.S. and Canadian fleets. These two factors contributed to an overall decline of about 4% in freight revenue from a year ago.

We reduced deadhead as a percent of total miles from 10.6% to 9.8%, continuing a trend that began about three quarters ago as we focused on reducing non-productive miles.

Average weight per loaded mile improved slightly to $1.511, up about $0.005 compared to the June quarter, which had shown a similar improvement from the March 2008 quarter. On a year-to-year comparison basis, September 2008, at that $1.511 level, it was better than the prior year of $1.506. This is the first time year-to-year rate showed an improvement in a long time.

We believe that the rate environment is improving as capacity is exiting the industry. Most of our customer contracts are renewed in the first six months of the calendar year, which we believe may coincide with the time of increasing trucking company failures. To the extent capacity becomes an issue for shippers, where hopefully there are opportunities to improve rates during that period.

Well over a year ago we instituted a program to improve our miles per gallon. As a part of that, we became a member of EPA Smart Way program and we are delighted to report that we won an excellence award two weeks ago. About a dozen companies out of thousands of trucking fleets won this award.

The average MPGs or our truck have improved based on many steps we have taken to achieve this goal. We modified steps of equipment, slowing maximum truck speeds by 2 miles an hour, and reduction in idling by our fleets. And we are truly pleased with the support of our drivers to enable this accomplishment.

Our non-asset-based business continues to grow, with our truck brokerage business growing about 125% from last year to $2.25 million. It’s still not a significant number but certainly it’s trending in the right direction. And our new LTL business between Mexico and the U.S., it’s also growing nicely.

TruckerB2B continues to do decently but it has certainly been adversely affected by the challenging environment for many fleets.

Looking at financial strength during the quarter, we reduced our debt from $102.0 million at June 30, 2008, to $81.0 million at September 30, 2008. Bank debt was approximately $26.0 million at the end of September. That is included in that $81.0 million. Our bank line, which is unsecured, is $70.0 million with a $20.0 million accordion feature. Our bank group is represented by Bank of America, JP Morgan Chase.

We would now be delighted to answer any questions any of you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Edward Wolfe - Wolfe Research.

Edward Wolfe - Wolfe Research

Do you have a revenue number for TruckersB2B in the quarter?

Stephen Russell

$2.25 million, and that’s representative of the rebates we received and commissions paid to us. And profit in the quarter was about $330,000.

Edward Wolfe - Wolfe Research

How do we think about the fleet going forward, in terms of you’re down on average tractors, how does that play out as you look forward?

Stephen Russell

We’re going to keep the fleet roughly the same size, until we see either a dramatic reduction in the number of other fleets or an improvement in demand.

Edward Wolfe - Wolfe Research

So flat with where you ended September, basically, give or take?

Stephen Russell

Yes, roughly. That’s correct.

Edward Wolfe - Wolfe Research

And within that, are you going to be replacing more vehicles? How do we look at capex for the next several quarters?

Paul Will

As far as capex, we think our net capex is about $50.0 million for the rest of the fiscal year, of which we believe we could pay for that with $36.0 million from cash flow from operations and then the rest could be from financing without even delving into our bank line, which is down to about $26.0 million as of the end of the quarter.

Edward Wolfe - Wolfe Research

And that $50.0 million is for the final three months of the year?

Paul Will

Final three quarters. Nine months through June 30, 2008. We will purchase equipment in the last two quarters of the calendar year and then our intended capex is [inaudible] basically for 2010 at this point.

Stephen Russell

We will essentially complete a pre-buy so that we don’t need to buy any tractors in 2010 calendar year, and perhaps not even in 2011.

Edward Wolfe - Wolfe Research

And direction, I know you have said in the past that you expect a lot of capacity to drop out. Obviously that’s going to happen at some point. The question is when. Yields, net of fuel, at 0.3 positive is actually better than most of the guys who have reported so far. Where do you see that in the next couple of quarters, assuming the economy is just getting worse here? Does that get worse before it gets better? Does it stay where it is or does it just get better from here?

Stephen Russell

I think the December quarter is probably going to be pretty similar to the September quarter. I believe that if our anticipation is correct that there will be a significant number of fleet failures in the March quarter, because of license plate purchases and insurance renewals, things like that. It will also, of course, depend on demand.

Assuming that steady-state demand with where it has been, which is not nearly what a vibrant economy would bring, I believe we will be able to get rate increases beginning in the January quarter and certainly January through June we will be able to get some meaningful increases. Whether that’s going to be 3%, 4%, or 10%, it is going to be based on what is going on in the economy and what is going on in the number of fleet failures.

Edward Wolfe - Wolfe Research

Can you talk about demand? What do you see when you look at the quarter of July, August, September, and now October? How did demand work and has it materially dropped off the last two months year-over-year or has it been more steady than that?

Stephen Russell

Basically if you look at same store sales, in other words, same customers matched, it’s down probably 3% to 4%. That’s comparing the same customers last year with the same customers this year.

Edward Wolfe - Wolfe Research

Is that October?

Stephen Russell

That’s really where it has been running and October hasn’t changed compared to where September or August was, in terms of that kind of comparison.

The first week of October, it appears to be weaker, which I think, and actually I got a phone call from the Chicago Fed District, I am one of the people that they call each quarter to ask how the world is, prior to the Fed meeting, and it seems like as a consequence of what occurred in early September, in terms of the stock market, that manufacturers became a little more hesitant about where the world is.

So it’s not a meaningful number at this point, but it’s certainly not showing any signs of improvement.

Paul Will

And I think people are kind of frozen in their steps right now.

Stephen Russell

I think that’s exactly right. Stuff that we move, probably 75% are things that get used in maybe 5 days from date of delivery to 30 days date of delivery. So we see things faster than businesses that are looking forward 3 or 4 months of having the impact of things. And that’s been the nature of most trucking companies forever.

So I think we see it faster and that’s probably why we’re one of the people that are called by the Fed to try to get an understanding of what’s going on.

Edward Wolfe - Wolfe Research

On the fuel side, obviously everybody is benefitting quite a bit, earnings-wise, as everybody was hurt when the fuel was going up, now that it’s coming down so quickly. I have been surprised at the magnitude of the benefit for everybody, to some degree. And in retrospect, I probably shouldn’t be because we’re just coming from higher absolute surcharge numbers we’ve never seen before. Fuel is still coming down on my screen. WTI is down to 68; it was 67 just a moment ago. Is your sense that the kind of peak of that was this quarter or is it next charter? How do we think about the advantage of fuel in a weaker economy?

Stephen Russell

There are two factors. One factor is fuel surcharges. Fuel surcharges in our industry, in the truck-load sector, essentially do not recover the costs because the fuel surcharges do not cover out-of-route movements. Some larger shippers try to get a somewhat lower fuel surcharge than that which is required, etc.

We burn about 1 million gallons a week and essentially the lag is maybe a week and a half or two weeks, based on the customer. Some customers are two weeks, some customer are once a month adjustments, but most are every week adjustments, based on the DOE.

The DOE fell something like $0.40 in the September quarter. So if you quantify that, basically if you pick up a week, you’re picking up $400,000 in our case, and you could work that out for other fleets.

I think what’s more important is that we have taken a lot of steps. We have fired 75 drivers in the last four months because of the unwillingness to stop short-term idling. We have spec’ed the trucks right, we’ve spec’ed the tires right, it’s one reason we won that excellence award. So the idling reduction, all those factors have contributed to an improvement of an MPG.

Is it as far as we can go? I don’t think so, I think that could even be more. So I think that factor is something that is unrelated to the question you asked, which is where our fuel parse is going. I think what happens in the OPEC meeting coming up next week, to the extent the U.S. economy is slowing down, the China economy is slowing down, the Europe economy is slowing down. Japan is slowing down.

The reduction in demand means that there is pressure to reduce prices of fuel and the question is what is going to be production versus that and what is OPEC going to do. So it’s pretty tough to see which way fuel prices are going to go.

We have decided not to hedge. One can argue maybe you should hedge at $68 a barrel, but frankly, and we feel that between the fuel surcharge and the steps that we’re taking we’re not going to hedge at this time.

Edward Wolfe - Wolfe Research

I appreciate the insight but the question wasn’t what your thoughts were on the direction of fuel, it was the net benefit, or the net impact, net of surcharge, net of cost, as fuel is, you know it came down every week all quarter and it came down from much higher numbers. If it came down this quarter it would be coming from a lower base and the impact wouldn’t be as great.

Stephen Russell

If you just look at the MPG improvement, it’s between $0.03 and $0.04 in earnings per share.

Edward Wolfe - Wolfe Research

So about half of the benefit, you’re saying, is coming from things that are sustainable that you’ve taken.

Stephen Russell

Correct. Absolutely correct.

Operator

Your next question comes from John Larkin - Stifel Nicolaus & Company.

John Larkin - Stifel Nicolaus & Company

Just banging on the fuel question a little bit more hear. I’ve heard from a couple of carriers that the wholesale prices dropped much more rapidly during the quarter than the retail prices. I was wondering if you were able to leverage that benefit during the quarter and if so, how much that may have helped you?

Stephen Russell

That occurred as the quarter moved forward and I think it probably related to truck stops adjusting their prices less rapidly than the fall in the DOE. So is there an impact for that? There is an impact but it’s not that significant an impact.

John Larkin - Stifel Nicolaus & Company

I think the DOE is tied to retail and presumably you’re paying more of a wholesale price, so to the extent that wholesale dropped faster, that would have been a somewhat unique benefit.

Stephen Russell

Yes. And you get hurt when it goes up. There is certainly a benefit because essentially what is happening is truck stop margins go up because if the price is coming down and they’re not reducing prices rapidly enough, so there is certainly a factor for that.

John Larkin - Stifel Nicolaus & Company

Remind us how much of the fuel you burn you pump through your own facilities and how much of it comes from truck stops.

Stephen Russell

Only 7% of our fuel do we pump at our own facilities.

John Larkin - Stifel Nicolaus & Company

How big a discount do you think you get on fuel at a truck stop chain versus a much smaller fleet?

Stephen Russell

It depends on what that fleet is perching the same fuel for. And what area they are in.

John Larkin - Stifel Nicolaus & Company

Do you sort of lump together the B2B purchases along with your Celadon fleet purchases, to get a better deal than you might otherwise get?

Stephen Russell

No, we don’t. We run the two businesses separately because at the end of the day, the suppliers don’t want to do that.

John Larkin - Stifel Nicolaus & Company

I think over the last few months you have helped a couple of carriers that were going Chapter 7 more or less unwind.

Stephen Russell

Yes.

John Larkin - Stifel Nicolaus & Company

Normally, I think if you thought it would have made sense, you would have maybe taken on some of the trucks, some of the drivers, etc. As it was, are there any ongoing benefits from having participated in the wind down of those businesses?

Stephen Russell

We have picked up some customers, which have just begun, actually. We are reasonably optimistic of the impact of that.

John Larkin - Stifel Nicolaus & Company

On the deadhead front, real nice performance on getting that down 80 basis points, which according to my calculations comes right off the operating ratio.

Stephen Russell

Correct.

John Larkin - Stifel Nicolaus & Company

How much more room do you have for improvement there and was any of that tied to a change in length of haul? Was your length of haul up or down? I guess if it were down, the 80 basis point improvement is even that much more impressive.

Stephen Russell

Length of haul stayed constant, but it was achieved through greater focus. If you were to quantify it, it’s probably $0.02 a share year-over-year, the benefit of that improvement. And where can we get to? If you go back to 2005, we were at 7.3%, so we’ve got a long way to go.

John Larkin - Stifel Nicolaus & Company

That’s encouraging.

Stephen Russell

Yes. In fact, in 2005 the average for the year, for the fiscal year 2005, it was about 7.6%. So we’re still 220 basis points above that.

John Larkin - Stifel Nicolaus & Company

It’s a different company now, though, with a much broader customer base.

Stephen Russell

But by 2005 we weren’t doing much business with the Big Three. That’s why we didn’t go back earlier than that.

John Larkin - Stifel Nicolaus & Company

You think it’s possible to get to that level again at some point in a stronger freight market?

Stephen Russell

Yes.

John Larkin - Stifel Nicolaus & Company

And I notice you made mention of use of heater units, which I guess are much cheaper than APUs, which enable you to shut down the main power plant on a cold night and still keep the driver warm. Why did you go with the heater units instead of APUs? What do you do, especially with so much activity down in the Texas area, on those hot days? Do you still let the driver idle, or how does that work?

Stephen Russell

The problem is, and we tested a whole bunch of the APUs probably a year ago. The air conditioning doesn’t really work when it’s 110 degrees in Laredo or El Paso, in the APUs. They’re fine if you’re running around Michigan or Ontario but what we decided was to put in these S-bar heaters because that clearly works well in the winter. Essentially 9 months of the year it’s as good as the APU. And frankly, the APU, in many areas, doesn’t work that well when it’s very warm.

The difference in price is enormous. The S-bar heaters are something in the range of $800, the APUs are the $5,000 to $8,000 range.

We basically don’t run trucks over three years. So you also have that impact and there is much more service required with the APUs.

John Larkin - Stifel Nicolaus & Company

Do you see any danger of the guaranteed residuals on your three-year trade-backs being renegotiated? I know one freight liner ran into problems during the last down cycle, that they actually came back to people to renegotiate them. Has there been any noise to that effect out there in the truck market place?

Stephen Russell

We have optional trade-backs, so it’s not a required trade-back and therefore it’s pretty tough for the other guy to negotiate, because it’s not a commitment.

Operator

Your next question comes from Todd Fowler - Keybanc Capital Markets.

Todd Fowler - Keybanc Capital Markets

Steve, how many miles do you think you got during the quarter as a result of some of the wind-down agreements that you had? And going forward, how many of those miles would be sustainable based on retaining some of those customers?

Stephen Russell

The impact in the quarter was not significant. We did bring on about six customers that we think we are really going to build with. And how much can we build with them? Can’t tell yet. Some good customers, though. Brown & Forman, Textron, some additional freight with certain customers that we’ve got, which is starting. But in the quarter it had no impact.

Todd Fowler - Keybanc Capital Markets

What do you think your average price per gallon of diesel was during the quarter?

Paul Will

Between $4.00 and $4.25.

Todd Fowler - Keybanc Capital Markets

In the prepared remarks you had a couple of comments that you are being a bit more selective on your load acceptance at this point. Could you talk a little bit about what sort of metrics you are looking for. Are you solely on a kind of a rate per mile and more profitable freight from that standpoint or are you looking at balancing different lanes? And really what the thought process there is and how it impacted on the rate per mile during the quarter and what we should see going forward as well.

Stephen Russell

The largest area related to deadhead improvements and we were running to Paris, Texas, to cover loads for a major food shipper. That just made no economic sense for us because of the amount of deadhead involved, the amount of fuel surcharge that they were paying. So we did, if you will, walk away from various business related to the overall economics.

And it’s a broad answer because it varies based on the customer. In some cases it was too much deadhead to run, some cases the fuel surcharge wasn’t fair, it varied based on those kinds of things.

But they were conscious decisions on our part, which Chris led be was all agreed to.

Todd Fowler - Keybanc Capital Markets

Do you think that there is opportunity going forward to continue to scrub the loads that you are moving or do you think that you captured a lot of that here in the quarter?

Chris Hines

I think it’s something that you are continuously scrubbing. It’s part of the overall business strategy so it’s a day-to-day basis across the entire customer base.

Stephen Russell

As an example, the other day we were running from Mexico to Alberta for a customer. Fine rate going in, but I think we did about 80 loads into Alberta in the month of September and about 40 loads outbound, which meant we had to deadhead 40 trucks out. And the deadhead from Alberta is like 1,500 miles to Minneapolis or 1,000 to some of the loading areas on the West Coast. Things like that. So we are continuing to do that with I think greater emphasis than we did in the past.

Todd Fowler - Keybanc Capital Markets

On the capacity side, I know that through TruckersB2B you get a little bit of an insight into what’s going on with some of the smaller fleets. Do you have any color you can share? One of the things we have heard more recently is as fuel has come down that has helped keep a few more trucks on the road. I’m not sure if you have seen some of that through either the discounts you’ve been giving or through the number of carriers. One of things you have looked at in the past is checks being returned. Any sort of incremental color on what you’re seeing in the capacity market would be interesting.

Jon Russell

I think it coming down has given a little bit of a lifeblood to the small fleets. We really feel it is a short term. Our fleet, we can call them failures, but fleets that we deactivate from membership has remained flat from last quarter. Roughly 400 of our fleets deactivated in the third quarter, or our first [fiscal] quarter. We didn’t see and acceleration in that number. We have seen an acceleration of our decline in total fuel gallons.

So I think it is helping fleets stay around a little bit longer but overall the gallons and purchasing for us is down significantly so I don’t think it will have much of a long term impact.

Todd Fowler - Keybanc Capital Markets

And what was that 400 fleets? Is that still up two or three times what it was from the year ago quarter?

Chris Hines

Yes. We used to average roughly 150 to 200. It’s now running in the 400 to 450 range on an ongoing basis. And again, we expect the first quarter of next year and the second quarter of next year, that March/April time frame for us to pick back up. We’re pretty cyclical on that basis and we expect it to happen again.

Todd Fowler - Keybanc Capital Markets

And with the share repurchase program, I think that if I remember correctly the authorization expires in early December. Any thoughts with what’s going to happen with the shares that are authorized? Do you extend that authorization? Do you become active on that in this market? What are the thoughts on the share buyback at this point?

Stephen Russell

I would rather defer that. We have a Board meeting next week, actually.

Operator

Your next question comes from Thomas Albrecht - Stephens Inc..

Thomas Albrecht - Stephens Inc.

For the last 8 quarters your depreciation had been going up as you shifted to more ownership of equipment from leasing. I was really surprised to see it drop from $9.4 million down to about $8.0 million and there was also a drop in equipment rents. I can understand the rents with the fleet being down, but can you talk about where we should be thinking about D&A and was there anything in that line item beyond the depreciation of equipment?

Paul Will

We started doing some leasing in the last six months as opposed to using our bank lines or using capital, etc. But what we look at is we look at a combination of the two, between depreciation and amortization of equipment rentals. It was down from 14.8 to 14.1, around $700,000. A big portion of that really represents gains associated with sales.

What we’ve been doing is we’ve got three different buckets. A retail yard, we’ve got wholesale sales, as well as we’ve got sales associated with, in essence, trade-backs, as Steve mentioned earlier.

When we look at the two, we look at the combined bucket. We’re at 14.1 for the current quarter and I think on a go-forward basis you could look at that being somewhere between 14.5 and 14.7 as a range, or 14.4 or 14.8, somewhere in that range is where I think we will fall.

But it’s really a function of the equipment that we’re bringing in and equipment that we’re taking out and the timing of it. Because we continue to depreciate the equipment until we sell the equipment.

Stephen Russell

And we now have two retail yards, too.

Thomas Albrecht - Stephens Inc.

So how much was the gain exactly, then? $600,00 or $700,000?

Paul Will

It was approximately $1.0 million. We don’t necessarily look at it as much that as we continue to depreciate, we could depreciate an extra $200,000 to $300,000 if we carry the equipment for two months at a time when equipment sales are a little slower.

So at the end of the year you could say the depreciation would have been $250,000 higher, our gain would have been $250,000 lower. It’s just a flip. But we look at the two components as a whole.

Thomas Albrecht - Stephens Inc.

I try to do that, too, but that was a more dramatic change than we’ve seen in a long time.

Steve, you mentioned owner-operator losses. I think they are primarily concentrated in Canada. Canada was about 400 trucks two or three quarters ago. Given the owner-operator losses, has the Canadian fleet shrunk materially or have you put in company equipment?

Stephen Russell

What is occurred is we have reduced the number of Canadian owner-operators and we did that by essentially tying them to the U.S. dollar, making them the same cost as the U.S. owner-operator. We have also built a fleet of U.S. drivers that are willing to go to Canada. I think we’re running about 75 of those now. And those are more economic than the Canadian owner-operators.

And basically because we have our own terminal in Canada, the border crossings are something we do far more often than any of our competitors, we are able to do that and run that very effectively. So that has been a nice plus for us.

It’s also the Canadian dollar declining is a positive impact going forward as well, because of our costs that we do incur in Canada.

The Canadian dollar is at $0.799 this morning.

Thomas Albrecht - Stephens Inc.

The deadhead, thus far if you look at the public carriers that have come out, it is somewhat mixed. Everyone had a great deadhead performance in the June quarter. It’s been a bit more mixed here in the September quarter, yet you have improved yours by 80 basis points. I was a little surprised, given how sluggish freight was. Does that mean that your reliance upon brokered freight actually went up a little bit, or literally you had that much opportunity in your network?

Stephen Russell

No. If you look at June quarter, it was about the same as the June quarter.

Thomas Albrecht - Stephens Inc.

Yes, it was, but others have actually gone up sequentially with freight.

Stephen Russell

We stayed the same. I think it was because of the selectivity we were using in reducing loads that did require too much deadhead in this environment. So we were flat, at 9.8 that compared to 10.6 last September and actually 9.7 in the June quarter. That was at 10.6 in the March quarter and it had been running in the 10.5 range prior to that.

Thomas Albrecht - Stephens Inc.

Can you discuss the magnitude of used truck prices? I know it varies by how they’re spec’ed and aged and that, but at the beginning of the year, if you sold a used tractor for “x” back then, how much would it be going for today? In other words, how much has the deterioration been? Obviously you’re still getting gains so I’m just talking big picture right now.

Paul Will

I think that’s where some of the priority the C.W. Johnson, the type of acquisitions or the type of wind-down situations we have been involved with are a function of just that, that the equipment values have dropped maybe 25% to 30%, depending on how you spec it and how you’re disposing of it.

The way that we’re disposing has mitigated that impact. But what these guys, if you have Caterpillar engines, that’s a big negative. Depending on the type of truck you’ve got, it’s a big negative. And if you have the long hoods that’s a big negative. So a lot of these fleets that have the wrong spec’ed equipment, whether it be engine or truck itself, it’s even more negative when they try to dispose. And they can’t upgrade their fleet.

So I think a lot of these guys are seeing 25% to 30% hits year-over-year in the value of their equipment. We believe that we way we have spec’ed equipment in our distribution or sales process has allowed us not to be impacted as greatly as other fleets.

Thomas Albrecht - Stephens Inc.

What is you approximate residual, in terms of percent? Is it three years, three and a half years, 40% of the original price? Just refresh our memory on that.

Paul Will

Between 40% and 50%. After three years.

Thomas Albrecht - Stephens Inc.

That range relates to the type of equipment?

Paul Will

Yes. Type of equipment, miles. The way it is spec’ed, etc.

Stephen Russell

The other point, the tax rate was much higher in the September quarter and probably at the earnings level we used of $0.13 a more typical tax rate would be 47% or so as opposed to 52%.

Operator

Your next question comes from Chaz Jones - Morgan, Keegan & Company.

Chaz Jones - Morgan, Keegan & Company

Did you repurchase any shares in the quarter?

Stephen Russell

No, we didn’t.

Chaz Jones - Morgan, Keegan & Company

Was there any type of material impact, positively or negatively, from exchange rates?

Stephen Russell

No. Essentially, the Canadian dollar may have a positive impact going forward but most of the change occurred in the last really five to six weeks. The Canadian dollar only went down after the bank implosions and Lehman Brothers and all that. Until then it $0.97 or $0.98.

Chaz Jones - Morgan, Keegan & Company

Could you remind us, in the past when there has been big currency swings in a quarter, the impact would maybe be a couple of pennies. Is that fair?

Stephen Russell

That’s fair.

Chaz Jones - Morgan, Keegan & Company

Getting back to the discussion on the fleet outlook and kind of keeping the tractor count flat over the near term, I just wanted to discuss owner-operators. Obviously that trend is not unique to Celadon but a low to owner-operators leaving fleets, I guess, first, if you could help us in terms of, are those owner-operators actually leaving the industry? Is it natural attrition? Any thoughts there would be helpful.

Stephen Russell

I think they have stopped being owner-operators and looking for company jobs. And I believe that has happened and is continuing to happen because the economics of being an owner-operator are pretty tough in this environment.

I believe that we have seen, and this isn’t a direct answer to the question, but driver availability is quite good. A lot of drivers are leaving failing fleets, they are afraid of failing fleets, they don’t want to lose their last-week’s pay, they don’t want to lose their benefits, they don’t want to worry about getting COBRA, things like that. So we are seeing the number of drivers that are available for us to hire go up substantially.

What we’ve done is we’ve tightened the standards of existing drivers, raising the level of service required, raising the level of safety required, and certainly unnecessary idling being grounds of dismissal. You couldn’t have done that a couple of years ago. And part of that is the shift from guys who were owner-operators just parking their truck or selling their truck or having the truck taken over by the lender.

There has been a major reduction in the number of financing companies that are willing to lend money to owner-operators. Their standards have risen. GE has virtually backed out of doing any meaningful lending to the trucking industry. We don’t use GE for financing but certainly all those things reflect on each other.

Chaz Jones - Morgan, Keegan & Company

If we continue to see pretty material decline sequentially in the owner-operator count, does that put pressure on you to grow the company’s fleet in a bad market, just to keep the fleet flat?

Stephen Russell

We are comfortable where we are now. We don’t have that many owner-operators. We’ve got maybe 75 in the U.S. and maybe a total of 250 at most, including our Mexican fleet. So relative to the overall, if you include the Mexican fleet we have about 3,000 trucks and I think maybe 250 owner-operators, of which 100 in Mexico and about 100 in Canada.

Chaz Jones - Morgan, Keegan & Company

So you think most of the declines in owner-operator counts, at this point, probably have been factored in?

Stephen Russell

I think so. For us anyway.

Operator

Your next question comes from Greg Olaf - BB&T Capital Markets,

Greg Olaf - BB&T Capital Markets

Could you tell me the percentage of drivers that use your per diem plan?

Paul Will

About 50% to 60%. It fluctuates, but somewhere in that range.

Greg Olaf - BB&T Capital Markets

And you stated last quarter that you brought the use of outside brokerage business down to 3% from 6%. Can you talk about what that is this quarter?

Stephen Russell

About the same as it was in the June quarter.

Greg Olaf - BB&T Capital Markets

And what was the amount of new equipment you brought on this quarter? I know it’s all replacement, but can you give us a tractor amount there?

Paul Will

About 300 trucks.

Operator

Your final question comes from Tom Spiro – Spiro Capital Markets.

Tom Spiro – Spiro Capital Markets

I am new to this story. Just a question about the residual value guarantees. I’m not sure how those work. Do they become a significant use of cash when used equipment pricing is going down sharply?

Stephen Russell

It give us the ability to sell at a predetermined price. So it is an optional delve but it’s much like a car lease except you’ve got the right to sell it back to the manufacturer.

Paul Will

When we’re replacing equipment one-for-one, which is all we’re really doing, it’s basically you have a lease, you get off a car lease in essence you give the car back and you buy a new car. That’s basically what we’re doing.

Tom Spiro – Spiro Capital Markets

But I thought you had $60.0 million or so of commitment which wasn’t backed by any agreements, down-payment agreements and that kind of thing.

Paul Will

That’s correct. There’s two different types. We’ve got equipment out there that’s doesn’t haven’t a trade-back in essence and there’s equipment that does have trade-back. Stuff that doesn’t, obviously you can see that we recognized gains in the last quarter, so the way that we’re selling the equipment, we’re managing through the lower equipment value market.

Stephen Russell

And we haven’t been adversely affected by willingness of lenders to finance for us, either as mortgages or as operating leases or whatever.

Operator

There are no further questions.

Stephen Russell

Thank you very much everybody. Appreciate the call and if you have any other questions give any of us a call.

Operator

This concludes today’s conference call.

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Source: Celadon Group Inc. F1Q09 (Qtr End 9/30/08) Earnings Call Transcript
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