Covenant Transportation Group Management Discusses Q3 2013 Results - Earnings Call Transcript

|
 |  About: Covenant Transportation Group, Inc. (CVTI)
by: SA Transcripts

Covenant Transportation Group (NASDAQ:CVTI)

Q3 2013 Earnings Call

October 18, 2013 11:00 am ET

Executives

Richard B. Cribbs - Chief Financial Officer and Senior Vice President

David R. Parker - Chairman, Chief Executive Officer and President

Analysts

Ben Hearnsberger - Stephens Inc., Research Division

Thomas S. Albrecht - BB&T Capital Markets, Research Division

Ryan Cieslak - KeyBanc Capital Markets Inc., Research Division

A. Brad Delco - Stephens Inc., Research Division

Operator

Welcome to the Covenant Transportation Third Quarter Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Cribbs. Mr. Cribbs, you may begin.

Richard B. Cribbs

Thank you, Christina. Good morning. Welcome to our third quarter conference call. Joining me on the call this morning is David Parker, along with various members of our management team.

This conference call will contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. Please review our disclosures and filings with the SEC.

As a reminder to everyone, a copy of our prepared comments and additional financial information is available on our website at ctgcompanies.com. Our prepared comments will be brief, and then we will open up the call for questions.

In summary, the key highlights of the quarter were: Our asset-based divisions' revenue, excluding fuel, decreased 1.3% due to a 1.7% decrease in average tractors and a 0.6% decrease in average freight revenue per truck, partially offset by an increase in our refrigerated intermodal freight revenues.

Versus the year-ago period, our miles per truck were down 1.3%, while average freight revenue per total mile was up $0.011 per mile or 0.8%.

Freight revenue per tractor at our Covenant Transport subsidiary was even with the prior year quarter, while our Star Transportation subsidiary experienced an increase of 4.8%, and our refrigerated subsidiary, SRT, experienced a year-over-year decline of 3.8%.

Compared to the year-ago period, the asset-based divisions' operating cost per mile, net of surcharge revenue, were up approximately $0.016 per mile, mainly due to higher driver wages and owner-operator settlement amounts, workers' compensation expense, revenue equipment rental expense, as well as operations and maintenance expense. These increases were partially offset by lower nondriver employee wages, reduced casualty insurance expense and lower depreciation and interest expense.

The asset-based operating ratio improved 50 basis points to 95.6%.

Our Solutions logistics subsidiary increased revenue by 57.8%. Due to the combination of reduced purchase transportation expense percentage and improved fixed cost absorption with the added revenues, its operating ratio improved 660 basis points to 96.6% from 103.2% in the year-ago quarter.

Additionally, our minority investment in Transport Enterprise Leasing produced a $1.2 million contribution to pretax earnings or about $0.05 per share.

Since December 31, 2012, total indebtedness, net of cash and including the present value of off-balance sheet lease obligations, has increased by approximately $26 million to $268 million, primarily due to our decision to increase the number of tractors that we are purchasing in 2013 due to the improved fuel economy.

The average age of our tractor fleet continues to be very young at 2.1 years as of the end of the third quarter.

With available borrowing capacity of $40 million under our revolving credit facility, we do not expect to be required to test our fixed charge covenant in the foreseeable future.

Versus the prior year quarter, our consolidated operating ratio improved by 90 basis points to 95.6%, while net income doubled to $2.0 million compared to net income of $1 million last year.

The main positives in the third quarter were: Significant improvement in the operating profitability at our Star Transportation and Solutions subsidiaries; improved returns from our 49% investment in Transport Enterprise Leasing; and our safety efforts produced a 19% reduction in our quarterly DOT accident rate per million miles as compared to the prior year quarter.

The main negatives in the quarter were: A 1.3% decrease in utilization versus last year; the deterioration of operating profitability from our SRT subsidiary; and a year-over-year increase in average open trucks from 3.5% during the 2012 quarter to 5.7% during the 2013 quarter.

Among asset-based service offerings, since the end of the second quarter, we marginally reduced capacity allocated to our regional and dedicated service offerings, while maintaining capacity levels in our expedited and refrigerated offerings.

Freight results for the first 3 weeks of October 2013 have been decent. We continue to utilize improved systems and processes to challenge our employees to improve profitability through improved yields, cost control, better driver retention and appropriate allocation of valuable capital resources. In addition, we will continue to task the employees of our younger brokerage, intermodal and truck leasing service offerings to grow profitably. We believe that our disciplined approach to continuous improvement and strategic execution will drive positive results.

Now David Parker would like to say a few words about our addition of Herb Schmidt to our Board of Directors.

David R. Parker

Thanks, Richard. We're excited about the addition of Herb to our board. With his past experience in the truckload industry, we expect he will expand the depth of our board's knowledge, leadership, strategic planning capabilities. I look forward to working personally close with Herb as our team continues the task of building the value of CTG for all its shareholders. So I'm very excited about Herb coming on the board.

So we'll thank you now for your time, and we'll go ahead and open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Ben Hearnsberger with Stephens.

Ben Hearnsberger - Stephens Inc., Research Division

So can you kind of take us through how freight demand trended throughout the quarter and into October? And kind of as a corollary, have you guys seen any slowdown or heard of any slowdown in demand due to the government shutdown?

David R. Parker

Ben, the quarter at best has been okay. There's nothing about -- as I look throughout the country, I mean, the refrigerated freight off the West Coast on SRT and then on the produce side of Covenant was strong, of course, in the summer. And the freight off the West Coast was very strong. And so I would say that those are really -- that and the East Coast are the 2 regions that were consistently strong throughout the quarter from July through September, East Coast, West Coast. Other than that, the rest of the United States was basically, in my opinion, a 1.5% GDP. And to me, a 1.5% GDP means good and bad. There were days that we needed freight, and there were days that our customers were needing trucks. And there was just no -- we could not develop any rhythm in the quarter throughout any of the companies. And it was almost every day, was a new beginning from a freight standpoint. You can really tell where capacity is because it just does not take much for capacity to tighten very, very quickly, but there's no sustainability to it. It tightens quickly and shippers are looking for capacity and are really trying to reach out to the carriers, but that lasts for 3 or 4 days. And then it's back to a mute-type [ph] situation where, you're needing to add some freight to the environment. And so the best that I could say is that, it has just been okay. I want to say that as it pertains to the shutdown, that there probably was not any noticeable decline in business. That said, I believe if it would have lasted much longer that we probably would have seen some declines, not because any of my customers were telling me that, but for the last couple of weeks, I would say that I'm stretching it to say that freight was okay. Using the word decent or okay. I mean, it's not bad. So I don't want you to think that, but at best it was okay. And I think that some of that was -- the consumer that was starting to ripple its way through the supply chain of, what is the shutdown going to do to me? And I think the last 2 or 3 days, we have sensed that coming through. And I think it's strictly the sentiment of the consumer. So it's good from a freight environment that it's up back going again. So hopefully, that part of it will start getting better for us.

Ben Hearnsberger - Stephens Inc., Research Division

Okay. That's great. And then on pricing, when we think about you guys going out and getting rates. When do you really get into kind of the meat of your bid season?

David R. Parker

Yes, there's a couple of things to that. As I paint the picture a little bit for CTG, the last 2 years have been some very nice rate increases. Leading the industry around 5% kind of numbers for about 2 years in a row, I would say that the first year might have been a little bit of catch up to the industry in my personal opinion. I think the second year was industry-leading kind of numbers in increases. So I think that we did all that catch up. And so now, I think that we're kind of in the industry as it relates to percentages of increases. So that's where my thoughts are. That said, we've got the fourth quarter -- I would expect the fourth quarter is going to be 2 things happening. I expect it to be flattish to maybe even down a little bit, third quarter over fourth -- fourth quarter over third quarter. So I think it's kind of a flattish number only because we have another second -- as it just relates to percentage, we got a second large customer that has changed their formula and it's taken out about $0.10 a mile out of rate and put it into fuel. And if you all remember, some of you may remember that happened on the Covenant side over a year ago with a top 5 account that took rates down about $0.10 a mile and the fuel also went up $0.10 a mile. So net-net, it was good. But just from a percentage standpoint, it affected Covenant's rates by about $0.015 a mile. And the same thing is going to happen with the Star rates, about $0.015 a mile on a top 5 account of theirs. So if you just negate that, there are -- the fourth quarter will have some nice increases in rates. We do have, on the refrigerated side, on the SRT side, we do have some nice accounts that will be going to affect actually starting next week and will continue to increase through the quarter. So I think that we're going to see some nice increases there. I think on the expedited side of Covenant, you will continue to see what it always sees in the November-December timeframe, and that is "the peak." Peak has became a Thanksgiving to December 20 kind of time. So it will continue to increase. We're already out there now with that, with customers that are -- we're sewing up levels and rates. So that said, and then it will become a March kind of timeframe. So I see a movement in the overall rates for SRT. I see Covenant's peak rates being good and then going back out to the shippers around March 1 is where a buck of -- a lot of it starts March-April kind of timeframe.

Ben Hearnsberger - Stephens Inc., Research Division

Yes, that's good color. And then on insurance and claims expense, it looks like it was the lowest we've seen it in a long while. What was the real driver there and is that lower level sustainable?

Richard B. Cribbs

Yes, the quarter just had a really nice accident rate, but we're continuing to see that as a trend. Is that sustainable? We hope so. We believe so. We've put in a lot of different processes in place. We're adding to the technology of our trucks and trailers to be able to benefit the safety record that we have here. We're going through -- we used some behavior management processes as well to try to help and assist with reducing accidents. And so we believe it is sustainable. On top of that, we've got our claims management process in really good shape. And so we haven't had as much of the trending increases in claims that we had over the last year. So it's really nice this quarter. Maybe a little lower than what's the sustainable number, but it's -- I do expect it to stay fairly low for a while now.

Operator

Our next question comes from Tom Albrecht with BB&T.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

I wanted to ask first about Herb. What committee or committees he may be on and does this really -- is your expectation that he may be a bit more involved compared to a typical board member given his extraordinary background? And related to that, what do you foresee potentially as you look towards Mexico?

David R. Parker

Those are great questions, Tom. Yes, Herb will be involved -- he's interested in being -- as actively involved as we would like for him to be. So he has been just wonderful from that standpoint. And I'm going to allow him to be as actively involved as he would like to be. Herb will -- Herb brings, as you know, a great wealth of experience and knowledge and wisdom. And he and I have spent some good time together in the last couple of weeks, and we're going to continue to do that. Herb came up with a lot of great areas of -- throughout his experience in coming to the presidency that he was in. And so we're going to take those assets that he has as a person, and we're going to make sure that we're brainstorming in a lot of these areas. Our board meeting is not until the end of November, but Herb will spend a few days with us. And again, whenever we need him, he is open to come. So we're going to brainstorm a lot of different areas within our company on best practices and his thoughts of what his experience has brought. So I see it's nothing but an enhancement to not only our board, but to the company, CTG, as a whole. And so I'm excited about that. As it pertains to what committees he will be involved in, we're just now starting that process on -- because with his talents, to be honest with you, he could go in various ways. And so we have not made that final decision. We'll be making it before the next board meeting in November but -- so we'll just see where that goes, but it could go in any of those ways. We will continue -- I'm very -- and it's interesting. I'm happy with our Canada, Mexico situation that we're doing. We continue to grow both of those. And it's interesting because as we all know, Mexico's the larger portion than the Canada. And I'm more happy of what we've done on the Canada side than I am the Mexico's side even though both of them are growing for us, but I just know there's great opportunity in Mexico for us. So we are continuing to align ourselves with folks that truly understand the market and Herb is one of those. But we also got other individuals that are within the company that we brought on in the last 7 or 8 months that are assisting in Mexico with a lot of knowledge. And now we're starting to see the kind of -- starting to move on that area. So I expect some great things on Mexico. The thing that we have said in the past is that, we see Mexico as CTG's next California. As you know, when I started the company, it was California, and California is still a major player for CTG, but I see Mexico is the same opportunity. Great long length of haul, and I think that CTG will provide a lot -- be able to provide a lot of team drivers in that long length of haul, which the market really does not have now. It's mostly dominated by singles that are running Mexico. And so we're going to go there and be able to put a lot of teams and give a lot of express service on Mexico. And I expect a lot of great things in the next couple of years in Mexico.

Operator

Our next question comes from Ryan Cieslak with KeyBanc Capital Markets.

Ryan Cieslak - KeyBanc Capital Markets Inc., Research Division

I guess, the first question I had for you guys, it's just, maybe David. I wanted to get your view on how the hours-of-service impact progressed through the quarter. Maybe relative to your initial expectations going in. I know you gave some quantitative figures in the release, but maybe you just talk a little bit about the dynamics that came about and again relative to maybe what you had expected going into July 1?

David R. Parker

Yes, Ryan, that's a interesting thing because I remember talking on the second quarter conference call in July, and I really felt like that it would be a -- that the industry would go through the month of August and try to figure out what was happening on hours-of-service and that we would know sometime in September and have to -- and the whole industry would have to go to the marketplace sometime in September to address it. I have -- one of the analysts that I was talking to that felt like they would take a couple of more months longer than that. And I think the analyst is more right than I am. Because I do believe that it's a negative 2% to 4% kind of number. It is a negative. And -- but the most difficult thing that you got on this hours-of-service is because it's cumulative. It runs as the week goes, and it is not like you can go to a particular shipper and say, "You are the cause of me being down a negative 2%." It's you Mr. Customer because we knew -- we had that already in detention. We know the customers that are tying up our trucks for 2 more hours than they should, and that was addressed in the past. And so we need -- we're going to those customers and trying to improve their hours-of-service to try to get back some of this negative number. But that was stuff that we've been trying to do. So that doesn't, in my mind, that doesn't necessarily affect the numbers that great. But any high performer, whether it's a team or whether it's a single driver, those guys are affected pretty big. I think those guys are affected between 4% and 8% on anybody that you are running very good. Whether it's a team running 6,000 miles a week or whether it's a single running 2,500 miles a week, those guys are being affected. And so therefore, the guys that none of us are happy with, the team running 3,500 miles a week or a single running 1,700 miles a week, they're not having no problem anyway because they're not running enough miles to -- for the hours-of-service to even have an effect on. So you're always trying to increase those people. So one's with negative 4%, 6%, 8%, the other one is not hurting at all. And so the mix of those 2 is that 2% to 4%. But again, it accumulates as we're all starting to figure out -- accumulates Monday through Sunday, and you just wake up at the end of the day and we don't have the same amount of miles because of the hours and the shutdown. And then you're seeing these trucks all over the interstate if any of us are out driving around at 4:00 and 5:00 in the morning or at 10:00 in the morning. These guys are all over the interstate trying to find somewhere to stop. Another thing that we have seen that is an absolute is that the 30-minute break, I found it interesting, we -- of the amount of drivers in our network that were not taking a 30-minute break after 8 hours of driving, they were not taking it. I mean, personally, I'd probably have to take 8 or 10 breaks, but they were not taking any breaks. And now, they have to take the 30-minute break because the thing that we have found out is that, that 30 minute is actually becoming an excess of 1 hour, up to about 1 hour and 20 minutes for these guys, these drivers to find a place to park and then that truck cannot be moving at all. And so, by the time they do it, then they get back on the road, it's in excess of 1 hour. So there is definitely some things that are hurting it. That said, the way that the industry is going to have to go to the market, when it does, whether it is now. Right now, everybody is just eating it. But when they do go to the market, it's going to have to be going with, my utilization is down 3% because I haven't met a customer yet that doesn't think that they're not -- that they are -- they're not causing none of the problem. They think none of their freight is causing the problem. And to be honest with you, with the customers that say, "I know that this is an issue with you, so I'm going to give you an extra hour to deliver my freight," and we thank them for that because of the 30-minute break, et cetera. But in the long run, that's not -- that still hurts utilization. Yes, thank you for giving me an extra hour. But to be honest with you, my goal is to get the truck there an hour earlier than what you wanted it there so I can get it off my truck. So those are the moving parts, Ryan. And we and the industry don't -- do not have our hands around it yet. I think that we saw it immediately on the SRT side of our business. That for single drivers, SRT was running that 2,200, 2,250 utilization a week. That's the way they've been running for many years. And they popped down there to that 2,000, 2,050 miles a week almost right out of the chute. And it's one of the things that you're seeing on their operating performance is -- some of it is related strictly to a high utilization that now is kind of running still high utilization, but not where it used to be. I don't know if I answered all your question on that, Ryan, but that's about what I'm seeing.

Ryan Cieslak - KeyBanc Capital Markets Inc., Research Division

No, that was actually great color. I really do appreciate that. And then from that perspective then, I think you maybe answered it a little bit, but what do you think, David, it's going to take to be able to go back and mitigate the impact with shippers in terms of getting some rate? Is it just that you need a stronger market? You need tighter capacity to have that leverage? Or is it more, just more time to the balance of this year to really figure out and be able to present some of the issues that you guys are having?

David R. Parker

Well, that's a great question, too. I think that we can increase rates to be able to cover cost plus a little bit. Just right now, with capacity being where it's at and freight environment being where it's at, you've got to go have those discussions face-to-face with these customers. You got to be paired to lose to get something. But I do believe that we will and we continue to, but I also believe that the number is -- to get a 4% or 5% kind of number, it's got to tighten up more than what it is today. So one of the things that we're benefiting from at CTG is that we started this process of new engines, if you remember, 2 or 3 years ago. So we got a lot of our competitors that are now getting sticker shock on what depreciation is doing on new trucks and these new engines because our trucks have been new so long that they were part of our P&L. So we're getting some of that benefit that our rate increases, a lot of our rate increases are going to the bottom line, not to say, "I'm having to change out half of my fleet because I let it get 5 years old." So there's a lot of positive as it relates to the CTG side. So I think that freight has got to firm up to get 4% or 5% kind of numbers, but I do think that we can get more than what costs are going up.

Ryan Cieslak - KeyBanc Capital Markets Inc., Research Division

Okay. That's great. And the last one that I have, and I'll jump back in the queue is, just your perspective on the deferred pricing dynamics within refrigerated relative to dry van. If there's any differences that you're seeing there that might make your one stronger or weaker going forward here into 2014?

David R. Parker

Yes, I think that, as I think about our reefer, predominantly on the SRT side, and then on the dry van side of Covenant and Star, the dry van side for the last year has led the way on rates. And I think that we've actually got behind the curve on the refrigerated side. And we're in the process of correcting that as we speak. And I think that we got some catch up to do on the refrigerated side. I don't think that -- I think that the market will allow us to be able to increase it. I think that we have grown our SRT subsidiary so dramatically over the last few years that we got behind in the last year or 1.5 years on increasing rates all in the name of making -- wanting to make sure that we had enough miles for our drivers to drive. So we got behind on the 8 ball on rates. I think the market will allow us to raise rates. And Tony and Justin and that group is absolutely committed to getting the rates up. And they are in the process of doing that now. So they're leading that effort very, very nicely. I'm very happy with what they're doing on that side of the equation. And then they're just going to have to work on their utilization to try to absorb some of that. So I think that dry and reefer is kind of at an equilibrium. I think the last few years reefer was ahead of dry, but the last 2 years, dry started going ahead of reefer. But I think for the last year that on us, it has been our fault and not the market. There is some opportunity on our reefer side to raise our rates.

Richard B. Cribbs

And Ryan, keep in mind there, on the dry van side with Star, we reduced their trucks. Just year-over-year, we're down 50 trucks from about 350 down to 300 and the length to haul has increased from 407 to about 470 or up about 15%. So the rates there are down 6%, 7%, but it's really because of length to haul and changing to a more dedicated model from regional. So that impacts our mix a lot, too.

Operator

Our next question comes from Brad Delco with Stephens.

A. Brad Delco - Stephens Inc., Research Division

David, could you remind us, how much business you do with LTLs on their line haul piece?

David R. Parker

Yes, it's about -- when you think about -- and the way to really lump it is the way we lump it is other transportation companies that is LTL companies, which as you know, Brad, we do business with almost every LTL company in the country. But it's not only LTL, we lump it also with airfreight companies, whether that's UPS or FedEx. They also go into that bucket. So it's a -- as well as what we recognize as -- even though we own one of them, but you know the difference, not a broker, a 3PL that is managing freight, whether that's UPS logistics, those kind of 3PLs, we lump that all into one bucket. It is 27% of our total business.

A. Brad Delco - Stephens Inc., Research Division

So if you look at that sort of bucket, and I understand that the freight within that bucket is certainly extremely diverse. How do you think that segment, if you look at that as an industry vertical, compares to maybe some of your other industry verticals that you're looking at? Are you seeing more strength there?

David R. Parker

Not necessarily. The LTL guys, I think, are doing better right now than the truckload guys because of the amount of capacity that came out of their industry, that segment in the last couple of years. So I do believe that most of the line haul that we are doing, that their trailers are more full just because of lack of the capacity side of it. So that's good. There are some opportunities that are continuously presenting their self on the transportation side of it. But I'll also say that, as I look down through our list that, our housing is doing very well. I'm very pleased. Our automotive is very strong. I'm very pleased with the automotive side. So I'm seeing some good opportunities on 3 or 4 of the segments of the business. So not just that, even though I'm happy with it, but not just that.

A. Brad Delco - Stephens Inc., Research Division

I mean, and I know you speak with those customers a lot, but there seems to be a lot of -- not necessarily noise, but a lot of what could be a lot of changes in the LTL markets specifically. A lot of people are focused on bringing down purchase transportation, others maybe have opportunities where now they can use third-party line haul. So net-net, if you look over the next 12 to 24 months, are you -- do you feel more optimistic about that segment of your business? Or do you feel like, maybe there is a focus for some of these LTLs to be less dependent on third-party line haul?

David R. Parker

Yes, I feel much more optimistic. There's much more opportunities within there. One of the things that's happening on the LTL side, I mean, they've gone -- even though we all would love to have it, I mean, they've gone from virtually a 0% driver turnover percent to running a 10% driver turnover percent. And I was with one of the largest ones just a couple, 3 weeks ago, and they were bemoaning the availability of truck drivers, which I would love to have their numbers. And so we are seeing them with more opportunities of outsourcing to us just because they are now starting to sense the driver issue within their own networks. So I don't -- I have not had any -- I want to say this year, but definitely in the last foreseeable few months, I have not had any that have came to us and said, "Hey, you're going to lose this because we're going to start running it ourself." I mean, have we lost any lanes to competitors? Yes. Have we gained? Yes. Those kind of things, but not because they decided they were going to take it on and do it their self. So that does not worry me.

A. Brad Delco - Stephens Inc., Research Division

That's good color. I appreciate that. And then, David, you're a man that's been in this industry for a long time. And I know you serve on various boards on some industry groups. To me, and I know you and I have had this conversation, maybe we haven't seen the impact of hours-of-service on capacity because those that were maybe kind of operating in some gray areas, if you will, prior to maybe still doing it now, and so it's not having the tightening effect. But the solution is the mandate on electronic logging devices or EOBRs. And I know you stay pretty close to that, is there any way you could give kind of your thoughts on how this may play out over the next 6 months? And longer term, what kind of date you think we could see a mandate to have these things in the trucks across the industry?

David R. Parker

Yes, I agree with everything you just said there. That we all know that there are carriers within the industry that are running illegal. We know that. And so without preaching again on that, that happens. And here we are, all the big guys are running to computers and making sure that every hour is accounted for, which is what we want to do, but that's what we are doing. And it's not a level playing field. And it will become a level playing field. I think though that, that timeframe is more of a couple of years timeframe than it is a 6-month timeframe. One of the things though I find interesting is that on the TL side, they -- a lot of their customers are the smaller operators that are going to stay in business. They made it through a lot of the crashes, but there's definitely 1,500 truck fleet that are good operators that haul for 2 or 3 accounts. And that's all they ever want to do. And that who TL's customers are and -- but they do surveys within that piece of business with all their. And they're up to what, 500, 500 or 600 trucks on lease to give you an idea. It's a great sample. But the surveys that they do, I found it very interesting that the last survey they did showed that those small carriers, the hours of service are affecting them and -- I mean, it was a high percentage, like 50%, 60% of them on the survey was that the hours-of-service is our #1 issue. So I think I'm finding this -- we all know this. It's not every small carrier, they're legal and running down the road with people that have no business. There are some people running 1,500 trucks that are good operators. And those guys are having problems with the hours-of-service out there. So it is starting to trickle itself down. But I do believe that the real game changer will be when there's computers on all these trucks. And I personally think though that is probably 1.5 years to 2 years away.

A. Brad Delco - Stephens Inc., Research Division

Got you. I mean, I think we were supposed to get a proposed rule in August from the Federal Motor Carrier Safety Administration. Do you have any idea when that may come now? Is it April or March?

David R. Parker

Down here, I'm hearing that it's more like the first of the year.

Operator

Our next question comes from Tom Albrecht with BB&T.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

I wanted to follow up on some of the pricing comments you made, David, I guess, in particular. I'm a little surprised to hear, although glad to hear that you think you can get rate increases that equal or slightly exceed your cost. But it seems like within certain buckets of shippers maybe consumer products, retail, things like that. I'm not sure that -- I'm not really sure that they share your view on understanding your cost. I think it's still more about supply. Could you maybe just elaborate on where you see the most progressive mindsets? And could you also talk about whether they're still a batch of shippers that it's still just about supply and demand?

David R. Parker

Yes, I mean, that group of shippers is always going to be there. That it is about supply and demand and I'll play the market and those kinds of things. And we have those. The thing is though, that play in the market is becoming an every other day deal. And those shippers -- I had one this morning that we're dealing with and which will be told that we're not going to be picking up your freight. And the thing is, today that might be okay. But come next Wednesday, they're going to be calling us wanting it. We got another particular shipper, another example. These are negative. But another example that we probably had 200 lanes in the system, we picked out 23 lanes that are very good, operating the way we want them to operate because they were not going to give us a rate increase. And we took those 23 lanes and said, we're happy with these 23 lanes. We are were going to cancel. And we agreed to it, both of us. So it wasn't us forcing it. But we agreed to cancel the other 170 lanes that we had, and we feel very comfortable with our ability to replace, immediately replace those approximately, say, 170 lanes. And so we are canceling those 170 lanes. We're happy with the 23. And I can only tell you that they've all -- some of those 170, we've already started hauling the same lanes that they would not give us an increase in on load-to-load negotiations that are higher than what we were asking for. So now, we may go 3 days and not get that lane, but then we'll get 2 loads on that lane that they would not give us a rate increase and the rates are 20% higher than what we wanted to put in to begin with. So that's the way in which we are going to operate with those customers. And truly, Tom, if it's a customer that's telling us, "We're not going to give you one. Just be happy with it." We're not going to be happy with it. And whether we come back in 2 months or these sales guys better find me some more freight that they can replace that with, then so be it. But we're going to do something about it. We're going to at least be able to keep up with what these costs are doing out there and/or we're going to identify those customers that we have in the last year that didn't just -- something that's happening as we got 5% rate increases. We were doing the same thing. And that is, who are the customers that were telling me, "You don't need to be doing business with me." Then fine, let's go with the solution. If you'll let them do a solution, if not Mr. Sales person, you better replace this account. So that's the way in which we're doing it.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

So do you expect more or less bids this fall and are you seeing a number of letters come out saying, "We're just going to hold rates flat."?

David R. Parker

That's -- it's a mix of both of those, Tom. I'm going to give you an example of one that -- a large account that we were doing about $2 million of business with. And this account, we did a bid with them. And the account got back with us and said, "We want to give you $12,500,000 worth of business." And we said, "Well, okay, I don't know if we can do $12 million. Fine, let's look at what you wanted to give us." They wanted to give us $12.5 million a year, but they said, "You need to find $500,000 to come out of the network," which we came out and found $83,000 that we would come out of the $12.5 million bucket. They said, "Well, that's not going to be good enough. You're going to probably be awarded about $6 million of business, up from $2 million, about $6 million of business." That said, it looks like we're going to be getting about $8 million of business on that. So there's a lot of those kind of things that are happening out there on bids. Then we have the customers that are not doing bids at all. Some of our major accounts have not -- did not do a bid this year, and they have not told us about any bids for the next 3 or 4 months. So I would say, overall, it's kind of quiet on the bid front of the major accounts. I think they're kind of -- I think everybody's doing kind of what we're all doing. They're just - but believe me, if they feel -- if all of a sudden we go into a recession, me and you both know that they'll pop a bid out in 2 weeks. So it's not nothing they feel bashful about.

Operator

[Operator Instructions]

Richard B. Cribbs

Well, it sounds like that's all the questions we've got today. Thank you, guys, for your interest, and we'll talk to you soon. Bye.

Operator

Thank you. This concludes today's conference. You may now disconnect.

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!