Celadon Group, Inc. F4Q08 (Qtr End 06/30/08) Earnings Call Transcript

Aug.11.08 | About: Celadon Group, (CGI)

Celadon Group, Inc. (CLDN) F4Q08 Earnings Call August 5, 2008 10:00 AM ET

Executive

Stephen Russell - Chairman of the Board, Chief Executive Officer

Paul Will - Vice Chairman of the Board, Chief Financial Officer, Executive Vice President

Chris Hines - President, Chief Operating Officer

Jon Russell - Executive Vice President, Logistics

Analyst

John Larkin - Stifel Nicolaus & Company, Inc

Chaz Jones - Morgan, Keegan & Company, Inc.

Todd Fowler - KeyBanc Capital Markets

Greg Olaf - BB&T Capital Markets

Edward Wolfe - Wolfe Research

Thomas Albrecht - Stephens Inc.

Operator

Welcome to the fourth quarter and year end 2008 Celadon Group earnings conference call. (Operator Instructions) I would now like to turn the call over to your host for today Steve Russell, Chairman and Chief Executive Officer.

Stephen Russell

I am joined in Indianapolis by Paul Will, Vice Chairman and CFO, Chris Hines, President and COO, and John Russell, Executive Vice President of our Logistics Operations. I would 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 contained additional information about factors that could cause actual results to differ from management expectations. Before talking about the quarter, I’d like to discuss our view or the shape of the truckload industry. Although demand has not shown any meaningful improvement, there has clearly been a significant reduction in supply of seated truck capacity, close to a 1000 fleets failed in the March 2008 quarter and we believe some similar number failed in the June quarter.

TruckerB2B our fleet buying groups with about 20,000 member fleets, so about 450 fleets close up sharp in the June quarter. The capacity reduction is also evident in new truck builds, leading up to January 1, ‘07 when the new EPA engine went into effect, there was significant pre-build. We estimate the required run rate for Class 8 tractor builds is about 250,000 tractors per year, as they’re sort of required to be study state. In 2005 approximately 300,000 were built, 2006 pop assembly 330,000 built.

Essentially an increase about 130,000 between those two years in total with a study state, assuming those numbers are accurate, the overbuild bump capacity meaningfully, in other words from what we estimated study state are about 1,250,000 trucks up to about a 1,380,000. Further in those years demand was strong and banks and lenders were willing to finance. In 2007 only 170,000 trucks with built and at this point it appears that a number of new Class 8 trucks for domestic consumption that will be built in 2008, it’s around a 140,000.

Weak fleets can get financing as banks and other lenders have become much more stringent on their requirements. Further it’s estimated that over the past two years close to 40,000 Class 8 trucks, under five years old have been exported to Russia, Brazil and elsewhere. Additionally many of our larger competitors have dramatically reduce there capacity as well. With the new EPA requirement going into effect January 1, 2010 and with week balance sheets of many truckload fleets, we believe it’s unlikely that under capacity trend can be reverse anytime soon.

Essentially in summary we are seeing that this change is now having an impact on the industry. Rates began to stabilize in the March 2008 timeframe, since then we’ve seen a slight tick-up in rates and a greater willingness of customers to pay deadhead to have loads covered.

Let me with briefly reduce the key operating metrics of Celadon for the June 2008 quarter. We have achieved meaningful improvements in our core performance, deadhead or empty miles of percent of total paid, total miles dropped from 10.5% in the June 2007 quarter and 10.6% in the March quarter to 9.7% for June 2008. This was the best level we’ve had since December of ’06. In 2005 we are at the 8% level so we have long way to go to get back to that, but each 100 basis points in deadhead reduction is worth about $0.10 of earnings per share on an annual basis.

Miles per week, per truck improved by 2% in the June 2007 quarter and is our best performance in September 2006, but still about 75 miles per week or 1000 miles per truck for quarter below the 2005 levels. Attaining those 2005 levels are worth about $0.20 per share in EPS on annual basis. Revenue per truck per week was the best since September ’06 as well. Rate per loaded mile is about $1.51 or $0.02 below June ‘07 levels for negative impact in the quarter of about $0.04 per share compared with prior year.

However, rate was up about 0.5% from March ’08 quarter, which in turn was flat with December ‘07. It’s the first time we’ve achieved an increase in almost two years. Rates have a very significant impact on earnings. For example, a 5% change in rates, which on the $1.50 base is worth about $7.50 per mile is roughly worth about $0.50 in earrings per share on an annual basis and very significant.

Certain costs were higher in the June 2008 quarter than typical levels. Insurance expense was up about a $1.7 million from $1.6 million from the June 2007 quarter and an increase in bad debt expense about $500,000 resulted in an adverse hit the earnings per share about $0.06 in total compared to the prior year’s quarter. Some of that bad debt expense was actually buildup in bad debt reserves in view of today’s economy.

Further, a higher income tax rate due to non-deductible per diems being a higher percent due to lower earnings cost us $0.02 to $0.03 per share versus last year’s June quarter. Some other items before I move on to questions. Over the past 12 months Chris Hines has dramatically strengthened, while concurrently streamlined our sales force, its having a very positive impact on the addition of new customers that’s contributing to better loaded miles and lower deadhead.

Additionally, as a consequence of technological enhancement in our systems, late in the June quarter we consolidated into Indianapolis various operating finance functions that have been decentralize at our terminals. The impact will be a reduction of about 5% in total non-driver employees. We’ve also initiated a consolidation or LTL business at one of our logistics centers in Franklin, Indiana, but 20 miles south of Indianapolis and are running team trucks between that facility and five Mexican border crossing points, that business is essentially focused on the trade between U.S. and Mexico and its been handled as part of our non-asset base businesses, which are led by Jon Russell. Those non-asset based businesses generated about $32 million in revenue in the 2008 fiscal year up about 30% in 2007, and generated about $4 million in pre-tax profits.

TruckersB2B was relatively flat with 2007, as gained and new offerings were offset by general weakness of the small fleet segment to the trucking business. From a balance sheet standpoint, total debt increased from $95 million in June of ’07 to $103 million June of ’08, an increase about $8 million. We had repurchased $2 million shares of our stock in November of ’07 for about $14 million.

In addition of course receivables are greater, there are up about $10 million as a consequence of fuel surcharges. Net debt excluding the stock purchase was down about $6 million despite the purchase of about 420 new tractors during the last six months. At this point our average tractor age is about 1.8 years old and we expect it to be at that level when the new EPA engine requirement takes place in 2010 and we don’t expect to buy any tractors in 2010.

I would like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of John Larkin with Stifel Nicolaus.

John Larkin - Stifel Nicolaus & Company, Inc.

Steve you had mentioned that the TruckersB2B have seen the failure of I think 450 fleets out of 20,000 fleets in the second quarter is that correct?

Stephen Russell

That’s correct.

John Larkin - Stifel Nicolaus & Company, Inc.

What was the average size of those fleets, just our curiosity?

Stephen Russell

John

Jon Russell

There were on the smaller side. They were about 14 trucks.

John Larkin - Stifel Nicolaus & Company, Inc.

Still a lot of the vehicles coming out of a system there, also with respect to Chris Hines excellent work in terms of the broadening out the customer base and bringing new customers in. Have you and your travels, if Chris is on the line seen any change in tone with respect to perhaps the expectations regarding a peak season this year, the last couple of years. We haven’t had much of the peak and is there any hope on the part of the customers that perhaps we are beginning to turn the quarter on the demand side. Chris

Chris Hines

Think it’s still bit too early to call even though we are sitting in August on the peak season, everybody still kind of hedging their bets there. Volumes certainly have not continued to pickup significantly in July and we have not being in demand, I’ve seen improvement and we have it. No, is it a rosy picture being painted by the shippers.

John Larkin - Stifel Nicolaus & Company, Inc.

I got it. Okay and then you had also mention Steve, I believe that there was a 5% reduction or there is about to be in non-driver employees due to the centralization of some functions formerly performed out at the terminals?

Stephen Russell

Yes that occurred basically in the last week of June.

John Larkin - Stifel Nicolaus & Company, Inc.

So that’s take in place already and any senses to how many total people are involved there, so we can maybe engaged the savings?

Stephen Russell

Between 25 and 30 people

John Larkin - Stifel Nicolaus & Company, Inc.

Okay and no change I presume on the driver side of the equations still that Celadon has viewed as an attractive place to work, and any change in the average age of your employees on the driver side?

Stephen Russell

No change in the average age it’s roughly 47, we actually just checked that the other day. The number of drivers joining us is significant to class. This week we have two classes, a Monday and Wednesday, a year-ago we had 25 or 30 in the Monday class, we’ve got 50 this week, basically we have toughened the admitting standards from a safety standpoint which I think already were very tough compared to the industry. We don’t hire trainees, we don’t hire felons etc.

We’ve also terminated over 50 drivers for excessive idling in the last several month short-term idling is a big cost to our company. I may have gone through this exercise once on a call before, but if a truck idles four hours a day when it doesn’t have to you know lunch, dinner, breakfast whatever the truck burns 1.1 gallons per hours, that’s 4.5 gallons DOE today, it was 460, it was down about $0.10, $4.60 per gallon down about $0.10 from last week, but that’s $20 or $21.

We run basically about 2500 company trucks, $52,000 a day. So, every driver, manager has on their computer screen something when he’s talking to a driver, which shows how much short-term idling they are doing. They get a talk with first just to stop short-term idling, they then get basically a warning and they then get terminated.

John Larkin - Stifel Nicolaus & Company, Inc.

As your turnover rate declined exclusive of the folks you have terminated for excessive idling or rather undesired behaviors?

Stephen Russell

Not in any meaningful, our turnover rate is much below industry average, it’s an 85% range and I think we are terminating about 25% of that 85% that’s continued. Canadian owner, operator we did change the pay program up there because of the Canadian dollar, so we did see a reduction in the number of Canadian owner, operator.

Operator

And our next question comes form the line of Chaz Jones with Morgan Keegan. Please proceed.

Chaz Jones - Morgan, Keegan & Company, Inc.

Maybe a couple of housekeeping questions here quickly. I guess follow-up there on Canada, was there any currency translation impact on the quarter?

Stephen Russell

There was because if you compare where I did average, I think $0.99 in the June quarter that was compared with a $0.93 or $0.94 a year-ago. So, that’s probably a couple of cent hit, but we are now beginning to lap that, so actually Canadian dollar traded as lowest $0.96 this morning, which is I think marginally above where was a year-ago, but certainly that seems to be less of an issue.

Chaz Jones - Morgan, Keegan & Company, Inc.

So, there is comp store to get easier assuming things stay where they are at moving forward?

Paul Will

Yes the $0.99 that Steve was referring to, that what we looked at the other day and that’s base what we averaged throughout all last year, so if you look at it like that then anytime it’s obviously below 99 then we are lapping over the last year, so we should see it be the same, we are improving if its under 99.

So anything under parities is probably a good number on a relative basis. If it goes down below, its pick up, if it goes to above its impactful and I think Steve’s talked on previous calls on what we’ve done with the pay structure, etc. With the owner operators up in Canada to more reflect of what we are doing to the U.S. guys to get rid of the impact from the Canadian dollar change.

Chaz Jones - Morgan, Keegan & Company

And looking at fiscal ’09 and given the environment, could you help us at all in terms of what we should be thinking of when we look at CapEx and fleet growth expectations as we move into the next year?

Paul Will

I think that we don’t intent to expand the fleet, we’ve been at same level now for nine months or so and we intent to retain that level. Of course this assumes no acquisition there, just found a steady state basis and we will continue to take new tractors essentially through the end of the next year.

Chaz Jones - Morgan, Keegan & Company

Okay, and from the maintenance CapEx standpoint then. I mean assuming it’s all on balance sheet probably?

Paul Will

Yes, I think probably talk to …

Stephen Russell

Yes, we can king of go though that question off-line questions if you want.

Chaz Jones - Morgan, Keegan & Company

And then I guess talking about acquisitions, can you comment on the environment out there, I know in the past you guys have tracked not to pay goodwill, equipment values coming down over the last six months to nine months. How has that impacted your decision on the acquisition front given that it seems the last several acquisitions you’ve just essentially bought the equipment?

Paul Will

We’ve looked at lot of deals we’ve been compacted by many fleets. The trailer used trailer market is down dramatically, so many of these fleets that have debt on trailers are way underwater on them. Tractor market not down as much, but down somewhat, so we’ve continued to use that philosophy and we haven’t seen any acquisitions that would make sense to us.

The other point is, if you go back over the past five years many of those acquisitions were to bring new customers in, we are now being much more effective than bringing in new customers than we had been for the last five years frankly. So, we are not ruling out acquisitions, we are looking but at this point we haven’t found anything that would be immediately accretive and at my age we are only looking for immediately accretive ones.

Chaz Jones - Morgan, Keegan & Company

Last one here and I will turn it over. The comment on the press release that you said you expect to give rate increase opportunities moving forward if rate doesn’t head south, do you care to quantify that at all?

Paul Will

I think that most contracts in this are in the March quarter, some in the June quarter, very few in the December quarter, very few in the September quarter mostly the first quarter of the year. As a consequence I think that between now and then there will be some rate opportunities, but nothing really meaningful. I believe that if what the state of the industry continues the way it is now. We’ve got fleets failing and the inability to folks to buy new trucks. I think that the opportunities, the January through June timeframe will be very significant in other words, it could a 5% or 7% I believe that’s certainly possible.

Operator

And our next question comes from the line of Todd Fowler with KeyBanc Capital Markets. Please proceed.

Todd Fowler - KeyBanc Capital Markets

Steve can you talk a little about the capacity environment and really the benefits that you are seeing from tighter capacity in the marketplace, is it really just the function of you are seeing effective quality where more people are turning to Celadon, because they know you can be in business tomorrow and you’re actually getting new business or is it the fact that there is more freight that’s out there and you’re able to reduce your debt head miles; just a little bit of color around the benefits from tight capacity would be helpful.

Stephen Russell

Okay and maybe let me do it in almost an arithmetic way. A $1.25 is steady state and that’s continuing, it doesn’t seem to be any massive shift to rail or any other kind of transportation. Between ’05 and ’06, there was a build up of 130,000; 330,000 in ’06 versus 250,000, so that ay brought capacity to $1.38 roughly 10% above where it should have been.

In ’07, 170,000 were built, which brought that back down by 80,000. In ’08 a 140,000 that brought it down by another 110,000 and then if 40,000 trucks were exported, that’s another 40,000. So you probably have something like $1.15 now which is 8% or so below its sort of typical capacity requirements and frankly Adam Smith was right. I mean we saw about a horrendous rate environment backend in ’07 and latter part of ’06 because of the excess capacity and basically I think if you look at it on a macro basis and I made a presentation at AECT, which is a consulting firm to the industry to really suppliers and vendors in the industry and quoted those numbers and they thought those were reasonable number.

So, I think that therefore the under capacity now -- what's going to happen to demand, the stimulus package Bernake and a whole bunch of other things and we’re not qualifying to comment about that.

Todd Fowler - Keybanc Capital Markets

But, I mean I guess specifically what you’re seeing, I’m is it that you got more accounts for new business turning to you; is it that you guys are relying less on broker freight because capacity is tighter. Specifically, what's going on and what are you seeing within your business because of the tighter capacity environment.

Stephen Russell

We’ve listened to the C.H. Robinson conference call. They are the largest trucking company in America. If you look at the truckload business they do, it’s just probably an equivalent of 50,000 trucks without one truck and they’ve indicated they’re seeing capacity tightening up.

We basically broker freight a year ago was about 6% of our business, today it’s 3% of our business. Even in ’05 it was 2% of our business, because we don’t have salespeople in Montana and we end up sometimes taking loads to Montana. So, essentially I think if you sort of look at it overall, capacity is tightening up and there’s always seasonality, in John Larkin’s earlier question about whether there will be a peak or not, but the reality is that, we haven’t seen customers pay for deadhead in two years and I’m not saying it’s happening everyday, but it’s certainly beginning to happen.

Todd Fowler - Keybanc Capital Markets

And what about trends throughout the quarter, what did you see? I mean, it seems like that April and May were relatively soft and then June was pretty strong; did you guys see other similar trend and then if you have any comments on what's going on in July, that would be helpful?

Stephen Russell

The trend really didn’t change much April to June, I think June, it’s always better than April and May, because it’s end of quarter and stuff like that. So June was a better month than April and May, but not dramatically of that degree of increase. July is always yucky, it is yucky and I’m not sure that word was right. I didn’t learn that at undergraduate school, but basically July is typical July and normally you see that improvement as you move forward even with or without a spike due to peaking demand, but basically that’s where it is.

Todd Fowler - Keybanc Capital Markets

Okay and thinking about 2009 and looking at the environment, where can the operating ratio go near-term based on kind of a steady state with demand; you’ve not had significant improvement and obviously your fuels going to be a variable, but what's your sense for what you can see with the operating ratio kind of moving off of where we ended the second quarter and as you look at kind of the next 12 months, what's kind of a baseline where you’d like to see the operating ratio end up at the end of the year?

Stephen Russell

I think, if you look at earlier ‘06 I recall. We were at roughly an 89 operating ratio that adjusts to exclude the fuel surcharge, compared with 95 or something like that today. I think that the key to that will be what is the rate environment in the January to June timeframe because as I said before a 5% rate increase to $7.05 a mile to us is worth $0.50 in EPS, significant impact on operating ratio, but we won’t know it until we’re there and see what’s going on.

Paul Will

Hey Todd this Paul. I think when you see it, we’ve got 95, we should trend down somewhat with what we’re doing from a utilization standpoint, reduction deadhead, our fuel programs idling, get rid of excess idling, all those types of things we’ve locked in our insurance and so from a cost standpoint I think everybody is seeing cost go up with fuel and all the byproducts of fuel, tires etc, so it can trend down somewhat based on improvements what we’re doing internally, but the rate environments going to be the real driver that’s going to push it to the next step now.

Todd Fowler - Keybanc Capital Markets

Okay that’s helpful and the just real quickly I guess on fuel costs; I think the last time we spoke you were looking at auxiliary power units. Did you install any auxiliary power units on the fleet during the quarter and are there plans to do that going forward as well?

Paul Will

We are doing the heater only because that’s going to get us through three out of the four season and in the environment we’re in, it’s like in Texas etc, we believe that APU is not the best economic choice. So, but we believe that we’ll see fuel savings especially going into this winter on all the unit that we put. We put the in cab heaters on about 400 units so far and we’re continuing to put them in all new units as we replay them out and the AUPs in 110 degrees if the rate or our El Paso doesn’t work.

Operator

And our next question comes from the line Tom Albrecht with Stephens Incorporated; please proceed.

Thomas Albrecht - Stephens Inc.

Paul, it looks like your average interest rate has been a little bit lower. It’s been kind of closer to 7%, but when I short of averaged the debt you may have had through the quarter and what your interest expense was, it looks like its quite a bit lower, has something changed there for the better?

Paul Will

Well, we change our bank line and added the $20 million; we did that about six months ago or so. So, the goal there was to put equipment using the bank line, the bank line obviously based off LIBOR when LIBOR came down, that is a lower average than what we had on capital leases and so forth. So, that’s where you see the down tick on a average rate basis.

Thomas Albrecht - Stephens Inc.

So, what is your latest LIBOR plus?

Paul Will

We’re basic LIBOR plus one right now. So, when you blend it all together you see a higher percentage of bank debt outstanding throughout the quarter relative to what it had been in the past.

Thomas Albrecht - Stephens Inc.

Okay and then was there any gain or loss in the sale of equipment in the quarter?

Paul Will

Say a couple of hundred thousands, it’s pretty neutral.

Thomas Albrecht - Stephens Inc.

A gain or a loss?

Paul Will

A loss of about 240, something like that.

Thomas Albrecht - Stephens Inc.

Okay and then we’re kind of late in getting the operating stats, so I haven't had a chance to look at all of them, but what was roughly the B2B revenue in operating income?

Paul Will

Revenue was $2.2 million in the quarter. Operating income was just over 300,000 about 320,000; it was a difficult quarter.

Stephen Russell

It was down about 80,000 from prior year?

Paul Will

Yes, a little bit less, because operating income was down about 40,000 from prior year and revenue was down about 90,000. It was just a cross going on. Less purchasing and across every single product we have, except for factory.

Stephen Russell

And the trade off is obviously difficult for Jon; hope that will better for sale on the future.

Thomas Albrecht - Stephens Inc.

Yes absolutely, contra indicator. Steve, you mentioned you weren’t going to buy trucks in 2010 and I was sort of distracted for a moment. What’s your game plan for the rest of calendar year ’08; I think its all replacement, but what’s the approximate number we’re looking at?

Stephen Russell

It is all replacement right now. For fiscal if you look at the rest of the calendar ’08, we’re talking about another about 400 units and then next year about 900 units and that basically will have replaced our fleet through the end of 2009 which gives us an opportunity to decide what we want to do going in 2010 with the new engine technology and then as Steve said we haven’t been growing the fleet; we’re going to look at growing through acquisitions until things pick back up, but right now we’re not growing the fleet, we’re just doing replacements.

Thomas Albrecht - Stephens Inc.

What is your latest thought on acquisitions; there’s so many sick carriers, does it makes sense to move forward in this environment or let those who are going to die sort of die and then maybe get more aggressive in calendar ’09?

Stephen Russell

My view is essentially it depends on the customer base of the carrier. If it’s got outstanding customer base and we could buy it from the way we’ve bought companies in past, we’d be interested, otherwise we wouldn’t be interested, so we are looking, but at this point we haven’t found the right one yet.

Thomas Albrecht - Stephens Inc.

And then on the insurance and claims increase, how much of that was related to developments on prior claims versus new accidents during the quarter?

Stephen Russell

If you look at that $1.6 million increase, the increase about $400,000 in workers comp claims and that you have no way to projecting that or predicting that. About a half of the $400,000 was a one claim in the period and the other half is product development on work comp. On the others, probably two-thirds was the current period and one-third development.

We haven’t seen a significant detrimental impact from development in the past few years. I think what you see is historically the last two years, we’ve had very, very good experience and if you’re looking right now, insurance is running less than 4% which is very respectable. So it’s really kind of comparing a good number to a great number.

Last June’s quarter had a reduction in reserves, but they get trued up at the end of every year as part of the audit, so last year it went down, this year it was just confirmed where it was going, so the liability increase was related to accident.

Thomas Albrecht - Stephens Inc.

Now I thought the workers comp normally is in salaries, wages and benefits, so is it an I&C for you guys?

Stephen Russell

Yes, it’s an insurance account.

Operator

And our next question comes from the line of Edward Wolfe, with Wolfe Research; please proceed.

Edward Wolfe - Wolfe Research

When I look at the yield net of fuel how is that tracking; if you look at it for the quarter down 1.3, how do you think about that as you go through the quarter, has that been improving slowly and how do we look into your expectations for that as you go through this quarter?

Stephen Russell

What are you defining as yield Ed, speak out a bit louder.

Edward Wolfe - Wolfe Research

I’m sorry, revenue per mile net of fuel.

Stephen Russell

Well, revenue per mile net of fuel actually was up between the March quarter. It was a $50.1 in the March, a $50.6 in the June quarter, so it actually first increased in several years.

Edward Wolfe - Wolfe Research

And Steve, when you look at it year-over-year just taking all seasonality out of it, how do we think that that year-over-year goes. In other words, from April, May, June, July is that starting, because if…

Stephen Russell

I think what you’re seeing, if look at June of ’07 it was $52.7, about $0.02 higher. I think it’s bottomed out and I think that you will see going forward the year-to-year differential be less than the $2.01 that was evident in the June quarter.

Edward Wolfe - Wolfe Research

So directionally though are you starting to really feel that. I mean it seems like you felt the tightening of the capacity and now what’s going to follow that is the pricing and I’m trying to understand where are you in feeling that pricing? How confident; is it here or now, is it here in July is it, coming in September, October? When do you expect to feel relief?

Stephen Russell

Well, it depends on the freight. The contracted freighted it’s unlikely to see that because there are very few bids outstanding. Right now, I think certainly major shippers are not going out for bid because of the fear of what those responses might be. Spot business and spot business broker alone is say 3%; in other spot business it maybe a total of 10% or so, that stuff we are seeing increases in.

Edward Wolfe - Wolfe Research

And what types of increases; was does that feel like year-over-year and what did it feel like say a couple of months ago?

Stephen Russell

I would say on spot business or broker related business and other spot business, what do you say, Chris 5%.

Chris Hines

3% to 5%.

Stephen Russell

Say, 3% to 5%.

Edward Wolfe - Wolfe Research

So Steve, but based on that with the expectation that that would lead to 3% to 5% type contractual rate when you get to next year, when contracts come up?

Stephen Russell

I think if in fact truck builds end up being 140,000 or so and difficulty of getting financing by fleets issues that other fleets have, some fleets are cutting back their number of trucks substantially. I think it could be more than that in January. In other words with the big bid processes, I think it could be more than that. I don’t want to be overly optimistic but in a sort of a major recession depression, if demand stays where it is or it ticks up a little bit, I think that January, February, March, April we could see annualized increases of 5% or more 5%, 7%.

Edward Wolfe - Wolfe Research

And have you had any contracts come up in the last couple of months and what did those types of contracts go up?

Stephen Russell

I would say the contracts that went into effect in June or July were contracts that were set in March and April and had no increases or very slight increases.

Edward Wolfe - Wolfe Research

And were they generally for one year or are you starting to see more of those a little longer?

Stephen Russell

The only ones that were two years were Wal-Mart and Whirlpool. Target, basically was more of a two-year as well but other than that they’ve all been one year.

Edward Wolfe - Wolfe Research

And those three large ones, what’s the average increase you get in the second year?

Stephen Russell

Without being specific, because I wouldn’t want to kind of -- I think the average is in the 2% range for the second year.

Edward Wolfe - Wolfe Research

Can you talk a little bit about what’s going on with the Mexican border? It seems like Congress went on vacation and duration has extended the pilot program again?

Stephen Russell

DOT yesterday announced a two year extension of pilot program. I’d been very involved with that because until a few months ago, I was Chairman of Homeland Security for the ATA. My term ended, I’m now Chairman of the audit committee, so I’m not sure which will more fun, but like John Hill announced yesterday he’s Deputy Secretary of the DOT, it’s the test program which has had very few fleets participate in I think 50 trucks or 70 trucks was all that participated; that is being extended two years.

The house subcommittee voted not to provide funding to DOT to manage that process. I think a lot will depend on who wins the election in November Ed. I think if in fact there’s a two year extension; we discussed that yesterday afternoon here in Indianapolis after we saw it; if it’s a two year extension we’re going revisit participating in that. On a one year program we decided not to participate. We've been approved or we've been audited, our Jaguar Mexican Company’s been audited, but if we felt it was going to be shut-down in September why go into the effort.

We’re watching that carefully. If it does extended for two years and excuse me it has been extended, but if that stands we’re going to take another look at having Jaguar across.

Edward Wolfe - Wolfe Research

It sounds like your sense is a democratic congress and it doesn’t stand and if you don’t get enough votes maybe it over then maybe it’s over ridded, then it can stand?

Stephen Russell

Yes unless there’s a veto; I don’t think get they’ll get enough votes to overcome a veto, but a lot of people are smarter than I am, but if it does get extended two more years, we’re going revisit the opportunity to participate in that.

Edward Wolfe - Wolfe Research

But one last thing and I can take this offline with you, but I just want to make sure I’ve heard this right; did you said that you’ve had through 1.25 million Class A vehicles and only and 250,000 produced a year?

Stephen Russell

That’s over-the-road trucks. I mean a 3 million Class A’s, but over-the-road trucks, not government trucks or post office, but basically the world we compete in the, trucks where the driver is sleeping in the truck two or three nights a week or something like. I’ve go to clear that with the ACT before speaking about that.

Edward Wolfe - Wolfe Research

I think that 250 number and in relation to that 125 is a big, big number because that would imply a five year life for these things, which is got twice that.

Stephen Russell

Well buy and large over-the-road trucks aren’t over the five years, because maintenance cost kills you. They then pickup containers reports and go 100 miles.

Edward Wolfe - Wolfe Research

So we can take it off line, but ACTs numbers including not just over-the-road, but all Class A’s of average of that 220 for the last 10 years. I understand directionally where you’re going, it sounds like you’re trying to focus on over the road trucks, we can work on that offline.

Operator

(Operator Instructions) and our next question comes from the line of Greg Olaf, with BB&T Capital Markets; please proceed.

Greg Olaf – BB&T Capital Markets

As far as you stock buy back is; did you exhaust that this quarter or what do you guys have left there?

Stephen Russell

I think we haven’t bought back any stock since we bought 2 million shares in November and we haven’t bough any back since.

Chris Hines

The full $2 million is left out there after we did the $2 million that’s up seven; obviously the stock has continued to climb since then, so we felt like keeping the money available for acquisitions. It was a better choice at this point in time.

Stephen Russell

But, we have authority to do 2 million more.

Greg Olaf – BB&T Capital Markets

Okay, excellent and can you give us a rough percentage of your drivers that are on the per diem plan now?

Chris Hines

It’s probably about a 30% right now.

Greg Olaf – BB&T Capital Markets

Okay, excellent and lastly can you just give us kind of your thoughts on the demand and pricing environment as far these truck sales go?

Stephen Russell

I think probably Paul should answer that, because he’s more involved in it.

Paul Will

I think we’ve seen a softening. The trailers that Steve earlier, it’s a total disaster out there as far as used equipment, sales and so far, but trucks have softened somewhat. What we’ve done is we’ve got probably two-thirds of our equipment on trade backs so therefore it’s not as impactful for us, so what we’re doing is we’re selling wholesale and retail and in between deals we’re trading trucks, so therefore we’re managing through it, but I think you can look at equipments down 5% to 15% over last six months. I think it’s probably a fair statement.

Stephen Russell

When you look at some of those bigger carriers in the industry in over 1,000 trucks, Greg many of them are cutting back on capacity because of financial issues or other issues; that’s forcing more trucks into the auction market. On the other hand, I think six months or a year from now that could probably turn around because the concerned people will have over the ‘10 engine, but that’s not going to in full a year or year and a half.

Operator

There are no additional questions at this time.

Stephen Russell

Thank you very much everybody for participating and feel free to give any of us a call if there are any questions. Thank you very much.

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