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Celadon Group Inc. (NASDAQ:CLDN)

Q4 2009 Earnings Call

August 12, 2009 10:00 am ET

Executives

Chris Hines – President & COO

Steve Russell – CEO

Paul Will – EVP & CFO

Jon Russell - EVP

Analysts

Thom Albrecht - Stephens

Chaz Jones - Morgan Keegan

Todd Fowler - KeyBanc Capital Markets

John Larkin - Stifel, Nicolaus

Robert Dunn - Sidoti & Co.

Edward Wolfe - Wolfe Research

Operator

Good day ladies and gentlemen and welcome to the Celadon Group fourth quarter 2009 earnings conference call. (Operator instructions) I would now like to turn the presentation over to your host for today’s conference, Mr. Steve Russell; please proceed.

Steve Russell

Welcome to the fourth quarter fiscal 2009 year press release teleconference. I'm joined in Indianapolis by Paul Will, our Vice Chairman and CFO; Chris Hines, our President and COO; and Jon Russell, our Executive Vice President in charge of our non-asset based businesses.

I would like to remind all of 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's expectations.

Before I talk about Celadon’s results I’d like to briefly outline our views on the state of the trucking and logistics industry, truck load and logistics industry. American Trucking Association statistics continue to show volumes down from prior year.

For the month of June ATA indicated a decline of 13.6% in tonnage compared with June of 2008. Further June represented the ninth consecutive month of year to year decline. Compared with May of 2009, June declined 2.4%, hence volumes in the industry are weak.

Further rates have dropped significantly compared to prior years as some fleets are willing to bid at clearly non-compensatory levels to keep their trucks running. Although spot rates in certain pockets of the market have shown some strength in the last two months, bid process by many shippers has resulted in very aggressive low pricing.

Coupled with this supply/demand situation used truck and used trailer prices have dropped over the past nine months dramatically. In many cases well below what trucking companies owe to their banks.

As a result in today’s environment banks are unwilling to call their loans and shut down fleets while concurrently, and in most cases, unwilling to provide working capital loans to weak fleets. As a consequence of this situation there has resulted in some fleets having closed or filed bankruptcy but far less than we would have expected, even if the banks don’t want to pull the plug.

In view of the spread between the amount of companies that owe their banks and the value of the used tractors and trailers not being near what they’re owed, the banks are not pulling the plug and forcing the fleet to close or file. With working capital loans generally not available, virtually all of the fleets in this situation have only one alternative, which is to park and mothball trucks.

But fleets, the act of mothballing saves the variable cost of running the truck thereby throwing off short-term cash and that amounts to something like $2,000 a week per truck between $800.00 the driver pay, $1,000 for fuel, maintenance, etc.

And therefore throws off short-term cash and allows the fleet to also use parts and tires on the mothballed trucks on the trucks that are still running. Although this can only last a limited amount of time, it has deferred closing for many fleets.

This cut back in the number of trucks on the road has resulted in requests from some shippers for us to handle loads that were awarded to other fleets and those fleets either no longer exist or no longer have the capacity to cover their commitments to the shipper.

For Celadon June was the month in a year when billed miles exceeded that of the prior year. This positive trend has continued through July and through the first two weeks of August. As a consequence of so many trucks being mothballed, we have also seen that for each driver position we’re filling, we have received an average of between 25 and 30 applications.

Looking at Mexico and the Canadian markets, the US Bureau of Transportation Statistics, an arm of the government, showed that trade between the US and its NAFTA partners is down over 30% from last year. We suffered significantly in the December, 2008 to April, 2009 period as a result of this decline.

Our international trade however has improved somewhat in May and continued that trend in June and July and so far in August. Looking at Celadon’s performance in the June, 2009 quarter, we earned about a million dollars or $0.01 per share.

The higher tax rate reflects permanent differences related to the pay of driver per diem. That was down from a $0.10 profit in June, 2008 quarter. Our average rate per loaded mile dropped to $1.41 from $1.51 or approximately 6.5%. This cost us $0.15 in earnings per share although we added some very strong customers that we believe will be important to our future.

Total loaded miles dropped about 4%, actually 3.9%, which cost us $0.04 per share compared with prior year. Partly offsetting this $0.19 share decline was a $0.05 per share improvement due to reductions we’ve achieved in various cost areas including salaries and wages and a $0.04 pick up in reduced fuel expense primarily due gains we’ve had in miles per gallon and to a degree the impact of lower diesel fuel prices.

Our non-asset businesses continued to do well with our supply chain warehouse business growing, truck brokerage growing, truck brokerage has grown about 70%, up to about $14 million on an annualized basis.

Our LTL business to Mexico is improving despite the overall Mexican trade being down. And in spite of the suffering of many small fleets, we’ve achieved satisfactory performance at truckers B2B due to new product offerings.

In total for the non-asset based business, its roughly $40 million and we’re doing about $6 million in the [inner modal] business at this time which we started about seven months ago. Regarding our fleet purchasing plan, in light of the new EPA engine requirements for 2010 models, we intend to continue purchasing tractors through the end of the 2009 calendar year.

At that time our average truck will be approximately 1.1 years old. We should not have to purchase any trucks in 2010 or possibly 2011 as well. As a result the lack of CapEx should generate significant cash flow during that period.

In summary in spite of an extremely challenging economic environment particularly in the international markets, we believe we’ve navigated this storm well and we’re beginning to see some flickers of sunshine through the clouds.

We’d be delighted to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Thom Albrecht - Stephens

Thom Albrecht - Stephens

I wanted to go back to the international comments you made a moment ago, how much of that do you believe is because of the severe devaluation in the Mexican peso and resulting in maybe new plants either being reopened or new facilities being built in Mexico altogether versus just the fact that we’re kind of coming up on maybe some easier comps during the second half of this year.

Steve Russell

I think its all due to the first, the peso devalued, the devaluation began when Lehman imploded the middle of September and by two months later it had dropped from $0.10 per US dollar to $0.07.5 per US dollar. Its now about $0.07.7. The Chinese yuan renminbi certainly didn’t devalue and what’s occurred is many manufacturers including Sharp, Samsung, others, to a degree LG group as well are shifting production from Asia to Mexico.

Of course there’s a difference in transportation time and expense but most importantly the peso devaluation has helped that. In addition automotive manufacturers who are now starting up again both cars and trucks but as well as parts and component manufacturers are shifting to Mexico too.

Though I think that’s what’s really driving the improvement in demand that we have seen. Now if you look at the statistics in the June quarter, I think actually in the month of June, it was down 30% between the US and Mexico. We’ve actually seen better performance then that.

Thom Albrecht - Stephens

That’s interesting, and as you were talking about a bit of a mileage rebound recently what’s the magnitude of that and did it start in June or just kind of since July, mileage utilization.

Steve Russell

It started really at the beginning of May. If you look at January through April our miles were down meaningfully. May, the first week of May or so, we also were effected by the swine flu situation as it relates to our Mexican business which by the way is about 25% of our business.

But since then we’ve seen continued improvements. I mean July and so far in August we are better than last year. And I think that’s a consequence of a couple of things, number one is we’ve added some customers in the last six or eight months that have meaningful but I think we’ve also, there were three anecdotal events of one major shipper calling us two weeks ago awarding us an additional $3.5 million of business.

Because business that they had awarded to other fleets, they were not getting the service as those fleets couldn’t fill their commitments. We got a call from a shipper about a month ago who called Wayne Deno, who is our VP of pricing and said congratulations you won the bid.

And Wayne said, what bid, we haven’t bid on your stuff in six months, since January. And they said, well, we’re not really getting the service we expected because of lack of capacity so you’ve won these lanes. Wayne said we wouldn’t honor the rates of those lanes. I don’t know where its going it from there but the reality is, that’s happening.

Last week Paul and I were at an auto manufacturer in Detroit who said they’ve lost meaningful piece of their capacity so I think that’s contributing too.

Thom Albrecht - Stephens

Okay so if we fast forward over the next two to three quarters and we continue to see a recovery in mileage utilization, that always precedes a rate recovery, and I know nobody’s crystal ball is going to be very good right now, but do you believe that as we get into bid season 2010 that there’ll be another round of pressure to go negative on rates or do you believe the opportunity exists for at least flat to slightly up rates, or is it too early to tell.

Steve Russell

If you look, let’s look retrospectively at rates, when American began its recession and that was probably sometime late 2006, beginning or middle of 2007, rates held up. They held up for awhile. I mean we didn’t really see tremendous rate pressure until the last eight months or nine months.

If capacity isn’t around, we have contracts, the contracts go generally a year. There are a couple that go two years but what happens is if you can’t provide capacity the only way you could do that is basically tell the customer you’ve got to pay for the deadhead to cover that load and that can start happening whenever capacity, whenever supply and demand flip.

And right now supply is clearly dropping whether they’re mothballed or bankrupt and so its not inconceivable it could start to turn relatively quickly but I think any real turning will take place in the bid season between January and June. And so that’s sort of the way I perceive it.

Thom Albrecht - Stephens

That’s great, Thanks of the color guys.

Steve Russell

Congratulations on your move.

Operator

Your next question comes from the line of Chaz Jones - Morgan Keegan

Chaz Jones - Morgan Keegan

If I could start out with a quick housekeeping request, do you have the operating income number for truckers [inaudible] at the end of the quarter.

Paul Will

Yes, the operating income was $330,000. That was up actually about 3% from the year prior, on down revenue though, a little bit.

Chaz Jones - Morgan Keegan

Then I guess moving on to truck count, if I could, and I see that you started breaking out the held for sale equipment on the balance sheet, if I remember correctly I think the plan was to start shrinking the fleet by about 50 units per month starting in March, is that still the expectation for the balance of the year. Has the used equipment market kind of given you some push back on that front.

Paul Will

That is our expectation, what we said last quarter was that our truck count would hold flat but our equipment held for resale we would continue to, or equipment that we were trying to sell would go down by 50 a month. From a replacement standpoint, we actually reduced our company fleet by approximately 50 trucks in June quarter so, less than what we had hoped, but we’re still, the number is moving down.

Our goal is still the 50 a month. We’ve got a lot of deals out there. We’ve seen a little bit activity but you’re correct that the used truck market is abysmal at best.

Chaz Jones - Morgan Keegan

And I guess maybe, correct me if I’m wrong, I’m guessing maintenance CapEx for you probably running in the $40 million range or so for your owned equipment, but CapEx is clearly probably going to come in somewhere below that for calendar 2010, have you commented, or how low do you think CapEx could be in either calendar 2010 or fiscal 2010.

Paul Will

We’ve been kind of quoting things in calendar year just to make it easier but calendar year 2009 we’re going to buy equipment [at the end of] this year and no equipment in 2010. We’ll evaluate 2011 when it comes later at the end of 2010. Our net CapEx requirements for the rest of this year through the end of the year is approximately $35 million of which we have funding for about $50 million right now.

So whether we fund it through operations, external sources, or just other equipment sales, we’re adequate and that’s why one of the reasons we looked at the bank line, didn’t feel like we needed $70 million and reduced it to $50 million was that reason.

Because that funding through the rest of the year will not require any bank resources.

Steve Russell

And then CapEx in 2010 as Paul indicated no tractors or trailers, the rest of our CapEx is minimal, maybe a computer upgrade or some fixing at some terminal but we really don’t expect that to be more than $1 million or $1.5 million.

Chaz Jones - Morgan Keegan

And then kind of to close it out, just a few more quick housekeeping items, could you give me roughly the percentage of broker freight you hauled in the quarter, what that was on the same quarter last year and then you may have commented on it, where the fleet is currently as far as age profile.

Steve Russell

To answer the first question, broker freight was about 5% which was up a tad from last year. It was probably 4%. We generally run at the 4% level even in good times because of the nature of where the trucks may be landing.

And that compares with a 7% or 7.5% back in March. With regard to the age of the fleet, current age of the fleet is about 1.3 years. So it’s a very new fleet, 1.3 years is the average age of our trucks now.

Chaz Jones - Morgan Keegan

Definitely new compared to the rest of the industry.

Steve Russell

Yes and it will be eventually 1.1 by December.

Operator

Your next question comes from the line of Todd Fowler - KeyBanc Capital Markets

Todd Fowler - KeyBanc Capital Markets

Could you talk a little bit about it sounds like the volume improvements that you’ve seen over the past couple of months, a lot of that has come from new customers or share gains, what are you seeing with your existing customers, has their volume activity picked up over the past couple of months either related to their expectations for business levels or for maybe just not going through the heavy de-stocking that they’ve gone through over the past couple of quarters at this point.

Steve Russell

We’ve see it up but its hard to tell. Its hard to tell whether we’re picking up share of lanes in those customers or is the economy really improving. Everything we hear, the economy is not improving. There may be pockets of things getting better but if you ask 80% of our customers whether the stimulus package has any impact, and they’ll all tell you no.

So if you look at July employment statistics the market soared because it went down 247,000 jobs but certainly it doesn’t appear that the economy is turning.

Todd Fowler - KeyBanc Capital Markets

Does anybody tell you that things are getting worse or what are expectations I guess for [adjusting] customers for their volumes for let’s say like the next three quarters, through 2009 and early 2010.

Chris Hines

Very few customers are actually hitting the capacity numbers that they put out in the bids earlier in the year. And again any gains I think that will happen will have to happen from trucks being mothballed or are bankruptcies because very few customers are actually hitting, they ask for of course capacities and they’re not hitting those numbers.

Again there’s pockets where there’s a little bit of improvement, but nothing across the board.

Todd Fowler - KeyBanc Capital Markets

And then on the pricing side as you think about coming through the bid season and putting in some of those new contractual rates into your freight base here during the second quarter, what percentage of new I would call them calendar 2009 bids are in place coming out of the second quarter and what should we expect to see as we get through the third quarter basically as, are we going to see more lower bids on a year over year basis be implemented into the freight base.

Steve Russell

There were two bids that were completed in July, other then that I think we’re all done. All of our shippers have gone through the bid process within the last 10 months. I think that some things, we met with an automotive manufacturer in Detroit a week ago I mentioned, and they indicated that the number of cars they were to be building in the month of August appeared to be, the demand appeared to be far greater then that.

Whether that’s the cash for clunkers thing or any improvement, who knows, but basically that’s the overall situation. But the bid process is complete and if things stay the way they are I think many shippers may defer going out for bids because there may be a change in the attitude of the fleets.

Todd Fowler - KeyBanc Capital Markets

And so the revenue per loaded mile here during the quarter, the let’s say 1.407, that basically has a lot of the new lower rates for 2009 in play with the exception of a handful of bids that will come through in the calendar third quarter.

Steve Russell

Exactly right.

Todd Fowler - KeyBanc Capital Markets

And then one last one here on pricing, what are you seeing with spot pricing right now as we get into, as we’re into August I’m assuming that spot pricing is still down year over year but have you seen it move up sequentially from where it was in the second quarter based on some of your comments about capacity and what you’re seeing with volumes.

Steve Russell

There have been improvements in parts of the country, Texas is much stronger in spot pricing, southeast is much stronger. I mean one of the major biggest fleets in America about four months ago, April or May was offering a $0.69 special out of the southeast, that’s clearly changed,

There’s just been a, spot prices are better out of certain areas, across the board.

Todd Fowler - KeyBanc Capital Markets

How much at this point is auto or auto related as a percentage of the overall freight base.

Steve Russell

About 3%, 4%. Its really a little bit of Honda, its some Volkswagen, some automotive suppliers, very small percent.

Todd Fowler - KeyBanc Capital Markets

And then last one here, currency as an impact on the P&L from an operating expense standpoint, was it positive or negative here in the calendar second quarter.

Steve Russell

The Canadian dollar—

Paul Will

The Canadian dollar based on the rise last year and then the drop this year, it’s a fairly neutral for the quarter.

Operator

Your next question comes from the line of John Larkin - Stifel, Nicolaus

John Larkin - Stifel, Nicolaus

The 6.5% year over year rate decline, seemed like it was maybe a touch greater than some of the other public companies but may be not quite as great as what we’re hearing anecdotally from private companies and freight brokers and so forth, why do you think yours was maybe a little higher than the public companies, is it a freight mix issue like the fall issue, inner modal competition issue, or have you just decided to be a little more aggressive to keep the volume up.

Steve Russell

We’ve actually added some very good customers at aggressive rates because that was the only way to get the business but we’ve added customers that we’ve never done business with before and added some meaningful business with them and we felt that when the world comes back we’ll be comfortable with our service, comfortable with our capabilities and we’ll keep them as customers.

John Larkin - Stifel, Nicolaus

Are they concentrated in any particular area, are they retail, consumer oriented, food, beverage, can you give us any color on any customers.

Steve Russell

Two of the more significant ones were Coca-Cola and Home Depot, both of which are basically should be pretty strong accounts going forward.

John Larkin - Stifel, Nicolaus

Did you have to invest in any new trailers for the Coca-Cola business.

Steve Russell

No.

John Larkin - Stifel, Nicolaus

Because they seem to like the single tires and the lightweight trailers. You were able to win that business just with your standard fleet.

Steve Russell

Yes.

John Larkin - Stifel, Nicolaus

On the cost side, have you made any adjustments to your driver pay.

Steve Russell

Yes, we did two things, we reduced starting driver pay at the end of March, and I think we’re the first to do it but I think everybody has followed us. And reduced starting driver pay by about $0.2.5 a mile. The end of May and this is staggering, we decided to not pay management bonuses this year for the fiscal year ending June of 2009.

And we’ve been paying our drivers on a unique way, in addition every 30,000 miles they got a bonus. And it’s a productivity bonus. But we’ve reduced that by 40% and we sent out a call com message to 2,700 US drivers saying that we made that change effective the following Monday, June 1 and expected to get some really negative reaction to doing that.

We got two phone calls and one of the phone calls which I got was to me, from a team that had been with us for 14 years, husband and wife team, and the husband said, we know what you’re doing, we agree with you doing it, we’re behind you, keep mother healthy.

The other call was somebody who was just ready to get his bonus, missed it by 40 miles or something but essentially the reaction was surprisingly realistic.

John Larkin - Stifel, Nicolaus

And if you take the sum total of the $0.2.5 cents starting driver pay decrease the decision not to pay management bonuses, the reduction in the productivity bonus, netted that all together, what was the sum total of the impact on the cost side either in operating ratio points or savings.

Steve Russell

Paul if you’d correct me, I’d say $6.5 million a year.

Paul Will

Yes, we haven’t quantified it like that as far as, we look at individual components, but—

Steve Russell

It was $6.5 million or $7 million a year.

John Larkin - Stifel, Nicolaus

Big number then.

Steve Russell

Yes.

John Larkin - Stifel, Nicolaus

Do you feel like when freight tightens up that you’re going to have to reverse that out or do you think you can stay with these new levels for awhile.

Steve Russell

I think that utilization miles per truck per week are improving so that’s helping the driver. I think when we’re making the kind of money we expect to make as a company we’ll put certainly the bonuses back.

Paul Will

The reality is we’ve taken out some costs as you know, some of the pay stuff will come back. Some stuff we think we’re doing more efficient now. We’ve got new trucks, utilization, the aerodynamics on the trucks, the heaters on the trucks, that type of thing, that will stay.

The [counseling] of the drivers, from idle standpoint, that will stay. And there’s other opportunities that we’ve looked at within the organization that we can take additional costs out more than what we’ve done today which we’re pushing those initiatives through right now.

So some will come back, but there’s a big chunk of that that we believe will just be more efficient going into higher miles and higher rates at some point in the future.

Steve Russell

If you start with when we began with effort about a year and a half ago, and certainly it improves with every new truck we buy but we have terminated about 225 drivers in the last 18 months for unnecessary idling. We have reduced idling substantially. Our MPGs are about 6% better than they were a year ago which, 15 months ago say, which converts to about three million gallons a year that we’re saving on the number of miles we ran in fiscal 2009.

So at $2.50 a gallon that’s $7 million or something like that. And that’s not going to come back. That’s in the till forever.

John Larkin - Stifel, Nicolaus

You’ve mentioned a couple of times the continuation of your equipment replacement program in spite of the reduction in the value of used trucks, do you have guaranteed residuals on some of these trucks or are you just holding them for sale yourself.

Steve Russell

Two thirds we have back to the manufacturer. One third we are selling but we now have two used truck lots, Warner’s got 20 or something like that but we have two and therefore being able to sell it at better prices then sending them to auction which is what we used to do three years ago.

Paul Will

We’re evaluating the whole process and looking at what we could get rid of the equipment for, whether it be trade, used, retail, etc. so we’ll make whatever modifications we believe necessary so that we don’t build up an inventory of equipment, I think that’s part of what your question was.

John Larkin - Stifel, Nicolaus

And then you mentioned a number of times that you’re average tractor fleet age will be down at 1.1 years which is really impressive by the end of the year, of the trucks that will be in the fleet at that time, will they all be equipped with the aerodynamic package and the cab heaters and so forth or will there still be a percentage that is relatively less efficient.

Paul Will

There’s only going to be maybe 5% or 6% at that point in time, that won’t be the newer aerodynamic trucks. And that’s really a mileage issue that we’re not just going to get rid of trucks at low miles just to get rid of them. We’ll take a lower number, we’ll utilize those equipment, we might retrofit those with the [bunk] heaters.

John Larkin - Stifel, Nicolaus

Is there a way to slot those less fuel efficient rigs into shorter haul regional type markets.

Paul Will

Exactly and that’s part of the initiative, one of the initiatives we’re looking at.

John Larkin - Stifel, Nicolaus

And then your comments on mothballing I think are right on target with respect to how people are dealing with the lack of working capital allowance but the willingness on the part of the lenders to sort of keep these companies afloat, how do you think this plays out say over the next six, nine, 12 months. Do some of these mothballed trucks end up ultimately getting liquidated when the supply/demand market tightens up for used trucks or do they ultimately work their way back into the fleet. That probably ends up being a combination of both, but I’d like your take on that.

Steve Russell

Thirty five years ago when I was President of Hertz Trucks, now Penske Trucks, basically what would happen and that was during the recession of 1974, something like that, we would try not to repossess trucks from people who were leasing trucks to but then would have to do it because it just got to the point where a fleet with 50 trucks, 15 or 20 were mothballed and then cannibalized. I mean if you needed a new tires, better tires, they’d take them off those trucks.

They needed new parts, they’d take them off. They needed a new engine, in other words it becomes totally cannibalized. So to say that that’s a meaningful number, who knows. It depends how long this goes. But certainly its effecting capacity because the long one is mothballed, the less value it has.

Its not like parking trucks in a desert where they’re not touched, they are touched and it’s a way to save maintenance. The number is staggering. And I mentioned this briefly before, but if you take driver getting say on average $800 a week in pay, if you’re collecting receivables that are 40 days old, if you park that truck and terminate the driver, you’re saving $800.

If the truck is burning fuel, an [over the road] truck, that’s $1,000 a week that you don’t have to pay. You don’t have to pay maintenance, you could cut off insurance, you’d save $2,000 a truck. So if you’ve got a 200 truck fleet and you park 50 trucks, you’re going to save $100,000 a week over the next six weeks, that’s going to throw off $600,000.

And then the fact that you could use those trucks to maintain the others, you could survive much longer then you thought you could survive. And that’s the right play if you can’t make working capital loans. That’s what’s happening. Its hard to quantify what percent.

Operator

Your next question comes from the line of Robert Dunn - Sidoti & Co.

Robert Dunn - Sidoti & Co.

Kind of again on the cost side, with the fuel and the driver pay and the sort of streamlining, I think you said you’ve taken about $14 million out of the cost structure, assuming that that driver pay had to come back at some point, what percentage of that would you say is permanently gone. Is it $9 or $10 of that $14.

Steve Russell

I’d say the fuel is $7 or so at three million gallons on today’s, on the miles run in fiscal 2009. On the salary side we did cut back people which were included in that saving. And those were efficiencies that we don’t intend to give up. I think the driver pay situation, it will come back when profits come back.

Robert Dunn - Sidoti & Co.

What was the headcount at the end of the quarter.

Steve Russell

Total headcount non-driver, drivers roughly 3,000 or so, 3,100, non-driver if you exclude the supply chain business to the non-asset based business, somewhere around 550 non-driver personnel, and that excludes the non-asset based businesses. We’ve got about 300 or 350 in warehouses that we operate, supply chain business, truckers B2B, another 20, etc.

Robert Dunn - Sidoti & Co.

I guess kind of what I’m getting at is sort of when you think about earnings from a cyclical perspective how would you describe the earnings power of this company versus the last cycle, looking out a couple of years. I mean it seems that with all these costs taken out that its probably 200, 250 basis points higher than it was say back in 2006, would that be a fair characterization.

Steve Russell

If you look at the last five years, the best our operating ratio was the September, December quarters of 2006 where we were about an 89. If you assume that the fuel efficiencies are here to stay and that some of the operating efficiencies are here to stay, I think we could be at 86.5 or 87 or something like that when supply and demand are back in order.

Operator

Your next question comes from the line of Edward Wolfe - Wolfe Research

Edward Wolfe - Wolfe Research

Can you give the CapEx for the quarter and the cash from operations for the quarter.

Steve Russell

He’s got his calculator, he’s got his papers.

Edward Wolfe - Wolfe Research

Okay and then also you talked about CapEx for calendar years, but what is that equal for fiscal 2010, what is the CapEx guidance. I think you had said $40 net for calendar.

Paul Will

At this point the calendar year is the same as the fiscal year because we’re not taking any equipment in the next calendar year so the $35 net CapEx is also for fiscal year 2010.

Steve Russell

In 2010 calendar, maybe zero or we’ll see where the world is in 2011.

Edward Wolfe - Wolfe Research

So then what’s the $35 net CapEx for if you’re not bringing on any trucks.

Paul Will

I’m saying the $35 net CapEx is between basically call it July, December and then its zero, [inaudible] through June.

Edward Wolfe - Wolfe Research

Okay so the $35 is all in the next two quarters, I’m sorry.

Steve Russell

That’s right.

Edward Wolfe - Wolfe Research

And then for now it will hold $11 with a zero placeholder subject to a change in the economy.

Steve Russell

Correct.

Edward Wolfe - Wolfe Research

And for the quarter did you get those numbers.

Paul Will

The gross equipment purchase was about $24 million in the quarter.

Edward Wolfe - Wolfe Research

And what’s the net.

Paul Will

It was, that was about $12 million.

Edward Wolfe - Wolfe Research

And the cash from Ops.

Paul Will

Its about $10, $10.5.

Edward Wolfe - Wolfe Research

The covenant that you allude to in your release that you’ve been adjusted down to $40 million, where was that prior to that and what exactly are the terms of the covenant.

Paul Will

The covenant was taking down the gross, the borrowing, maximum borrowings we took from 70 to 40 because we only had five [inaudible] outstandings, and we don’t expect to use that line for equipment purchases through the rest of the year. We had a tangible net worth, fixed charge, debt to EBITDA ratio and a minimum asset coverage, the fixed charge and the, we’ve adjusted debt to EBITDA ratio, were both adjusted or tweaked based on the current economic environment just to make sure that wouldn’t be an issue for the next 12 to 18 months.

Edward Wolfe - Wolfe Research

So where did the debt to EBITDA for instance, what was it and what is it now going forward.

Paul Will

We’re going to end up putting out an 8-K and that will have all the information in the 8-K.

Edward Wolfe - Wolfe Research

But the sense is that there’s no pressure there, that wasn’t the reason for doing it. It was more to save the dollars going forward.

Steve Russell

We will have zero bank debt, [inaudible] months or something like that and then with significant free cash flow in 2010 calendar year and bank debt will be irrelevant.

Paul Will

The answer is the fixed—

Steve Russell

We’re not have any, unless we made an acquisition.

Paul Will

Fixed charges was $1.25 so at a break-even or above break-even, that’s not going to work for us so what we decided was we didn’t need all the money plus, let’s make sure that we’re not going to have issues at 18 months, even at a break-even level if that’s the case. It’s the combination of the two.

Edward Wolfe - Wolfe Research

What were the management incentives a year ago versus fiscal fourth quarter.

Steve Russell

We paid out in bonuses last year about, I think it was about a million in total last year. The year before, for 2006 it was about $2.5 or $3 million.

Edward Wolfe - Wolfe Research

And it was nothing this quarter.

Steve Russell

Zero. No that was expensed all during last year, what we paid out last year.

Edward Wolfe - Wolfe Research

Was there a reversal in the fourth quarter.

Steve Russell

No. We never accrued any throughout the year.

Edward Wolfe - Wolfe Research

Been that kind of year, what’s the savings, is it a significant savings in taking down the $70 million to $40 million, what’s the savings from that.

Paul Will

Its not a significant savings, no. The reality is what we’re looking at, all our cost aspects and there’s no reason to have a $70 when you only need $40.

Steve Russell

And the reality is that in this environment we’re not going to make any acquisitions because every acquisition that one would look at, they’re still underwater, the bank wouldn’t agree to it and at the end of the day the seller wouldn’t agree with, because we don’t buy with goodwill and we’ve always bought at our appraised value.

And the appraised values today are so much below bank debt that we couldn’t make an acquisition if we wanted to, that’s point one. Point two is we have a much better sales force, much better capability of growing. I think Chris has done a great job in changing the sales force, an enormous turnover, we had about 28 sales people.

I think there’s a turnover of about 20 of them, but the sales force is outstanding and we’re able to add customers without the need to go out and buy companies.

Edward Wolfe - Wolfe Research

Can we talk a little bit about the tractor fleet, I’m just a little confused. The average tractors for the period haven’t moved much in the last couple of three quarters at 2878 and the end of the period haven’t moved much the last couple of quarters at 3168, and the difference between those two numbers is usually what’s for sale, is that right.

Steve Russell

Correct, now both the 2878, that’s includes owner operators as well.

Edward Wolfe - Wolfe Research

So those two haven’t moved much but I think Paul said you sold 50 in June, so that 2878 number is going to probably stay still but the 3168 is going to come down as we go out. Am I thinking about that right.

Paul Will

Yes, the goal is to have that total number come down, correct. You are thinking about that correctly.

Edward Wolfe - Wolfe Research

Do you have any trucks that are parked given utilization and everything else right now.

Steve Russell

We have trucks that we want to sell, but we don’t have trucks—

Paul Will

Other than the normal—

Steve Russell

Yes, I mean, add the number of applications, we hire about 180 drivers a month and we have about a 90% turnover and we’re terminating 50 and the voluntary is about 40% so we’re keeping the fleet at the same size. And we’re having thousands, literally, we hired 200 drivers, we got 7,000 applicants or something like that.

So there’s no issues getting good drivers.

Edward Wolfe - Wolfe Research

Amazing what a couple of years—

Steve Russell

Three years ago there was a driver shortage. We’ve never hired trainees, we’ve never hired felons, ex felons, and we don’t hire safety risks. And still the number of drivers coming to us is significant because a lot of fleets cut back. Big fleets do. I mean Hunts virtually are getting out of the trucking business. Warners cut down on the number of trucks, and we’ve got a good image, good reputation and significant pool to choose from.

Edward Wolfe - Wolfe Research

You said that load and miles had improved in July and August, was that sequentially or year over year also.

Steve Russell

Both.

Edward Wolfe - Wolfe Research

And how about profitability, are you more profitable in July and August then June. I know its not seasonally equivalent but—

Steve Russell

We don’t give, we never give forecasts of that. June was a good month for us.

Edward Wolfe - Wolfe Research

The other income line, the $274,000 below the operating line, what was that benefit this quarter.

Paul Will

It was, we had currency position on the Canadian dollar that we had a pick up on that at the border. We [unwound] some position there.

Edward Wolfe - Wolfe Research

And Mexico, when you get a sense that things are improving, what’s improving there. I know for instance KSU has told us about automotive and chemical plants starting to ramp back up there, what are you seeing there and what’s your auto exposure now. I know its not all that much and where is it.

Steve Russell

The auto exposure is very small. Its, total auto I said before I think is 3%, maybe 2.5%, maybe 4%. Very small percent of our business.

Chris Hines

I think the KSU statement is pretty right on. Low auto parts, truck parts, non-consumer durables.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Steve Russell

Thank you very much everybody. Its been a very, very tough and challenging year and not just at Celadon but the world and America certainly so, appreciate you being on the call and the only way all of us are getting through this is leaning into the pain and trying to make ourselves better because of it.

Thanks very much, good bye.

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Source: Celadon Group Inc. F4Q09 (Qtr End 06/30/09) Earnings Call Transcript
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