Covenant Transportation's (CVTI) CEO David Parker on Q4 2015 Results - Earnings Call Transcript

| About: Covenant Transportation (CVTI)

Covenant Transportation Group, Inc. (NASDAQ:CVTI)

Q4 2015 Results Earnings Conference Call

January 26, 2016, 11:00 AM ET

Executives

Richard Cribbs - SVP and CFO

David Parker - President, Chairman and CEO

Joey Hogan - President and COO

Analysts

Jason Seidl - Cowen and Company

Scott Group - Wolfe Research

Nick Farwell - Arbor Group

Operator

Excuse me, everyone, and thank you for holding. Please be aware that each of your lines is in a listen-only mode. At the conclusion of today's presentation, we will open the floor for questions. At that time, instructions will be given as to procedure to follow if you would like to ask a question.

I’d now like to turn the call over to Richard Cribbs. Sir, you may begin.

Richard Cribbs

Good morning. Welcome to our fourth quarter conference call. Joining me on the call this morning are David Parker and Joey Hogan, along with various members of our management team.

This conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. Please review our disclosures in filings with the SEC, including, without limitation, the Risk factors section in our most recent Form 10-K and Form 10-Q. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances.

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

In summary, the key highlights of the quarter were: Our asset-based divisions' revenue, excluding fuel, increased 5.3% to $159.3 million due to a 1.7% increase in average tractors, a 2.9% increase in average freight revenue per truck and an increase in our refrigerated intermodal freight revenues.

Versus the year ago period, average freight revenue per loaded mile was up $0.224 per mile or 11.5% and our miles per truck were down 6.4%.

Freight revenue per tractor at our Covenant Transport subsidiary experienced an increase of 7.5% versus the prior year quarter, while our refrigerated subsidiary, SRT, experienced a decrease of 2.2%, and our Star Transportation subsidiary experienced a decrease of 2.1%.

Compared to the year ago period, the asset-based division’s operating costs per mile, net of surcharge revenue, were up approximately $0.20 per mile mainly due to higher employee wages, net fuel cost, and depreciation expense. These increases were partially offset by lower revenue equipment rentals and building rent.

Gain on disposal of equipment was only $300,000 in the fourth quarter of 2015 versus $700,000 in the fourth quarter of 2014

The asset-based operating ratio was 87.2% in the fourth quarter of 2015, compared with 85.2% in the fourth quarter of 2014. The 2015 period included a $1.6 million increase in fuel hedging losses compared with the 2014 quarter. Adjusting for that item, our operating margin contraction was approximately 100 basis points.

Our Solutions logistics subsidiary increased revenue by 49.9% versus the year ago quarter. Combined purchased transportation and other operating expenses decreased as a percentage of revenue resulting in operating ratio expansion of 140 basis points to 87.7% from 89.1% in the year ago quarter, the result being an increase of operating income contribution from $2.3 million in the prior year quarter to $3.9 million in the current year quarter.

Our minority investment in Transport Enterprise Leasing contributed $0.9 million to pre-tax earnings or $.03 per share.

The average age of our tractor fleet continues to be very young at 1.7 years as of the end of the quarter, basically flat to a year ago.

Since December 31, 2014, total indebtedness, net of cash and including the present value of off-balance sheet lease obligations has increased by approximately $39 million to $266 million. During the first quarter of 2016, we expect collection of the excess peak-season accounts receivable and payments for tractors under sale contracts to generate a range of approximately $35 million to $45 million in net cash, outside of cash from operating activities and normal net capital expenditures.

With available borrowing capacity of $60.6 million under our revolving credit facility, we do not expect to be required to test our fixed charge covenant in the foreseeable future. The main positives in the fourth quarter were, one, a 2.9% improvement in average freight revenue per tractor in a materially weaker industry-wide freight market.

Two, strong customer service that is leading to potential new opportunities entering 2016, and three, improved operating profitability from our Covenant Transport and Solutions subsidiaries.

The main negatives in the quarter were one, increased operating costs on a per mile basis, including the impact of the unfavorable fuel hedging position, two, the deterioration of operating profitability from our SRT and Star subsidiaries, and three, an increase in our balance sheet indebtedness.

Our fleet experienced a decrease to 2,656 trucks by the end of December, a 65 truck decrease from our reported fleet size of 2,721 trucks at the end of September. Our fleet of team-driven trucks averaged 966 teams in the fourth quarter of 2015, which was equal to our number of teams in the third quarter of 2015.

Similar to what we experienced just before peak shipping season began, utilization for the first three weeks of January 2016 has underperformed the prior year. We are continuing to experience year-over-year rate per mile increases, though they have decelerated from what we have experienced over the last few years. We now expect year-over-year rate per mile increases of between 2.0% and 3.5% for the first half of 2016.

As compared to the first half of 2015, we expect our average fleet size will be 1% to 2% lower for the first half of 2016. Absent an unexpected improvement in overall U.S. freight market conditions, earnings per share may decrease compared to the first quarter of 2015.

Thank you for your time and we will now open up the call for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jason Seidl with Cowen and Company.

Jason Seidl

Couple quick questions here, you talked at the earnings could be lower in the first part of 2016, based on what you're saying, could you put some parameters on the magnitude, maybe give us a range because the market seems to have slid a little bit on the truckload side, at least from the fourth quarter with some of the data points that have been coming in. So I just, see if you can put some context around on those comments?

Richard Cribbs

I don’t think we’re ready to give an estimate on that but the first quarter what we’re seeing is lower, like we said the lower rate increases of 2% to 3%, expected maybe a little better in the second quarter with some contractual rate increases. And yet we still have the overhanging of the fourth quarter effect of any driver pay increases that we had last year that were ended up being for the year showing about 10% really the pay increases were probably around 6 or 7 taking out the effect of the committed freight volumes in the fourth quarter.

So it’s kind of even-ish there and then there are going to be some additional depreciation related to the used chart market decreases, value decreases that we saw in the August, September, there is going to be additional capital cost related to that, as well some additional interest cost on the higher overall debt.

Those are the kind of pieces that I see bigger movement in first quarter this year versus first quarter last year.

Jason Seidl

Okay. And just to clarify when you say 2% to 3% rate increases, are you talking all in combined or are you talking just new contractual business that you’re signing right now?

Richard Cribbs

Yes, all in combined.

Jason Seidl

On Swiss call just before your, they were mentioning that January has been weaker in terms of what they’ve been giving in terms of the rate, they were saying some were flat but none were down and some were normal. But they thought that that was going to improve as the year went on and they were talking about I think about half there, their rate increases were already locked in for the year.

Could you give us a sense in terms of your overall book of business what's already locked-in for 2016 end and about what rate? And talk about what you’ve seen early on in this bid season?

David Parker

Jason this is David. We’ve got a couple large accounts that you know that are over VF, so keep in mind the vast majority of CTG's increases are in that May, June timeframe, a couple of days was in April, so we’re kind of that March, April into May before we really get a idea of the power of the rate increase even though we have gotten a couple of rate increases so far this year and during that range that Richard was talking about they’re more in the 3% kind of number.

So I do think that the rates will be in that 2.5% to 3%, 3.5% kind of number for the first six months even though I personally am in the count that the first six months of this year will be similar to what the industry felt from August through December, as we saw it continuing to go down in August and September to October and inventories rise and those kinds of things and it’s sluggishness that was there.

I think that maintains for the first six months and I think it’s going to be just the opposite of last year and I think the last six months of the year that we’re going to see it strengthen and I think that we’re going to see capacity start to tighten up once again for the latter part of the end of the year.

So I think that the first six months that you’re going to be in that 2, 3, 3.5% kind of number and I do think in the last six months of the year that you‘re going to have more of opportunity.

Jason Seidl

That’s great color. I’ve one more question and I want to hung up all the time here, you sort of mentioned about capacity tightening that that was your expectations, on Swiss call they said their fleet’s going to be flat, you just said at least for the beginning of the year expect about 1% to 2%, do you think overall at least in the first half of the year that the trucking industry in general be at best flat from the prior year in capacity?

David Parker

Yes I do.

Jason Seidl

Okay, perfect, I’ll turn it over to somebody else. Gentlemen, I really appreciate the time as always.

Operator

Our next question comes from [Ann Reese] [ph] with BB&T Capital Markets.

Unidentified Analyst

First just on SRT, I know we had hopes about a year ago of driving margins from like the high 90s and 92 and 93, just wondering how many we finished in 2015 and how we should be thinking about margins in refrigerated you know given the supplying demand is a little bit better than driving?

Joey Hogan

The first part of that, the improvement year-over-year from 14 to 15 was about 400 basis points of operating ratio improvements. So we did see a lot of improvements not to the levels that we had hoped for and that we hope for next year, but we did see quite a bit of margin improvement.

David Parker

And we continue to make headway and that's our themes, and if I look at stats just in the last couple of days I’ve been looking at stats, on that sort of we, something that we’ve of course been looking at the 2-3 years but I was just refreshing myself as the year came to an end updating the numbers. And you know it’s just interesting on SRT that their model, and there is lot of companies (a) that had to go through it and (b) they are getting ready to go through it.

But since 2013 when the new hours of service regulation and then ELB went into effect, SRT forever was a operations driven company. And they ran high utilization with rates being moderate and they produced an annual arc and that was their model.

And to give you an idea since the onboard computers and the new regulation of hours, their utilization had been hit over the last couple of years since July 2013 to the tune of 30% to 40% on utilization and so you had a cliff hanger that happened there and at the time that miles were moving down rates were stagnant even though we started increasing them immediately because the rates of increase sits that number, I just gave you a number of say 30% decrease in utilization where the rates have gone up about 10%, 20% and since July of '13 itself.

So the model and it’s produced about 400 basis point improvement in LR, we just got to continue. I was telling one of the SRT guys last night that let me take the vast majority of solo operations today would take 2,000 miles a week of utilization and be extremely happy with that and we made again a increase of about 20% increase in rates but there will be another 10% or 15% increase and that’s the model that we’re operating at and we expect SRT to continue to make progress.

We cut about 400 basis points last year, we will continue to make progress in 2016 and that’s the path of getting SRT back into the low 90s that we believe that that will get to.

Unidentified Analyst

All right, thanks David that was helpful. I also wanted to ask about Star, just wondering what percentage of that dedicated business is up for renewal in 2016 and I was also curious about you know what your annual rate increases or adjustments there are tied to, is it the CPI or something else?

David Parker

Yes, you talking about on the rate increases on Star?

Unidentified Analyst

Yes, kind of dedicated.

David Parker

Yes, the dedicated continues to grow, we’re very, very pleased, very happy with what is going on there. The vast majority of their business is another year away from any renewals coming up. Actually we've been winning some extra business with all our existing accounts, over a lot of our top existing accounts. We just actually won a 50 truck operations in the last three or four weeks ago that I’m very, very excited about.

And so there is a lot of great things there. There is no - I see no negative standpoint on the contracts that’s going to drive rates downwards. I do think that we will continue to be able to get rate increases in 2016 on those. Most of them are under contractual agreement.

So we’ll be able to get whatever the contract is calling for them, but Star is doing a very good job and the rates are not tied to CPI or anything like negotiated. We do a two-year deal. The rates have been negotiated for those two years, after 12 months we get X amount for staying on rate increase. So they continue to grow, I’m very excited about what is happening in the Star side.

Joey Hogan

Yes. On Star they average about 340 trucks in the fourth quarter. That additional 50 truck expansion isn’t expected to go into place until – fully until around July. So that's not an immediate 50 truck increase to our dedicated fleet, it does start – it should be that big by July.

David Parker

And other thing that is indirect on the Star that you got to consider when you look at the pricing there it's like there are two large accounts; one being that he just talked about adding 50 trucks in the process of adding 50 trucks over the next few months. But both of our top largest accounts with Star, they're giving idea their fuel base is about 20 centimile increase in fuel versus the rate. So like these 50 trucks are at lower rates with about 20 centimile higher fuel charge that we have with them. So their rates can be a little misleading, flat to down, but the fuel side of it explore; the less where make up, the two together do extremely well.

Unidentified Analyst

Okay. That’s helpful. And then just one other question. It kind of goes back to your outlook for 2015, but with all of the operational improvements that you've done over the past couple of years and you sort of realigned your customer base, what's your comfort level that you can earn a profit in Q1 2016? I know in the past years sometimes you've had a loss in the first quarter, but what's your comfort level with integrating profit in Q1 of 2016?

David Parker

I feel extremely confident that we absolutely will do that. I think that we had talked about the first quarter and we were – we were saying the same thing, and I agree with all that. There is no doubt the last three or four, five months in my mind since the middle of August, whether the economy has been in a recession or not, trucking has been in the recession. It does, the production has been in a recession and so there has been a lot of inventories have risen that have caused trucking recession.

And so there is no doubt that I’m very proud of how we’ve been able to react and I think it shows some improvement in the last three or four months of how our model has changed dramatically over the last four or five years and that it is not the same company.

Yes. In our goal and folks within our company for three or four months has been is that the industry is going to go through storms, it’s going to rain on everybody. And the thing that I want to make sure is that when it does rain that we also go through the rain and we don’t get in a Hurricane. And as time pass, we will get in Hurricane and not when everybody is in rain storm. And I do think that we're there. I think that we are right there with the whole industry going through whatever we’re going through.

And I actually think that that we got some great opportunities out there to supersede even our expectation as it relates or think about some of the e-commerce that is exploding as we all know that the right in our belly with now these expedited team size will now think about the improvements that we will continue to make on the SRT side, because you’re right. Somebody, one of the analysts said little while ago that the refrigerated side is not getting beat up as bad as the dry side and that's true. And we will continue to benefit from that.

So dry has got more pressure on it than the refrigerated side and we will continue to make progress on the SRT side. So I will see that as some good opportunities that could compliance through the tunnel as we exit this tunnel.

Operator

Our next question comes from Scott Group with Wolfe Research.

Scott Group

So why don’t you just maybe start with little bit more color on the market? I know in the press release you talked about generally it starts off in January, but maybe can you help us think about geographically and end market rises. Is there anything that turns particularly good or bad within that?

Joey Hogan

Scott, its Joey. I think – I would say there is any particular geographic region right now or any other products so I would say a strong. Okay. Which I think kind of talked to what David was mentioning about the freight market right now. There is some that we have seen that I would say it's not unusual, but I would say is weaker than the others.

Probably the biggest one for us that we always watch is the West Coast and how its doing. And that's because it's kind of critical for not only our expedite side, but our refrigerated as well. And so it’s pretty rough there for several weeks. Eventually, better. I'd say better.

The East Coast has been okay. I would say okay. Marketwise Southeast has been pretty soft, which is unusual this time of the year. The Central South has been okay to fair. And then the Midwest is kind of unpredictable, I would call right now. So would be the term up for around it. As we get inside the model, so we look at the three pieces between expired, refrigerated and dedicated.

Dedicated has been – it's dedicated. And so once you get through holidays in the different times of the year, it bounce back to where it should be whether you had an okay holiday and you'll take a step back. So I would say dedicated is the most consistent, but it should be.

And then as David already mentioned the new piece of business that we got where we're building into that. So we’re not frankly surprised where we are based on what we saw the last four, five months of the year, but it is now as Richard already said a little bit versus a year ago.

Scott Group

Is there any way to breakout or isolate the impact of the e-commerce changes under utilization and pricing, meaning just start on a more of an apples-to-apples basis. What do you think utilization would have been down and pricing up outside of the impact that you guys talked about?

David Parker

Yes. As something we tried to look at in each of your, Scott. And we you get into various products and build to things naturally. We did try to watch our base business sequentially from third quarter, fourth quarter, and versus year ago it was pretty meaningful. I would say its 8% to 10% type of the utilization decline versus fourth quarter 2014. And so the impact of the e-commerce business – here is the way that we have been saying it.

Each year e-commerce - our peak, I'd say, each year peak had its own personality and if you look back to last four, five each of them had a different, as I use to call, personality about each one and it's been different each time, whether its service issues, whether its paying too much, next year respond to that. Whether it's to respond to the service issues, the continued growth through the e-commerce and Amazon’s impact not only there view in the marketplace, but how their providers look at it. And so providers as they begin to cap what they’re willing to do with Amazon. It throws different perspectives to other providers in the marketplace.

And so I would characterize this year as being inefficient as well as the underlying base freight market was just not good, not good. And so plus you had some provider issues between the various e-commerce providers and then the carriers, early in the quarter, late to third quarter that we're sorting out.

That did kind of cause the fourth quarter, beginning of fourth quarter be very clunky if you will with the few of the providers for that marketplace. And so it was – it had its challenges of inefficiencies.

But the facts of the matter is it continue to grow 12% to 15%, three to four times faster than retail as a whole is growing and its continuing to – I think what we’re going to continue is struggle with is the peak-to-peak is that velocity between Thanksgiving and Christmas, more volume has been shoved into that period of time and there is only so much capacity available to be able to haul it.

And so as that continues to grow, it's going to continue to put pressure on stand box capacity, dedicated capacity, ad-hoc capacity. There is only so much the overall freight network can manage. So it's going to be really interesting how that works.

But I do believe that each year if there is a tough year and everyone say's, let's say this year is inefficient, next year will be better as regards to that. What we're saying is whatever transpired, the next year gets better. The customers do things to make it better the next year. And so I do believe that it will get better, but the biggest customer in that space is growing 20% a year. And so that's going to continue to challenge the better as they provide for that.

So I don't know, it's an interesting one and I would characterize it overall as pretty inefficient. A lot of waiting, lot of hurry up late, hurry up get there, long haul, short hauls. Irrespective of that really proud of how our organization serviced all of our big customers this year, and we did all things considered extremely well.

Richard Cribbs

I'll tell you another thing that has happened there, Scott, is that aside from peak year around, as I think about the e-commerce side is that because of the hours of service rules, you can't stop the clock now for two years.

I'm going to tell you these teams are absolutely as we probably all known its call. They're the most absolutely demand called for our team drivers, because with the inability for solo now to stop the clock, the solos can only run lifts the hall about 350 miles to 425 miles a days of those solos running 500 miles and 600 miles are overweight. They just cannot do it if they have any, if they get any dead head, urgent or any wait time, they cannot run about 350 miles to 400 miles and the e-commerce expedited is a lot of 500, 560, 700.

The west coast in Texas, the long haul are still are number one lanes, but we're growing dramatically in that 600 miles and 700 miles length of haul and I don't see that changing. And that stuff is just as hot an expedited and it has won 2000 miles length of haul was for all my life.

Joey Hogan

I think we must add as discussed it, I failed to mention is one of the things for us that what we're really excited about is what our solutions team was able to do to service the incremental capacity in the marketplace. And I think that's one of things as we look at kind of future from a career standpoint, people know that we're going to have some freight at the peak time.

And how we treat for our carriers about a year, what type of freight we're allowing the haul, the margins we're able to make. And then knowing that we're going to have some freight and then how we treat them through that period of time. So we're able to add quite a bit of expedited, I mean expedited not solo business expedited capacity.

And during the peak year, which that frankly was kind of want to things if you go through Richard talked about, there was a lot of margin improvement in our solutions team because of that. And that contributed to CPGs overall success.

So that was a big change for us as we look back for the last couple of years that we're excited about. We've done a lot of post-peak reviews, a lot of our larger providers. All have done very well, very pleased. Our service was very strong and already excited about what we've may able to do for next year.

Richard Cribbs

Scott, we've answered very long to your question, but one thing to add there and try to wrap it up may be is that our customers were extremely satisfied with the committed capacity they were provided and they needed each of those trucks, each of those days, whether or not they ran 600 miles that day as a team or ran a 1000 miles that day as a team. It was so important for them to get that freight fare on time that each of those trucks was important to the customers and so the service was excellent.

The excitement around what we were able to accomplish for them was very strong. And I think that we've seen that as a change in the way that five thing happens for peak freight is that you have committed capacity. You have a truck at a certain price for today and I would expect that to continue.

David Parker

Yes. That's a great – and again, we will wrap up your question here. But you are exactly right. There have just been a lot of changing that we are seeing in the last two to three years. And we all talk about Amazon, but it's not just Amazon, I mean it's every .com, e-commerce shippers its out there, Amazon may be the big gorilla, but there is a lot of small ones that are also doing the same thing.

And that is I think as long as some of that is absolutely dependent upon, meaning you get on a computer on whatever day, we decide to get on the computer and press the order button, that thing flows through to the carrier of us them not knowing, us not knowing, cancellations there in peak season being high because they don't know that Tennessee or New York City is the one that's ordering the commodity or the product until we press the button.

And the model is, I need trucks. I don't know where they are going. I don't know when the load is going to be ready, I need trucks and they're buying the truck and then we have to react to that purchase of that truck 24x7, all day long, when it's ready then it's hot. And it won't be hot until the load is ready. So again, that three guys answering one question. You've got another quick question, Scott?

Scott Group

I won't ask you guys to repeat the answer there. One last one hopefully quicker. So we're now been in this lower oil price environment for longer now. Is it starting to have an impact on intermodal conversions? And are you seeing business come back to your kind of longer haul over the road business from the rails?

David Parker

Yes. I mean there is no doubt that we are seeing that. We are seeing some of these in the last few months and may be at the - good paint a picture the freight could be worse than what it was, but we have seen some of the NPL business that we do a lot of that was intermodal that it's going OTR. So that has been helpful from our standpoint, but there is a lot of freight or percentage of freight in a low environment that's been converted to OTR.

Operator

Our next question comes from Nick Farwell with Arbor Group.

Nick Farwell

You delineated the impact for the fuel hedges in the fourth quarter. Could you remind me what the full year impact was? Using the current tax rate, I came up with $0.14 in the fourth quarter. That may not be accurate, but if you could give me some idea if it's either aggregate dollars or earnings per share.

Richard Cribbs

It was about $1.6 million I believe we had in our release for the year-over-year for the fourth quarter alone. It was larger than that each of the three previous quarter, I think north of $3 million. So I think overall for the year it was closer to around $0.30 to $0.33 a share of impact to us.

Nick Farwell

And looking out, could you talk a little bit about your exposure looking out into '16 and beyond. And tactically how you are -- if you are changing your fuel hedging program?

Richard Cribbs

Well, it's basically a similar strategy where we lock those in about two years in advance of purchase. And so in '15 we had approximately 12.5 million gallons hedged in an average price of $3.48 a share - $3.44 a gallon, sorry. And '16 we have a few – a little bit fewer gallons that close to – its 12.1 million gallons hedged and the price goes down from $3.48 to $3.27 a gallon. That's approximately $3 million less operating expense that is worth about $0.09 or $0.10 a share.

But then in '17, we have 12.1 million gallons hedged and the price drops from that $3.27 number in '16 all the way down to $2.55. And so that's about $8 improvement, operating expense improvement, which is closer to $0.27 a share.

So that's the big number that really comes on '17. And so far in '18 we have approximately 7.6 million gallons hedged at about 241 a gallon so about $0.13 gallon less somewhat we have in '17. And some opportunities maybe to lock in some more at lower prices than that.

Nick Farwell

To what degree have you considered either recognizing those losses and going neutral or changing the commitment looking out over time?

Richard Cribbs

Well, not a whole lot of thought around locking in those and taking the losses and going neutral. Because we believe that we're still making nice profit and we still have other things improving, fuel economy and things like that that make up for some of that yet.

But we have looked at possibly reducing the percentage that we hedge. We have been hedging around 25% to 26% of our fuel purchases each year since around 2006. That one is relative to the fuel surcharge recovery percentage we get is around 72% to 78% or has been over those years.

And so we're basically seeing any naked fuel purchases we wanted to do put in a fixed cost on, so that we work at the lam of the market related to fuel and we could price our services accordingly and feel comfortable that we can make a profit on the fuel profit that we had settled on for each of those years.

Looking forward – and those times are little tougher for us. So we lost the money during those years. We were closer to breakeven. Now that we feel more comfortable with our business model, we may be willing to take a little more risk on volatility from quarter-to-quarter.

So we may reduce the percentage of hedges that we put in place and have a little more naked percentage of our fuel that could be at the limited market, but not too much. We still feel comfortable having most of that fixed.

David Parker

And that is also, Nick, is that I got to believe that probably we're vulnerable in 2016 on the numbers that Richard just gave. But stuff that we've got hedged in '17 and '18 are almost current market conditions and I don't think there is a whole lot of downside $28 barrel oil. I think it is just opposite. I think there is more upside. It only takes one bomb going off somewhere in this world where we are not going to have $28 barrel.

Q – Nick Farwell

By no means, I'm not being critical.

David Parker

No, no. Believe me we've done exactly same thing you are doing. We think about it all the time all of that. And there is no doubt two years ago when we were doing hedging in '16 and '17, hey, are we making the right decisions for '15 and '16. I feel confident that even the market itself, because we went probably seven or eight years it was opposite to that, where it was performing at $0.15 to $0.20 positive EPS to it as it relates to the market.

No down the last year $0.30 or whatever Richard just said there that it took a hit, but I do think over the next short-term couple of years that the numbers look pretty good and give us the protection on the upside if something goes crazy.

Q – Nick Farwell

So one other quick question on that, David, and that is to what degree your customers look through your hedging program to look for committed capacity and stability or pricing? Is that part of the pricing decision we need to discuss with your key?

David Parker

No. Not at all. Not at all. Some of our customers that hedged their sale on their transportation cost, but none would say let's talk about you individually. Have we ever had those conversations over since 2006 two or three times, but nobody has ever really got serious with it.

Q – Nick Farwell

Joey, you made a comment that the early part of the fourth quarter, the e-commerce sort of customer base was clunky. What do you mean by clunky? What were you telling us?

Joey Hogan

Nick, between some of the providers there was a contract negotiation going between standard providers and particularly Amazon, and how that all sorted out. We saw some freight movement between providers. And so it did early in the fourth quarter and it's all public information, so you can go see it is that rate was moving between them and it started some network slow or too fast and couple may be could recover faster enough and it kind got slow.

And then there was a – tough recovery period through that. So that's what I was meaning. It's just that. That was an issue early on in the first quarter and seems difficult for one of the providers to kindly get back over the half for that as we sell it throughout the -

Q – Nick Farwell

So if I understand correctly, it might mean, I'm not saying this is the case by any means because I don't know, it might mean that the commitment from Amazon, the UPS increase and diminish that FedEx, you had a greater commitment to FedEx and you had to reposition that equipment to the utilizer in this case in my analogy UPS?

David Parker

And just the opposite, all that is true.

Joey Hogan

Yes. That's right.

Q – Nick Farwell

And then can you talk a little bit further about the impact of Amazon's decision to control more and more of its own delivery and their entire logistics and strategy? And do you see that impacting patterns looking out the next couple of years given how important it is to the fourth quarter?

David Parker

Nick, your question is our question. And again it's not just Amazon, but its all other that we're talking about Amazon, because they're again the big gorilla. We got a meeting up there. We got moving actually this Friday and we made all the time. So we got peak meeting this Friday and then we got another meeting in about three weeks up in Seattle to discuss peak. I guess the positive side as you think about the Amazon world is that they're growing so dramatically, so dramatically that it's hard for anybody to keep up with what they are doing in the marketplace and they need every truck so they can get their hand zone.

That said makes you wonder five, ten years down the road what is their model and what does they look like? I think at the end of the day, they cannot have those 3 million CDL drivers and I don't think they're going to have our level. Even they with their private planes, they'll give me 3 million trucks. They're not going to have all the trucks. So I think there is going to be a need big, a big, big need for their providers to give them the trucks.

And to me as long as we're the number one provider, we're the number one service provider and we're right at the top of it in terms of services as well as volume, I think that we will always have a chance to win big in that environment offer us against anybody to come to the watch, because they are not going to control everything they got.

Now what changes, I mean they got [store centers] [ph] now, they got this, they got to have, and we're servicing all that. Who knows where all that ends up and I read as much as you read and I don't have the ability to talk to Jeff Bezos direct, but all the people I'm talking about I feel confident in the trucks.

Q – Nick Farwell

And then looks like so far what they're looking at doing is supplementing the capacity that the LTL providers can provide them. It doesn't seem to be impacting the long haul carriers.

David Parker

And I have to give you that deal that thousand trailers or whatever, heard about that 2000, 1000. I mean we've all heard all those numbers. Let me tell you, there picks no one – they need 4000 of them, neither that as I need to go out and like I did and rent 5000 trailers, because we cannot supply the amount of equipment that is needed for 15%, 20% cancellation then people calling 3 o' clock in the morning, 6 AM in the morning, 10 AM in the morning needing 5 trucks, 10 trucks, 12 trucks. I mean it's a moving target.

The load is ready, your trailer and the inbound has not been delivered yet, I've got to start loading the outbound and so this we have deal is going out and buying the 1000 or 2000 trailers.

Nick Farwell

Yes.

A – Joey Hogan

Yes. I think, Nick, the other part to think about is for all of is the [indiscernible] carrier basis. Carriers run a business 52 weeks of the year and so we don't run a business for 6 to 8 weeks of the year. And so whatever you do in those 8 to have enough capacity to service that need, there is another – whatever that is 44 weeks of the year that you got to make sure you've got a business to keep your providers busy and happy and challenged.

And so that's some of the – that's a lot of a dilemma is that as we as consumers continue to get evolved to this and no ramifications at all for being able to order four days, three days before Christmas and expect to still get in Christmas and that volume continue to grow.

There is no cost to us to have that ability, it's only going to continue to compound the problem we're trying to shove an elephant through a water hose if you will. And so that's going to ultimately the challenge here. We can rally for that, but what you do, what the providers do for the other 44 weeks of the year.

Nick Farwell

So that clearly speaks the premium pricing and how that whether its Amazon, FedEx, UPS and FedEx and UPS and others clearly understand, because they're in the logistics business. Amazon is probably appreciating that to some extent. So when you look back at your experience in the last couple of years, are you getting the premium pricing for having that – setting aside that capacity and delivering?

David Parker

We're very happy with the profit.

Joey Hogan

We're just going to make sure our driver stay ahead.

David Parker

That's right. It's more of a driver. Make sure we're paying them correctly. That's becoming the issue, because there is network and efficient, drivers don't like to sit, drivers don't like to wait. They expect – they want to work, they want to run. And so that as time goes by is becoming more of the challenge tactically is how you keep your driving force motivated, challenged, compensated for the quote hurry up, late.

Joey Hogan

And we make sure we keep them compensated even when they're not running when we are getting paid for committed truck. But they still prefer to be running. They like to work. They're great workers and so they expect to be running and earn the money.

Nick Farwell

One other quick thought, and that is you being in the management team has done a magnificent job in the last three, four years and improving your operating ratio and rationalizing the business in many dimensions.

How would you describe how you can continue to improve the OR and to say the mid to lower 80s? Is that an objective you think is reasonable or I should ask you a different – what do you think is a reasonable OR on an annualized basis? Looking out overtime and how you get there, roughly speaking how do you get there from here?

Richard Cribbs

Our goal is to compete with the best in our industry. And we do see that as – we see that as a target. We see that that the target that we can achieve and not one that we're just hoping one day to achieve and over what we've done in the last four and five years have been – I think the best thing that we've ever did in our career is coming up with our strategic planning that we live by and that we operate our companies buying and making good and hard decisions when there got to be and when the number is dictated and look at every decision on the internal invested capital and not just making the decision based on what we think it is.

But then we're looking at on a monthly quarterly basis that holding outset by cannibal to whatever the numbers are showing and that's going to go in harder and faster and those kind of things with all those kind of decisions. Thus the strategic planning I'm trying to make sure that we are bringing value to our customer. How do we bring value?

That is what separates us with just being a ad-hoc carrier in the marketplace in one of the thousand is that, are we truly bringing value in and what is our differences to our customer? Because if we are bringing value then they will pay up for the value that we're bringing.

So that's the most important thing and we will continue doing that to make sure that we are customer operation-driven company and we do see our ability to be able to get down and compete from a low standpoint with the best providers in this industry. And it's going to be again from a topline standpoint, it's going to be focus, it's going to be return on invested capital, it's going to be looking at every cost out, we got to be as the lowest cost provider as we possibly can be.

And whatever that means, whatever decision that is from whatever - we look at – continuously look at those, so it's making sure even in the market that not be tough, we already talked about 2% and 3% rate increase, those kind of things. Okay. If the market is really a 3% then let's be 3%, I don't want to be at 1% in the market of 3%. And if we're proving excellent service then we should be able to get paid the best we possibly can. But we are holding ourselves accountable and the results accountable to that. So hopefully that will help -

Joey Hogan

Nick, one thing I'd like to say. I think that one of things that we're trying to change paradigms on, it's not as much focus on operating ratio, but focused on return on invested capital. So as our solution subsidiary grows in OR it's phenomenal this year,93, 94 OR for our brokerage business is really strong.

ORs return on invested capital is really good. Really, really, really good at that right. So is that grows just got to put pressure on the OR, but we're excited to grow our bottomline return on capital. And so that's one perspective we're spending a lot of time focusing and even within the assets, we’re still charged, grow this one, shrink that one if we have to or gradually improve that one.

But if you go back to OR for a second, there is a couple of things that I would point you to all that being said is: A, and we've already talked about refrigerated product is that it continues to improve from let's call it mid 90s down. There is going to be a lot of tailwind there that will move, because it's good size delusion of the group. And then, B, if as we've already talked about the hedging improvement is significant, especially once you get out into 2017.

So three things: a, we're going to be very focused on returns on invested capital. OR is important, but it's not the only thing. It's forever [indiscernible] biggest return. B, as a refrigerator growth or improves and we've been really good about our improvement plan there that will drive some of the margin improvement.

And then C, the hedging impact, is significant, which we've already talked about, but it's that quote cost leads it's way out. It got pretty big meaningful, but both OR and margin.

So that's kind of the path that we're pushing to the both improve the OR, but more importantly the retired margin.

Nick Farwell

But Joey, I'm sorry taking this time. Just to clarify that if you use night – and I’m just picking a name, if you use night in a low 80s OR to me that's a much different model. We all know that's a different model, because you're dominated to a greater extend by long haul.

So one of the topics we've discussed for years is that as the long haul capacity diminishes and you guys enhance the long haul side of your business since you could call yourself a leader in that space, you should get inordinate returns in long haul which would dramatically be reflected in improved investment capital, which is really a balance sheet metrics, not an income statement metrics, I realize that you are connected with – we connected but the point is the same and that is you may not see yourself, you may not see yourself in OR 82, but you can see the best improvement in invested capital as your long haul business captures the economic returns that you deserve.

Joey Hogan

And I think, Nick, it's there to your point and you've been following the company for almost 20 years and I think we are very – what that we've talked about for 20 years is now happening on that expedited team side. The returns are best I have ever seen and numbers we've never seen. And they're continuing to improve.

So we don't get in a disclose in all the various margins and all the various products, but just let me say the expedited return is finally getting and it's continuing to improve what it should deserve.

Operator

At this time, I'm showing there are no further questions.

Richard Cribbs

Thank you, Della. Thank you everyone for listening in our call today and we'll talk to you in next quarter. Bye.

David Parker

Thank you.

Operator

This concludes today's teleconference. You may now disconnect.

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