Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Celadon Group (NYSE:CGI)

Q3 2013 Earnings Call

April 26, 2013 11:00 am ET

Executives

Stephen Russell - Founder and Executive Chairman

Paul A. Will - Chief Executive Officer, President and Director

Analysts

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division

Ben Hearnsberger - Stephens Inc., Research Division

Donald Broughton - Avondale Partners, LLC, Research Division

R. Alex Scott

Chaz G. Jones - Wunderlich Securities Inc., Research Division

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Operator

Ladies and gentlemen, hello, and welcome to today's conference titled Celadon Third Quarter Earnings. [Operator Instructions]

And now to start off the conference, I'd like to welcome and turn the call over to Mr. Steve Russell, Chairman. Please go ahead.

Stephen Russell

Thank you, Lisa, and welcome to our March 2013 quarter earnings conference call. I'm joined here in Indianapolis by Paul Will, our President and CEO; Eric Meek, our Chief Financial Officer; and John Russell, President of our Asset Light Businesses.

I'd like to remind you that my comments and those of others representing Celadon may contain forward-looking statements, which is subject to risks and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management expectations.

Okay. Earnings per share declined from $0.25 in the March 2012 quarter to $0.19 in March 2013. Historically, the March quarter has always been the most difficult quarter in Celadon's history based on a historical mix of customers. In addition, similar to our trucking company peers, we experienced weak and uneven volumes throughout the quarter. The March 2013 quarter was, in fact, one of the best quarters in the history of Celadon at $0.19.

As indicated on our press release, unusually high medical claims cost us $0.03 per share compared with the March 2012 quarter. Further, gains on sales were $0.06 in March of 2012 compared with $0.01 in March of 2013. These 2 items explain $0.08 of the decline between the March '12 and March '13 quarters. Further, the March 2013 quarter was quite challenging, with difficult winter weather, particularly when compared with March '12 quarter, and 2 less work days compared with March '12 due to leap year and the timing of Easter.

Looking at the key metrics. We experienced a significant decline in average seated count, from 2,851 in March of '12 to 2,624, so a decline of over 200 trucks. We've begun to address this issue by initiating a driver training school here in Indianapolis in the December '12 quarter. As a result, we've achieved an increase of over 70 seated trucks since March of -- March 31, that's in the last 3.5 weeks, and continue to see positive results. I'm confident in our company's future as I believe we have a lean cost structure, limited capital expenditure requirements due to our newly refreshed fleet of both tractors and trailers and an improved seated count, as described in the press release, the increase of over 70 trucks since March 31.

Our utilization has improved as miles per week per truck in the March 2013 quarter was 2,080, up from -- up 68 miles per week per truck from the 2,014 in December '12 quarter and up 29 miles per truck per week from the 2,051 in the March '12 quarter.

And Lisa, we're ready to open the floor to questions. Thank you very much.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question in queue comes from Todd Fowler with KeyBanc Capital Markets.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Steve or Paul, if you could talk a little bit about some of the things that you saw during the quarter. I know that your freight profile has shifted over the past several years, but I always think about you as having still a little bit more manufacturing exposure, running more freight in the Midwest versus some of your peers, and it feels like that's where some of the challenges were on the weather, as well as the end market side. I'm curious to get your comments on what you saw with your end markets in your geographies during the quarter.

Paul A. Will

Yes, I think that's a fair comment, Todd. If you look at kind of our freight, it was -- when you look at, what our peers are saying as well, is freight was somewhat choppy throughout the quarter. I think if you look at March, March ended up being a little bit stronger, albeit not where we necessarily want to see it. But in April, similar to March, in the same sense, it's a little bit uneven, but stronger definitely than January, February. If you look at our mix of customers, and we've talked about that with investors in the past that we've continued -- or we continue to try to get into more diversified retail, beverage, food, et cetera. But when you look at a lot of what we do in and out of Mexico, it's a lot of industrial type, manufacturing type, which we felt was a little bit softer in -- especially in the January, February time frame so that impact us as well as, obviously, going in and out of the Midwest, there's more storms definitely relative to year-over-year comparables. So I would say it's a fair statement, but what we're seeing in -- what we saw in the month of March and the month of April so far is obviously much better than what we saw in the January, February time frame to date at least.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

So -- I'm sorry, Paul, just to finish that thought. So what you're seeing in April, I mean, you have seen an improvement relative to where you were in March or relative to where you were in the first quarter in total?

Paul A. Will

The first quarter in total, but more specifically, if you take January February, March started picking up, still somewhat spotty week-to-week some weeks stronger than other weeks, but April has continued to be similar to March but definitely stronger than January and February. So when you take the average for the first quarter, it's better, and I would say it's comparable to what we saw in March, a little bit stronger than where we were in the beginning of the quarter, clearly.

Stephen Russell

And historically, Todd, Mexico is an important part of our business. Right now, it's close to 40% of our business. And Mexico has always been awful in January and February, and that's been true for 28 years since we started the company.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

And I guess is there anything that you would say specifically? I mean, when I look at the miles for Jaguar here this quarter, I mean, they've been weak for the past couple of quarters, but they were, again, weak here in the first quarter. I mean, is that related to the seasonalities or something specific going on with Jaguar relative to the rest of the Mexican activity?

Paul A. Will

Well, a lot of what Jaguar is running is really more from a manufacture and automotive standpoint because there are just -- keep in mind, that's just in Mexico run to the border, so plant shutdowns and some change on lines created some mild shortfall in Mexico from that standpoint. We're looking to do the same thing, obviously, with our Jaguar fleet to get what we call more door-to-door movements, as well as movement shifts to the border that we could then interline with the U.S. side of our fleet. But we're looking for -- we're trying to solicit, obviously, more freight that's not as manufacturing or automotive based, which will help in the future [ph].

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Okay, yes. And then on the seated tractor count, I know you had some comments on the prepared remarks on some things that you're working on. We've also heard this from other carriers. It seems like that there is -- the driver market has become even more challenging and that that's accelerated in the past couple of weeks. It feels like that started to really kick in at the end of February and into March. I guess I'm curious if you can speak to, a little bit more specifically, what you're seeing there. It sounds like you've got some things in place. And then how do we think about the seated tractor count into the second quarter, either sequentially or on a year-over-year basis?

Paul A. Will

Yes. If you look at where are we trying to -- our average seated count in the quarter was right at -- pretty much at the same number, within 1 or 2 trucks of where we ended the quarter. So if you look at kind of what we stated in the press release, you could take 70 off where we were on average during the quarter. So if we stay flat where we're at today, you would expect us to be up about 70 trucks on average for the quarter. We do feel like we've gotten a lot of success. When you add a little bit of lackluster miles, that's created some additional internal force, plus the driver market is a little bit tougher so that slipped somewhat in the quarter. More specifically, it looks larger year-over-year, but sequentially, it's not as down as much. But what we've done is we've really pushed out to the actual terminal locations to do more recruiting on a more, let's call it, terminal-, regional-based recruiting, which has allowed us to really be more in tune with what the drivers' needs are, working out with a driver management from a terminal level, location level as opposed to bringing everybody through Indianapolis, from an orientation standpoint. That, as well as the school -- we started a school in the fourth quarter of last year, the December quarter. What -- that's a 4-week school, a certified school, and then, when the school is done, you have to drive with a trainer, real life obviously, for 6 weeks so that's a 10-week program. This week we had -- in our class, we had about 10 drivers come out of the truck, and then they'll be obviously running on their own through the school, through the training program and new drivers in the seat of the trucks. So we believe that, that's one of the things that's really helping us and will help us on the go forward to be able to drive that seated count and therefore, grow miles through increased seated count.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Okay, good. And then just the last one I have, and I'll let somebody else have at it. But thinking about the sequential improvement in the operating ratio, or at least what we typically see historically between the June quarter and the March quarter, is there any reason to think or -- and I know there are some moving parts on the cost side here in the March quarter. But is there any reason, I think, that we shouldn't see kind of that normal sequential progression between -- as we move into the June quarter? Are there any things to think about on the cost side going forward versus where we ended up the current quarter?

Paul A. Will

Yes, one thing I'd say about the current quarter, because of the little bit of lackluster movement on freight, we had -- especially on the border, we had a lot more brokered freight that we don't normally see. Obviously, that creates some rate suppression that we have already seen that kind of dissipate in the month of March and the month of April, so we think our rates should trend up as a result of not having that pressure. But the other thing is, so with that in mind and with the higher seated count, we -- and if you look at it sequentially, we should probably see probably 200-basis-point increase -- or improvement, reduction in our OR from the March quarter.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Okay. And so Paul, what you're saying on the brokered side is that in the -- the revenue per loaded mile in the March quarter that, that was pushed down because you had more brokered freight? That's different from a comment on seeing the increase in purchase transportation related to the increase in brokerage revenue, right?

Paul A. Will

Right, correct. If you look at purchase transportation, just to kind of summarize that, purchase transportation was up about $2 million because of our increased intermodal, we do TOFC. And it was up about 4 million miles because of our increase in owner-operated seated count. That's what you're seeing in the purchase transportation bucket. That's really the increase [ph], okay.

Operator

Our next question is from Tom Albrecht with BB&T Capital Markets.

Unknown Analyst

It's actually John [ph] on for Tom. A couple of quick questions here. I just want to start out with the gains. What are the gains likely to be in June? And can you comment on why they were so low in the March quarter?

Paul A. Will

If you look at over the past 2 years, obviously, we've done a major refresh of both the trucks and trailers, as I think everybody is aware of. In the most recent quarter, it was just a function of what was parked down, what was sold. We're pretty much through all our trucks at this point in time. But we still have trailers to work out through the system, which the lion's share of those will be done through the June quarter. So that's why you saw lower gain in the March quarter. The June quarter, I would say, approximately $1 million in gains is what you should probably model.

Unknown Analyst

Okay, all right. And then on the PT side, I heard the comments you just made about that. But should we expect that to run in the $32 million to $35 million range per quarter?

Paul A. Will

Based on where we're at today, based on what's going TOFC and based on our current composition of owner operators in the fleet, yes.

Unknown Analyst

Yes?

Paul A. Will

Yes.

Unknown Analyst

Okay. And then last one here is on the medical claims. Will there be any carryover in the June quarter from what you all experienced in the March quarter?

Paul A. Will

The medical claims, we went back and looked over the last 8 to 10 quarters, and if you look back, that medical claims have run anywhere between $1.4 million, $1.7 million in any given quarter. 1 quarter -- this quarter, it was closer to $2.9 million. We had 1 quarter that was about 6, 7 quarters ago, that was $2.3 million. If you take those 2 out, it's historically a run rate of between the $1.4 million, $1.7 million level so that's why we really consider that unusual in nature. Those are individual claims, about 8 claims that really hit more specific, which we've got a cap of 250 [ph] per client per individual, per participant, and it was just unusual in nature, which is why we called -- specifically called that out. If it goes back to historical levels, which we've seen over the last 8 to 10 quarters, we think it'd be back down in that $1.4 million, $1.7 million level. Could it be a little bit higher than that? Obviously, those types of claims that come through are really unusual in nature. We try to do is, a lot internally, as far as health, wellness, put the clinic on-site, work with health reimbursement accounts and a try and do a lot of stuff as it relates to the medical side. But we believe that's unusual in nature, and it should come down -- back down to normalized level in the June quarter.

Unknown Analyst

Okay. So the $1.4 million to $1.7 million range?

Paul A. Will

That's -- I mean, obviously, that's -- it could be higher, it could be in that range. But we would expect it to be more in that range, yes.

Operator

Our next question is from John Larkin with Stifel.

John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division

Paul, the last time we talked, you were very positive on the application of some software from Manhattan Associates to optimize the network. Has the shortage of drivers gotten in the way of the realization of the benefits from the application of that system? Or are you still getting some value from that?

Paul A. Will

No. That's one thing that I think when you look at how we're running our book of business today, I think we'll continue to reap the benefits associated with that, a larger fleet, obviously more transactions, more correct decisions are made on what freight to take. And I think if you look at how we run the fleet today, it should continue to improve with the use of that software. So I think we're still seeing some of the benefits associated with that, and I think we will continue. That's one of the things that we're hopefully going to showcase with our investor day or analyst day in May, on May 7.

John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division

And then the acquisition program, which was quite active last year and I guess the year before, the primary objective of that was to capture drivers and some incremental accounts, I guess, and then to get rid of the equipment at something roughly in line with respect to what you paid for the company in the first place. With the investment in the driver school, is it safe to say that you think the driver school is a better way to acquire quality drivers as opposed to the acquisition program? Are you going to continue with the acquisition program as well?

Paul A. Will

I think we are looking at a combination of the 2. But I definitely think that bringing the drivers in through the school allows us a few things, but the most important is being able to bring them in and get them to understand the Celadon philosophy, the Celadon way on how we do business. They are also locked in for a period of about 1 year contractually, and that's just based on us really paying for their school and then the training associated with the school, 6 weeks that we put them in the truck. So that's much better than trying to do an acquisition, and you tend to get drivers that either they have preconceived notions when they come in, they've got whatever their expectations are based on previous companies. And as a lot of fleets will tell you, obviously, drivers turn over quite a bit, so we believe it will be more stable workforce, more economical from a cost standpoint workforce than what we're seeing in the general experienced driver market. So we're pretty excited about the school side of it. But then, from an acquisition standpoint, I think we're seeing a lot of activity. We're trying to be a little more selective in what we're looking at today and what we'll move forward with. So I think both those you'll see over the next 12 months as opportunities to grow the seated count.

John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division

Have you shared with the Street the cost of the driver school in terms of the capital investment and I guess, what must be a building and then also, your estimated cost of training each driver trainee?

Paul A. Will

We have not other than -- it's probably about $6 million building and property associated. It's in the same industrial complex as where our current corporate headquarter's campus is. That alone will reduce, obviously, our hotel bills that we currently have today, associated with bringing drivers in through the school. We've got a 10-acre facility, where we're currently at, that we're utilizing for the driver school. The school itself will be, obviously, outfitted with hotel rooms equivalent for the drivers and so forth. We believe when the building is complete it will be a cost reduction to what we're seeing -- or what you've seen in the March quarter already so that's a -- will release some cost pressure from that standpoint. But each individual driver, we're thinking it's about, based on our -- what we've calculated so far based on the activity we've had, and keep in mind that the more numbers you put through the lower the cost per will be because of the overhead associated with it, but about $1,500 to $2,000 per driver is kind of what we're looking at.

John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division

And does that driver, more or less, pay you back in his first year of employment for the training cost?

Paul A. Will

Yes, yes. It's. . .

John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division

That's sort of the essence of the contract?

Paul A. Will

Yes, correct. That's -- yes. So we believe -- but the big thing is if you look at it from a stability standpoint and a reduction in the turnover, it more than pays for itself.

John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division

Got it. And I guess from a seasonality point of view, could you just comment on how big a factor you think the winter weather was? It seems to be hanging on forever in the Midwest, in the upper Midwest. I guess, they had some snow up in the Dakotas as recently as yesterday. I was talking to somebody in Iowa who said the buds out aren't on the trees yet in Iowa. Do you expect that once spring breaks in the Midwest that there will be this huge pent-up demand for what normally moves in the springtime and what last year, because of the weather, moved in the sort of March, April time frame?

Paul A. Will

Yes, I think that's right. We've had a lot of conversations on that specific topic. If you look at, even like in the Midwest, we had sleet on Tuesday, here we are at the end of April. People are -- as far as lawn, garden clothing, all that kind of stuff, all that stuff has been delayed in essence. People aren't doing that stuff outside when the weather drops down into the 30s, when it normally, obviously, wouldn't be that low. So I think that's something that there will be pent-up demand for some products that otherwise would have been done sooner. So we're expecting that is a good opportunity, which is another reason why, obviously, we're trying to get the seated count back up quickly because we believe, obviously, that capacity is going to be the name of the game in the marketplace with the lack of drivers out there for others.

John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division

And then just one final one on demand. Did your company have any exposure to the rebuilding effort due to the Hurricane Sandy devastation?

Paul A. Will

We have some exposure to that but -- as far as opportunity, but I wouldn't say it's a significant amount.

Operator

[Operator Instructions] Our next question is from Brad Delco with Stephens Inc.

Ben Hearnsberger - Stephens Inc., Research Division

It's actually Ben on for Brad. So digging a little bit more into the driver issue. I know you've already made up 70 units. Kind of looking longer term, how long do you think it will take to kind of back fill those lost units?

Paul A. Will

Our expectation is, say, 70. Our expectation is you should look at the average seated count for the June quarter to be somewhere between the 2,700, 2,750 range. Obviously, our goals are to grow it -- return to the same level we were last year faster. But I think that's a reasonable expectation right now.

Ben Hearnsberger - Stephens Inc., Research Division

And then as you look at kind of the driver hiring cycle, is there ever any seasonality there, i.e. is the June quarter typically a better hiring quarter than others?

Paul A. Will

Historically, it has been, yes.

Ben Hearnsberger - Stephens Inc., Research Division

Okay. And then, if you look at you're kind of getting to the near -- you're kind of getting near the end of your trailer refresh cycle, what do you guys think you'll be using your capital for going forward?

Paul A. Will

Just continue to pay down debt.

Ben Hearnsberger - Stephens Inc., Research Division

Any room for buybacks in the future?

Paul A. Will

That's -- nothing at this point in time has been discussed.

Ben Hearnsberger - Stephens Inc., Research Division

And then just one on the model. What do you expect for D&A to be in 4Q?

Paul A. Will

The combination -- it will end up running about what you're seeing -- the combination of the gain and the depreciation and rental expense in the third quarter, you'll see about the same net amount in the fourth quarter, give or take $500,000.

Operator

Our next question is from Donald Broughton with Avondale Partners.

Donald Broughton - Avondale Partners, LLC, Research Division

Help me remember. Steve, when was the last time you -- I know you prided yourself on hiring experienced drivers for years. When was the last time you actually hired new driver trainees?

Stephen Russell

We really never did -- we did some, but very few over the last several years. But conclusion we reached was that the driver school is going to, we think, have very significant impact on us. And the way it was structured and certainly, the facility, when it's completed, I think, will be a real opportunity to bring in drivers.

Donald Broughton - Avondale Partners, LLC, Research Division

And what factor of inability, for whatever reason, to meet the terms of their contract have you built into your doubtful accounts essentially?

Paul A. Will

As far as the -- it's fairly too early in the program, but we've talked to a lot of other fleets that had this training school/training program. And we're still kind of getting numbers together on turnover and so forth and what the turnover is based on who finishes the school, who finishes the training and then when they get on the road. And so far, the turnover has been very low once they actually get on the road on their own. But as far as going after -- as far as bad debt, we are expensing everything associated with the training, everything associated with the school, so there's no exposure as far as receivable from the individuals. That's not to say that we don't attempt to go after those individuals to recoup the money because it's clearly explained to them upfront that this is no different than any other kind of school that they would get a training or education from, but that's not in the books.

Stephen Russell

Frankly, Donald, the folks who are joining us are basically people who have been looking for jobs. The attitude that they have, becoming truck drivers is pretty good. And as long as we could give them the miles and keep them in relatively new trucks, we're very confident that it'll work.

Paul A. Will

If you look at the probably the largest 5 or 6 fleets out there, most of which have these type of programs, we use the same services, as far as collection standpoint, that they use.

Donald Broughton - Avondale Partners, LLC, Research Division

Sure, sure. I will -- we're all aware that not 100% of the people who start the school are going to be a driver for you 9, 10, 12 months later. I'm frankly more concerned about how you were accounting for it, so we didn't have any unpleasant surprises along the way as a result. And I understand that it's hard to find drivers, and so you need to do what you can to solve that equation. When I look at per mile expenses on -- other than fuel and maintenance, which is understandable given what you've done with the capital investment I mean, and your fleet, which is just outstanding, every other line item went up at a fairly accelerated pace sequentially year-over-year. I mean, my back of the envelope math says, basically, your cost to run your trucks went up 13% per mile, not including fuel, and your pricing, obviously, was only 1%. How does that headwind get muted in incoming quarters?

Stephen Russell

I'm not -- I don't understand how you got those numbers, Donald.

Donald Broughton - Avondale Partners, LLC, Research Division

Well, I know that, that math is somewhat exaggerated because of the unseated truck count, but when I take your expenses and I divide it by the number of miles you ran...

Stephen Russell

I mean, the math. . .

Donald Broughton - Avondale Partners, LLC, Research Division

That's the way you manage your business.

Stephen Russell

Medical claims, certainly.

Donald Broughton - Avondale Partners, LLC, Research Division

And that's in insurance and claims line, right?

Stephen Russell

No.

Paul A. Will

No, medical and benefits.

Stephen Russell

That's salaries, wages and benefits.

Donald Broughton - Avondale Partners, LLC, Research Division

Okay. So that line item was up 12% on a year-over-year basis on a per mile basis. Insurance and claims was up 14.8%. D&A, I understand, was up 38% because of the renewal of the fleet. Communications and utilities was up 48% on a per mile basis. Operating taxes and license on a per mile basis was up 22%. General and others 16%. Those are big cost headwinds. I understand there's...

Paul A. Will

Well, if you're doing it on a per -- but if you take in we have the higher seated count and you get more miles, obviously, it's not that our costs are up that much. It's that on a per mile, they're up, which is why we have to get our seated count back up to offset that. So I understand what you're saying now. I was -- because our costs aren't having -- we've got pretty -- what we consider pretty good cost structure that the incremental units on top of that aren't going to cost any more to run.

Stephen Russell

And last year we had, as Paul indicated, significant gains on sales. And the way you're computing it, you see that as an increase.

Paul A. Will

We've got a fixed cost structure.

Donald Broughton - Avondale Partners, LLC, Research Division

That's a good point, Steve. That's a good point. No, I just -- one of the things that I've marveled at, as you've been doing this little acquisitions along the way, is that you were actually, up until this quarter, at the top of the heap among all of the publicly traded carriers that released the stats, the ability to keep your cost per mile in check and at or below, which your pricing power was -- in this quarter, it obviously swung hard the other direction. I just wondered. Your answer, Paul, it's. . .

Stephen Russell

Donald, if you adjusted for the changing gains on sale and adjusted for the medical, I have difficulty believing that we were up significantly at all.

Donald Broughton - Avondale Partners, LLC, Research Division

All right, all right. Well and...

Stephen Russell

Lend me your analysis.

Operator

Our next question is from Art Hatfield with Raymond James.

R. Alex Scott

This is Alex Scott in for Art. If I could circle back to the owner operators again one more time. I saw that over the past couple of quarters, that's increased 60 to 70 trucks or so. And just curious if that's kind of a conscious effort or if that's just reflective of maybe you're having a more difficult time attracting company drivers versus owner operators. And kind of going forward, how do you look at that mix going forward?

Paul A. Will

It's really more of a -- obviously, from a trying to make sure we get seated count, there's obviously different avenues. There's owner -- pure owner operator lease purchase, which, obviously, we've got the financing on the equipment or a company truck. And the lion's share of the increase in the owner operators is really related to lease purchase, where we still have the equipment. So it's just a different avenue by which you get a driver into the truck and him being his own business owner in essence instead of him being a company driver. So it's similar in nature to just an extension of our company drivers.

R. Alex Scott

All right, that makes sense. And if I were to...

Paul A. Will

And turnover ends up being a little less, depending on what type of equipment they're in. And we try to get them in equipment that's similar to where we're on, on the company fleet, which is fully equipped with battery powered APUs and all the amenities that will hopefully make them successful as far as from a -- minimize their fuel consumption.

R. Alex Scott

Sure. And one more then, if I could just ask real quick. With upcoming hours of service, have you all come up with kind of what you think -- kind of quantify that impact on capacity, what it could be for you guys, effective July as it's planned to?

Paul A. Will

Yes, we're currently going through that right now. We haven't come to conclusions, obviously, each lane and whether it's dedicated or not dedicated or if it's your regular runs, what the impact is. So we haven't concluded on that at this point.

Stephen Russell

The competitors, particularly small fleets, are all having great difficulty, particularly going to be impacted by the hours of service issues. So I think that there will be a shortage of capacity as time goes on, and there are no startups in this industry anyway.

Operator

Our next question is from Chaz Jones with Wunderlich.

Chaz G. Jones - Wunderlich Securities Inc., Research Division

I was just wondering if maybe you could talk about the pricing outlook. I know, Paul, you had commented that maybe having a little bit higher brokerage freight in the March quarter negatively impacted rates, and certainly, that was the smallest improvement we've seen in the last couple of years. But just given where April started out and the bid activity that's gone on, do you -- are you still sort of expecting pricing to get back to maybe the 2% or 3% range looking out here in the forward quarters?

Paul A. Will

Well, I just don't think there's a -- I think that the supply-demand side is still not necessarily in the favor of either side but more on the side of maybe shippers. But it's continuing to change, and the expectation, I think, everybody is putting out there is that the back half of this year, you'll see an imbalance more towards the carrier. But based on the environment we're currently in today, and I think what a lot of our peers have said, is you're seeing anywhere between 2% to 3%, 1% to 3%. And I think a 1% to 3% range is probably what we should expect currently. We don't know what's going to happen, obviously, 6 months from now, 3 months from now, but in the environment we're currently in today, I think that's kind of the expectation.

Chaz G. Jones - Wunderlich Securities Inc., Research Division

Got it. Yes, I think most have been saying that they're more on the lower side of the 2% to 3%. And then, I don't want to beat gains to death or anything like that but maybe thinking about fiscal '14. Just given the fact that you probably won't be trading much equipment, does the gain comparison get a little trickier in 2014 and so there's probably going to be a little bit more D&A pressure?

Paul A. Will

I think if you look at -- and obviously, this quarter basically has no gains in it. So it's pretty clean relative to what you'd see as far as our equipment cost because we're pretty full right now. Obviously, we have some open trucks that if we increase our seated count, it doesn't mean it's going to increase our D&A cost because those trucks are unseated today. But if you look at kind of -- what we've said all along is our refresh cycle would be pretty much done in the March, June quarter this year, which is kind of why you're seeing that kind of whittle down. So I think as far as what you should see as far as gains in the future, it'll be minimal next fiscal year starting July 1.

Operator

Our next question is from Jeff Kauffman with Sterne Agee.

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Question, I know you're winding down on your investment cycle, but have you had any discussions with any of the OEMs on how pricing is going to change when we get these greenhouse-gas-compliant trucks later this year?

Paul A. Will

We have not. Our requirements as far as -- based on where our internal fleet is and the size today, we really don't have to buy anything until the back half of next year at this point. So....

Stephen Russell

The calendar year.

Paul A. Will

Yes. That's not something that we really have dug into at this point in time.

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Okay. And I wanted to take a step backwards because I think you've discussed how the current landscape is changing with the delayed winter and some of the things you're seeing in terms of pricing. But longer term, as we look out, say, over, let's say, a 3-year, 4-year period, how is the landscape changing? And you're focused on the driver school right now and the kind of whole dynamic with that change. But what other businesses or what other business segments is the company maybe not as prevalent in today that you need to start thinking about positioning yourself for, say, over a 3- to 4-year period?

Paul A. Will

I think we're laid out -- we're going to continue to expand upon what we've set up over the last 1.5 years, 2 years, which is some of the southeast regional, northeast regional, some dedicated. Obviously, we've got a major push into the dedicated, which obviously adds stability to earnings, whether it's up -- the environment is up or down, as well as we're -- more of a local, regional to offset the costs associated with the terminals. We're trying to do a little bit more of that business, while supporting our line haul fleet. The only other -- When we did the acquisition of Rock, that brought on some opportunity to get involved with some temperature control side of it, refrigerated side of it, which a lot of our customers have come to us with significant needs in that area, which that could be an opportunity for growth over the next couple of years as well.

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

All right. Just one final question because a lot of mine have been answered. But I wanted to follow up on Don Broughton's question. The -- I understand how the driver school is going to offset turnover and hopefully, be in that cost savings over time. Have you thought about the impact on the CSA scores of bringing in younger, less experienced drivers? And is that something kind of hard to predict, how that's going to affect your scores and your cost structure? Or have you figured out kind of how much give you might have to have there?

Paul A. Will

Well, we spend a lot of time before we actually started the school, and we looked at and talked with a lot of other fleets that have such programs. And what we found was that the actual students themselves coming out are more attentive to driving as opposed to maybe some of the experienced -- more experienced drivers are a little bit more comfortable behind the seat of a truck and therefore, when they're driving, they may be a little less attentive to the details, to moving lane to lane and all that. Our initial -- we've got about 80 out in the fleet today, and our experience with them is the same or less than what we have with our experienced drivers, and that's a good sign, especially when you think about the winter weather that they've just gone through, which would imply that they're not any more risky than what we have currently. So we look at that, and we look at -- talking to other fleets. They've seen the same thing, which is a good sign as far as from that standpoint, from a risk standpoint. From a cost standpoint, those drivers end up costing, obviously, less when they're running up and down the road until they get, in essence, payback for the school. And the school, in essence, costs about what? It would cost externally as opposed to necessarily what our internal cost is because we've got, obviously, the volume of bringing students in. So we believe it will minimize cost pressure on the drivers side. it Will obviously bring additional capacity, additional seated trucks so we could generate the miles. And kind of follow-up on what Donald said earlier, I mean, if you really look at the March quarter of last year, we had about $142 million, $143 million worth of costs, operating expenses and about $141.6 million this year, about $142 million. And he's absolutely right that on a per mile basis, our costs appeared that they've gone up, but we look at more on an absolute basis. Our overhead and our back office, that doesn't change when we add the additional miles. So getting that seated count up and getting the additional miles, obviously, we believe our cost structure is in line, and it'll generate a lower cost per mile on a go forward when we get the miles up.

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

I used to think that the old rule of thumb was roughly 1 out of every 2 people that started at driver school ended up seated behind the wheel eventually. What kind of ratio/dropout rate are you guys anticipating?

Stephen Russell

So far, it's been much less than that. In other words, much less dropouts.

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Meaning a bit better?

Paul A. Will

We've seen about 80% of the guys that start in the -- like some guys will sign up and then they don't show up for class. Some guys will start the class, don't finish the class. Some guys will get through the class, don't finish the training. So what we're trying to do is break it out by those different components. And if -- but if you look at a guy that comes in, starts the class, about 80% so far from our experience have actually finished the class. Then, they go in with the trainer to start getting real-world experience. So as we start to track that a little bit more, that goes into the factor on what it costs per driver as opposed to on a one -- driver-by-driver basis.

Operator

[Operator Instructions] And we have no further questions in queue.

Stephen Russell

Thank you very much for participating, everybody. Feel free call any of us here if you have other questions. Thank you, Lisa.

Paul A. Will

Thanks.

Operator

Thank you, ladies and gentlemen. That concludes this webcast.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Celadon Group Management Discusses Q3 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts