Excuse me everyone. We now have all our speakers in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of today’s presentation, we will open the floor for questions. At that time, instructions will be given as the procedure to follow if you would like to ask a question. I would now like to turn the call over to Mr. Richard Cribbs. Sir, go ahead.

Thank you, Travis. Good morning. Welcome to our Third Quarter Conference Call. Joining me on the call this morning are David Parker and Joey Hogan. This conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. Please review our disclosures in filings with the SEC, including, without limitation, the Risk factors section in our most recent Form 10-K and Form 10-Q. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. As a reminder, a copy of our prepared comments and additional financial information is available on our website at www.ctgcompanies.com under the Investor Relations tab. Our prepared comments will be brief and then we will open up the call for questions. In summary, the key highlights of the quarter were: our asset-based divisions’ revenue, excluding fuel, increased 1.2% to $133.9 million due primarily to a 4.1% increase in average freight revenue per tractor, partially offset by a 2.6% decrease in average tractors. Versus the year ago period average freight revenue per total mile was up $0.07 per mile or 4.4% and our miles per tractor per week were down 0.3%. Freight revenue per tractor at our Covenant Transport subsidiary experienced an increase of 4.5% versus the prior year quarter, and our refrigerated subsidiary, SRT, experienced an increase of 7.2%, while our Star Transportation subsidiary experienced a decrease of 6.6%. The asset-based division’s operating costs per mile, net of surcharge revenue, were up approximately $0.031 per mile compared to the year ago period. This was mainly attributable to higher employee wages and maintenance expenses. These increases were partially offset by lower net…

[Operator Instructions] Our first question comes from Scott Group, Wolfe Research.

Hey good morning guys. It is Rob Salmon on for Scott.

Hey Rob.

Could you talk a little bit about your pricing expectations as we look out to next year? And maybe give us a little bit more context in terms of the rate per loaded mile that you experienced in the quarter. Given some of the noise around the hurricanes that you guys alluded to that obviously were a negative impact on utilization, I would imagine it was pretty nice tailwind when we're thinking about the pricing side of things.

Yeah I will give you the expectations. I'll let Richard and Joe help me on the hurricane information there, Rob. I would tell you, the rate environment, I think, is going to be very good. I think after coming off of two years, August 15, until basically August 15 this year, rates are predominantly flat. Ours are up a little. They're probably more of the industry than any individual company but kind of flattish in the environment. And I think that now there's a lot of – we got a lot of wind helping us from an environment standpoint, and I expect next year that we're going to continue to see very nice rate increases. If I was going to right now throw a number out there, I mean, I think that number is 5% to 7% to 8% to 9%, I mean I think that there's going to be some opportunities there for some nice rate increases after going through years without them as the year progresses. Because I think about a lot of our large customers that we go yearly on that prior to say, August, when the environment really heated up, in a lot of those customers we got between 0 and 1.5%. As I'm sitting here thinking of a lot of our say, top 10 accounts and most of those accounts don't come back up until the first two quarters of next year, with a lot of them in that May kind of time frame that is out there. So that said, it would be another six or seven months before we will hit a lot of our big accounts. But what we are sensing out there today is in that 5% to 7% kind of number is what is happening today. So I think next year is going to be a good year for a rate environment.

And related to the hurricanes, Rob. We, prior to the hurricanes in July and August, we were averaging rate increases slightly above 2%. And so you see the final number of 4.2%. So yes, September had some nice rates in it related to some of the hurricane-affected regions and the market in general because of that being tighter. And you saw the resultant utilization. We already talked about it. July utilization was up about 0.5%. August was up about 3%. And then September being down 4.5%. But so kind of looking at the impact across each of the months, it was pretty close to the 4% to 3.5% to 4.5%, 5% kind of numbers on a revenue per truck basis on a yield basis. And I think that's what we're seeing. And to David's point, what we're seeing in the market when we're repricing, well when we're pricing new lanes today that we're pricing them about 5% to 7%, 5% to 10% higher than what we were pricing them at in March or April. And we're being awarded those at about that same rate.

That is helpful and when you guys are speaking at that kind of 5% to 7% next year, is that on just the contractual renewals when they happen beginning in May? Or do you think you can average that over the full year given mixed opportunities, maybe a little bit better spot market?

No, I think I'd average it for the entire year.

Alright, that is very helpful there. When we're thinking about these types of rate increases, how should we think about driver pay? Should that be kind of commence increase at the same rate of the pricing that you're going to customers and that drops the bottom line? Do you think it will be a little more, a little less?

The driver situation is difficult out there today, so they will absolutely get a portion. In the past, in the past kind of, Richard, for every percent that we got, we've given drivers kind of 30% or 40% of that.

Which equals to, if there's a 5% rate increase, there's generally a 5% driver pay increase, too. And that ends up being about 40% of the rate that you get.

So I think that, that is probably the minimum number, that you might see that increase a little bit. It's not going to go crazy. But I could see, where we got to get a little bit ahead of the curve because as the business environment has gotten better in the last few months, the driver situation has also become more difficult. And so I think that we're going to have to attack that through the pricing for our drivers, through rate increases – I mean, through driver wage increases.

And that driver capacity issue seems to be the lid on capacity that, I guess, for somewhat the industry kind of needs to continue seeing the margin improvement that the industry also needs. There's a lot of the local jobs and last-mile jobs and those kinds of things that have opened up, and that continues to be booming and that does take away some of the over-the-road drivers.

Got it. I guess with drivers as tight as they are, you've lift the fleet age a little bit. It's still a very new fleet in comparison to the industry on average. Is that something that you guys think you might have to de-age the fleet again next year in light of some of the higher kind of maintenance costs that you're seeing as well as the tight driver market today?

I don't really think so. I mean, I think that our fleet is about, from a running standpoint, one of the things that we're looking at right now as we speak is, do we need to do anything more aggressive on the automatic side of it? We're probably at about one third of our fleet being automatic on this driver situation that more and more of them are – they are going to automatics. And I think we might be a little bit behind the curve and that we need to get at least equal to the curve on the automatic side. So if in fact we do it, it's not because I feel like that we have to do it and it's not because of a maintenance standpoint. It would be because I think we're a little bit behind on the automatic side. And we're having internal discussions on that. So I think you possibly will see that, but it's only because of that reason, not because of maintenance cost.

Yes so we’re about 2.2 years now. We grew to that level about second quarter of this year. So we still have, if we don't reduce the fleet age a little bit, we're probably looking at the same kind of a little bit higher maintenance cost for our fourth quarter and first quarter. And then when it wraps around the second quarter of 2018, seeing that possibly be kind of equal-ish year-over-year at that point.

That’s really helpful. I’ll leave it there and hop back in the queue if you have additional questions.

The next question comes from Brad Delco, Stephens Inc.

Hey David, Joey and Richard how are you?

Thank you Brad.

Thank you Brad.

Doing well. How are you?

Doing well. I want to ask you a question. David, I don't know how close you are to maybe some of these tax proposals. But what do you think the overall impact of what's being, at least thought, could do to the trucking industry? And maybe particularly the owner-operators. You think this will maybe kind of save some of the pressure that might otherwise be put on them with ELDs? Or I guess broadly speaking, how are you thinking about potential tax reform?

Yes, there is no doubt that it's going to be, a, I think something will happen. I don't know why I think that with our Congress we've got today. But I think something probably will happen. And it's going to be a big deal. And it's going to be a big deal for all the carriers out there. I was speaking to somebody yesterday, and we were having a conversation about ELDs and what it's going to do to the small guy. And it's going to – the saving grace to a lot of the small guys is that not only the tax but just the environment that is there, if they have the ability to understand, to make sure that they raise pricing to offset some of their decrease in utilization. And again, it may take something that in my humble opinion is going to be the biggest thing is deregulation, from a capacity standpoint, between December and April 1 that will start developing to make it something that's horrible to make it something that's bad. And a lot of that is going to – some of that savings is going to be on the tax. So I do. I think it's going to be a very good positive to all of us. And I think that it will allow us to do a lot of different things from a cost saving standpoint as well as there's no doubt that a lot of our employees will be able to – from a driver standpoint as well as the internal people, it's just a win-win when they're going to give you more money back.

Got you. And then, maybe a couple quickly for you, Richard. You just made the comment to Rob that you thought maintenance cost would be flat-ish in the fourth and first quarter. But you also said you're selling a lot more equipment in the fourth quarter than you're purchasing. And so typically, I think of there being prep cost before the sale of equipment. And maybe, at least, I was thinking that was the reason for higher maintenance cost. Is that – have we not seen that flow through yet? Is that what's going to contribute to higher maintenance in the fourth quarter? Or is it truly just older trucks?

Yes, to make sure, you just said that I said that we're going to be flat for fourth and first. And sequentially, that's probably true, okay. That makes sense. I thought you're saying year-over-year. Now I mean, just with the average age of the trucks, you have a few more of the trucks that are kind of just past their warranty periods and those types of things. And then, you have a little more over-the-road kind of maintenance costs and repairs than you do with a younger fleet. And so there really is some additional costs related to that. The prep charges actually haven't happened yet. When you see our balance sheet come out on the Q in early November, you will see our assets held for sale still aren't that high. And that kind of means that the prep charges haven't happened yet. If they were prepped and ready, they'd be put in that asset held for sale category. And so I think you're still going to see some of those costs continue to contribute to higher maintenance costs in the fourth quarter. And really, those costs will end up being in probably loss on disposal. So I expect that the capital cost number to be a little higher than it was in the third quarter related to a little more loss on disposal from higher sales of trucks in the fourth quarter.

Okay. And then two other real quick ones. When did the fuel hedges roll off?

Well, we still have some in the 2018 year. I think we were fully kind of basically what we call fully hedged about a quarter of our fuel purchases, 25%, 28% through the end of this year, end of 2017 and 2018 – yes, about 12% of our fuel purchases are hedged for 2018. And those are still at prices that are well, right now, they're probably at prices kind of equal to the DOE price. So we should see those turn – possibly turn favorable or at least be breakeven. But there'll be a benefit versus the losses on fuel hedges that we've had this year. We're probably going to see about – I'm going to say it's about $0.08 a share if I recall. I don't have that form in front of me. I'm pretty sure it's about $0.08 a share for next year compared to this year on fuel hedge savings. And then, they're rolled off and there aren't any more at this time. And we don't have an intent to purchase any at this time.

Okay. And then last is just related to guidance, and this may be, David or Richard, your question. But you basically said there's no change in your fourth quarter view. But I imagine it is quite different based on where we were three months ago. So I just want to make sure we're not interpreting – interpreting your guidance to suggest that you don't think the environment has changed in the last three months, I guess.

Well, it has. The underlying freight market is a little stronger. We are seeing from better freight selection, you're seeing the overall rate that you see recorded and recognized being up a little bit. And that's excluding the hurricane and FEMA-related activity. And so yes, probably up a little bit. And peak is basically kind of fixed at this point. We're basically committed. David could speak to that better than I could. But we're basically committed at this point for our peak freight. And so it's not really out there. We talked earlier in the year about maybe holding out, and let me just play on the spot market completely for those five weeks of peak. And we have setup with customers now where we're pretty much fixed on what that is going to be.

Okay. Just to make sure. All right, thanks guys.

Thanks Brad.

Our next question comes from Jason Seidl, Cowen.

Hi, guys, a couple of quick questions here. Talk to me a little bit about your spot exposure in 3Q and how that compared to maybe a year ago. And any plans on that changing going forward?

There's no change. I don't know if the definition of the spot is count the hurricanes or not. To be honest with you, I don't know how that's defined. But excluding the hurricane, our spot is 5% or less. It's not a big, big number on our spot. There's no doubt that we have seen it. As we all know, we have seen it explode throughout the third quarter and probably leveled off there up. But I mean, went up about 20% higher since – higher than that.

30%.

30% higher, 30% higher numbers that I think now we're kind of maintained in that 20% level.

Year-over-year, yes.

Year-over-year. And it's about 5% of our total, Jason, not count the hurricanes.

Okay. That makes sense. Also Richard, I think you gave us some good numbers on your fleet plans for the fourth quarter. I think you said 35 additions and 200 disposals. What should we start looking at for 2018?

Yes, I just think that it's hard, that's hard to determine. I think we're sitting at 2,500 trucks at the end of the quarter. I think I saw a report that was about 2,560 like in the last day or two here. So we're kind of maintaining around that number. I don't think there's any reason to believe that we could significantly grow our fleet, given the driver capacity issue next year. So I think if we were – we'd probably be happy to maintain our fleet size next year. Do you hear that, Joe and David?

Yes. I think Brad, or Jason, it's probably going to be somewhere 400 to 500 new trucks for next year, but we haven't finalized that yet and then replacements of those.

All in replacement.

Okay. All in replacement. So just net-net flat for now, that's how we should be thinking about it?

Yes.

Okay. Perfect. Also, you touched a little bit on driver pay. Could you remind us where you guys fall in terms of the scale of driver pay within the industry, if you can stick yourself on a quartile compared to some of the other carriers?

Yes, I think, Jason, our team pay, we've seen this over the cycles. Our team pay is typically in the upper 10% quartile in the industry. We constantly are pushing the needle on that. We've seen in good markets over the year, there's a bunch of people that want to move into that market and they'll start pushing wages. And we respond and decide what we want to do with that. So very typically when things are very high. On the dedicated side, as we grow that product, which we've grown a lot this year and we hope to grow it a lot next year, it's more on kind of what the market pays for that particular piece of business. And I would say, we're at market. And we are learning a lot about that, about how to source that and what each particular product needs to pay. But I would say, we're at market. Our solo product, which is primarily on the refrigerated side, I would say we're about average. If you look at all the pieces, I think we have some opportunity to move that average up as we continue to improve our refrigerated product offering utilization, which will move that average wage up. So team, very high, upper end, dedicated, market, solo, let's call it average. It's kind of who where are. Because really, the solo product on the expedited side, which we used to have a large product, is very small, so we really don't, call it, benchmark that much anymore.

Okay. So I guess the way to think about it for myself and for investors is barring anybody really trying to get aggressive in getting into the team market, you should fare better in wage increases than the average carrier?

I don't know if I would say that even as far as what rate increases we get, that we'd have to pass that on.

I think that we'd stay – I think we want to stay in that kind of upper percentage and teens. And I think that we want to stay at that market to slightly above market. So I don't know that you could say what you just said.

I think we will respond to wherever the market – whatever the market does. And so I don't think we want to give ground at all on the team side. So if it went up, we will respond to it. And so yes, I agree that we will respond to the market.

Okay, fair enough, gentlemen. And I think you kind of alluded to it that looking out in the fourth quarter that your peak season capacity is already booked. Did you book all that capacity in terms of pricing before the market really tightened in the hurricane?

Yes. Yes, it's interesting. I would say that most of our capacity tightened or we gave away our capacity middle of August to end September-ish up until a week ago. But I mean, in the last 60 days, last 45 days.

Other than that, that half of capacity that we talked about that we did in February or March.

Yes. Okay.

Outside of that, it's been in the last 40, 45 days.

Okay. Well, that’s great color. Gentlemen, thank you so much for the time. I really appreciate it.

Thanks, Jason.

We currently have no further questions in the queue.

All right. Well, thank you, everybody, for being on the call this quarter, and we look forward to talking to you again in January. Have a nice day.