Covenant Transportation's (CVTI) CEO David Parker on Q3 2016 Results - Earnings Call Transcript

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Covenant Transportation Group, Inc. (NASDAQ:CVTI) Q3 2016 Earnings Conference Call October 20, 2016 10:00 AM ET

Executives

Richard Cribbs - Senior Vice President and Chief Financial Officer

David Parker - President, Chairman and Chief Executive Officer

Joey Hogan - President and Chief Operating Officer

Analysts

Brad Delco - Stephens

Scott Group - Wolfe Research

Jason Seidl - Cowen & Company

Operator

Excuse me, everyone. We now have all of our speakers in conference. [Operator Instructions] It is now my pleasure to turn the conference over to Mr. Richard Cribbs. Mr. Cribbs, you may begin.

Richard Cribbs

Alright. Thank you, Chelsea. Good morning. Welcome to our third 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 and 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 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 division’s revenue, excluding fuel, decreased 5.2% to $132.3 million due to a 4.3% decrease in average tractors and a 1.2% decrease in average freight revenue per truck. Versus the year ago period, average freight revenue per total mile was down $0.016 per mile or 1%, and our miles per truck were down 0.2%. Freight revenue per tractor at our Covenant Transport subsidiary experienced an increase of 3.9% versus the prior year quarter and our Star Transportation subsidiary experienced an increase of 2.2%, while our refrigerated subsidiary, SRT, experienced a decrease of 11%.

The asset-based division’s operating cost per mile net of surcharge revenue, were up approximately $0.106 per mile compared to the year ago period. This was mainly attributable to higher capital costs, employee wages, casualty insurance expense and other fixed costs. These increases were partially offset by lower operations and maintenance expense. We recognized a loss on disposal of equipment of $0.4 million in the third quarter of 2016 versus a gain of $0.1 million in the third quarter of 2015. The asset-based operating ratio was 97.3% in the third quarter of 2016 compared with 90.2% in the third quarter of 2015.

Our Solutions logistics subsidiary increased revenue by 14.4% versus the year ago quarter. Combined purchased transportation and other operating expenses decreased as a percentage of revenue, resulting in operating ratio expansion to 88.5% from 93.4% in the year ago quarter, the result being an increase of operating income contribution to $1.8 million in the current year quarter from $0.9 million in the prior year quarter. Our minority investment in Transport Enterprise Leasing contributed $0.5 million to pre-tax earnings or $0.02 per share. Our effective income tax rate declined to 27.1% in the current period from 43.9% in the year ago period. This reduced effective income tax rate is not expected to regularly occur in future periods. The average age of our tractor fleet continues to be very young at 1.7 years as of the end of the quarter, equal to a year ago. As we do not expect to accept deliveries of any new tractors for the remainder of the year, we expect the average age of our tractor fleet to increase by December 31, 2016.

While earnings per share declined significantly versus year ago, our operating cash flows decreased 18.2% to $17.7 million during this lackluster freight economy. Since December 31, 2015, total indebtedness net of cash and including the present value of off balance sheet lease obligations has decreased by approximately $25.9 million to $238.3 million. At September 30, 2016, we have available borrowing capacity of $47.6 million under our revolving credit facility.

The main positives in the third quarter were: one, revenue growth and improved operating profitability from our Solutions subsidiary for which we also hired former Armada executive, Paul Newbourne, to continue to push profitable growth; two, a 4.1% sequential improved revenue per truck at our Covenant Transport subsidiary; three, a 1.9% sequential improved revenue per truck at our Star subsidiary; and four, our tangible book value per basic share increased 15.3% to $12.38 from $10.74 a year ago.

The main negatives in the quarter were: one, increased operating cost on a per mile basis, including unfavorable capital and casualty insurance cost; two, a 5.3% increase in Department of Transportation reportable accidents compared to the prior year quarter; and three, a 4.2% sequential decline in revenue per truck at our SRT subsidiary, resulting in further deterioration in quarterly operating profitability at SRT while operating a loss for the third consecutive quarter.

Our fleet experienced a decrease to 2,581 trucks by the end of September, an 8-truck decrease from our reported fleet size of 2,589 trucks at the end of June. Our fleet of team-driven trucks averaged 996 teams in the third quarter of 2016, a 1.1% sequential decrease from 1,007 average teams in the second quarter of 2016. Our third quarter freight was softest in July and improved in the last two months of the quarter. Our year-over-year July miles per truck, was down 4%. Our year-over-year August miles per truck, was up 1.1%. And our year-over-year September miles per truck, was up 2.3%.

For the fourth quarter of the year, our focus will be on executing on the additional commitments from peak season customers at higher peak season rates while ensuring all of our valuable customers’ shipping needs are met and increasing the percentage of our trucks with drivers. Regarding SRT’s profitability improvement plan, we are focusing this quarter on transitioning to new leadership, enhancing the culture and employee morale, building lane density and optimizing the freight network, removing excess equipment to improve capital costs and improving on the excellence of our customer service.

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

Question-and-Answer Session

Operator

Alright, thank you. [Operator Instructions] And our first question will come from Brad Delco.

Brad Delco

Yes, good morning David. Good morning, Joey and Richard.

David Parker

Hey, Brad.

Richard Cribbs

Hello, Brad.

Brad Delco

Richard, I like the comment you made with the improvement throughout the quarter. Was it revenue per truck negative 4% plus 1.1% and then plus 2.3% in September? How much of that is a function of the improvement in SRT versus how much of that do you think is the market as a whole? Because it seems as if following the second quarter results, a lot of truckers were talking about unusual strength in July in the market. So, this is just a little bit counter to sort of what we think the market has been hearing.

Richard Cribbs

Yes, Brad. That was actually just utilization, the miles per truck, not the full revenue per truck. But even on that, the volumes at SRT did increase sequentially a bit. They were basically up, so that was part of it. In August, they were up 5% for SRT on a per day basis and up 3.9% from August to September on a sequential basis. So, part of that was SRT. But overall, we also saw some additional volume as we went fully online, for example, with the Fresh Express dedicated account. That wasn’t fully up and running until early to mid August. And at that point, we were getting good utilization on those trucks in that dedicated environment. And so that helped us in August and September when we had a full month of that in September and had gotten more efficient with that.

Brad Delco

And the – again, those utilization metrics were on a year-over-year basis, is that right?

Richard Cribbs

The ones that I gave for at least – that was in the script was on a year-over-year basis. That is correct.

Joey Hogan

Hi, Brad. I think another thing to consider is at least for us, as we move throughout the third quarter, the comparables to last year, you really started seeing freight within our network start to really slow down middle of the third quarter, I’d say.

Richard Cribbs

Of ‘15.

Joey Hogan

Yes. And so the comps in our model frankly get easier as we move throughout the third quarter. So we did see nice improvement versus year ago on the expedited side pretty meaningfully. The decrease versus year ago at SRT got less. And then as our other new piece of dedicated business on the automotive side got ramped up, that saw some nice movement throughout the third quarter as well versus a year ago. But some of it, perhaps they were wrapping around to a softer freight period last year as well.

Brad Delco

Okay. And then David, there wasn’t any commentary, as I don’t think there is normally, around peak season expectations. Can you talk a little bit about what customers are saying in terms of the sort of demand and any additional color you can give on pricing?

David Parker

It’s interesting, Brad. I would say that our peak customers have been similar to what we all on this phone feel like the season is going, not peak season, I am not talking about the economy and it’s slower in July and August and started picking up in September, it got a little bit better, etcetera, but they are just – nothing is robust out there and those kind of things. And it’s kind of going hand in hand with our peak discussions. Number one, we are going to have a good peak season, but we are still slower than what I would like for it to be from a standpoint of putting all the puzzle together. It’s probably about – going to give you a percentage, it’s 98%, the puzzle is put together, but we still got a couple of percent there that we got to get more confirmation on. I mean, we are already starting to spot trailers. We are already starting to do a lot of things there internally. But we are still doing some engineering of lanes and those kind of things out there that typically would have been finished about 2 weeks ago. And a lot of it – I mean, we had one, I won’t say who it is, but we have one that we thought was cemented a month ago.

And to the good, from a standpoint of the good, last week, they are calling looking for more equipment, looking for more. So, either some carriers were falling out or them trying to engineer their peak and getting more data from their customers, they are finding out that it’s more than what they anticipated. So, they got hold of it last week and they are wanting to increase it pretty dramatically. And so one side is can we do it? And other side is, is that do we have the equipment to be able to do it? So, that’s a positive side. But there has been a slowness of it a little bit, slower than what it had been in the past few years of uncertainty of what they think they are going to have. But then now, just in the last 5, 6 days, it seems like it’s – and it will, but it seems like it’s starting to come together, but probably a couple of weeks later than what I would have anticipated. But as we say it, there is no doubt that it’s going to be a good peak season for us, number one. Number two, what we have been saying all year is also true and that is, is that utilization will be up, rates will be down. Even if the rates are the same, and a lot – and I would tell you that the vast majority of the rates are basically the same, but you had some customers last year that just did not run the trucks the way that me and you and everybody else would have thought they would have wanted and the way they wanted to run them. But – and so this year they are doing some things different and they should be doing some things different. That’s going to increase more miles for basically the same kind of revenue, but that’s only – the only correct thing. I mean, some that we are getting paid on a – basically, on a per day basis that we were screaming at them last year saying, listen you need to run these trucks. You need to run these trucks. And this year, they are going to be able to run them, because we are assisting them this year in engineering lanes. So if all that makes sense to you, Brad.

Richard Cribbs

And this is Richard. To clarify a couple of things, one, David wasn’t saying that the freight is slower. He is just saying it’s taking longer to get this all, the puzzle figured out, one. And two, to clarify one more thing, last year when we had – and this is only because I got questions at different times throughout the year, when we had trucks that were sitting not running for, more specifically, one consumer that was paying on a per truck basis, those trucks were not hardly ever were out being used for other freight and getting additional revenues on top of that revenue. There was a very little of that. There was a little of that and that got shared, the part that was like that got shared with that customer. So that was a misnomer that I’ve had to correct a few times and I’d like to correct it on this call.

Brad Delco

Got it. Well, I have taken up a lot of time. I got more questions, but I will hop back in queue. Thanks, guys.

Richard Cribbs

Thanks Brad.

Operator

[Operator Instructions] Next, we have Brad Delco again.

Brad Delco

Wow. Alright. Well, I will keep going. The – so Richard, any additional guidance you can give us on 2017 CapEx? I heard that you guys will not be taking any trucks for the rest of the year, but what do you think ‘17 looks like?

Richard Cribbs

Yes. ‘17, we still won’t be up to a maintenance CapEx level. We have deferred, slowed down the amount of new trucks that we are going to take and extend on the trade cycle, so that right now, we are at 1.7. I commented in the script that it would grow by the end of the year. I think it will grow throughout most of next year until we get around maybe late third quarter or fourth quarter and then it might settle out and/or start decreasing a little bit. That all said, you go from 1.7 to say, 2.3 to 2.5 kind of average age, maybe at its peak, which is still most of the trucks are all under warranty. So even though there should be a little climbing of maintenance expense, it won’t be great, because the trucks will still be under warranty. So, it won’t be big repairs that aren’t covered for the most part. And so I think CapEx is somewhere closer into a $25 million to $40 million kind of number next year, well below now what’s expected for depreciation, especially with the accelerated depreciation. So, it should be a good opportunity, continue paying down debt, assuming all things stay equal and the fleet size stays equal and all those type of things.

Brad Delco

Okay. And then can you just talk a little bit more about what really happened with or what is happening in the used equipment market? Why did you accelerate depreciation? Why is this an issue or why does it seem to be a bigger issue for you guys versus others? Just I know there is a lot of questions out there from investors and I think that would be a good topic to hit.

Richard Cribbs

Okay. I think it’s somewhat a matter of opinion that it’s worse for us than others. It maybe is a little worse for us than others. So, maybe that’s a fair statement. And that mostly is regarding the number of miles we put on our team trucks early in their lifecycle with us even if we do switch the team truck off on to a solo operation after running it for 1.5 years or 2 years or what have you, which we haven’t done a whole lot of, but we plan to pick that up some as we extend the trade cycle over the next 2 years. So, that’s one thing. Two, as you may note, if you go back in our history over the last few years, you can go back to last year and the rest – and the start of this year, out of our six quarters into the second quarter of 2016, we only had one quarter where we showed any loss on disposal. So, if there is any question about depreciating correctly through that time period, there shouldn’t be, because if you were under depreciating through that time, you should have seen losses on disposal and that just didn’t happen. Instead, what has happened is the market has had a phenomenal decrease in used truck values as well as the amount of sales of used trucks that are occurring right now. So, you are seeing a whole lot of growth of inventory in used trucks since last – let’s call it, last June, July, August of ‘15. And so over the course of these last few quarters, we got to December or the fourth quarter of last year and used truck values had decreased, let’s call it, $10,000 to $12,000 at that time. And so we looked at all the trucks that we were going to be disposing of in the next 6, 7, 8 months and said we need to make sure that those get down to that correct value of $10,000 to $12,000 less than what we had previously sold them for and so that started some accelerated depreciation on that group of trucks. The reason we only did it through that time period is because the "experts," that would be OEMs, wholesalers and retailers and dealers, gave indication that this thing should be cleared up by June or July. The used truck market should come back by that time. Used truck buyers only can let their trucks get so old before they need to start replacing them. That made sense. And so our estimates were based on – partially on that.

Come around to the second quarter and used truck values had further decreased and instead of $10,000 to $12,000 lower than what we had previously sold them for, we are looking at $16,000 to $17,000 kind of numbers, lower than what we had previously sold a similar truck for. And so at that time, those same experts were saying, well, this thing, it didn’t heal by now, but surely, it’s got to heal by December of ‘16. So, we looked at the rest of the group of trucks that we had that would be disposed of prior to, let’s call it, January of ‘17 and placed new salvage values on those that were now instead of $10,000 to $12,000 lower, $16,000 to $17,000 lower. And then as we kind of got into August of this year, we started looking at things a little differently. Those same experts started saying, you know what, I just don’t think this thing is going to heal. There is too much inventory. Nobody is buying new trucks now, which really grew that – that pace of selling of new trucks really slowed down in the last 5 months and orders getting placed really slowed down in the last 5 months. And so it changed where it looks like, okay, this thing is not going to heal for 18 to 24 months. Several of us internally, myself included, looked at what’s happening. And if we believe ELDs are coming in place and those type of things and you think that there could be some trucking bankruptcies and – of the smaller trucking carriers that are the buyers of these trucks, and this thing might not heal for 2, 3, 4 years. And so we felt like it was prudent and correct to look at all of our trucks in our fleet, which will have lives all the way up 3 and 4 years now and look at what we are selling the trucks for. That same truck that was selling for $15,000, $16,000 less, by the end of September, it was really selling for almost $19,000, $20,000 less than what it sold for previously back in June of ‘15. And so we looked at all of our trucks. We changed the salvage values down to that lowest number and – basically all the trucks, not quite all the trucks but basically all the trucks. And so that’s causing the new depreciation that you are seeing in the third quarter, which will also be at increased levels in the fourth quarter, first quarter and second quarter of ‘17, above what we have seen in the first two quarters of ‘16. I expect that as long as the fleet stays the same that by the time third quarter rolls around, then we will actually see a little bit of a tailwind and have a little bit of reduced depreciation versus what we are recording in third quarter of ‘16. That was a long explanation, but I hope that did answer the question.

Brad Delco

No, that was great. And I am going to keep going guys unless you see someone else in the queue let me know, I will jump back out. David…

Operator

We have three more people in the queue.

Brad Delco

Then I will get back in queue again. Thank you.

Operator

Okay. Next we have a question from Scott Group.

Scott Group

Hey, thanks. Good morning, guys.

David Parker

Hey, Scott.

Scott Group

So can you help calibrate kind of expectations for utilization in the fourth quarter? I know it’s down a lot fourth quarter last year, because of the peak issue you – issues you guys have talked about. So, what’s a fair expectation for utilization year-over-year in the fourth quarter?

Richard Cribbs

Yes. Scott, I think it will be a best guess at this point. Again, there is so many changes that happened during the peak season because of the nature of that type of freight and so probably best guess that we would have at this point would be an increase of 1.5% to 3% over last year, sequential improvement of about 1%. Somewhere around that would be a best guess at this point, but it really isn’t a hard estimate.

Scott Group

Okay, that’s very helpful. And then, David, were you saying that you think pricing overall in the fourth quarter is flattish or was that kind of specific to some of the larger e-commerce customers? I am trying to get a sense of relative to down 1 on revenue per loaded mile, how you are thinking about...

David Parker

Yes, that was – and I was talking strictly about the peak type businesses. It’s going to be a kind of a flattish rate per mile.

Richard Cribbs

Versus last year.

David Parker

Versus last year. Is that your only question, Scott, on that?

Scott Group

Yes. So, does that kind of imply kind of more of the same or kind of similar to that down 1 in aggregate for the fourth quarter that we saw in the third?

Richard Cribbs

Well – and I think it’s that rate per load – this is Richard, sorry, Scott. The rate per loaded mile maybe very similar, but keep in mind there was a lot of non-mile payment as well. And so overall, I think when you see the rate per total mile come across year-over-year, it will be down and I would – frankly, as pricing is not fully completed, I would not give you even a best guess on what that would be year-over-year at this point. There is still too many unknowns and that’s still a volatile situation.

Scott Group

Okay, that makes sense. And then David or Joey is it – can you maybe give like an initial kind of view on 2017 pricing expectation?

David Parker

Yes, that’s pulling one out of the hat. Scott, I think that pricing is going to have to start moving up. And whether it is overall total by customer or whether its lane specific by consumer, pricing has got to start moving up. On the used truck market, it is as I think about some of the solo operations out there that have gone from – because we all got residuals. We all got backstops. But running as many teams we got, we are now going to never use – our goal is to never use our backstop, because our maintenance cost would go up dramatically and so we would rather get rid of the truck whenever we can on whatever sweet spot there is. But just a solo operation, whether they got a 5-year residual and their typical trading patterns are 4 years and they are going to take it now to the fifth year, we are probably two to three quarters into that decision, so there might be one or two quarters left. But I am here to tell you that when that truck gets to a 5-year trade cycle and it has to go back to that manufacturer in today’s environment, the new truck price maybe x, but I guarantee that the residual will not be x. The residual will be less than x. And so depreciation is going to climb. It’s just a matter of when is it. Is it now like hours on some of ours? And – or is it later on, two or three more quarters down the road for the whole market? That said we can’t ignore that. I mean, to me, that’s a $0.03, $0.04, $0.05 a mile kind of number that the market has got to go and get in 2017. And so that said, I think that you will see pricing in 2017 start increasing. Now, there is no doubt in my mind also that you are going to have bids that come out and try their best to lower the pricing and those kind of things. And I guess, we are all going to find out what kind of true partners we got with customers, but so our goal is that we are going to plan on increasing pricing.

Scott Group

That makes sense. Just one follow-up there. Do you think that the private trucker that maybe manages more to cash flow and less to operating ratio thinks about depreciation the same way and the need to get price because of that?

David Parker

I think you have got a lot of them, Scott that are truly just trying to hang on out there. They – no, I think they are going up and down the road today saying, I am just going to let my truck get older and are not coming to us, for instance, the secondary market tail, for instance and trying to get rid of – buy 1 of our 3-year-old trucks, etcetera. And those awakenings will happen, but I don’t think that they are out there today. Then I would better increase my depreciation internally. I don’t think that they have. I think it’s going to be a rude awakening for them as they progress. And at the same time, you guys as ELDs – I mean, I was at a Walmart conference yesterday, and let me tell you, I mean, they talk – and we do some business with them as a 3PL solutions group. But they were talking to their 3PL, which is about 10% of their total spend is with 3PLs, and they told those 3PLs very clearly, let me explain something. You better understand who is hauling my freight and who had ELDs, because I am not going to come 12 months from now, and I can’t find a truck. And so you are going to have this dynamic of what you just asked on the equipment. Do they recognize that they realize they got to go get a rate increase for this equipment? At the same time, there is going to be a tightening every quarter, every quarter until next December on this end, it’s going to magnify on the ELD, whether they go out of business or whether the customers start demanding what we do about ELDs, and there is going to be some type of fallout on that. So, trucks will exit. So that’s why Richard was saying the used truck market maybe another couple of years down the road that we are having this phenomena. One side, we are all saying, hey, ELD is going to come to effect. It’s going to take out, in our opinion, 8% to 12%, 14% miles is what our opinion is. But at the same time, you are going to have this – and that’s going to be good. That’s going to be good for pricing, but you are going to have this used truck market over here hanging around, that is probably going to increase in used trucks before it gets better.

Richard Cribbs

Yes. And I think the smaller peers are also seeing increases in fuel prices.

David Parker

Insurance.

Richard Cribbs

They are also seeing much higher cost of insurance and they are also seeing if they do employ ELDs, they are going to have to pay more per mile for the drivers, for the drivers to get made whole on what they are getting paid. So, there is a lot of other cost concerns that they have that they are going to have to cover through rate increases at some point.

Scott Group

Okay, thank you guys.

David Parker

Okay, Scott.

Operator

[Operator Instructions] And our next question comes from Jason Seidl.

Jason Seidl

Good morning, gentlemen. Couple of quick things. One, I guess, I will just jump on a comment that you guys just made. You said that ELD is going to take out 8% to 14%. Is that an industry number that you are projecting or is that 8% to 14% of the people who don’t already have ELDs in place?

Richard Cribbs

Yes, that was an industry number. And again, that would be high end, of course, at 14%. It is not – it does not just take into account the percentage of miles that we believe maybe running outside the legal parameters. It also includes some trucks that will go out of business. It also includes some thoughts on the efficiency of their networks in these smaller trucking companies that they no longer can make that route for a customer that goes 600 miles in a day and then to another customer, the next day that goes in a – in kind of a engineered lane that they have for their driver that goes 600 miles the next day. A), they won’t be able to make it to Point A on their first delivery in time and then they won’t be able to make it to Point B the second day. So, they are going to have to find new customers, new networks. So, there is going to be – I think there could be some network disruption as well and so that’s kind of initial, if everybody is on ELDs number that then gets a little better over time as the networks get more efficient.

Jason Seidl

And when you are thinking about the positive impacts that could come out of that for carriers such as yourselves who are already ELD compliant, when do you think you are going to start seeing any noticeable impact? Is this a back half of ‘17? Is this we have to wait for 2018 event?

David Parker

Yes. What you just said there is probably correct, Jason. I mean, we have been saying now from fourth quarter last year, in our opinion, that at that time we were at eight quarters away from implementation of 2017 December and that we felt like that quarter-by-quarter starting with rumblings from customers and truckers, but quarter-by-quarter, you would see it get a little bit more intense on what was going to happen. And I think in the first two quarters this year, it’s more doing surveys and finding out that 6% of our trucks with solutions have – are ELD compliant. And I think everybody’s brother has done that, trying to figure that out to a meeting yesterday with Walmart that said, let me tell you, 3PLs, let me tell you, and he spent 2 minutes preaching to the 3PLs of what their expectations were. So, we have gone from little surveys to a large customer saying, what are you going to do? And then I think at the next, fourth, first, second quarter starts, they will be whatever implementation, whatever we are going to do as an industry to figure out who does not have them and what they are doing to put them on led by our customers and us 3PL companies. I think that, that’s what you will feel. Then I think come this time 12 months from now, it is really going to start getting tight. And the thing that’s not out there yet is that tightness is it just that the Walmarts of the world and people like that get up and say something different or is there going to be some way to prove it? Is there going to be some way to register it or what are we going to have to do to prove that the ELDs are on our solutions carriers trucks and that will – within 12 months, that is going to be the thing of making sure that’s it, because these customers are not going to sit around waiting till December ‘17 to see what happens. Then I think, Brad [ph], is that all that happens, as it gets tighter, it gets more energy behind that, more intense, some trucks start leaving, capacity, miles, etcetera start getting worse, Jason. And then, in the first quarter, you are going to have a major accident that’s going to have fatalities involved in that accident that is not going to have ELD on that and you are going to have plaintiff’s attorneys going to get everybody and his brother, including the major customer, whoever had the fatality accident. Then it starts coming to light that you got some running out here without ELDs. That will happen in the first quarter of ‘17, some major accident.

Richard Cribbs

‘18.

David Parker

I mean, ‘18, major accidents that customers will then do whatever we are going to do to determine them, the exposure is too great. The exposure is too great whether that means they got to physically come on every yard to check it, which they can’t or the insurance industry will do that, which they are today. They are already starting that. And keep in mind, we don’t own it, but part of our solutions is a little insurance agency and we don’t have any ownership on it. We just get a percentage of what they sell and we have seen premiums go from $5,000 to $10,000.

Richard Cribbs

Per truck.

David Parker

Per truck. And so we get a sense for what these 10 or 20 truck operators are paying out there today just in the last two quarters, and it’s not getting any easier. So I hope, Jason...

Jason Seidl

That was a great detailed response. Thank you very much. My next question is more on the accounting side for Richard I understand depreciation has gone against you because of what the market has done in the used equipment side. But in 2 years, if it starts reversing itself, doesn’t that mean you are going to have to reverse that? And then it’s a positive benefit again? I understand it’s a lot, but...

Richard Cribbs

Yes, if that happened and frankly, I don’t foresee that happening. Just being honest, we wouldn’t have – we may not have chosen to do this on the entire fleet if we thought that was going to come back anytime soon. So, there would be a possibility of that, all – it would show up in gains on disposal and/or you readjust depreciation a little bit and slow it down again at some point. But I would really just don’t see that happening unless...

Jason Seidl

I understand. I am not in the near term. But ultimately at some point, the used truck market will recover, whether it’s 2 years or 5 years or whatever, right? But at that point, you will have to reexamine how you are accounting for this again and that could result in the upswing even though it’s all non-cash, right?

Richard Cribbs

Yes, we agree. I agree with that.

Jason Seidl

Okay, perfect. That’s all I was checking. Gentlemen, I appreciate the time as always.

Operator

[Operator Instructions] And right now, we are currently holding for questions.

Richard Cribbs

Okay. Well, I think we will wrap it up. We appreciate your interest and we will talk to you again next quarter. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today’s teleconference and you may now disconnect.

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