Celadon Group's (CGI) CEO Paul Will on Q4 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: Celadon Group, (CGI)

Celadon Group (NYSE:CGI)

Q4 2014 Earnings Call

August 07, 2014 11:00 am ET

Executives

Stephen Russell - Founder and Executive Chairman

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

Analysts

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

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

A. Brad Delco - Stephens Inc., Research Division

Reena E. Krishnan - Wolfe Research, LLC

Nicholas J. Bender - Wunderlich Securities Inc., Research Division

Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated

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

Operator

Good morning, and welcome to the Celadon Group Inc. Fourth Quarter Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Steve Russell. Please go ahead, sir.

Stephen Russell

Thank you very much. Welcome to Celadon's Fourth Quarter Fiscal 2014 Earnings Conference Call. I'm joined here in Indianapolis by Paul Will, President and CEO of the company; Eric Meek, our Chief Financial Officer; and Jon Russell, President of our Asset-Light divisions.

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 were quite pleased with the results for the June quarter. Earnings per share were $0.65 compared with $0.31 in the June 2013 quarter. The gain on sale of our TruckersB2B business was $0.36. Earnings, excluding the sale of TruckersB2B, were $0.29 per share despite a $0.03 per share charge related to severance and contractual buyout costs primarily related to previous acquisitions.

Key operating metrics showed nice improvements as we move into our fiscal -- 2015 fiscal year. Despite the driver shortages that have severely been impacting the trucking industry, our average seated count increased to 3,191 in June 2014 quarter, up by 15% from the 2,770 in the June 2013 quarter. Although down somewhat from the average in the March quarter, we experienced nice improvements each month in the June 2014 quarter. Miles per tractor per week were at the highest level in several years. Further, new trucks that we will take delivery of in the next few months should meaningfully improve our miles per gallon and maintenance [indiscernible].

And we are confident that the challenges facing the truckload industry are, in fact, improving the future for the larger and stronger carriers, as the weaker, small companies continue to suffer from increased government regulations and related changes. Essentially, need I say more about that.

I would like to turn this over to Paul for additional comments on the quarter.

Paul A. Will

Thanks, Steve. I'd like to give some detail on fleet composition, miles and intermodal revenue for the quarter and some clarity on expenses pertaining to June 2014 quarter and expectations on future quarters.

First, I'd like to summarize the sale of our minority inch ownership interest in TruckersB2B, LLC for $21 million in gross proceeds and approximately $9 million in net income or $0.36 per share when factoring in transaction costs and taxes. We are pleased with the proceeds associated with the liquidation of this investment that we used to pay down outstanding debt.

The operating stats evidenced in the June 2014 quarter continued to improve both sequentially and year-over-year levels. Celadon was able to achieve gains in some key metrics in a difficult operating environment associated with the more operationally challenging hours-of-service changes, which are now fully included in our operating results for the full year.

As indicated in the press release, compared to the June 2013 quarter, seated count increased significantly, up 421 units or 15%. Revenue was up -- was $197 million, up by $35 million or 21%. Revenue per loaded mile improved from $1.59 in the June 2013 quarter to $1.62 or an increase of approximately 2% compared to the year-earlier quarter. The average company tractor count increased by 486 trucks from 2,177 last year to 2,663 this June 2014 quarter.

Company miles increased by 13.1 million from 58.8 million miles last year to 71.9 million this June 2014 quarter. Owner operators decreased by 65 tractors from 593 last year to 528 this June 2014 quarter. Owner operator miles decreased by 1.4 million from 16.1 million miles last year to 14.7 million miles this June 2014 quarter.

Intermodal revenue increased by 4.5 million from 7 million last year to 11.1 million in the June 2014 quarter. Included in this year is approximately 4 million related to container movements in Canada, which comes from the Yanke acquisition this year.

Next, I would like to address some of the expenses incurred in the June 2014 quarter. Continuing from last quarter, we are negatively impacted by the tractors acquired from recent acquisitions. In the June quarter, we refreshed approximately half of the 425 tractors -- acquisition tractors, which are less fuel-efficient, not equipped with the anti-idling solutions like the existing Celadon fleet, and have higher average mileage, resulting in higher maintenance and fuel expense vis-à-vis completely replaced with new tractors before the end of the September 2014 quarter.

Maintenance, which is included in the operating supplies and expenses, was higher than last year by approximately 1 million related to the increase in miles, 1 million related to the cost of operating the new emissions and the aging of that equipment and 800,000 related to the operating of the older tractors acquired through the acquisitions. We should see the maintenance and fuel expense continue to decrease during the September quarter with the replacement of these tractors and subsequent quarters thereafter.

Salaries, wages and employee benefits increased year-over-year primarily due to 4 specific items. Approximately $1.4 million in severance and contractual costs, as discussed earlier; the increased costs of the driver school and training program; our growing local and dedicated operations and increased team count. This has resulted in our ability to organically grow our seated count in a challenging driver market and improve utilization through the use of team operation.

Finally, the increased local and dedicated operations included in other revenue continue to drive higher-margin returns.

We are very comfortable with our performance to the ever-changing regulatory environment, which has resulted in more expensive equipment, shrinking supply of qualified drivers and the result in fleet failures. We believe we have positioned ourselves to benefit from a more robust freight environment resulting from both economic improvement and, more importantly, a decrease in capacity in the marketplace.

I would now like to open the phone to questions.

Stephen Russell

[indiscernible], whenever you're ready.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Todd Fowler with Keybanc Capital Markets.

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

Paul, I was hoping you could start off by talking a little bit about what your expectations for yields would be going forward. The 2% increase here in the second quarter, if I remember correctly, I think that you had 100 more contractual commitments during the first part of the year, and then there's going to be more for ramp in the back half of the year. Is that still the expectation? And how are you thinking about pricing as we move to the rest of the calendar year?

Paul A. Will

Yes, that's a good question. So when we look at it, we've given guidance 2% to 3%, we've got -- other than probably about 3% to 5% of our business, it's all contractual. So to your point, a lot of that was done the back half of last year before, really, the freight market start heating up a little bit and capacity start coming out. We look to accelerate through the back half of the year when our contracts come due. And our goal is to ultimately get a higher rate increase, which hopefully will -- bled this up so that as we roll into -- beginning of next year to the 3% to 5% rate increase level next year compared to the 2% to 3% rate increase this year. But a significant amount of our work related to contractual customers will come in the back half of this year. So we look at the next quarter to probably be consistent in the 2% to 3% level. When you look at year-over-year for the September quarter, not a significant probably increase, as well in the December quarter, probably, once again, the 2% to 3%. And then as we start to move into the calendar year '15, it is when we believe you'll start to see the increase based on the work that we'll do in the back half of this year with our contractual customers.

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

Okay, perfect. That's helpful. And then how should we be thinking about the seated tractor count moving into the back half of the year? Obviously, we see the average for the full quarter, and you've got some commentary that it sounds like it improved towards the end of the quarter. What would your expectation be for the average seated tractor count into the September quarter? If you could talk about either what you're getting from the driver school or what's happening from a retention standpoint to get you to where the count -- where the fleet count should be, that would be helpful.

Paul A. Will

Yes, another good question. So when we look at it, we gave guidance at the end of last quarter because with the bad weather that -- obviously, like the Yanke transaction and some of the transaction we did at the end. And we didn't -- we weren't bringing in new equipment to, obviously, the most recent quarter that just ended. So that was difficult to retain people when you have to go on to our operating authority, go to physical, drug test, all of that. You have to go into the same truck, but now you have to use electronic, on-board recorders. So we knew there was falloff and that we kind of guided to that. And I think most of the analysts kind of baked those numbers in. We continue to see a little falloff in the month of April before the earnings call. May seem to be we kind of held our own. We picked up some of the June, and then we continue to pick up a little bit of the seated count in the month of July as we gave guidance in the release -- in the -- going into the September quarter. So when we look at it, we've kind of mapped it out, and we think that we finished up at 3,191. We finished the quarter higher than that number, and we would -- we're looking to grow year-over-year by about 250 trucks, which should put us at the, say, the 20 -- or 3,275 level, which we feel comfortable with. That would be up, obviously, sequentially in the 75 to 100 or 50 to 100 trucks is kind of what we're looking for in the September quarter. And where we're seeing the pickup is our owner operator program through the use of the element financing that we transactionally did last quarter, the March quarter. That has allowed us to bring on equipment that is really more speculative to the owner operator. And to bring that equipment on, that shift started to come in. We had some delayed deliveries, which is why you only saw about half the 425 trucks be replaced out. So we didn't see as much on the maintenance and fuel pickup as we had hoped because of the timing of deliveries, which we're pushing with the manufacturers to speed those deliveries up. But the amenities inside the cabin of the truck, the amenities for the type of the truck for the owner operators, is now really starting to pick up, and that's why I think we've seen in June and July now the increased seated count related to both company and owner operator. So we think that, that will continue, and that should ramp up in the 75 to 100. The other thing is, from a school standpoint, we've got in process probably about -- we got about 100 drivers in trucks training right now, probably have another 60 or 70 in process to go with trainers. And if you look at last year -- so in total, let's say it's about 250, any step of the way between coming into class and then getting into a truck on their own, if you compare it to last year, we are probably at the 50 to 75 level compared to the 250. So, really, what's important to us is we created a pipeline, and that pipeline is in addition to the Indianapolis school. As we announced, we have gas in Alabama, and we also have a facility in Texas. Those 2 school locations are helping us ramp that up, as well as we're looking throughout the rest of the calendar year to find a few more locations to continue to expand that program, which we believe will be kind of a long-term solution for us to supplement hiring experienced drivers.

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

Okay. No, that -- all of that is actually -- that's helpful and what I was looking for. I guess the last one that I'll ask and turn it over to somebody else. But looking at salaries and wages, and we try and look at it on a per mile basis, and you might have numbers that are a little bit different than what we're coming up with, we try to back out the earn-out amount during the quarter, but we're coming up with salaries and wages being up about 10% year-over-year on a per mile basis. I guess I'd like to get kind of your thoughts, and it sounds like that -- we backed out the earn-out piece, but it sounds like there's some expense related to the driver school, there's the cost related to the teams and the dedicated and the regional piece. Is that kind of a right -- the right run rate that we should think about with salaries and wages or is there anything else that's going on there? And how are you thinking about driver pay, I guess, more broadly going into the back half?

Paul A. Will

Yes, that's good question. So when we look at that, we kind of try to break that out on the script that we just went through, and that means that the teams, obviously, that's better utilization, so you'll see better utilization, but yet it costs more, obviously, from a team application standpoint [indiscernible]. And you'll continue to see that because what we're trying to do with our school is drive those individuals as much as we can into a team application to get better utilization on the equipment, especially with our service, and it's more of a premium benefit to the customer. So growing that piece of what we'll say is a higher-margin business segment. If you look at the local and dedicated, that type of business, we have about 300 trucks in that currently in the local applications. And then if you look at kind of dedicated, we're up about 50 year-over-year to about 450, kind of dedicated specifically to individual customers. What that's allowing us to do, even though it shows higher pay down below, that's why you're seeing the other revenue go up, which is why we kind of isolate that out. The other piece was that with the school, obviously, you're paying for the trainer, as well as you're paying trainee pay because you're obligated, obviously, to pay them while they run in the truck. So, therefore, training them, it's a cost, it will still continue to be in there. As we ramp the schools up, you'll see that, and eventually, you'll get to a point where they're paid less through the first period of their career at Celadon. So that will end up resulting in a reversal somewhat of that in subsequent quarters, but when you're building, you're paying more for that aspect of it. So I think you'll see a higher level. The one thing that we really were trying to break out is in addition to the $1.4 million, which you've already kind of pulled out a bit. But what we're trying to make sure is that the items in that, it's not a pure pay increase. It's not why those buckets are -- that bucket is up, it's more the things that we're doing to strategically trying to drive either higher margin through team application, higher margin through local and dedicated or through the -- be able to grow organically our seated count with the students is why you're seeing a higher salary and wages number.

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

Okay. So it sounds like that there's mix in there, and then it also sounds like that there's, on a year-over-year basis, the driver school costs. And that going forward, at least, on a sequential basis, that those should start to stabilize as the schools ramp, then maybe even get some benefit as you start to see the driver trainees into the driver population.

Paul A. Will

Yes. So I would say you take out the $1.4 million, I think you're pretty close to run rate. We'd like to be able to bring that down somewhat over time, but it's pretty close right now for the -- maybe the next 2 quarters, for sure.

Operator

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

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

Paul, you gave some good statistics. I appreciate that. How many teams do you have approximately now? And how does that compare with maybe a year ago?

Paul A. Will

So we're about 280 today, and we're about 180 last year. So the team count, obviously, is growing nicely.

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

And then reefer units, I'm trying to remember, what, about 300 reefer trailers?

Paul A. Will

Yes, about 340, 350 reefer trailers today.

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

Okay. And then just kind of looking at the -- what I call your logistics division, your Asset-Light businesses, it's got a really strong growth rate now, over 18% of revenues, and you just finished your fiscal year. Is there some thought to beginning to give maybe an OR from that versus the truck OR just so we could have a sense of the profitability? So that would be kind of one question. Are you thinking about giving that? But even today, if you don't have it today, what is the margin difference approximately between the truck OR and logistics?

Paul A. Will

Yes, our -- what we call our brokerage LTL and non-asset-based businesses that Jon Russell runs is running in the mid-80s range. Obviously, you've taken them -- the trucking side obviously makes up the difference. So one of the things that we're looking at is our -- as we move forward, we're probably looking at breaking out that piece of it, as well as some of the dedicated, maybe the refrigerated, as those areas grow because what we're trying to concentrate on, one of the higher-margin, get rid of the irregular route as much. And then as we go through this bid season, one of the things that we've strategically been looking at is getting rid of only having 3% to 5% contractual starting to move towards some of the fleets out there that play more on the spot market. That's where you see -- when the spot market goes up 15%, 20% rate-wise, you'll see their rates go up significantly greater than, say, someone like Celadon has historically been more contractual. So we feel confident with what we're doing from a systems technology standpoint and what we've done in from -- on the operational floor itself that we can really start to manage the spot market better as opposed to what we've done in the past and, therefore, reap the benefits of servicing customers at that level and getting the benefit of higher escalating rates.

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

All right. And one additional question. So your length of haul year-over-year was up about 6.5%. It was kind of similar sequentially, but I was a little surprised that your deadhead didn't improve given the length of haul increase we've seen. Other carriers see their length of haul go up this calendar year, and it's had a pretty positive impact on the empty miles figure. Why is that? I know it improved sequentially but it was basically the same year-over-year. Why did that not show a little more improvement?

Paul A. Will

Yes. We've seen -- so through some of the activity in the June quarter, we've kind of rebounded back. If you look at the month of July so far -- or now going into August, that's come -- that's improved by about -- down 1%. So we feel like we're getting that more in line. That's part of turning the Celadon order. That was a contributing factor in the last quarter. And then part of moving on, seating some of the trucks that we've done in the current quarter, because a lot of those trucks that we seated or the big chunk of them are up in Canada with a longer disparity as far as length of haul for them to -- or deadhead miles for them to get in and switch out the trucks caused some air as well. But I think more importantly, you'll see that come down back to a more reasonable level or a workable level on the -- in the September quarter.

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

Okay. And then on the 575 trucks to come, will that all be in the September quarter? Can you talk us through on the timing and expected gains on sale? Again, I know it's a red hottie used market, but maybe you can give some guidance on the timing of the deliveries and what we should expect for gains in the September and December quarters.

Paul A. Will

Yes. As I said earlier, we're trying to exploit that because there's a significant amount of fuel savings, reduced maintenance and really better utilization from the standpoint of trucks. The newer trucks, they're not breaking down as often as you'd have a 3- or 4- or 5-year-old truck. And then the last piece is driver satisfaction. So we definitely want to move that up because of that. If we look at weather coming in, right now, it's scheduled. Hopefully, we should get 250 in September quarter, the balance in December quarter. If we can move that up, great, because that's only going to help our P&L. You'll have a little bit higher equipment cost, but it will be more than offset by fuel savings and maintenance savings and regulation. As we look at what does that mean to the P&L, we're looking at around $2.5 million, a little bit more than the current June quarter, but kind of approximate to June quarter, about $2.5 million. And we're looking at -- really, this is a 12- to 18-month refresh, so you're going to see gains coming through over that same time frame. So we stepped back and said, "Okay, our equipment bucket -- equipment cost is around $18.5 million." So you should see that equipment line running around $16 million for the foreseeable future based on our current fleet count and currency level.

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

You mean the depreciation?

Paul A. Will

Yes, depreciation. Net of gain would be about $16 million.

Operator

Our next question comes from Brad Delco of Stephens.

A. Brad Delco - Stephens Inc., Research Division

Paul, I hate to get you to repeat some numbers, but you repeated some -- or you gave us some numbers as it pertained to what you thought were some excess costs related to having this older equipment. I did hear 800,000. Can you share with us those numbers again?

Paul A. Will

Yes, about 800,000 is what we're looking at as far as the older equipment associated with maintenance. There's obviously a fuel component as well, which we didn't quantify the fuel component of that.

A. Brad Delco - Stephens Inc., Research Division

Okay. So then as it pertains to going kind of back to Tom's question, the cadence of these newer units coming in over your fiscal first quarter, how should we expect sort of the P&L in terms of cost savings to trend? And I guess where I'm kind of struggling is the rate guidance you gave was for things, on a year-over-year basis, to remain relatively constant. You typically see some OR degradation from fourth -- the first quarter. And so I'm trying to think of what could help on the cost side to grow the earnings sequentially.

Paul A. Will

Yes, we haven't necessarily quantified -- we've done some calculations. We look at the 3, forget utilization improvements, driver satisfaction to see the trucks, which we think are very beneficial, some tangible, some intangible. But the maintenance and fuel lines are the two that obviously still impact the most. It was some -- bringing in 225, 250 trucks in the June quarter was impactful, but those came in, in the back half of the quarter. So now you'll probably average maybe 400 trucks for the September quarter, and then as you move to December, you'll average 600 trucks. We could try to pencil something out and give you some guidance, but we don't have any in front of us today. But I would say the other thing in the September quarter and December quarter is going to be really having the additional capacity in the margin, driven by that, should be an opportunity, as well as we're looking at the main components of the fleet refresh, which should drive those cost savings. The driver school should drive organic growth and, therefore, additional capacity in the margin on that capacity. And then the potential for additional acquisitions are the kind of drivers that we see in the third and fourth quarter as rates start to -- we work on the rate process, contractual rate process that should really kick in going into the first part of this next calendar year.

A. Brad Delco - Stephens Inc., Research Division

So -- got you. So -- and that's good color. If I heard you correctly, so this new equipment could come on, you have organic growth with your driver school, does that suggest maybe that you would retain some of that older equipment if the market is strong enough to keep those trucks moving? Or are you getting rid of this older equipment irregardless of that and getting these older trucks out and these newer trucks in place?

Paul A. Will

No, we've got our order where we need to be as long as they come in on a timely schedule. We're -- as we said, we're a little behind now. But we would bump our order up if the fleet count grew. We wouldn't want to continue to run them in the trucks because we've done a detailed analysis and laid out which are the acquisitions trucks that we got through the acquisitions. And then in addition to that, we're very conscious of which trucks are close to being out of warranty because we don't want those to roll out of warranty and the additional costs that those incur. So our first focus is to get the trucks out replaced, refreshed. And secondly, if we're going to grow, we're going to grow by replacing those trucks out with new trucks by increasing the orders.

A. Brad Delco - Stephens Inc., Research Division

Got you. And then maybe my last question. Any expectation -- I know you have the $1.4 million for severance. Are there any other sort of targets out there that could cause some additional severance charges or, I guess, adjustments to purchase price going forward?

Paul A. Will

No. No, what we did was -- as we're trying to work on the acquisitions, integrate them, generate synergies, it was -- what we said was, "Okay, what associated with this makes the most sense, kind of bite the bullet, move forward and really concentrate on getting these integrated and generate as much synergy as possible, as fast as possible, so you can start seeing the bottom line?" So that was our conscious decision to do that all at once as opposed to let them bleed out over the next 6 to 12 months. So we don't have -- we don't envision anything like that on a go-forward basis.

Operator

Our next question comes from Reena Krishnan with Wolfe Research.

Reena E. Krishnan - Wolfe Research, LLC

So I guess there's just a few things. One, if you could -- in the past -- or in the last couple of quarters, you kind of gave guidance on what you're expecting to do with your OR over the next 12 months or so given the refresh and hopefully lowering some of the fuel costs and maintenance expense and with gains on sales maybe also picking up and with rates accelerating at the beginning of next year. Could you just give us a sense of what your target is now? I think in the past, you've said about 400 basis points of improvement from where you've been over the last few quarters, but could you just give us some guidance?

Paul A. Will

From an operating ratio standpoint?

Reena E. Krishnan - Wolfe Research, LLC

Yes, exactly.

Paul A. Will

Yes. We've -- obviously, our goal -- as we're working through bringing the new equipment in, the acquisitions, the synergies driven from the previous acquisitions, what we stated in the last call was -- or trying to -- internal goals are to try to drive towards the 90 OR, which we think is very obtainable. I think within -- what we said was within the next 12 months, end of March. So I still think doing with what we've got currently in the current marketplace the tailwinds, we believe. There are some headwinds, but we believe all the headwinds mostly are baked into our operations today, whether it be our source or regulations or anything of that nature, costs associated with equipment. So we still think we could drive towards that 90 OR definitely by the end of the June quarter, our fiscal year, for sure. That's definitely what our target is internally, for sure.

Reena E. Krishnan - Wolfe Research, LLC

Okay. And so with that in mind and with growing the fleet, I guess, so when we look at labor cost and how that's been trending, if your sense that most of -- I think that most of the driver, in terms of mitigating some of the driver situation, that's going to just -- that's going to be more organic in terms of what you're getting from your driver schools in terms of bringing on younger drivers versus trying to retain drivers brought on through acquisitions. Am I understanding that correctly?

Paul A. Will

Yes. Well, I think more importantly, yes and no, okay? So from an acquisition standpoint, some of the acquisitions that we've done in a distressed nature is much more difficult to retain those drivers. The Yanke transaction made it more difficult because of the weather, they weren't getting miles, they have to get into old -- the same trucks they're in, they had to switch to electronic, on-board record. There's a lot of variables in there to give them opportunities to kind of rethink whether or not they should stay with the new company, Celadon, or just look for a different job. If you look at the Hyndman transaction, the Osborn transaction, we're more -- they're profitable companies to begin with. The retention there was very good there. There's very little turnover, if at all, so to speak. You always have some driver turnover. So acquisition, the drivers from acquisitions, if you do -- existing companies are profitable, we believe you won't have the turnover. If you look at the turnover with the school, it's about 30%. So we believe by expanding what we're doing from a school standpoint and bringing those individuals in, not only are you going to -- you've got a pool or a pipeline of drivers coming in but, two, you've got drivers that aren't going to leave as quickly as an experienced driver, which is more like a 100% turnover. So the combination of those, with experienced drivers coming in, should allow us to ultimately grow our seated count. But our focus is going to be on the schools because that's a better solution long-term for us. As it relates to wage pressure, as we said, the students, getting them trained, bringing them in, have them with the trainer for a period of time that is more costly when you're ramping up. But then once it's ramped up, then it will trend down because those students that are considered inexperienced for the first year are paid less than a experienced driver that comes in from over-the-road. So that could -- that should trend down once it's more at a mature level. So what we're seeing inside the salary, wage and benefits level is not necessarily pay increases, as we said, but more as we're ramping up these programs. So our focus really is going to be on the company, the schools, as well as continue to try to hire experienced drivers. But those are not as plentiful as they were, and to your point, they're more expensive than what they were. But what we're seeing is, whenever you see increased utilization, our turnover levels go down. So -- and therefore, our retention goes up. So that's a better way to put money in their pocket than just giving it 1% or 2% or 3% or 4%, $0.04 rate -- or pay increase to -- it's more impactful because their miles and what they could pay in the irregular route markets differ from week-to-week.

Reena E. Krishnan - Wolfe Research, LLC

Okay. And then I guess my last question is if you could just update us on your CapEx expectations for this year as you're replenishing some of the older equipment and what your plans are with your own equipment outside of what was brought on through the acquisitions.

Paul A. Will

Yes. In the -- the 575 trucks, down from the 800 trucks, represent both replacement of the acquisition trucks from the acquisitions, as well as trucks in our own fleet that need to be refreshed based on age and coming out of warranty, et cetera. But we're looking through, based on what we have on order today through the rest of the fiscal year, $37 million is -- $36.5 million is our net CapEx requirements.

Operator

Our next question comes from Nicholas Bender with Wunderlich.

Nicholas J. Bender - Wunderlich Securities Inc., Research Division

Just wanted to circle back on the utilization front. Obviously, you guys are making some strides there. With hours-of-service rolling off this quarter, do you feel like you can sort of potentially take utilization growth from sort of the flattish level, I guess, x weather over the last year or so, and get a little bit of material improvement in this next year? Or is that something that you're sort of less focused on and just more focused on sort of overall profitability to some of the growth initiatives you've been talking about?

Paul A. Will

Yes. I mean, there's some opportunity with how we're managing the drivers on the floor right now. We think there's some opportunity from that standpoint now that we've lapped the hours-of-service changes. But one of our key focus items or areas, as we've talked about in the past, is trying to get a lot of these trainees that are coming out to be experienced drivers but get them to team up at least for the first year. That's allowed us to grow our team count from about 180 to 280. And you'll get, obviously, significant more utilization of your assets by doing that and provide a higher-margin service offering to our customers that draws a bigger margin. So we see the teams as being a better -- or a more impactful increase in utilization than organic solutions to get the drivers more miles, although we think there is some opportunity there but not as great as the teams.

Nicholas J. Bender - Wunderlich Securities Inc., Research Division

Okay, okay. Can you talk just a little bit to, obviously, dedicated has been a hot topic over the past couple of quarters, where you stand with your dedicated effort and what your anticipation is for that in fiscal '15?

Paul A. Will

Yes. So we're at about 400 last year, about 450 right now. We expect to try to grow that by another 10% or about 50 trucks throughout year. One of the things that -- as Tom was asking, how breaking out different areas, non-asset-based, and we're talking about refrigerator, we're talking about our dedicated, our local in the areas that we believe drive more margin improvement, that's definitely one of the areas that we want to start focusing on, that one-off spot, project-type stuff that drives a higher margin than the irregular freight. So we're pushing in that area, but we're selective on what we're doing. And we're trying to get freight that's not where we've just been, not with an incumbent, but we're trying to provide creative solutions to the customers that can generate good margin for us but then also can save them money. So we believe working with customers, trying to generate better solutions for both parties is better long-term, and it helps us on our margin. So...

Nicholas J. Bender - Wunderlich Securities Inc., Research Division

Right, right. That sounds good. What is -- can you give us an idea, Paul, what the -- sort of the margin differential is between sort of your run-of-the-mill, so to speak, irregular route load versus some of the dedicated business that you're taking on, on an OR basis?

Paul A. Will

Yes, it's more like the mid-80s compared to more like the mid-90s in the typical irregular route, over-the-road.

Nicholas J. Bender - Wunderlich Securities Inc., Research Division

Got you. Looking for an update as well on Mexico and Canada. Can you update us on what percentage of your freight is touching each of the board these days? I know you've seen a lot of good growth in Canada, but maybe an update on how things are looking in Mexico. Certainly, heard there's some challenge there with the driver market as well, obviously, with demand for employees in the Southern U.S. Can you just update us on where you stand, especially with the Mexico business?

Paul A. Will

Yes. Mexico is doing really well. Our business is still approximately 50% domestic, 50% international against 30% Mexico, 20% Canada or ballpark numbers to that, maybe 22% Canada and the difference, Mexico. But we're seeing a bigger opportunity right now. As supply and demand balance changes and capacity comes out of the market, the cross-border business becomes a bigger opportunity. We don't want to chase lower rates just to run miles, but as those rates come up, we'll have more opportunity to and from the border. Where we're seeing more opportunities is domestically within Mexico with a lot of -- with our Jaguar operation to be able to run. A lot of the manufacturing parts that go into the final production are now being manufactured in Mexico. So you've got more movement within Mexico than you've had historically. So that's a big concentration area for us. We've continued to grow that business over the last 12 months by adding equipment down there, trailers, et cetera, so that we can move domestically as opposed to, to and from the border. So what we see, as Mexico continues to grow and capacity tightens, we're going to be doing more to and from the border, as well as what we're doing internally. So we believe that's a huge opportunity for us over the next several quarters from that standpoint.

Nicholas J. Bender - Wunderlich Securities Inc., Research Division

That's great.

Operator

Our next question comes from Jeff Kauffman with Buckingham Research.

Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated

A lot of my questions have been answered. A couple of detailed ones. Paul, did I hear you right saying that CapEx was looking to be somewhere in the mid to upper $30 million range in 2015?

Paul A. Will

Yes, call it $37 million, $36.5 million, $37 million.

Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated

Okay. That's a net number, so the gross is going to be much higher?

Paul A. Will

Correct.

Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated

Okay. And what was that number for the full year fiscal '14?

Paul A. Will

For CapEx?

Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated

Yes.

Paul A. Will

Yes, say, probably like $40 million, $50 million. I don't have that right in front of me.

Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated

Net?

Paul A. Will

Gross.

Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated

Gross, okay, very good. Okay. Just kind of looking at the cash flow statement, despite the higher CapEx in theory, you should be throwing off a fair amount of cash flow. I know Yanke is taking a little longer to integrate, but do you think we get a little more strategic in terms of using that cash flow in 2015? Or is the focus more on reducing debt at this point?

Paul A. Will

Our current focus, obviously, is always to continue to reduce debt, bring the debt level down, obviously put ourselves in a position that if opportunistic acquisitions present themselves, then we'll go ahead and report those. We're, right now, forecasting. Even though we're going to do a significant, obviously, replacement, we're looking out over the next 3 quarters, and we still should have about the same debt position we have today, even though we'll refresh over 600 tractors. So I think from a cash flow standpoint, about $25 million in a quarter should put us in pretty good position just to refreshably not increase our debt load and then also, obviously, continue to have ample drive power to be able to position ourselves for acquisitions if they present themselves, which we're sure they will.

Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated

Okay. Paul, can you help me understand the way to think about the tax rate? We might not have backed out the tax from some of these unusual items right this quarter, but it looked like the tax rate was a lot higher than normal.

Paul A. Will

Yes. I mean, this quarter is a little unique, especially with the TruckersB2B transaction. There was some permanent tax difference, as well as the ordinary taxes. So it's probably not a good quarter to look at the net tax because it's not broken out between those components. But I think from a budgeting standpoint or a modeling standpoint, 38%, 39% is the right number on a go-forward basis.

Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated

All right. And what was -- rough idea, what the effective tax rate probably was this past quarter?

Paul A. Will

From normal operations, probably around the 38%, 39% level.

Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated

Okay. So the difference, that would be attributable to the differences on the sale of TruckersB2B?

Paul A. Will

Correct.

Operator

Our next question comes from Jason Seidl with Cowen and Company.

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

Two quick questions. One, just thinking a little bit about sequentially in the next quarter and the puts and takes, it sounds like, obviously, we shouldn't have any more severance costs in the quarter, and I think you said, Paul, that you're expecting sort of similar levels of gains on sale for the current quarter end. So with taking on these trucks sort of in the back half of the previous quarter, should we see sort of an improvement in OR, all things being equal? Because, normally, your OR ticks up in this quarter a little bit sequentially.

Paul A. Will

Yes. Our expectation would be that it should be at the same level or improve a little bit from the June quarter. So...

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

Excluding the onetime items on payment, correct?

Paul A. Will

Yes, correct. That's correct.

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

Okay. That's my one question. My other question is, you mentioned trying to sort of get your sort of spot market exposure up a little bit from the current 3% to 5%, I was wondering if you can give us some numbers around your goal and how quickly could you get there. I mean, is it looking to try to get it to like 10% or above 10%?

Paul A. Will

Yes. I mean, obviously, we spend a lot of time strategically trying to map that out, and it's probably 10% to 15%. It's really just -- I think we have a lot more confidence in what we're doing, one, and, two, where the market is and where the market is heading over the next several years from a supply-demand standpoint, ELDs eventually coming down the pipe. But it's going to be through the bid process, the fall bid process that's going to put us in a position to start to move towards that in the first -- one, you'll get used to rate increases coming through at a -- we believe at a higher level than what you've seen in the last couple of years in the first, second quarter of calendar '15, as well as that's when you're going to start to see, going through that bid process, us moving onto the spot market more 10% to 15% level. So it's not going to be in the September, December quarters, but that's what -- we're just trying to give guidance on what we're thinking internally and how we're strategizing to move the business on a go-forward basis.

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

All right. That's good color. Also, speaking of the bid process, you said that there's a lot of your business comes up for bid in the back half of this calendar year here. Can you remind us how much?

Paul A. Will

Probably about 70%.

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

About 70% between the next 2 quarters?

Paul A. Will

Yes. So what we've talked about in the past has been the first quarter is when -- that's when it really comes into play, although with the bid process is the back half of calendar year, typically.

Operator

Our next question comes from Todd Fowler with KeyBanc Capital Markets, a follow-up question.

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

I just had a quick follow-up. On the comment about the $16 million of equipment costs, is that depreciation only or is that depreciation and the equipment rentals line? I think in the past, you talked about those as being combined. I just want to make sure that we've got that right from a modeling purpose.

Paul A. Will

Yes. So we look at -- obviously, our equipment cost is 2 buckets, I think, you're referring to. So if you take the 2 buckets gross, it's about $18.5 million. Netting the $2.5 million projected gains would be $16 million. So it's the gross -- it's the total of the 2 lines, not just the 1.

Operator

And another follow-up question with Tom Albrecht with BB&T.

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

Paul, I think you said this, I just want to make sure I heard it correctly, that -- is the current run rate from the driver school about 250 or it's going to soon be 250? Or did I just hear something altogether different?

Paul A. Will

Yes, there's -- it's -- 260 is in the process. There's about 150 with trainers basically, and then there's about another 100 that are currently in the school. 260 -- I'm sorry, 260 in school, 150 with trainers, 400 in total in the process.

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

All right. And from start to finish, it's, what, 4 weeks or what?

Paul A. Will

No, it's going to end up being around 12 weeks in total. It's 8 to 12 weeks, depending on how many miles a day they run. So if they're doing more local-, dedicated-type stuff, they're not going to get as many, but we try to put them mostly in the line haul or long haul division. So I would say that they trend to the 10 to 12 weeks, typically.

Operator

[Operator Instructions] Showing no further questions, this concludes our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

Stephen Russell

Thank you very much for everybody. To the interesting industry these days, frankly, what's going on with the ELD requirements, electronic logging devices, it's just changing the life of the small guys, and many of them are failing, they're losing drivers, et cetera. So government-mandated regulations are frankly helping the bigger guys. So basically, any questions on anything, feel free to call any of us. Thank you very much. Bye-bye.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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