David Parker - Chairman, President, & Chief Executive Officer Richard Cribbs - Chief Financial Officer Joey Hogan - Chief Operating Officer.

Brad Delco - Stephens Reena Krishnan - Wolfe Research Tom Albrecht - BB&T.

Good morning and welcome to the third quarter conference call with Covenant Transport. (Operator Instructions). I would now like to turn the call over to Richard Cribbs. Sir, you may now begin. .

one, significant improvement in the operating profitability excluding the cargo claim reserve at each of our three asset based trucking subsidiary; two, a 6.7% increase in average freight revenue per total mile and a 5.7% increase in average miles per truck versus the same quarter of last year; three, a sequential increase in our professional driver employee headcount; and four, a decrease in our total indebtedness.

The main negatives in the quarter were the $7.5 million additional expense related to the 2008 cargo claim adverse judgment; and two, other increased operating costs on a per mile basis.

Among asset-based service offerings, since the end of the second quarter, we increased capacity allocated to our Covenant Transport subsidiary and maintained the capacity level of our Star Transportation subsidiary, while reducing capacity allocated to our SRT subsidiary.

Our fleet experienced growth to 2,599 trucks at the end of September, a 35-truck increase from our reported fleet size of 2,564 at the end of June. Our fleet of team driven trucks averaged 851 teams in the third quarter of 2014; that’s a 6.4% sequential increase over 800 teams in the second quarter.

Therefore, we increased our overall driver count by approximately 85 drivers during the third quarter of 2014. Availability of team driven trucks is especially important in order to help meet our shippers expected strong fourth quarter demand for the time sensitive needs of expedited freight associated with e-commerce retailers.

Freight yield results for the first three weeks of October 2014 continue to outpace our prior year results as the freight environment shows no signs of slowing down heading into what has traditionally been our peak shipping season. Thank you for your time, and we will now open up the call for any questions..

At this time we will open the floor for questions (Operator Instructions). Our first question comes from Brad Delco with Stephens..

Good morning David, Joey, and Richard, how are you?.

Good morning..

Hey Brad. .

David, maybe to start with you. You guys had a great quarter first off. In the commentary around 4Q, you sound strong as well, particularly the commentary in what you’ve seen quarter-to-date in October.

Can you sort of put into context what your normal seasonal trends are through the fourth quarter? Is this abnormal to see the strength this early in October and what are you expecting in your business as we get closer to Thanksgiving and Christmas season?.

one, being paying capacity that’s existed out there that date back a year ago, and then the other one was just a phenomenal growth of e-commerce that I think really came to fruition last year when you consider that some time in the month of November, the [day] (ph) that we’ve all been riding on and talking about for multiple years with supply and demand, and all these people went out of business for the last five years, it crossed.

Something happened last November to the trucking industry on capacity, and after you saw that in November, then peak was unbelievable and then e-commerce was unbelievable, so that was last year. I remember though sitting in October, the first five weeks or so of last year saying business is okay, but it’s nothing to ride home about.

We were moving our trucks, but we were doing it pretty easy on moving the trucks, and this year it is just opposite of that.

Freight has been very, very good in just about every region of the country for the first three weeks, and what we are sensing from our customers about the upcoming peak, they are all expecting some excellent numbers, and so I’m very excited about it.

We are having multiple, multiple meetings on making sure that we are ready for peak and I think it’s going to be an exciting time based upon expectations. At the end of the day, none of us know until people start dialing 1-800-Amazon or Wal-Mart or Zachs, or whatever they are going to call in this e-commerce world, so it will be interesting. .

Yes.

I guess David kind of specifically on that question though, it sounds like I guess your comp in October may be a little bit easier, and I guess what would give you confidence that these trends we are seeing thus far in the fourth quarter, what sort of visibility do you have from your shippers that would say as we get into November and we did see that acceleration a year ago, that these sort of year-over-year improvements that we’re seeing in results could hold throughout the quarter..

Yes, the only thing we don’t know – I mean we’ve got a lot of shippers, a lot of customers that have already bought up capacity, and they pay us for that capacity, but that said, you know that’s one of those things that if they get in to peak and lets say that their purchasing capacity of whatever -- ten trucks, that starts November 20th.

They are buying that capacity, but at the same time, if they get in the -- and there’s no Christmas season and everybody’s feeling horrible, then they can release those trucks.

So, even though they are buying the capacity to begin with, there is no doubt that they could easily let that capacity go away if they see that they are not getting the business that they thought they would for Christmas..

Brad, I’ll add a little color to that and that every year we have our shippers telling us what they think their needs are going to be, and except for maybe one who’s done a really good job of forecasting what peak is going to be, they are always a little high.

But so, say they started at saying they need 12 loads a day or what have you last year, this year they would be saying higher numbers. So they might be saying 16, I’m just using this as an example for this year. So they are always a little high, but they started higher this year than they started last year.

And then the one retailer or shipper that I’m talking about that does a really good job of forecasting has forecasted similar growth this year from what they had last year..

No, that’s good color, and then last question from me and I’ll get back in queue. Has there been any change in the discussions with shippers.

I mean clearly they need your team expedited capacity in tight periods of time, i.e., what we see in the third quarter and fourth quarter, but you typically see that demand for that service go away in the first quarter, which puts a lot of seasonality in your business.

Are you structuring any of your conversations with shippers to say, hey, we’ll give you capacity in the fourth quarter, but you have to sort of be with us if you will in the first quarter; have those types of conversations been had?.

Yes, yes. That’s a great question actually Brad, because you’re exactly right, the way the team model does, you know that. And yes, we’ve had more in-depth discussions. Sam Hough is leading that effort internally with our customers and the ones that are asking, asking, asking on this –them saying, here’s what we expect.

And it’s the hardest that we’ve ever been on trying to draw the line and saying here are our expectations for the first quarter, and I can tell you, those conversations have gone extremely well, and there’s no doubt that proof is in the pudding, but these are long term existing customers that we have done multiple years of business with that we are going to hold them accountable in this first quarter on what they are telling us, and I’d say that we’ve probably have had five or six serious conversations in the last 60 days about our expectations in the first quarter, and so far everyone of them are saying, we will be there for you.

Even if we got to take it off rail, we will be there for you. So we are at least – now I don’t want to say confident, because I won’t be confident till March gets here, but we are pretty happy about what we are hearing from our customers..

And Brad, these are customers that we have a strong relationship with and great partnership with and they’ve been very receptive to agreeing to taking or giving us more loads in the first quarter, especially in the areas where we need it the most.

And part of those conversations are around, they are really understanding our drivers needs for those additional miles and that if we are going to be there for them and have team capacity in March, in May and June and August and September, then we need to keep our drivers happy and retain them by giving them the miles that they need.

And so they are understanding that, and recognizing that it’s for their own benefit to keep our trucks moving in the first quarter for them as well..

Got you. Well guys, thanks for the time and congrats on a great quarter..

Thanks Brad. .

Thank you, Brad..

Our next question comes from Reena Krishnan with Wolfe Research..

Hello. Good morning guys.

How are you?.

Good morning..

Just wanted to make sure – first of all, just wanted to understand a few things. In terms of the tractor additions and the driver count, I thought that you guys were – when you guys put out your pre-report you had mentioned a number of 50 tractor additions and it looks like its 35.

Am I not remembering that correctly or was that…?.

That’s correctly. At the end of August we were up 50. At the end of September we were only up at 35. However we had continued conversion to team trucks from solo.

So one of the things that we’ve benefited from was – and that’s why the driver camp was actually up 85 and that was the statement we made and that’s because the team pay, at least at the Covenant subsidiary has a bigger delta from solo pay on total compared to what you take home than it ever has and so we have had quite a few of our solo drivers that have decided that its worth teaming and have converted to being on a team truck..

Okay, I see what your saying, okay great. And then in terms of – you guys mentioned that so far quarter-to-date year-over-year trends are trending at or above where they were in 3Q and if I remember correctly, you guys also have a couple of large dedicated contracts that are coming up for re-pricing this quarter.

Have those already been re-priced or are you in the process of doing that? Where do we stand in terms of that?.

Those are kind of November, a couple of large ones are November event and those conversations are going well. I mean I’m not worried at all about loosing business. It’s a matter of can we get to what we’re asking for and I don’t know that yet..

Sure..

Yes, we’re okay there..

Yes, okay. Just wanted to get a sense of that commentary, included what your expectations were or not, okay.

And then in terms of the length of haul and what you guys are doing or what you guys are seeing in terms of solo to team conversion, should we expect your length of haul to increase more between third quarter and fourth quarter or is it going to kind of stay in this level. What are you guys expecting, just given what your hearing from customers and….

Reena, as I said I had a really – it probably will close to where its at now. It may increase a little bit, but our peak consists of a lot of long haul freight, but as I’m thinking, as your sitting there, I mean we also got a lot of local stuff, some of those local stuff. So I’m just guessing that it’s going to be about the same length of haul..

Okay, I got it. Okay, and then in terms of gains on sales, should we expect a similar level? I know that last year – we are looking at sort of an easy or comp or just versus what you guys saw last year in terms of gains of sale or you actually saw a loss.

How should we think about it for next quarter or for this quarter as we are looking at you guys bringing on a few more tractors or trading out a few more tractors?.

Yes Reena, on the gains, they should be reduced in the fourth quarter from the third. Probably half of what we saw this third quarter versus $1.355 million and so around half of that, because when your in peak season it is much more difficult to trade out trucks and trailers when your running as heavy as you are.

And then when your not running heavy its because guys finally get a little home time and so there’s not as much trading out of equipment, so we don’t have as much disposals, which is part of the reason our fourth quarter was poor last year from a gain standpoint. So that’s going to be lower in the fourth quarter.

CapEx should be about the same as it was in the third quarter, around that same range of $13 million-ish..

Okay great, and then one last question from me. Just have you guys given a thought for CapEx for next year, just given the strength in used truck market and what your seeing in terms of fuel efficiencies.

Do you expect at this point it to be similar or better or higher I should say?.

Yes, the trucks that we are purchasing, we’ve been in somewhat of a pre-buy mode to, as we discussed to get this great deal of 50 (ph) trucks into our fleet and that will basically be completed by May.

We are hearing that there is another nice step of improvement into 2015 trucks from all the equipment manufacturers and so we have a smaller order through the end of the year, after we kind of get through the first round of pre-buy.

So our truck purchases next year will be less than they were this year, at least that’s the current expectation; however, our proceeds will be much less too.

Going into the year we had a whole lot of trucks held for sale and I think we had – it was maybe 220 out of service tractors that were sitting there at December 31 that I was a little frustrated about frankly, that we didn’t get them out of the fleet sooner. So this year we’ve seen heavier proceeds.

We won’t get that next year and then we are going to be buying more trailers and swapping up trailers next year. So CapEx should be higher next year actually, but still probably close to depreciation levels. .

Okay, and I guess – sorry, this will be my last question. In terms of looking at fuel costs, have you guys given any numbers or any guidance on how to look at it.

How much are the lower fuel costs is from the new equipment versus fuel prices actually being lower throughout the quarter?.

No, we haven’t and we probably wouldn’t try to break that down for everyone. That would be pretty tedious with fuel surcharge recovery, our hedge activity.

Reduction of idle time miles, idle time, fuel economy….

What we’re paying at the pump..

What we’re paying, I mean it’s all of those..

It’s multiple things..

Okay, understand. I was just trying to see how much of this was obviously the upgrade of the equipment versus for fuel. Okay, thanks guys. Thank you for the time..

And the trucks that we are replacing currently, we are still getting better fuel economy on the new trucks versus what we are replacing..

Okay, understand. Thanks..

All right. Thanks Reena..

(Operator Instructions) Our next question comes from Tom Albrecht with BB&T..

Hey guys, good morning and fantastic quarter. Just a couple of questions. I’ve chatted with Richard about this a little bit, but David, I wanted to get your perspective. I think you got 200 or so refer teams.

What do you think you could add in 2015? Could you add 50 or 60 teams there or is that too aggressive?.

No, I do think that around a 250 kind of number is a number that probably is where that thing is going to be set at for 2015 Tom. .

Yes, it’s probably by the end of the year. Over the course of the year we are continuing to add to that..

Yes, our team refer just continues to have some great opportunities out there for us as this organic grocery stuff comes about and we are very, very pleased with that and there’s a lot of opportunities out there..

And how many dedicated – in the dedicated question earlier, approximately how many trucks are represented through those two contracts?.

A couple of hundred..

Okay..

Yes..

And then it’s easy – I mean I certainly get this question from time-to-time. People just automatically assume that the overwhelming reason you are strong with your teams is because of the rail service problems. But could you just kind of walk through the strength in teams and where it’s coming from, maybe north south versus east west or west east.

Can you elaborate on that?.

Yes, its interesting that right, wrong or indifferent for 30 years we all know we’ve gone through times and we do a lot. I mean we are up to about $1 million a month with the rail, so I don’t mean this in negative at all; they are a good partner of ours.

By the end of the day they were going to take over every load that existed going long haul and we just kept doing what we did throughout good and bad and that is the belief that our teams were – something that was precious there and I think that the question that is really there to determine what’s the longevity of this team exposure and my humble opinion is starting around 2007, 2008 when the financial crisis hit, and you had customers who started worrying about inventory levels more than they’ve ever worried about them ever, that displays that.

And then e-commerce, depending upon what your take is on e-commerce, is it going to grow, is that going to get flat, that would determine what happens with these teams and we are in the half that inventory levels are going to continue to remain at historical lows. There is good and bad to that.

The bad is that the fright environment truly does operate based upon the cash register to-date.

And they are able to – if it slows down and not as many people came in and bought stuff, they slow the supply chain down immediately and we feel that immediately and the opposite side of that is that when things are going well, we feel that immediately also and then when its going well, they are screaming for teams.

And that with the driver issue that we’ve all been experiencing, you’ve got less and less carriers that have kind of given up the ghost of the team side and the ones that have been left on the teams have been able to do pretty well with that, with the teams.

So we are of the opinion that the team side is going to continue for the foreseeable future and what I mean by foreseeable future is that it takes four to five years anyway until I can say its up and down the road that dictates otherwise. So now to answer your question, it is all those.

It really became basically a not 800 to a 1,000 mile kind of whatever origin or destination it is that has that length of haul. There is no doubt that east to west is a no-brainer and its still a big part of our business and what we do. But north to south it became a nice piece of the business as well.

And with the hours of services and the singles not able to run the miles, its almost like an expedited team has gone down to that 600, 700 mile length of haul that expedited and we are just simply taking that and making sure that we are getting the revenue on a per day basis that we got to get if its 700 miles and its 700 miles.

So there is a lot of – if I was going to put a percentage on it Tom and I don’t have that in front of me, but I would say east to west its 65%, 70% and north south is 30% kind of numbers, but probably two years ago that north south was 10%. .

That’s helpful.

And then when I look at Covenant Transport, the average length of hauls, about 1099 miles, how big of a length of haul gap is there between the teams, the 851 and the other, call it 500 trucks that are solo, but generally somewhat long haul within Covenant Transport?.

Rich, I don’t know if you have the exact numbers. .

I don’t have the exact numbers, but it’s about 500 miles gap between those two. .

Okay. I mean that’s helpful enough. And then the last question I have would be just relative to earnings. Obviously fuel is helpful; you are off to a great start in October. You’ve really had five quarters in a row of meeting or beating expectations.

I think its important that you – I think you will continue to do well, but also just managing those expectations. Would you expect earnings to be comparable to what you just experienced or I know you don’t give guidance, but any sort of nuances might be helpful to sort of make sure expectations are realistic. .

Yes, we don’t give guidance, however I think you can look at what’s going on with rates and utilization, taking out of our outlook statement and see that we expect that to be improved sequentially.

We did also comment that we had implemented a nice peak pay increase for the professional drivers and so that’s going to eat up some of that improvement in revenue, but I’d say it probably won’t eat all of it, and then we just have to see how our safely quarter goes and how weather is and all those type of things.

So I don’t know if that gave you what you’re looking for, but that’s probably the best we can do. .

No, that’s helpful. You and I have chatted, so I think I know where you are coming from. So I appreciate that color. .

You know prior to saying that, as you look at that in my opinion is that sequentially over the years whatever second quarter did to third, and third quarter did to fourth, and fourth does to first, I do think a level has gone up better based upon our earrings and so the more it kept going up, but I think that sequential process up or down is probably a good rule of thumb Tom, with the first quarter being the one that none of us have our hands around yet.

I hope that everything we are demanding from our customers comes about. That’s how (inaudible) or not. .

No, that’s helpful. I appreciate it. Thank you. .

(Operator Instructions). At this time I’m showing there are no future questions. .

All right, thank you Dollar (ph). Thank you everyone for calling in and we will talk to you next quarter. .

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