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Celadon Group (NYSE:CGI)

Q1 2014 Earnings Call

October 29, 2013 11:00 am ET

Executives

Stephen Russell - Founder and Executive Chairman

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

Analysts

Jason H. Seidl - Cowen and Company, LLC, Research Division

A. Brad Delco - Stephens Inc., Research Division

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

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

Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated

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

Scott H. Group - Wolfe Research, LLC

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

Donald Broughton - Avondale Partners, LLC, Research Division

Ryan Mueller - The Buckingham Research Group Incorporated

Operator

Hello, and welcome to the Celadon September quarter earnings release conference call. [Operator Instructions] I'll now turn the call over to Steve Russell, Chairman of Celadon. Please go ahead.

Stephen Russell

Thank you, Adrienne. Welcome to our September 2013 Quarter Earnings Conference Call. I'm joined by Paul Will, our President and Chief Executive Officer; Eric Meek, our CFO; and Jon 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 are subject to risks and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management expectations.

We're pleased with our results for September 2013 quarter, as indicated in our press release. We completed 4 acquisitions late in the quarter. When we consummate an acquisition, they're generally not accretive immediately as we reposition equipment, hire drivers and on board customers. Due to the timing of the acquisitions, we only recorded approximately $3 million in revenue, including fuel surcharge, for the September 2013 quarter. We've seen our loaded miles increase nicely over the past 4 weeks. We're optimistic about the effectiveness of the recently implemented acquisition. Our strong management team has executed well, and it's focused on improving financial results as capacity continues to exit the truckload industry. Our young fleet of tractors and trailers, the effectiveness of our now 1-year-old driver training school in Indianapolis and the opportunity to dovetail into our current book of business, complementary [indiscernible] rate that should improve our lane density, enhance our service offering and diversify our book of business to remove some of the cyclical nature of some of our current business and would demonstrate improving financial results to Celadon.

We're very optimistic about the future of Celadon and the industry as a whole. Essentially, we're seeing the capacity decline because of small fleets that can't make it, certain acquisitions, et cetera. But interestingly, at the American Trucking Association conference last week in Orlando, Florida about 500 people and they -- every major fleet in America, we talked about an issue related to electronic logging devices. Most major fleets in America now have ELDs or EOBRs, either electronic onboard recorders or electronic logging device, which basically manage to ensure that drivers do not violate any of the hours-of-service requirements. However, most small fleets don't have that. And it's not a cost issue. I mean, it's more of a -- keeps them more flexible. And the issue is, and the Department of Transportation is intending, and they said this at the conference, to put out a requirement for EOBRs for every fleet. And that they intend to do sometime in November. The timing is not clear yet until they announce it. But certainly, that's going to impact a lot of the smaller fleets logistically to help the larger fleets do better. At any rate, that was quite interesting. And what I'd like to do now is open the floor to questions. And Adrienne, if you could do that, thank you very much.

Paul A. Will

Could we now open up to questions, operator?

Question-and-Answer Session

Operator

[Operator Instructions] And have Jason Seidl on line with a question.

Jason H. Seidl - Cowen and Company, LLC, Research Division

Steve and Paul, just to kind of wrap my head around the expenses that were incurred in the quarter for the repositioning of trailers, could you walk us through exactly how much and what line items? It looks like operations and maintenance was probably the key culprit there.

Paul A. Will

We haven't quantified all of it. There's -- obviously, there's additional payroll, so there would be some administrative wages and benefits line. There's the -- obviously, the repositioning of the trailers so there'd be deadhead that would come through and driver pay, that would come through and additional costs associated with maintenance on -- get ready to pull in some of the equipment that it had been running. So that may have come in through in the maintenance and operations line. So all in all, I think for the quarter, it ended up being $0.01 or $0.02 maybe. We haven't finished quantifying. It's hard to get some of the pieces pulled out specific to what we've done for the acquisitions.

Jason H. Seidl - Cowen and Company, LLC, Research Division

All right. Are you expecting any of these costs to bleed over into 2Q?

Paul A. Will

No.

Jason H. Seidl - Cowen and Company, LLC, Research Division

Okay. Well, that's very helpful. Now Steve, you mentioned that the loaded miles have increased nicely in the last few weeks. Could you guys give us -- be a little more granular about that and maybe talk a little about the pricing trends in the last few weeks?

Stephen Russell

Miles have improved compared to last year and have kicked up and were nice seeing that. Part of that is the acquisitions; part, I think, is just business getting a little bit better.

Paul A. Will

When we look at year-over-year, this year compared to last year, we're seeing a trend, a pickup similar to what we saw last year. And then, obviously, we have to take that into consideration relative to the larger fleet size in accordance with it. So we're seeing good seasonal trends at this point in time, similar to what we saw last year.

Stephen Russell

And our fleet, [indiscernible] all said, is not significant.

Jason H. Seidl - Cowen and Company, LLC, Research Division

Yes. No, you guys are doing a very good job of suiting your fleet for sure. In terms of the acquisition market, I mean, obviously you guys have been very active. How does it look going forward? Is it people still coming to you or...

Paul A. Will

Yes, we're seeing activity at a higher level than what we've seen in the past. A lot of it what we've seen recently is individuals wanting to exit either aged [ph] financial situation in their respective business or just thinking -- want to exit the -- their -- that line of business. So what we've done last quarter was really more take individual businesses that seem to make sense relative to ours. If you look at Greensboro, North Carolina, it made sense because we could consolidate 2 facilities into 1, take-out [indiscernible] between the 2 businesses. We looked at the same thing as far as the Land Span allowed us to have the opportunity to not take the overhead associated with the Lakeland, Florida office and then they had a facility in New Jersey that we're just going to use our Carlisle, PA facility. They had a facility in California which should allow us to do some additional things than -- more than what we were doing. But yet the rent on the yards that we have out in California really offset the yards at the facility that we bought on. So I think they dovetail nicely into our service network and it puts us in a position, I think, to benefit lane density, as Steve said earlier in the call. Those type of opportunities, we think, will continue to make themselves available when you look at whether it be the changes in our service, the equipment costs, the financing availability, et cetera, is what's really kind of pushed a lot of those to the forefront.

Jason H. Seidl - Cowen and Company, LLC, Research Division

Have guys been really complaining a lot about hours of service to you?

Paul A. Will

I wouldn't say specific -- at this point in time, they haven't been complaining specifically about hours of service, but it's just one of the things that concern them as far as productivity.

Operator

And our next question comes from Brad Delco from Stephens Inc.

A. Brad Delco - Stephens Inc., Research Division

Paul, your average seated line-haul tractors improved just over 9% sequentially. Can you help me kind of, I guess, distinguish between how much of that improvement was driven by the acquisitions versus what really is coming out of your driving school at this point, on a weekly basis? Just trying to kind of gauge how much of that improvement is based on the driving school?

Paul A. Will

Yes. If you look at the total increase, only about 69 of those -- we take the average seated count for the whole quarter. So bring in those drivers coming on in the back half of the quarter, if you blend it out and say, "What was the average for the quarter?" The average in that seated count number of 3,024 would be about 69 from the acquisition, so not a large number from a blended average standpoint. That will, obviously, bleed over and be into the fourth quarter or our second calendar or fiscal quarter. As for whole -- for the full quarter, they'll be in there as opposed to a partial because the average will be the full quarter. If you look at through -- from the class, we've got 214 drivers as of September 30 have been brought on through the training school, through working with the trainer and now on their own. Of that, about 92 are actually added in the quarter itself. Those are the main key components for that. So it's hiring experienced drivers, the school and then acquisitions are the 3 divers to get the seated count up from last year to this year. And then from, as I said, 69, 92 were the 2 components for this quarter, specifically.

Stephen Russell

Driver training school, Brad, is really impressive. I mean, when we started last October, we had 3 or 4 folks joining us each week. We're now at 25 or 30 every week and we're changing lives. These folks who are out of jobs who are certainly not happy in their life and now becoming over-the-road drivers and it's changing their lives. Makes us feel quite good about that.

A. Brad Delco - Stephens Inc., Research Division

That's good color. That make sense. So then, Paul, when I think about the impact of these acquisitions going forward, I think Steve made a comment that these acquisitions aren't anticipated to be accretive day 1. But you got $3 million of revenue, which I'm assuming is roughly 1 month. So is it safe to assume x any sort of seasonality that maybe you could comment on, that you're looking at roughly $36 million a year in revenue? And at what point do you think this starts contributing to the bottom line? Is it next quarter? Or is it not until next calendar year?

Paul A. Will

I think you'll see a contribution in the December quarter. And kind of what we've looked and kind of guidance, I guess, we put out there would be that we would see a 5% to 10% increase sequentially in the seated count based on what we know today, based on our hiring patterns on experienced drivers, what were -- our kind of our throughput to the school at this point, if it continues on as well as what we know will continue to rollout through the acquisitions. Assuming that goes as planned, we should see a 5% to 10% sequential increase over the next quarter. So then you can take those numbers and kind of run the math and see what the revenue should be, increases from those acquisitions and the increased seated count.

Stephen Russell

And I really believe that what we're seeing is outstanding execution by our management because [ph] how many drivers went into driver training school for the acquisitions. Just the overall growth we're beginning to see. I think our management's done a great job.

A. Brad Delco - Stephens Inc., Research Division

Absolutely, Steve, I give you and Paul a lot of credit for that. The final question, Paul, it looks like some of the metrics have changed on the reporting. The one that I think is kind of important is the number of owner operators. You saw a pretty dramatic increase the last 3 quarters, I guess, prior to this one. Do you have an average owner operator for the September quarter?

Paul A. Will

Yes, it represents about 22% of the fleet, about 680 tractors. I'll make mention or note of that as far as if you look at -- what we try to do is we try to, based on the last call, get -- include all Celadon Canada, Jaguar, basically all 3 countries to be included in all the stats. So Jaguar is now in all the stats, as noted on the press release and that's in seated count, rate utilization, et cetera. Another thing that we did was to show that on a historical basis, we have that currently on our website going back 3 years so that everybody can see the specific stats all in so they can model and take that back. The other thing we did is, because intermodal revenue's growing, our intermodal is at the $7.5 million run rate. The other thing that you have to take into consideration -- not run rate but just for the quarter, but the other thing that you have to take into consideration is that there's about $2 million that was really run on Celadon trucks for the dray piece of that. So all in, billed to the customer, intermodal's more like a $9.5 million, but $7.5 million is after eliminations of the trucking side. So what we're trying to do there, as well, is kind of detail -- further detail, breakout the individual components, the major components, and then we'll probably tweak and add a couple of items such as the owner-operator count and a couple other questions that some of the other analysts have had as well. So we'll continue to tweak it to try to get as much information and transparency out there as possible.

Operator

And Tom Albrecht from B&B Capital Markets is on line with a question.

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

So I just wanted to follow-up there because -- some of Brad's questions about the revenues and that. Is the $36 million a good revenue run rate? Because the wording was in the second half of the quarter, and I'm guessing that Brad just took $3 million for 1 month. But is it a little bit more, perhaps, than a $36 million run rate?

Paul A. Will

It's $35 million to $40 million is probably a reasonable number to use as a run rate, and obviously, no different than -- the way we describe acquisitions is we want to make sure that they come in, we integrate them, and we do in a manner that retain the drivers in the business as much as possible. So we're trying to be conservative in what we think that the revenue will end up being and the accretion will end up being associated with them.

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

Okay. So Paul, was the -- how special services -- or which one -- was it Hoss Cartage? Is that the only one that had trucks?

Paul A. Will

No, they all had trucks. We're -- the total trucks for 4 is probably about 250 in total when we took them over. So take the 250, obviously, retain all the drivers when you take on acquisitions. Some were a little bit more stressed than others. So we're hoping to retain at least 200 of those drivers, is the plan.

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

Okay. And wasn't Land Span a pretty good brokerage operation?

Paul A. Will

They did. At the point in time that we did the transaction, they were running around, call it 80 [indiscernible] operation tractors. That's it. That's what they were running. And they didn't have any brokers at that point in time we did the transaction.

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

Okay. Just a couple of other questions then. Given that you're done with the fleet refreshment cycle, but there's always probably an occasional sale here or there of a truck or a trailer, what do you think a good run rate for quarterly gains would be? $100,000 or less?

Paul A. Will

Yes, that's kind of what we're looking at, at this point in time. I mean, we do acquire and dispose of equipment through the acquisitions, obviously. So depending on that, barring any of that type of activity, I would say that's a fair statement [indiscernible].

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

Okay. And then on the -- operations and maintenance, had a big jump year-over-year and sequentially. How much of that was maintenance versus prepping equipment to get ready for the last of your sales and trades?

Paul A. Will

Maintenance is up about $400,000. One of the items that we're looking at and trying to work on is the physical damage aspect of it. If you think about all the trucks and trailers that we've brought in that have the skirts and the aerodynamic sides, sides are on trailers, skirts on the -- side skirts on the tractors, the bumpers. And then if you look at the stickers on the trailers themselves, there's a significant uptick, about $800,000, if you look at year-over-year in that bucket, which, that's one of the things that we're looking into. You also had the -- like say, if you take the Hyndman acquisition, we're bringing in equipment to replace out that equipment. There is significant maintenance savings, if you look at relative to what we were spending -- we spend, as a fleet as opposed to what they were spending with some older equipment. So that should come down as well. But those are the main 3 buckets that contribute to the increase. So as we look at those numbers, we should see those numbers start to trend down over the next couple of quarters. That's our expectation.

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

So if I had to kind of normalize it, would it be closer to $10 million than the $9 million you had last quarter?

Paul A. Will

I would say, from where you're seeing today, the $11,300, that should trend down to $10,000 over the next 2 quarters. So you may take off $600,000 or $700,000 in the December quarter and then you should see some additional reduction in the first quarter calendar.

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

Okay. And then lastly, can you just kind of talk about the pricing environment? We know it's been tough. Your niche maybe gives a few more opportunities. But just overall, what is the flavor of discussions as we begin to move into bid season?

Paul A. Will

We've seen pretty somewhat anemic, as we've talked about in the past, what our competition is as well. We haven't seen a lot of increase. We have seen a lot of bids come earlier this year than we have seen last year going through the bid process. Obviously, what we're trying to do is look at the freight that makes the most sense for us that will be incremental freight, increase our lane density and trying to get a better mix of our business so that there's less seasonality associated with it. So we think we can get the 1% to 3% rate increases. But also, we think we could better our mix of business through this bid season, is kind of where our goal is. But as far as pure rate increases going to customers, at this point in time, we haven't seen large increases.

Operator

And we have Chaz Jones on line with a question.

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

Maybe if I could just dive into the non-truck-related revenues. I'm just trying to think about margin profile. I think that's running about 20% of revenue now if you back out fuel. And I was just kind of thinking along the lines, as the business continues to ramp and grow rapidly, is that going to have an overall impact on margins in terms of maybe pulling them down a little bit?

Paul A. Will

If we look at our overall non-asset-based businesses, those -- that OR is running somewhat comparable to a little bit less than what we were currently showing as far as margin. So it's close enough that I don't think it will make a significant change one way or the other from a margin standpoint.

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

Okay, that's helpful. And then, Paul, in the other revenue line, what exactly is running through that now? Is that like the warehousing business? Or is there other stuff in there?

Paul A. Will

Yes, there is some lease equipment, some maintenance associated with a third-party equipment and there's some additional small warehousing bills [ph] and escrow [ph] type of billing.

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

Okay. And then I just kind of had 1 modeling question. What should we be thinking of about in terms of maybe a tax rate for the full year?

Paul A. Will

It came down a little bit this quarter, but I think 39% or 40% is kind of where we've typically pegged in the past.

Operator

We have Jeff Kauffman on line with a question.

Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated

I think you answered a little bit with some of the earlier questions. But what I'm trying to do is kind of parse out what's shorter-term. And really it looks like there's 3 areas: it's salary wages, you addressed that; O&M, I think you addressed that. Could you address the purchased transportation part and kind of where that should be going? And then talk a little bit about insurance and claims, which did seem a little bit higher than I would've expected this quarter?

Paul A. Will

Yes, purchased transportation, if you look at the increase in our owner-operator count, which went up from about 404 last year, same quarter was 680, so that 22% is what it represents as a component of our overall fleet. About $7 million of that purchased transportation increase is a direct result of that. And that's just based on the miles and the seated count. We had, as our rail businesses moved up, about $2 million of that increase is directly related to purchased transportation rail cost. We have expanded in our Asset-Light area, our LTL business, and that's about $1 million increase year-over-year in purchased transportation of the third-party LTL providers. So those are your 3 main components and it's just a function of the incremental business done in those 3 areas. As far as the insurance, I think the insurance ends up being, I think, on a percentage of revenue basis, even though it was up some, as a percentage revenue, I think it was relatively flat, I believe.

Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated

On a percent of revenue basis?

Paul A. Will

Yes.

Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated

All right. So your claims experience was no worse? There weren't any big payouts, anything like that?

Paul A. Will

Nothing out of the ordinary this quarter, no.

Operator

And we have Todd Fowler on line with a question.

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

Paul, on the 250 trucks from the acquisitions in the quarter, is the plan to keep that equipment? Or will you be trading out that equipment with existing solid on equipment that you have?

Paul A. Will

A combination, a combination of bringing on new equipment. But for the most part, we are able to use a lot of the existing solid on equipment to kind of fill the void. Some of the -- if there are trucks that are more on the local application, we're able to continue to use their equipment. For the over-the-road application, we'll bring in our equipment. As I said earlier on the Hyndman, the transaction we did back in April, we are just getting trucks in now to replace out their equipment based on the age of their equipment. So -- but for the -- these, I think it -- what it does is it fully deploys the existing assets that we had that were somewhat idle up to the point in time we did the transactions.

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

Okay. Yes, that's exactly what I was getting at. Because I look at your average tractor count for the quarter, around 3,000, a little bit more than 3,000, I kind of had that in my mind as the amount of equipment that you had at the end of the last quarter. And so the read through there is basically, at this point, most of your equipment is being utilized. You don't have that much park capacity anymore ?

Paul A. Will

That's correct.

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

Okay. And then back to Brad's question on the increase in quarter and kind of where the drivers came from. Going through the numbers, I think, that you gave him, I was coming up with 69 from the acquisition, 92 from the drivers school and that would leave about 90 or so that were experienced hires. Are those the right numbers there?

Paul A. Will

I think those are ballpark fair numbers, yes.

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

Okay. And then so the experienced driver piece of that, I think that that's maybe what was different than what we were thinking about. That's the traction that you're having from the regional recruitment efforts, I guess. Is that correct? And then if you could talk a little bit more about what's driving that, what you're seeing there and is that a good number to continue going forward?

Paul A. Will

I think -- what we're looking, at this point in time, is that's being beneficial. In sum, that 90 trucks, we are looking year-over-year now, as opposed to quarter-over-quarter, the 92 that were added in the quarter. But yet, if you look at year-over-year, I wouldn't say 90 came just from experience. I'd say maybe 115 or something, may have come from the school. Because we have 214 currently in the fleet from the school. So you can't really pinpoint what was the turnover on those even though we're seeing a significant lower turnout. Once a driver gets in the truck and we don't a lot of experienced, since we've only been doing it for a year, but we're only running around 20% turnover of the individuals. Once they get through the class, through the training, in the truck, the turnover is significantly lower for the school. But as we look on a go-forward basis, what our goals are is to have the experienced drivers be at least a wash with turnover, and then the schools added, as well as acquisitions would be added. That's kind of where our goals are. One of the things that we're doing right now is from a customer service standpoint is, and from a driver's sort of standpoint, trying to get it so we were working on a driver scorecard that will allow us to further take care of or compensate individual drivers based on good performance, service to the customers, picking up, getting good utilization out of the equipment based on the amount of hours that they have available to drive each day and manage them to that, no different than managing the hour of service changes. When a driver takes a 30-minute break, we're working on, from a systems standpoint, to have the driver manager work with that individual driver to get him back on the road, get him going, no different after a 10-hour break, et cetera. So as we look at it, it's -- we need to have enough drivers come in to grow to add capacity to be there when capacity tightens for our customers and reap the benefits of that. But also to be able to continue to maintain those customers and service them well and get rate increases in the future is making sure that we have the right quality of driver that can ultimately service those customers. So that's kind of our -- at least, our thought process in that, and it's really getting experienced drivers, getting drivers out of the school, and then through acquisitions.

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

Okay. No, that's probably a helpful way for us to think about it. And then just a couple of last ones. Is the expectation still that there's not going to be any CapEx requirements through the end of calendar 2014?

Paul A. Will

The only ones we have right now would be the replacement of the Hyndman tractors at this point in time, and that's probably going to be 150 tractors. And then we'll open that up like global [ph] sell, because we own the equipment that we'll be selling. The net CapEx will probably end up being about $8 million to $10 million.

Stephen Russell

And with the trailer fleet, basically, 2 years or 2.5 years old, and most companies' trailer fleets are 10, 15 years old, we don't have any trailer requirement for a long time.

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

Okay. And then, I guess, to that point about not having the CapEx requirements, how do you think about use of cash going forward? I mean, the balance sheet leverage has moved up as you've done some of these acquisitions. It sounds like you're going to have natural deleveraging into calendar 2014. Would you prefer to pay down some of the balance sheet debt? Or if you look at the stock at certain points, do you think it makes sense to consider buying back stock? Or are you still more inclined to do a sizable transaction? How are you thinking about the use of the free cash going into '14?

Paul A. Will

We want to continue to pay down -- initially, to pay down the bank line to position ourselves so that -- either have the availability for acquisitions and/or position ourselves to continue to refresh the fleet with cash on a go-forward basis, which will allow us to continue to have the financial flexibility to grow the business, is our primary objective.

Operator

And we have Scott Group on line with a question.

Scott H. Group - Wolfe Research, LLC

A bunch of little things. Do you have cash from ops and CapEx in the quarter?

Paul A. Will

We don't -- I don't have that right in front of us. Can we get that to you?

Scott H. Group - Wolfe Research, LLC

Okay. We can follow up. So in terms of the acquisitions, so I think what you gave us is about 250 trucks, $35 million to $40 million of annual revenue for the 4 [ph]. Can you give us any more color in terms of how much you paid for them, what the margin profile on these acquisitions is like, what depreciation is like for these companies?

Paul A. Will

I guess, in general, what we looked at -- these acquisitions, they run a higher OR than what we would want to run. We obviously are going to try to push them down to 90 OR, when you look at synergies associated with what we have to offer, our cost structure, synergies from operational standpoint. So what you could say is that -- I mean, we basically paid, for the most part, just asset prices for them, similar to other transactions. But yet, they're businesses that kind of dovetail on nicely to what we have from a facilities standpoint, from an the operational management standpoint that could expand what we're doing to retain the business that was brought on with them. And then the goal is to then generate services to get their ORs closer to the 90 level from where they were.

Scott H. Group - Wolfe Research, LLC

Okay, that's helpful. And then Paul, you have -- like, depreciation. Just how do we think about, $16 million in the first quarter, where they should go going forward?

Paul A. Will

We look at combined total equipment costs. That will probably be around $17.4 million next quarter is kind of what we're -- and then we take the equipment rentals and depreciation, we combine the 2.

Scott H. Group - Wolfe Research, LLC

So the $17.8 million in the first quarter, you think, goes to what, starting in the second quarter?

Paul A. Will

If you look at depreciation -- just a second. I think depreciation is -- you got depreciation of about $15 million, equipment rental's about $1.6 million. So that's, let's call it, $16.6 million, and we're saying that will be closer to $17.4 million in the December quarter.

Scott H. Group - Wolfe Research, LLC

Okay, perfect. Okay, that's helpful. We've got gains on sales separated out, okay. And then just last 2 things, just want to follow up on Jeff's question from earlier. I understand kind of the owner-operator mix impact on purchased transportation. I guess I'm just wondering why wouldn't then we see a bigger dropoff or less of an increase in the salaries line?

Paul A. Will

We've got -- there's a few things that we've got in the salary line that -- we've got benefits. Let me see if I've got the sheet. We've got some of the salaries associated with acquisitions, and when you look at the acquisitions and look at some of our outlying terminals and see the synergies that we get, there's cost that, we believe, that we've kind of laid out, roadmap-ed out that we could take out. And then they are probably about $1 million a quarter relative -- that will dovetail in over the next several quarters. But acquisitions represent about $3 million of that increase from $40 million to $46 million. You've got benefit costs increases year-over-year of about $600,000. And then in salaries and wages, you also have probably about $500,000 or $600,000 associated with the driving school. So when you look at the driving school, you have the cost of the hotels, meals, the training, the instructors, wages, et cetera, plus you have the hotels and those type of costs. So if you look at this quarter, what we've kind of laid out was there's probably a cost. And then once they get in the truck, you have to pay for the trainer and obviously, the trainee pay. So the combination of all that, it probably -- to bring the drivers out in the September quarter, probably cost us $0.02 a share. We believe that will be offset based on when a driver comes out, they get paid less than an experienced driver does for the first 120,000 miles. So that offset would mean that, we believe, in the December quarter, it will probably cost us $0.01 as we're ramping this program up. And then going into the March quarter and further out, it will be less financially -- it will be a financial positive on a go forward. But we do, all along, get the margin benefit of having a seated truck and the capacity to run freight. But those are the major components in salaries and wages that we have today. But yet, we're currently looking at how we're going to generate some synergies based on acquisitions that all the salaries come up in front, and then what can we do to kind of streamline those costs on a go-forward basis.

Scott H. Group - Wolfe Research, LLC

Okay. And last question...

Stephen Russell

When a trainee joins us, we pay the motel, we pay their meals. And we're completing our new building, which is the driver training school, which, essentially, means that the motel costs will go away because we're going to have 100 new dormitory in that building.

Scott H. Group - Wolfe Research, LLC

Okay. That's really helpful, guys. And just last question, so bigger picture, so you've got some acquisitions coming in doing, obviously, a really good job on the seated tractor side. Costs were an issue in the quarter and some of that's temporary, some not. When is a realistic time frame or what quarter do you think is realistic where we could start to see year-over-year earnings growth again?

Stephen Russell

As soon as we can make it happen.

Paul A. Will

Our -- I mean, we're going to work -- what our goal is, is to get the seated capacity. And then continue -- once we get the seated capacity, that should allow us then to work on the cost side of the business, getting the synergies out, cost reductions and so forth. And if you look at, I think historically, what we've been able to do, I think we've done a pretty good job from a cost standpoint. So it's the ramping up of the business, and that will take probably a couple of quarters to kind of streamline that out, which, over the next couple of quarters, we think that -- streamline those costs out, having a higher revenue, generating -- that should generate increase in profits over time. But I think it will take at least the December and March quarters to start to trend in that positive direction that you're looking for.

Operator

And we have David Tamberrino on line with a question.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

I actually have a couple of questions back here. Starting with the seated tractor count, kind of going along the line of questioning you went through earlier, how many additional trucks do you have unseated that you can continue to kind of grow the fleet without having to add new tractors?

Paul A. Will

We don't -- we have trucks through the acquisition that we continue to run. But we don't have a significant number of tractors currently just sitting around and that we could redeploy at this point in time, maybe 50 or 75 trucks, I would say, at the most.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

And that's after including kind of the full quarter of the additional 50 to 60, I guess, that you brought on at the end of the quarter?

Paul A. Will

Correct, correct.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then maybe following along the lines of Todd Fowler's discussion and maybe taking a step further. Do you have any internal kind of target debt reduction? Is it $50 million, is it $100 million for the year? Or what are you thinking over the next kind of 18 months when you're nearing your CapEx holiday?

Paul A. Will

If we look at, kind of, barring any other type of transactions, we should be able to take our debt down by about $50 million or $60 million between now and the end of the fiscal year.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

And then, does that includes the kind of capital lease paydown that's coming, so debt would go down by $30 million since the capital leases are down by $30 million?

Paul A. Will

Yes. Total -- I would say total debt, including bank line, capital lease normal amortization paydowns, that's correct in total, the combination of the 2.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then we continue to see empty mile percentage kind of creep up here. This quarter, it almost touched up to about 12%. I'm wondering how much of that kind of year-over-year increase, which about 170 basis points from 10.24%, could you attribute to the acquisitions and the empty miles and deadhead from repositioning of assets? And how much of that is just kind of a naturally -- the increase that we've seen over the course of 2013, up to that 11.5% range?

Paul A. Will

Yes. I think there's definitely a portion of it. We haven't kind of earmarked exactly what's associated. We obviously had to protect service, especially on the Land Span expedite [ph] business. We had to protect service by bringing teams in, paying for labors and having them ready to be able to service time-sensitive accounts. So there's definitely a portion of it related to that. Our goal is to continue to monitor that and try to bring that down over the next couple of quarters as well. When we look at some of that increase has been a function of trying to service customers in a fashion that basically protects service, it's one of the things we focused on over the last 3 to 6 months, which there's a portion of that as well. So there's a balancing act between how much deadhead you're willing to incur from a service standpoint and then are you going to be able to ultimately to get priced -- to get the price paid by the customer forward. So we're kind of in the process of that. But I think trending that down to -- definitely to 11% over the next couple quarters is definitely within reason.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then just one last one. Prepaid expenses up $20 million sequentially. It's kind of the highest we've seen it in a while. What was the large jump there?

Paul A. Will

There's a -- any time you see the renewals, because your comparing off of June balances as opposed to off of the same year September balance. But we renew all our insurances at this point in time, beginning of our -- end of the first quarter, our first quarter with -- after July 1, so a lot of prepaid insurance for our liability, excess insurances and so forth. And then we amortize that over the course of the year. As well as there's a receivable in there, a large batch of -- the remaining trailers were sold at the end of the period. I think there's about $12 million in there associated with receivable and trailer sales for trailers that have been parked down, titles [ph], basically and have been transferred, et cetera. So that's the biggest piece of it, but it's insurance and equipment sales.

Operator

And we have Donald Broughton on line with a question.

Donald Broughton - Avondale Partners, LLC, Research Division

Walk me through -- you're right in that, as a percentage of sales, insurance really didn't change much. But on a per-mile basis, which is, I know, how you manage your business, it was actually up about, what, almost $0.01 a mile or almost a double-digit pace, at least on a year-over-year basis. What drove that? Was it an increase in incidence? Was it an increase in severity?

Paul A. Will

In some instance, we have cargoes a little bit higher in the quarter. It was up about $200,000. Work comp is up about $100,000, but liabilities only up about $200,000 [ph] in that. And then insurance associated with acquisitions, where we have to pick up their insurance to cover, so we duplicate the insurance for a period of time and then roll their insurance off once it rolls onto ours would be the balance. So there's nothing individually significant, but those -- all 3 of those buckets moved up somewhat.

Donald Broughton - Avondale Partners, LLC, Research Division

Because I'm -- I'm sitting here looking...

Stephen Russell

[indiscernible]

Donald Broughton - Avondale Partners, LLC, Research Division

I'm sorry, Steve, go ahead.

Stephen Russell

One of the factors why the acquisitions are not immediately accretive, we have to pick up those costs.

Donald Broughton - Avondale Partners, LLC, Research Division

All right. Okay. You're assuming liabilities of the company you're purchasing, in essence. I'm looking at the rate environment. In your pricing, what, on a year-over-year basis, you're up 2.2%. That's pretty much in line with what the industry is seeing. Certainly, you're driving further to find loads. Your deadhead's up. So -- and miles per truck, not really making new -- a lot of progress there. So as I look at the equation and say -- actually, on a revenue per truck per week, we saw 1% decline sequentially. You're struggling to keep it flat on a year-over-year basis. That's not dissimilar from the rest of the industry. But it's also not dissimilar from the rest of the industry as you're seeing continued cost inflation on just about every line item. So how do I model for improving margins from here sequentially throughout the rest of your fiscal year? How do I get there?

Paul A. Will

I think those are, obviously, fair comments. When we look at it, we ultimately think that we'll get rates at some point in time. Our goal is to...

Donald Broughton - Avondale Partners, LLC, Research Division

Why?

Paul A. Will

Why do we think we'll -- well, we need...

Donald Broughton - Avondale Partners, LLC, Research Division

Unless something changes in the macro...

Paul A. Will

Yes. I think capacity is coming out that ultimately will change that. And obviously, we've been talking about that as an industry for a while. I would agree with that. But at this point in time, incremental miles, obviously, you're still generating a margin that will cover your costs and help maintain your current earnings per -- or earnings level, even though you're running more miles to get -- to cover that, in the interim waiting for the opportunity to ultimately get paid from the customer what you think you deserve for the miles run. We're not there yet, but that's our strategy.

Stephen Russell

Donald, everything is supply and demand. The extent that supply goes away either because of number of companies being acquired or the number going out of business. All that's positive. And now with this EOBR requirement, it's the same thing.

Donald Broughton - Avondale Partners, LLC, Research Division

I totally agree, Steve. And you and I are completely sympatico that there's going to be a day that there's going to be much more pricing power here. And your utilization may not improve, but certainly the utilization of a lot of your smaller competitors is going to go down dramatically. But the EOBR rule may be announced in -- later this year, but the actual enforcement date is still a couple of years away at best. And so I sit and wonder, how do I look -- how do I reasonably project margins to improve in the next 4, 6, 8 quarters?

Stephen Russell

Let's see what happens with the government's announcement. The other thing that we're looking at is maybe giving credits to those that have EOBRs, which would have the same impact, in other words credits like less age [ph], hours of service requirements, et cetera. So it's a little early to make that decision, Donald. Wait a couple of weeks.

Operator

And we have Jeff Kauffman on line with a question.

Ryan Mueller - The Buckingham Research Group Incorporated

This is Ryan, actually, on for Jeff. If you looked at the miles per truck, we're a little bit better than the industry, and we wanted to know what kind of impact you saw from hours of service.

Stephen Russell

Speak a little louder, please.

Paul A. Will

So the question being the miles and what's the impact from hours of service. I think when you look at -- obviously, our miles were down slightly from a year ago. But then they were down slightly from June and up slightly from September a year ago. If you look at what we had, as far as year-over-year, we -- it is a negative impact, obviously, from hours of service but -- and a negative impact probably from running the trucks in. And so, technically, our utilization could have been slightly better than that. We are seeing some impact related to the breaks that drivers have to take now and the resets. But a lot of what we're trying to do, on a go-forward basis, is work with those drivers, having the driver managers work directly with the drivers to try to keep them moving and get the most utilization we can get out of them relative to their stop time.

Ryan Mueller - The Buckingham Research Group Incorporated

Okay. And so are you seeing, with the existing drivers, that there's better utilization with them relative to the new drivers that you're adding out of the school?

Paul A. Will

I think if you look at the -- like, the drivers coming out of the training school, I think we're -- what we're trying to track is to see if we're getting better utilization out of those drivers because of the training that we're giving them, more specifically, on how we -- how, I guess you'd say, the Celadon way of doing business, how we need to log, how you need to minimize your breaks, minimize your -- obviously, with -- utilize the hours of service and EOBRs to make sure that you're complying, but yet maximizing your hours. So we believe that's a component of it. But we're still trying to track that at this point time.

Operator

And we have Tom Albrecht on line with a question.

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

I had just a couple of follow-up questions. So did you say the costs associated with the school and all that was about $600,000? Or was that about $600,000 increase from the benefits?

Paul A. Will

It's about -- that is about $600,000 increase going through SG&A. But the cost -- what we tried to kind of lay out when we are looking at is what is the cost associated with the school, the hotels, the meals, et cetera and then paying a trainer and a trainee to drive down the truck, where you can normally only have 1 individual in the truck, obviously. So when you kind of lay that out, we believe the negative impact in the quarter is probably about $0.02, when you look at the overall cost. We believe that -- because the trainees, when they come out, they make less than what an experienced driver does for the first 120,000 miles, we believe that offset in the December quarter will end up making it only $0.01. And then from March on, we believe that will be accretive at that point in time, independent of, obviously, the benefit of having a seated tractor and the margin associated with that seated tractor.

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

Okay. And then I want to make sure I heard you correctly. On the trucks associated with the acquisitions, I thought I heard 2 things, and I want to make sure I got the right one. Is there going to be a little bit of a refreshment cycle as well for those? Let's say, I think you said there are 250 trucks, you hope to keep 200 drivers. Is there going to be a refreshment element on those trucks?

Paul A. Will

There will be a refreshment element only -- I think, as we're looking at right now, laying out on the team side of it, which would be the Land Span, we'll refresh on that side of it. But the other -- we had enough tractors to fulfill the other requirements. So if you take out -- say you end up with 200, 250 tractors, take about 80 for the Land Span, the remaining tractors we really have enough in our operation that we can kind of moved around and won't have to do any CapEx for those tractors. So it's really more, call it, a 100 tractors or so for more routine expedite [ph] application.

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

Okay. All right. And then lastly, do you have any comments on how the refurb business is performing, whether it's a help, a hindrance? Where is it in its still fairly early development stage?

Paul A. Will

Yes. It's still early, but if you look at the rates that we're generating, utilization on the equipment, it's beneficial at this point in time. What we're doing is we're bringing on individual customers and then we're getting, in essence, market freight back or broker freight back until we can then balance and get a lane. And then we're utilizing that as kind of the platform to continue to build off and have density with few lanes. Based on the amount of business that we have today, we feel like we could focus on a few lanes at this point in time and continue to grow that. But overall, it's working well for us up to now.

Operator

We have no further questions at this time.

Stephen Russell

Thank you very much. Need we say more, feel free to call us. Thank you very much. Bye-bye.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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