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Celadon Group, Inc. (CLDN)

F3Q09 (Qtr End 03/31/09) Earnings Call Transcript

April 28, 2009 10:00 am ET

Executives

Steve Russell – Founder, Chairman & CEO

Paul Will – Vice Chairman, EVP & CFO

Chris Hines – President & COO

Jon Russell – EVP

Analysts

Edward Wolfe – Wolfe Research

Todd Fowler – KeyBanc Capital Markets

Donald Broughton – Avondale Partners

Chaz Jones – Morgan Keegan

Mike Bowen [ph] – Stifel Nicolaus & Co.

John Barnes – BB&T Capital Markets

Rhem Wood – Stephens Inc.

Operator

Good day ladies and gentlemen and welcome to the third quarter 2009 Celadon Group earnings conference call. My name is Luisa and I will be your operator for today. At this time all participants are in listen-only mode, we will conduct a question-and-answer session towards the end of this conference. (Operator instructions) I would now like to turn the call over to Mr. Steve Russell, Chairman and CEO, please proceed sir.

Steve Russell

Thank you very much Luisa. And welcome to the third quarter fiscal ’09 earnings release teleconference. And I'm joined here in Indianapolis by Paul Will, our Vice Chairman and CFO; Chris Hines, our President and COO; and Jon Russell, Executive Vice President of our non-asset based businesses.

First, 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 certain additional information about factors that could cause actual results to differ from management's expectations.

As reported yesterday afternoon, we incurred a loss of $0.10 a share, compared with a profit of $0.01 in the March 2008 quarter. Losses were sustained in the months of January and February, and a profit was achieved in March. Our financial results in the month of March 2009 were actually better than those achieved in March of 2008.

Clearly, the US economy, and its impact on our neighbors, created the most challenging environment I have ever experienced. Further, March is generally our most challenging quarter of the year. Although we've made significant progress in various areas that I'll discuss later, there were two major factors that principally accounted for the decline in our financial results.

First, the major reduction in international trade had a severe impact on our performance. The United States Bureau of Transportation Statistics indicated that surface trade with Canada and Mexico fell by 27% for the month of January 2009. Indicative, overall billed miles in our case were down 11% from the prior year's March quarter.

Our international billed miles, that is, between the US-Mexico and the US-Canada, declined 26% in the March 2009 quarter compared to the March 2008 quarter. Imports into the US dropped substantially, we believe largely related to the weaker US economy. Exports from the US, particularly to Mexico, declined sharply as the peso dropped late in 2008 from 10 to the dollar to 14 to the dollar.

In other words, the value of the peso dropped, when expressed in US currency in $0.10 to a little over $0.07. The decline we incurred in this segment of our business cost us $0.15 per share in the quarter compared with the prior year. However, we believe that Mexico's exports will increase as the effects of the lower peso positively impact Mexican cost structure when compared to other countries.

The second major factor that contributes to the decline in our financial results related to a drop in rates per billed mile. Excluding fuel surcharge our average rate per loaded mile declined by 2.7% from $1.50 in the March ‘08 quarter to $1.46 in the March ‘09 quarter.

This change resulted in an adverse impact on earnings per share of about $0.05.

The $1.46 level in the March quarter compared with the $1.49 in the December ‘08 quarter. And to know a small part of that decline related to Continental’s average rates were below ours. The rate decline principally relates to overall supply versus demand relationship in the truckload industry.

Although many fleets have failed and shut down, the pace of these closures is not as rapid as the decline in overall demand experienced in the US economy. In our view, lenders to the typical trucking company have become reluctant to close fleets down because used equipment values are so low, from lenders – are rather working with these weak fleets to avoid repossessing the equipment.

Somewhat offsetting the declines related to the international miles and overall rates were the benefits of the Continental Express transaction that we completed in December of ‘08. In addition to some excellent customers it enabled us – our domestic miles to grow in total about 2% compared with the March ‘08 quarter.

These three factors, the drop in International freight, lower rates related to the supply and demand relationship in the US, in part offset by the impact of the Continental transaction, resulted in the first loss we suffered in almost eight years. There have been, however, a series of positive steps that we believe will have meaningful long-term benefits.

One, we have made significant progress in improving our miles per gallon through various programs, including more aerodynamic trucks, and significantly reduced idling.

Second, in the March quarter, we reduced our non-driver staff by about 5%, implemented a salary freeze and related cost reductions.

Additionally, we reduced pay for new drivers who were joining us while also tightening our hiring standards. This was roughly about $0.03 a mile below where we were before. As a result of the Continental transaction, Celadon is now in the intermodal business and we believe we have significant upside opportunity.

We have been successful recently in winning some meaningful contracts that should have a positive effect in the months ahead and these include such new customers as Coca-Cola, Home Depot, Kraft Foods, we had been doing business with Kraft Foods, touch more of the additional business, Mead Westvaco, and others.

Our non-asset group of companies is achieving profitable growth in several areas, including rapidly growing brokerage division. Finally, our bank debt has been reduced to $14 million, from over $40 million at the end of June, which was the end of our 2008 fiscal year, where we have a $70 million bank line.

Two other points, and then we'll open the call to questions. First, it’s not possible to assess what impact will be of the swine flu pandemic and what the effect will be on our business to and from Mexico. Mexico now represents in the March ’09 quarter of about 25% of our billed miles.

Although it will certainly have an impact of the travel and leisure business to Mexico, at this point it is uncertain whether it will have an impact on Mexico's import and export business. Second, looking at the past six months, since I started Celadon 24 years ago and have been in this business about 40 years, I have never experienced such an imbalance between supply and demand.

Lower fuel prices, which basically began to decline rapidly in July reduced receivables allowing over-leveraged carriers to get a short term chunk of cash, the factor was important in terms of improving our cash situation as well and reduce bank debt.

Extremely low values of used tractors and trailers as I mentioned earlier have caused those lenders to avoid repossessing the used equipment. Finally, the drop off in demand, particularly through Friday – through February, has caused less freight to be moved, and resulted in severe rate pressure.

Roughly January and February are billed miles were down about 16% from the prior year, whereas if you look at March and April through yesterday and last year April was – Easter was in March, this year was in April, so if you combine the two months, were down about 5% compared to that 16% January and February.

The trucking industry has been cyclical since the first truck was built. Looking forward, we believe that the stress on many over-leveraged carriers will continue to reduce supply, and, perhaps even someday soon, demand will turn up. Is that day here yet? We don't think so, but when it arrives, we are prepared for it. Luisa, we would be happy to answer any questions that anybody has.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Edward Wolfe with Wolfe Research. Please proceed.

Steve Russell

Good morning Ed.

Edward Wolfe – Wolfe Research

Good morning Steve good morning Paul. Can you talk a little bit about that last comment about to billed miles improving so materially from minus 16% to minus 5% over March and April, what's changed as you see is if the contracts that you talked about signing, is demand improved overall or smaller guys going out, what is the combination?

Steve Russell

I think it is largely additional business.

Edward Wolfe – Wolfe Research

That is it in Mexico or US or both?

Steve Russell

US and US Canada, some in Mexico, but in fact I did mention any of those companies, we recently got a contract from our largest bottler in Mexico for northbound moments. The other thing that may be existing and it's hard to tell, but durable goods sales in the US were down eight tenths of a percent in March, which was the lowest decline that had been achieved in the last several months.

We do work fair amount of durable goods sales, you know washing machines, dryers, TV sets, however both fixtures, etcetera because that is a large part in Mexico's exports to the US. If our automotive parts is a big piece we do very little automotive part business, but we do a fair amount of durables northbound out of Mexico and that seems to have picked up somewhat, but domestically stronger too.

Edward Wolfe – Wolfe Research

Right are any of the big three customers at this point?

Steve Russell

Yes stronger compared to January and February.

Edward Wolfe – Wolfe Research

Are any of the big three customer at this point?

Steve Russell

No, we do – the only automotive business we do is we do somewhat Honda and some of Volkswagen.

Edward Wolfe – Wolfe Research

If you look at the revenue per mile net of fuel down 3:1 and you look at that January, February versus March and April, how does that look?

Steve Russell

March was a tad better, but not materially. Part of it is, the Continental business which added a relatively meaningful amount of miles, I think that is why our – I know that is why our domestic freight was up in the March quarter. That came in at lower rates than our average rate, we mentioned that on a conference call in January and certainly in this environment we are honoring those rates, but part of that decline relates to a chunk of the miles being Continental miles, the amid former Continental customers now our customers.

Edward Wolfe – Wolfe Research

But we are not going to see revenue per mile materially weakened, in other words to go get that business that takes you from minus 16% to minus 5% on the mile side when you report next quarter?

Steve Russell

At this point, it doesn't, I mean rates are not falling apart, and if that’s the question or do we perceive that, rates are marginally lower on average with some customers we do a fair amount of high-value freight were rates frankly are secondary to the shipper as opposed to the reliability of the service. So, I think that in some cases that is true of the stock market and we do about 6% of our business has been spot of broker free, if you will and that's been under a degree of pressure in the last several months. I think, we are moving towards some better mix of brokers in that area, but basically I think the overall rate. I wouldn't be surprised if it tended to go down a penny or two this quarter, but I don't think this is going to go down substantially.

Edward Wolfe – Wolfe Research

So two parts to that question, one I think you mostly answered, which is the market overall with all these bids our there and your sense is that it is going down a little bit, but nothing material, is that how you answer the market basically?

Steve Russell

I think on a case-by-case basis it may vary from that, but I think overall.

Edward Wolfe – Wolfe Research

And then the second question is because most of the other trucking companies did not report the March and April year-over-year has improved and certainly the ATA tonnage got worse in March although we all know that hasn't been the most reliable data, a couple of companies, Conway on the LPL side made it very clear they are going to give up some price to go get some market share, have you made that decision a little bit that may, we're going to go and the mix of moving towards giving low prize and getting a little market share makes sense at this point?

Steve Russell

I believe the answer to that is yes.

Edward Wolfe – Wolfe Research

Okay. As an addition to that the tractor count has gone up since Continental, how should we look at that going forward, the tractor count from where it ended quarter-end and going forward?

Steve Russell

May I ask Paul to answer.

Paul Will

Yes it is Paul. The expectation there is that even though this a difficult environment for used equipments that’s – that number we are currently taking one-for-one trades with any new equipment we take, in addition to that through retail and wholesale outlets, in addition to lease purchasing equipment with third-party financing sources that number should come down at the rate of approximate way 50 trucks, net trucks per month, it is our goal right now.

Edward Wolfe – Wolfe Research

That is for the rest of the year or just for this quarter?

Paul Will

Hopefully for the rest of the year. We have about 400 trucks that we could reduce all the fleets between now and then the year is our goal.

Edward Wolfe – Wolfe Research

And when did that start, in March or April?

Paul Will

March.

Edward Wolfe – Wolfe Research

And then just last question, I will turn it over. On the cost side, can you talk a little bit about some of the expert a little bit recently, depreciation I guess will start the comeback if you kind of fleet, am I thinking about that correctly, and how that might look going forward and the revenue of equipment rentals?

Steve Russell

The depreciation will as we prepared the fleet down. I think with regard to salaries and wages, I saw your comment this morning Ed, I think actually if you divide our salary and wage expense into the billed miles it is roughly the same as last year, as a percent of revenue because the revenue went down 2.7%, it is up relative to percent of revenues, percent of miles, so it isn't. And I think that what we have done on the drivers side is – and we have tightened our standard – we have always had the, I think the highest hiring stand, we don't hire trainees, we don't hire ex-talents, we don't higher known safety risk, but we’ve toughened that ladder standard and we are bringing in drivers and started a couple of months ago bringing in drivers at a lower salary, roughly $0.03 a mile below where our existing drivers are and as that feeds through the fleet that could be a significant benefit to us, we expect it to be.

Edward Wolfe – Wolfe Research

Okay, the D&A can you just give some guidance of what that should look going forward, if you have it, per quarter at 10.1 that was reported in fiscal third-quarter? Should it be around that number going forward, or how do we think about that over the next two or three quarters?

Paul Will

Over the next two or three quarters, we see it trending down, we haven't laid down truck by truck if what we would disposed of, but it should trend down 200,000 to 300,000 per quarter on a go forward basis with our expectations right now.

Steve Russell

The other issue Ed is that the fleet is newer than it was a year ago and we will complete our buying program before the end of this year and therefore will not need to buy any '10s or '11s. Trucks that we are taking also have bunk heaters, which are playing a role in reducing our idling, but the important thing I think is that accept the – some of that increase in depreciation etcetera, it relates to the fact that we do have a much newer fleet. Our average truck right now, I think saw 1.3 years old or something like that. It's got about one half, but meaningfully lower than it was a year ago and will continue to get lower as we go through the year.

Edward Wolfe – Wolfe Research

And should we assume that the 50 month cut come mostly from the Mexican size or 25% Mexico becomes less given the way the economy is rolling off, if we look at a year from now?

Steve Russell

Well I think that the trucks that we are talking about are fungible in terms of whether they run – the Canada runs in the US to run domestic US or to Mexico, you know at this point it is hard to assess what the swine flu impact is going to be, but I would assume that Mexico will, excluding any massive impact of swine flu, I think we will probably stay at 25%, it may even grow as demand picks up because Mexico is now much more competitive with China, but I think overall we have the excess of trucks that we took with Continental that we haven't sold yet has probably 200 of the 450. So, and those are basically parked, so those have been sold through either our retail outlets or through wholesalers mostly through our retail outlet. We now –

Edward Wolfe – Wolfe Research

Okay. Thanks so much for the time guys, I appreciate it.

Steve Russell

Thank you Ed.

Operator

Your next question comes from the line of Todd Fowler with KeyBanc Capital Markets. Please proceed.

Todd Fowler – KeyBanc Capital Markets

Hi good morning everybody.

Steve Russell

Hi Todd.

Paul Will

Good morning.

Todd Fowler – KeyBanc Capital Markets

Steve, how much of your freight has been rebid at this point, how much is still outstanding to be rebid in the coming months.

Steve Russell

Chris do you want to answer that?

Chris Hines

Yes. The bid process has really slowed down dramatically now, most everyone’s gotten through the cycle by the end of April, there is a couple out there, but not many new ones out there Todd.

Paul Will

February March were probably the most intense bidding in my history of, you know in other words was massive, but I think that has seen some slow down.

Todd Fowler – KeyBanc Capital Markets

Okay, so most of your large impact is at this place, at this point are in place for rather back half of the year?

Steve Russell

Yes

Todd Fowler – KeyBanc Capital Markets

And what does the rates look like on a year-over-year basis that we should see implemented when those new rates come through?

Chris Hines

That’s really I think what I tried to answer with Ed’s question, in other words probably could the average rate go down $0.02 or so, it is possible I don’t think it would be massively more than that from the March quarter.

Todd Fowler – KeyBanc Capital Markets

Okay and then during the quarter, I think you might have mentioned this as well I am wondering, do I response one of Ed’s questions, but what percent of miles was broken freight here during the quarter Steve?

Steve Russell

It was roughly 7%.

Todd Fowler – KeyBanc Capital Markets

Okay and where was that do you know in the year ago quarter?

Steve Russell

On the year ago quarter it was probably five Chris and if you go back ’06, ’05 was probably three, certainly up.

Todd Fowler – KeyBanc Capital Markets

Okay. And then Steve if you could talk a little bit about fuels here during the quarter and I know that you guys could feel a lot of different ways, you know how much do you think you guys were able to reduce either expense of gallons through some of the internal initiatives that you have done, you know how much did expense or gallons come down as a result of the reduction miles driven, you know just kind of your thoughts on obviously there is a swing in the net fuel expenditure during the quarter, you know how much of that is internal versus how much of that is external related to the movement in diesel?

Steve Russell

If you actually look at, let me pause welcome to (inaudible), but if you look at our MPGs, miles per gallon, they have improved – they have probably improved in the 6% range, which sort of on an annual basis equates to roughly 3 million gallons or so of less fuel. That’s been achieved through idling, we call it idling counseling we’ve probably terminated a 160 drivers in the last 14 months for unnecessary idling and we do that if they short-term idle or just we in some cases terminate drivers one the other day had moved in his eighth year, so normally we cancel three times, we cancel like ten times, so we’ve been affected with that. The other thing that has been affected is these s-S-bar heaters, which we have now and probably about 1,200 trucks and so that’s been effective.

With regard to the overall, if you look at December quarter versus the March quarter the fuel surcharge went down by 10.5% from December ’08 to March of ’09. Fuel cost went down by – Fuel surcharge went down by $10.5 million between the December quarter and the March quarter. Fuel cost went down by $7.7 million. This certainly the effect, the positive effect of the fuel drop was much more meaningful in December quarter than it was in the March quarter, I think more of the March quarter benefits actually related to the MPG improvement.

Todd Fowler – KeyBanc Capital Markets

Okay that’s actually helpful. And then with the cross border freight, you know it sounds like a lot of – there is no automotive at this point, you know are there a couple of big buckets that we can think about as far as what is moving between Mexico and the US and then as well as between Canada and the US to get a sense of you know what the softness would be here maybe you know what to look for when things could improve in those lanes?

Steve Russell

Yes. I think Mexico northbound is pretty much across the board, but certainly the durable goods and our customers and people like Whirlpool and Kohler’s, and LG, General Electric and they were all significantly hit in January/February. The other step that moves northbound from Mexico we do very little automotive parts that has been, but I am sure that has been a crash to set anything to support new cars [ph], Chris what else would that be.

Chris Hines

The only things that are still moving northbound Todd at reasonable volumes are alcohol, beer, and soda. And we do have apiece of each one of those products.

Todd Fowler – KeyBanc Capital Markets

Okay I guess that makes sense in this environment that those would be ones that are moving. Few last ones, thoughts on the balance sheet, I mean I guess going forward it looks like you guy pay down a substantial amount of debt here in the quarter, I would think that the rates and the credit facility would have been relatively low, so paying down debt versus stock buyback is that just given concerns about down to your appearance in this environment and what shall we expect with cash going forward?

Chris Hines

At this point going forward we have, you know when we have said this in the past, we know our intentions of buying these stocks back or doing anything of that nature and using the resources, the cash to continue to execute on our tractor replacement cycle should end the year. We threw off about $25 million were between pre-paid and receivables coming down year-over-year, the rest came from cash flow from, you know equipment sales etcetera. So that is the pay down for the quarter and we are going to continue that process through down the year to strengthen the balance sheet in this difficult time.

Steve Russell

We had looked at the issue of stock buyback back in – and in November, I think I had mentioned this on the January call and instead opted to acquire Continental, which was $24 million, let’s see what happens in the months ahead.

Todd Fowler – KeyBanc Capital Markets

Okay and then one last one, I mean it’s just for Paul if you have it, what is the breakout of actually owned tractors, leased tractors, and owner operators here during the quarter?

Paul Will

Percentage of how many owned trucks, how many owner operators etcetera?

Todd Fowler – KeyBanc Capital Markets

If you actually have the number of units that would probably be more helpful. And if not I can pick it up online.

Paul Will

Let me, I will email it to you.

Todd Fowler – KeyBanc Capital Markets

Okay thanks a lot guys.

Paul Will

Thanks.

Steve Russell

Thank you Todd.

Operator

Your next question comes from the line of the Donald Broughton with Avondale Partners. Please proceed.

Donald Broughton – Avondale Partners

Good morning gentlemen.

Steve Russell

Hi Donald.

Donald Broughton – Avondale Partners

Let me make sure I heard this right, the new contracts Kraft, Coca-Cola, were those negotiated, those are new customers or on new contracts?

Steve Russell

Coca-Cola is new customer.

Donald Broughton – Avondale Partners

Okay.

Steve Russell

With Kraft we had been doing business with since October of ‘06 when we bought (inaudible).

Donald Broughton – Avondale Partners

What were you doing, an expanded amount of business with them under a new contract?

Steve Russell

Yes.

Donald Broughton – Avondale Partners

Okay. And those new contracts are at lower rates than previously – than the rest of your base?

Steve Russell

It is hard to answer that directly Donald because it depends where the lanes are, and the –

Donald Broughton – Avondale Partners

But overall do you think those contracts will have a negative effect on your overall base rate?

Steve Russell

We have already implemented with Coke for example, there is a lot of Coke business in our March numbers as well as Kraft candidates so there is already a piece there in there Donald.

Donald Broughton – Avondale Partners

And they were only a negative effect, they were part of the decline, sequential and year-over-year decline?

Steve Russell

And they came in at the beginning of March.

Donald Broughton – Avondale Partners

Beginning of March, right.

Steve Russell

Kraft actually from the beginning of April.

Donald Broughton – Avondale Partners

Yes because I know the pricing environment stopped, but just want to make sure I had my facts right. Tell me this, the new tractor buy is to remind me you are buying exactly what truck inspects are you buying?

Steve Russell

International (inaudible) they had so much common power (inaudible).

Donald Broughton – Avondale Partners

And so what is the mix?

Steve Russell

We don't disclose that.

Donald Broughton – Avondale Partners

Okay fair enough.

Steve Russell

And they all would come essentials.

Donald Broughton – Avondale Partners

Okay here gentlemen. Thank you.

Operator

Your next question comes from the line of Chaz Jones with Morgan Keegan, please proceed.

Paul Will

Good morning Chas.

Chaz Jones – Morgan Keegan

Good morning guys. I guess most of my questions have been answered. Maybe a few housekeeping items, I apologize if I missed it, did you give the operating income for B2B?

Paul Will

Jon?

Jon Russell

Was 306 – 300,000.

Chaz Jones – Morgan Keegan

And then looking at the general and other expenses that kind of trended of here in the last couple of quarters is there anything that is pushing that directionally, is driver recruiting going through there?

Steve Russell

No driver recruiting goes up into the operations maintenance expense, but that was just all the cost-cutting measures that we put in place over the six to nine months has dried down, but nothing specific in that line that jumps out.

Chaz Jones – Morgan Keegan

Okay. Is – always seen in the last couple of quarters to get the run rate there?

Paul Will

Yes I think 1:7, 1:8 is probably a good run rate.

Chaz Jones – Morgan Keegan

And then – I guess going back to Continental you said you had kind of expected to give or I guess trade back in 200 trucks, at this point could you give us any sense for how much business, either one, how much business you have retained in terms of revenue or how many trucks you plan on retaining from that acquisitions?

Paul Will

It this roughly, 3 million miles a month, just under 2 million miles a month up in that range.

Steve Russell

That is in today's environment.

Chaz Jones – Morgan Keegan

Okay.

Paul Will

That is billed mile chase.

Chaz Jones – Morgan Keegan

Okay that is helpful. And then last thing here, certainly the balance sheet debt, debt has come off quite dramatically and I guess you guys did a good job in explaining the reasons why, has the off-balance sheet changed dramatically here over the last couple of quarters?

Paul Will

From the December quarter to this quarter it is up about $3 million, if you take the net present value the leased obligation including the non-residuals, those are not up that significantly from December quarter March quarter.

Chaz Jones – Morgan Keegan

Okay perfect that is helpful. Thanks guys that’s all I needed.

Paul Will

Thanks Chaz.

Steve Russell

Any other questions Luisa.

Operator

We have one more question coming from the line of Mike Bowen [ph] with Stifel, Nicolaus. Please proceed.

Mike Bowen – Stifel Nicolaus & Co.

Hi good morning gentlemen. Just got a question on the utilization with miles per tractor per week being down about 60% year-over-year now realized, you know rather has to do with the cross-border traffic being down, which is good utilization freight, is there anything you can do to mitigate that decline and utilization if that market remains suppressed in the next few quarters?

Steve Russell

That number and we have done this for years, so the comparability is totally valid, but that number is based on total trucks, even trucks that, you know are ready for sale. So if you ask one of my drivers they're doing better than 1,652. The key is based on the fleet that we have, if we where able to add more miles the impact would be very significant because we could look at those two numbers and literally multiply it out, in other words the 1,652 compared with what we where achieving a year ago that difference times, the number of, the average number of seeded trucks that’s the additional miles we can put in our fleet without adding one more driver, without adding one more tractor, without adding one more dollar in the administrative cost or anything else.

So that if you look at that decline in the March quarter were it went from 1,984 miles per week per truck to 1,652 that difference of over 300 miles times the 2,900 you know average line-haul tractors you know that’s a lot of miles and even at a 10% or 11% debt rate it is a significant upside and could we have lived with 300 less tractors, unless drivers? And the answer is we could have, not sure the prices would have been too significant to sell the equipment, but we could have done that. But we felt that the supply demand curve was going to kick up in the March quarter, it didn't. Why didn't it for the two reasons mentioned. Had it kicked up, the upside was enormous, I mean if you take roughly 3,000 tractors times 300 miles a week times 13 weeks, the additional miles that we had the ability to generate was anonymous.

Why didn't they kick up? Two reasons, one, lenders are unwilling to shut trucking companies down because they don't want the tractors back and second all trucking companies including ourselves benefited from the decline in fuel prices because the accounts receivable amount dropped so much as Paul indicated. So, we are ready for the market kick-up, we believed it would be doing that right at its plates were being bought, tags were being purchased now at $1,800 per tractor, so a guy with hundred trucks would have to lay out $1,800 times 100 trucks and if he can’t borrow it from the bank he can’t find those tags. Or what happened is the decline in fuel prices threw up enough cash to these suites, but that didn't happen and as a consequence we did have too many trucks and too many drivers, but the reality is that is going to change.

What did it cost in the interim? Probably $0.03 of that $0.10, you know we would have lost $0.07 instead. We hadn’t anticipated the Mexico collapse and we certainly didn't see the kind of failures we had expected. I mean I sort of report that McDonald bought and they put out yesterday, we set the number of the failures was half of what it was a year ago. Who would have believed that in this kind of supply and demand environment? B2B saw the same thing in terms of fleet failures in March, not to collapse, but the reality is that I'm not sure anyone could say that maybe the best thing we could see happen as fuel prices turn around and go back up because there will be no banks to lend to these guys, but the reality is that hasn't happened yet either.

Mike Bowen – Stifel Nicolaus & Co.

It makes sense. I really appreciate all the details, maybe one other question, on the cost control side and talking about and non-drivers being down, headcount of non-drivers went down by 5% from a year ago level, if volumes don't get any worse here may be say roughly the same, either additional non-drivers that you would look to cut or would you keep it roughly flat at these levels?

Steve Russell

I think we would keep it flat. Or we think we basically had reduced non-driver staff by 5% last June and we did it again in January, we did add some people in Continental that we kept the facility in Little Rock. We did suspend the 401-K match, we also put in a hiring frost, which is essentially if somebody voluntarily quits, it needs approval of the way the Chris, Paul or myself or Jon to be hired to replace that person, but I think we've done the right things and we're going to continue at the levels were we are at.

Mike Bowen – Stifel Nicolaus & Co.

Okay thank you, those are the questions I have.

Steve Russell

Thank you very much.

Operator

Your next question comes from the line off John Barnes with BB&T Capital Markets. Please proceed.

John Barnes – BB&T Capital Markets

Hi good morning Steve.

Steve Russell

Hi John.

John Barnes – BB&T Capital Markets

In the discussion you just had about utilization, you indicated that you know your miles per trucks I guess were on the total number of trucks even those available for sale or not in use, can you give us an idea of the number of trucks that just kind of fit that criteria that were either parked or not in service just to get a better idea of your kind of the utilization of the equipment actually in service?

Steve Russell

Paul?

Paul Will

It is probably about 350, which most of them generated through the Continental acquisitions.

John Barnes – BB&T Capital Markets

Alright. Steve could you talk a little bit about the carrier trends into the B2B business, you know just give us a little color on, you know number of new carriers have signed up, you know those that went inactive, you know maybe even a little bit of color on average dollars spent by carrier you know coming year-over-year?

Steve Russell

In the March quarter, we are currently at just under 21,000 total customers and we saw 650 go away in first quarter, which is a little higher than a typical churn. Our churn has gone from roughly 200 a quarter a couple years ago up to around 450 and now we did hit a high in March of 650. So we actually had a net ad, we added about 670 customers in the quarter. Total spend is down quite a bit, we saw our fuel volumes drop from March of last year, they are down around 17% compared to March of this year, which is consistent with the ATA statistics of down trucking miles.

Paul Will

We have certainly seen a drop off across the board of almost all product purchases. And as Steve mentioned earlier if fuel prices go back up I think the stress put on that small carrier more from a account receivable financing side would cause our numbers to drop pretty rapidly, but at this point while we’ve had an uptick in the number of – in our churn rate it hasn't been extremely dramatic compared to a year ago.

John Barnes – BB&T Capital Markets

Are you able to tell, you know the 650 that left versus the 670 that signed up, could you tell were you swapping about ten truck carrier for a one truck carrier or do you have or feel on the fleet size?

Steve Russell

Yes our average fleet size is shrinking a little bit, it is not a dramatic change, but we certainly are seeing a higher ad of smaller fleets. A little bit in terms of how we find a lot of the members, we work with some of our existing vendor partners such as tire dealers across the country or Sprint and Nextel dealers who are calling on trucking companies, they do tend to gravitate a little bit towards the smaller carrier, but it hasn't been a large change, it has not been an average 25 truck fleet being replaced by an average debt truck fleet. Our median has been roughly around ten and it stayed around ten.

John Barnes – BB&T Capital Markets

All right. Okay and then lastly Steve could you just, you know given that you completed Continental in December, you know things get a little bit worse in the first quarter, you know what are your thoughts from an acquisition standpoint at this point, you know you are kind of out of the game, or you still kind of beating the bushes?

Steve Russell

Basically Continental brought in – Continental was doing about 10 million a year in intermodal business John. We had never been in the intermodal business. We put together a couple of folks, two of them ex-Continental folks, so they hired and we believed that we put out some reasonable growth opportunity and some of the business we didn't take some of the intermodal business because we felt that wasn’t economic, we took the step that was economic and are growing it.

I think that we are probably, if fleets are failing where we have opportunities to pick up good customers at descent rates, we would do that, but in this environment we are not going to be involved with buying any trucks or buying any trailers. So, I wouldn't see us spending any capital to do it, we did it, you know our opportunities where if the owner is going to shut down he would do something where we would pay 2% or 3% commission to keep – take over the customer that kind of thing we do, but we wouldn't do where major capital is involved.

John Barnes – BB&T Capital Markets

Okay and I'm sorry if I had missed this because I had to jump off for second, but, you know with this whole swine flu and I hate to bring this up because I know it is early but, you know if they were to close the US-Mexico border for a period of time or make the travel between the two are little more restrictive can just remind us is there any of your business that would be – in what portion of your business could be potentially impacted by that?

Steve Russell

Roughly on a loaded miles or billed miles basics it is about 25% of our business right now. The only thing that has impacted is the travel and leisure business that would not have any impact on us. If it impacts manufacturing or exports or imports it certainly would have an impact.

John Barnes – BB&T Capital Markets

And that is 25% of the miles that would actually cross the border at some point?

Steve Russell

Correct.

John Barnes – BB&T Capital Markets

All right very good.

Steve Russell

Okay.

John Barnes – BB&T Capital Markets

Okay guys thanks for your time.

Steve Russell

Thank you.

John Barnes – BB&T Capital Markets

Thank you.

Operator

Your next question comes from the line of Rhem Wood with Stephens Inc. Please proceed.

Rhem Wood – Stephens Inc.

Hi guys. Can you remind us what your debt covenants are and whether there are any issues there?

Steve Russell

No issues at the end of March.

Rhem Wood – Stephens Inc.

And what we are covenants again?

Steve Russell

I think it is in our 10-Q.

Paul Will

We got our leverage, total capital and a couple of others, but there is, as Steve said there are no issues as of the end of the quarter.

Rhem Wood – Stephens Inc.

Okay. Can you give us a little help for now what you see is the tax rate going forward?

Paul Will

That is close to 40%, is where it need to be. Obviously when you have any kind of losses you still have the per DMs than for the non-deductibility associated, the end they pay the drivers, but on any profits you should figure 4% tax margins prior reasonable.

Rhem Wood – Stephens Inc.

Okay thanks. And then lastly, I know you said domestic miles where up largely due I guess to Continental, but can you give us some sense of what results would look like without the acquisition?

Steve Russell

I think it has probably been $0.02 to $0.03 worse. It would have been worse because domestic would not have had the miles that Continental bought it.

Rhem Wood – Stephens Inc.

Great thanks so much for the time I appreciate it.

Steve Russell

Thank you.

Operator

We have no further questions in the queue. I would like to turn the call back over to Mr. Steve Russell for any closing remarks, sir.

Steve Russell

Tough quarter, I mean March quarter is always tough. This quarter was particularly tough, but I think we are doing the right things and when it turns around I think we got tremendous potential because we truly reduced our costs of operating significantly in fuel and overhead and going forward in driver expense. So, we are happy with where we're going and we certainly feel the same kind of pressure everybody else has in this economy. Thank you every body. Feel free to call if any of you have questions. Bye-bye.

Operator

Thank you for your participation in today's conference. This concludes the presentation you may now disconnect and have a great day.

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Source: Celadon Group, Inc. F3Q09 (Qtr End 03/31/09) Earnings Call Transcript
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