Covenant Transportation Group, Inc. (CVTI) CEO David Parker on Q3 2018 Results - Earnings Call Transcript

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About: Covenant Transportation Group, Inc. (CVTI)
by: SA Transcripts

Covenant Transportation Group, Inc. (NASDAQ:CVTI) Q3 2018 Earnings Conference Call October 24, 2018 10:00 AM ET

Executives

Richard Cribbs - Executive Vice President and Chief Financial Officer

David Parker - Chairman and Chief Executive Officer

Joey Hogan - President

Analysts

Kevin Sterling - Seaport Global Securities

Scott Group - Wolfe Research

Jason Seidl - Cowen

Scott Schoenhaus - Stephens

Operator

Excuse me, everyone, we now have our speakers in conference. [Operator Instructions]

I would now like to turn the conference over to Richard Cribbs. Please begin.

Richard Cribbs

Thank you, Victoria. Good morning. Welcome to our third quarter conference call. Joining me on the call this morning are David Parker and Joey Hogan. As a reminder, 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. We undertake no obligations to update or revise any forward-looking statements to reflect subsequent events or circumstances.

A copy of our prepared comments and additional financial information is available on our website at covenanttransport.com. 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 Truckload segment’s revenue, excluding fuel, increased 25.7% to $168.4 million, due primarily to a 547 or 21.6% average truck increase, and a 6.1% increase in average freight revenue per truck in the 2018 period, as

compared to the 2017 period, partially offset by a $2.7 million year-over-year reduction in intermodal revenues.

Of the 547 increased average trucks, 428 average trucks were contributed by the Landair acquisition, as Landair contributed $18.4 million of freight revenue to combined truckload operations in the third quarter of 2018. Versus the year ago period, average freight revenue per total mile was up $0.277 per mile or 16.4% and our average miles per tractor were down 8.9%.

Truckload rates were impacted favorably and utilization was impacted unfavorably by the impact of the Landair operations on the combined truckload segment. Landair’s shorter average length of haul and dedicated contract, solo-driven truck operations generally produce higher revenue per total mile and fewer miles per tractors than our other truckload business units.

Versus the prior year quarter, freight revenue per tractor at our Covenant Transport subsidiary experienced an increase of 8.4%, our SRT subsidiary experienced an increase of 18.1%, and

our Star subsidiary experienced an increase of 4.2%. The Truckload segment’s operating costs per mile, net of surcharge revenue, were up approximately $0.179 per mile, compared to the year ago period. This was mainly attributable to higher employee wages, casualty insurance claims costs, and the impact of the Landair truckload operations’ higher cost per mile model.

These increases were partially offset by lower net fuel costs and net depreciation expense as we recognized a small gain on disposal of equipment totaling $300,000 in the third quarter of 2018, versus a loss of $700,000 in the third quarter of 2017. The Truckload segment’s adjusted operating ratio was 92.6% in the third quarter of 2018, compared with 95.1% in the third quarter of 2017.

Our Managed Freight segment’s total revenue increased 80.9% versus the year ago quarter to $46.3 million from $25.6 million. Of the $20.7 million of increased total revenue, Landair contributed $20.4 million of revenue to combined managed freight operations in the third quarter of 2018. The managed freight segment’s adjusted OR was 90.5% in the third quarter of 2018, compared with 90.3% in the third quarter of 2017.

The result was an increase of managed freight operating income contribution to $4.2 million in the current year quarter from $2.5 million in the prior year quarter. Our minority investment in Transport Enterprise Leasing contributed $2.1 million to pre-tax earnings or $0.08 per share. The average age of our tractor fleet continues to be young at 2.3 years as of the end of the quarter, slightly up from 2.2 years a year ago.

In connection with the July 3 acquisition of Landair, we expended $83 million in cash and assumed $15.5 million of Landair’s outstanding debt, which we have paid in full. Between December 31, 2017 and September 30, 2018, total balance sheet indebtedness, net of cash increased by only $17.6 million to $216 million.

At September 30, 2018, our stockholders’ equity was $326.2 million, for a ratio of net debt to total balance sheet capitalization of 39.8%, which compares favorably to the 40.2% ratio as of December 31, 2017, even with the cash expended for the Landair acquisition.

In addition, our leverage ratio has improved to 1.5x as of September 30, 2018 from 1.9x as of December 31, 2017. The main positives in the third quarter were: One, the successful strategic addition of Landair, meeting our stated objective of entering into closer relationships with our customers and getting deeper in the supply chain; Two, improvement in the operating profitability at each of our Truckload segment subsidiaries; Three, an approximate 10% increase in average freight revenue per truck for our Truckload segment, excluding Landair’s truckload operations, versus the same quarter of 2017; And four, improved year-over-year earnings from our investment in Transport Enterprise Leasing.

The main negative in the quarter was the increased Truckload operating costs on a per mile basis, most notably the unfavorable employee wages and casualty insurance claims costs, partially offset by lower net fuel costs and improved net depreciation expense. Our fleet experienced an increase to 3,077 trucks by the end of September, a 445-truck increase from our reported fleet size of 2,632 trucks at the end of June. Of the 445-truck increase, 413 of those trucks were operated at Landair, which we acquired in July.

A large portion of the remaining growth was a 36 truck or 13% increase of independent contractor trucks to 312 trucks by the end of September from 276 trucks at the end of June. Our fleet of team-driven trucks averaged 880 teams in the third quarter of 2018, a small increase from 878 average teams in the second quarter of 2018. We expect the overall balance of business conditions to remain favorable through the fourth quarter of 2018 and into 2019.

Freight demand has been, and remains, strong across our business units and indications from our holiday peak season customers indicate robust expectations for the fourth quarter. From a capacity perspective, attracting and retaining highly qualified, OTR professional truck drivers remains our largest challenge. Low unemployment, alternative careers, and an aging driver population are creating in a competitive environment.

In this environment, we continue to work actively with our customers to improve driver comp, efficiency, and working conditions while providing a high level of service and generating acceptable financial returns. We intend to continue to allocate our assets where the returns are justified and use our managed freight units to supplement our internal capacity.

Along with the Landair acquisition, we have increased our capital allocation to organically grow our dedicated truckload, 3PL, and other managed freight solutions. As of September 30, 2018, the percentage of our truckload fleet operating under dedicated contracts was 1,535 trucks, representing 50% of our fleet. This compares to a year ago when only 827 of our trucks, or 32% of our fleet, operated under dedicated contracts.

We believe the dedicated contract fleet provides a stronger partnership with our customers as we integrate deeper into their supply chains, offers more consistent and seasonally-manageable freight volumes, reduces earnings volatility of the cyclical freight economy, and provides a favorable drivers’ experience for professional drivers who desire greater consistency.

For the fourth quarter, we will remain a major participant in the holiday peak shipping season and anticipate our consolidated adjusted operating ratio and consolidated adjusted earnings per diluted share to improve compared with the fourth quarter of 2017. However, due to changes in team versus solo-driver mix, dedicated versus irregular route capacity, and managed freight capacity, as well as the impact of the Landair transaction, we’re not offering more specific earnings guidance.

Thanks 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 Kevin Sterling with Seaport Global Securities.

Kevin Sterling

Thank you and good morning, gentlemen.

Richard Cribbs

Hi, Kevin.

Kevin Sterling

Congrats on a very nice quarter there. Can I just ask a big picture here, as you guys travel the country and meet with our shippers and your customers, what are they telling you, you know as particularly as you think about 2019 and the capacity they may need, what are they saying regarding this environment? Are they seeing a slowdown and they probably got more insight than anyone, just curious, maybe if you could just share with us big picture, you know some customer conversations you are having?

David Parker

You know Kevin, I guess the way I would sum it up is that, I believe whether it is our business or our customers business, and we’ve seen quite a few customers during the quarter, I would say that it’s that – second quarter is a 4.2% GDP and let’s say that third quarter when it comes out, I personally believe it’s probably around 3.5% GDP. A number that we all will love, a number that we all will think of very good and strong, but it’s not 4.2 in the second quarter, and that was a bit away, I would describe.

They are very happy. They are very – say the business is strong. Whether they had seen a little bit of a slowdown, but only because it wasn’t the second quarter kind of numbers they were seeing. I think, we’ve also learned that there was definitely, there in second quarter a push forward tariff, tariff top freight, as I think about imports from China, as well as on the steel side of the business. And I do believe that people were getting ahead of it, even as I think about our parts for our Class A trucks, and trying to get their hands on some of that product. There was definitely a purchase early on in the second quarter that – during the third quarter I believe they had even out the numbers, but every customer I have seen, which is numerous ones, there in the third quarter are very, very happy with our business environment.

Kevin Sterling

Got you. Thank you, David. That is great. Let me ask you about some of the revenue synergies you are seeing with Landair, obviously that looks like to be a good acquisition and guys kind of hitting your stride there, so as we think about revenue synergies with Landair, you know what can we expect in – you know more importantly, what n Covenant bring to Landair? And on the flip side, what can Landair bring to Covenant, as we think about this acquisition heading into 2019?

Joey Hogan

Hi Kevin, this is Joey. I think what I would – there is couple of points, I would make. A, the integration of two operations has gone exceptionally well. In my long carrier, I have never – lot of transactions, I have never seen the integration goes well that has, and I am not saying that braggingly, I am just saying that as an observation, the attitudes and the energy to grow to get best out of both operations has been off the charts in my opinion.

Number two, I think that because of Landair business model, which is much more, let’s say, we keep using the definition of supply chain and further in the supply chain is much deeper than CTG as a whole was before. So, their lead time for new business is much longer than what you could call CTG prior to Landair. This is just because of what it does. It’s dedicated, it’s warehousing, you know managing freight and things of that nature.

So, the onboarding of new business takes longer, and so, and then on the CTG side, you have a, what we call enterprise sales team as we are focused on one way. And so, the synergies are between the two sales forces of what I would call lead generation, and the lead generation between the two, and I believe that that’s going exceptionally well. We’re very great in that and it’s going to take some time on both parties to get immediate wins. I think the wins will start in 2019, but we have seen some small wins, especially on the brokerage side from either their sales force into the brokerage opportunities.

So, we are seeing some small wins already. I think the pipeline is building quickly. I think the Landair sales team and me or us personally, we’ve been a little surprised at John and his team’s energy about the automotive segment, as far as supply chain work. It’s a large segment for CTG prior Landair. You know, getting opportunities into second, third tier suppliers and the receptivity of that with some of those shippers has been good. David has personally been engaged with that. So, I’m cautiously optimistic as far as what that could bring us.

So, I think on the sales generation side, we are early. I think the sales structures have been in place. The lead generation pipeline and workflow has been placed. The two leaders of those organizations are collaborating exceptionally well in my opinion, exceptionally well. And so, I think, we’re going to be – it is going to be – you need to see how 2019 unfolds. Our small, what we would call 3PL piece of business is being transitioned to Landair’s team, their small brokerage operation has been transitioned to the CTG brokerage operations, and then other than that we’re often running.

So, I think the short answer, Kevin, it’s early. We’re very, very excited about what we see. Top line is starting to develop. I think Landair, inside of Landair is going to grow faster than it has the last two or three years with some capital constraints. So, Landair looking – let’s call it Landair, John and his team looking for Landair type opportunities is only going to accelerate as we grow that operation as we grow that sales team. The capital constraints have been what I would call lifted for that business.

Richard Cribbs

I think to Joey’s point on that you see in the numbers through what we just read through the script that Landair had about $40 million of reported revenues in the third quarter. As you compare that to the pro forma’s that we have filed a few weeks ago. For last year, and for the first six months, you will see that that’s really nice growth. And above what the rest of the business is growing, our legacy business.

Kevin Sterling

Got you. That’s very helpful. Thanks guys so much for the color. And so, thinking about your dedicated business, I think you said, dedicated now is like 50% of your fleet seeing tremendous growth there, you know shippers continue to look for dedicated capacity as a way to lock in capacity. Do you anticipate your dedicated business continue to grow from these levels and maybe, I don’t know, at the expense of, you know one-way trucking if that makes sense, but I would imagine dedicated will continue to grow, and it's also a way for you guys to keep your drivers home at night more often, and give them a scheduled service, but as we think about the next couple of years, do you have an idea what percent dedicated could be of your fleet? Is there [indiscernible] where you would like to get to or?

David Parker

I tell you, when you put the lead question at CTG that said, how do we get deeper in the supply chain? So, we never become or we at least eliminate as much as you can the quote, ‘you call, we haul’. Our customer calls, I got a load. Okay, I’m going to go pick it up. How do you get deeper? How are you going to make sure you are bringing value to that customer and then you are truly a partner with them, and you know that’s the reason for the Landair acquisition was because of that, and we're going to continue to go in that direction. We're going to continue to get deeper in the supply chain, and one of the areas is the dedicated, and to make sure that we’ve got nice long-term contracts and we’re doing a great job on that side, and we will continue to grow that.

We’ve got internal targets that we’re just in the process of meeting with our companies as we speak right now to make sure that we’re all on the same thought process, but I expect next year to be another couple of hundred trucks on the dedicated side of our business, and again it is to get deeper. So, as we look at ours and the kind of segmentation that we’ve got out there, and that is capacity contract management the Landair, warehousing, PMS is a big potion that is going to be there.

The dedicated side, then our expedited side, where our customers are really needing us on the expedited because we’re performing a service that not everybody can perform, and then lastly the refrigerated side of the business. And I would say that, we’re probably up to 70% of that freight, it is freight [at about] recession hit, it’s not going to be heard as dramatically as what we were a year ago, and definitely what we were two years ago, and so we're going to continue doing that, and continue to grow that as a sake of just the OTR you call we haul, mentality.

Kevin Sterling

Got you. Thanks David. The ‘you call, we haul’ landscape is littered with companies where that didn't work as you know.

David Parker

Yes.

Kevin Sterling

So, lastly on dedicated, how do you feel about those contracts now, you’re signing, are they pretty staggered throughout the next couple of years and not all rolling over at once, how shall we think about the duration and kind of how these contracts are staggered?

David Parker

Yes. That is something that we have absolutely – because of the growth that we have been working on and we have been doing at. We have got two, three folks from the Landair side, as well as the CTG side that is running with that effort. And it’s in pretty good shape. I mean, we got to go internally about the end of the first quarter that we’ve got about – out of the 1,500 trucks, we’ve got about 300 trucks that we want to shore up a little bit better. And actually, I was in Detroit last week, and about half of those trucks are ones that, I mean we don't hand up a signed deal, but I am 98% that we’re going to be there that are kind of on a [bit-by-bit] transaction that will become a minimum of a three-year contract.

So, most of our accounts are on three or longer-year contracts. We do have one that you know that our star companies have for 25 years. They’ve had it for 25 years, but the contract is not as good as what we want. So, we have already talked to them. We are going to go business again. I think we will have success getting there. So, but it’s in pretty good shape, and I think by the end of first quarter that we’ll all think that we’re in excellent shape, and it’s kind of about a 25% a year, kind of number that over the next three years that 3 or 4 years that comes due on negotiations, and you know our goal was to put positions in there – I'll call this, I mean, because at the end of the day if you give them 70% on-time performance you need to be kicked out. And so, the contract allows that you’ve got to make sure as you’re given the service, so they can tell you goodbye tomorrow.

So, assuming that they lag because the purpose is to get out of it that have either [indiscernible] or those calls is in the contracts, but say over the next quarter you're going to reduce whatever 20%, 25%. The next quarter 25%. The next quarter, you know that kind of way at least it gives us an opportunity to find a home for those trucks, and we’re not here with 400 trucks just because we entered into a recession.

Richard Cribbs

Kevin, the majority of those contracts do have either significant financial or operational or both penalties related to them, and the staggering effect of the contract maturities is over 60% would not mature next year - 70% will mature next year or have the opportunity to without some significant additives.

Kevin Sterling

Okay, great. Thank you so much for that. That’s all I had today. Thanks for your time this morning. Congrats on another very solid quarter. Take care.

David Parker

Thanks, Kevin.

Operator

Thank you. Our next question comes from Scott Group with Wolfe Research.

Scott Group

Hi thanks. Good morning guys.

Richard Cribbs

Hi, good morning.

Scott Group

Wanted to just follow-up on sort of the first question just about the environment, maybe can you talk David just sort of more monthly trends and sort of what you're seeing so far in October from a demand and capacity standpoint?

David Parker

Yes. We came out of June in the second quarter and everybody was on fire, and I mean, and to be honest on healthy fire. I mean, when your customers cannot get their freight delivered that is not good. That is not good for me and you, eventually it’s going to bite us all in the bottom and you can't make anybody happy, and you know those kind of things from a service standpoint, when they’ve got 20 loads and you got one truck, and they have put all their eggs in your basket, and that’s the way the trucking industry was in the second quarter.

We definitely started seeing in – after the July 4, and around the July 10. There definitely was a moderation. I don't want to use the word slow down because I already used [4.2% to 3.5%] and I think anybody on this call would say that’s a great quarter we will take it, give it to me right now, and tell me that’s what I’m going to have for the next four quarters, and we all will be happy with that, but we definitely saw that, say those 20 loads I use as an example plus 20 with one truck, it became a plus 10 with one truck in the month of July. And in the month of August, that number probably became kind of a plus 5 for one truck, so it’s still healthy.

We were still moving our trucks in pretty good shape, and there will be days of the week that, oh, I need three more loads in Dallas today, I need five more loads in New Jersey today, but tomorrow, I am overbooked. So, that’s the way that the month of August and actually probably into the middle of September was going and then we started seeing the medal of September starting to come back and we started seeing early peak, but I don't want that as a material, but good.

Some good numbers that peak started for us say in the latter part of the month of September, and of course then you had the hurricanes that hit that Carolina in Florida, and you know the hurricanes produced for us about 50% of what it produced last year to give you an idea on terms of revenue. So, I mean it helps, but I mean from a financial standpoint. Excuse me, I am not taking that lightly, but just strictly trucking. It definitely helped.

It has no comparison to what it was last September, last October, and since then after the middle of September, it just continues to ratchet up, continues to get strong, and I’m very, very, very pleased with the way I’m seeing the freight environment, and we are just starting, I might say the word 10% into peak to give you an idea, and over between now and Black Friday, Cyber Monday is really when peak will start at that time. So, we are just at the beginning stages of it, and I'm very, very pleased with the freight environment.

Scott Group

So, if we went from a 20 to a 10 to a 5, where are we now? And then, just as I think, you know about the cycle broadly, what’s the number that would concern you in that sort of example you’re giving?

David Parker

That’s a good question. I would say, using that number, I would say that we are back up to the 10 kind of number, but we're very quickly here about the first week of November. I think that number will be back to 20, and that number will proceed to go to about 50 until about 20 of December and what does concern me, when it becomes negative, I mean which is a January, February event that we all live with and we all know that that happens, but that’s where it starts, you really happened to work.

Scott Group

Okay, that’s really helpful. I think last quarter you talked about 7% to 8% sort of as an initial [indiscernible] for 2019 pricing, what would be your sort of updated views today?

David Parker

And talking just when the truckload because one of the things that Scott that we got, I got to get my hands around and we are playing with numbers because we are just now starting to process a quarter into the Landair acquisition, and from the truckload environment, from the Covenant SRT, the star, the OTR Landair I said 7% to 8% and I’m more probably that is 6% to 7% kind of number, I’ve dropped it down about 1% because of July and August and the business is starting to getting stronger et cetera, but 6% to 7%, and again that has nothing to do with all this managed freight and all that kind of stuff. So, actually, I will have to defer that to Richard to see if that’s going to be separated or all thrown into the bucket together.

Richard Cribbs

Yes, that will be separate.

David Parker

Okay. 6% to 7% for not paying.

Scott Group

Okay, that’s helpful. And then just last question, I think when you did the Landair announcement there were 430 trucks, how many trucks are there today and anything changing in terms of, is the seated count going higher, lower post the deal?

Richard Cribbs

The number ended at 413 for the end of the quarter and some of that – they have some trucks that run over in the warehousing area and doing shuttling and those kinds of things and they get real miles, they are running around the warehouses and they are not included in that count. This is just, the 413 is what we consider in our truckload segment that has reported utilization and their rates are comparative there. And so, some of that is just kind of transitioning where they are needed, and so it’s still probably we would expect kind of 420 to 430 for the fourth quarter, and then next year just dependent on what kind of dedicated growth we have and because Landair’s dedicated would be included in the truckload side.

Scott Group

Okay. So, you're not seeing turnover issues or driver issues there?

David Parker

No, it’s been excellent. You know, matter of fact they have done a great job at Landair. They were in good shape. I mean their numbers were, you know they are kind of running that 2.5% to 3.5% open and it’s more since we’ve had him. Of course, we've had them to [indiscernible] they've been very blessed on their team, but they are now 1.5% to 2% open. So, it’s better than the rest of our companies. And so they’ve done a great job on filling already a low number open percentage to even a low one number, and so one of the things that we’re working on now is to make sure that all of CTG drivers realize some of the job openings that are throughout the company, just to make sure that if we got even the team expedited that the entire running of the team expedited market or refrigerated market and they want to be a home on an hourly of weekly basis those kind of things. There is a lot of Landair opportunities there. So, we're just now starting that process, but they’re already in good shape.

Scott Group

Okay. Good to hear. Nice quarter. Thanks for the time guys.

Operator

Thank you. Our next question comes from Jason Seidl with Cowen.

Jason Seidl

Thank you, operator. David, Richard, Joey how are you guys this morning?

Richard Cribbs

Good, thanks Jason.

David Parker

Good, thanks Jason.

Jason Seidl

Wanted to touch on two things. One, a little bit on the cost side. I mean you called out some casualty cost and then some driver cost. I’m assuming the casualty costs are more one-time in nature related to some accidents is that the right way you are looking at it?

Joey Hogan

Well, I hope so. It is kind of has been sending up a little bit versus last year anyway, just on a cost basis. And then this quarter, we actually had decent frequency where our accident per million miles were kind of equal-ish to slightly down on a DOT basis versus last year quarter. So, we had more accidents that involve third-party. And our outside parties so that really did drive the cost up. I don't think that there is a root cause that that will continue. So, I am hopeful that that’s not a trend, and then we should expect to see that number come back down.

Jason Seidl

Okay. That’s good to hear. On the driver's side, David, you pontificated on the 67% on the pricing side for 2019, what about the driver pay, what should we expect going forward on driver pay cost?

David Parker

Yes, it is interesting and one of the things, number one it will continue to go up, but I will say you know, as that, think about our companies and various ones did various different things, but the May, which was our second to third driver pay increase for this year was in the month of May, and when we raise that, it did something, it allowed us to get more drivers and seated about 1% more trucks that are seated than there was, and so it definitely assisted and helped us.

So, we definitely hit a number in the month of May that allowed us to get to the more drivers. So, we definitely will probably not be the same percentage there is 2019, as we’ve done in 2018, but it will be some number. I would be [steady] to say that it’s probably 3%, 4%, 5% kind of number for driver pays increases and then we will see what happens, see what kind of success we have on that and we will go from there.

Richard Cribbs

And Jason we have, this year rate increases have been double digits kind of 12%, 13%, 14%, however you want to look it. And driver pay has been similar, kind of 10% to 12% increases as well, and so I think that if our numbers 6% to 7% rate increases then that 4% to 5% could be 6% to 7%. So, maybe the range is really 4% to 7% kind of number on driver pay increases, which again is passing along probably about 40% to 50% of the margin that we get in the rate.

Jason Seidl

Well, listen that’s great color guys. I want to take it back, my last here, on SRT, it wasn’t long ago where you guys were less than satisfied with some of the numbers coming out of there, and you put in a new management team, changed operation, can you give us an updated on how well that’s going?

Joey Hogan

Yes, Jason, hi, this is Joey. I think it’s come a long, long way in the last year. I think it’s the overall margin included what we call [indiscernible] basis points improvement versus the same quarter a year ago. We still think there is some opportunity there. Now, that includes dedicated. So, all the companies have been aggressively growing its dedicated fleets. So, I think the management team has done a really, really good job. I think there are still some more opportunity there. There is no question. I think the non-driving workforce that stabilized greatly, which I think is a big part that we had talked to much about it actually internally, as a key to the success for our team in Canada.

So that stabilized greatly, which I think is significant as we look. Work through this kind of let’s call it a last group of operating efficiencies that we need to get through. So, if I look across the enterprise they are still on opportunities, but it’s not what it was, but I would say there’s another let’s call it 500 to 700 points of operating ratio of 5 point to 7 points of ratio opportunity on the table for [indiscernible], and so I think the pricing is done exceptionally well, we've closed that gap, cost banks that we need to close there, but really pleased, still some good opportunity and I think that 2019 will get really close to where it could be.

Jason Seidl

5 to 7 points still seems like a decent amount of improvement left there. Well gentlemen listen, I appreciate the time. As always, a nice quarter.

Richard Cribbs

Thanks Jason.

Operator

Thank you, our next question comes from Brad Delco with Stephens.

Scott Schoenhaus

Hi guys, this is actually Scott Schoenhaus on for Brad.

Richard Cribbs

Hi, Scott.

Scott Schoenhaus

Hi guys, just wanted to follow up on any unusual merger related costs in the quarter, just trying to see if there was a negative effect on the OR at all from this merger from unusual cost items perspective?

David Parker

Scott very, very small, not even a penny a share. We basically had most of that collected in the second quarter and we called that out at that time. So, other than the intangible amortization that we have now reconciled to give you a GAAP versus non-GAAP adjusted OR and EPS number, there really wasn’t anything.

Scott Schoenhaus

So, just a penny, is that?

David Parker

Yes. If that – I mean, we have some extra travel cost as we’re getting to know each other and all those kinds of things, but it’s nothing material at all.

Scott Schoenhaus

And I guess my follow up would be, I know Scott Group asked about your rate expectations heading in for next years bid, are you seeing any customers pulling their bids forward? We’ve heard a lot about that, I just want to see from year-end if you are seeing your shippers trying to pull forward their bids ahead of their usual timing of next year? You know early…

David Parker

No, I have not seen that.

Scott Schoenhaus

Okay. Great. I’ll hop in the queue guys.

Richard Cribbs

Thanks, Scott

Operator

Thank you. And I’m showing there are no further questions.

Richard Cribbs

Alright. Well, we will wrap it up then. Thank you for everyone calling in, and we’ll talk to you again next quarter. Thank you.

Operator

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