Covenant Logistics Group, Inc. Class A

everyone. We now have all of 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 up the floor for questions. At that time, instructions will be given as to the procedure to follow if you would like to ask a question. I would now like to turn the conference over to Paul Bunn. Please go ahead.

Yeah, thank you, Shelby. Welcome to the Covenant Logistics Group third quarter conference call. As a reminder, this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risk 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, our risk factor section in our most recent Form 10-K and our current Form 10-Q. We undertake no obligation to publicly update or revise any of these forward-looking statements to reflect subsequent events or circumstances. As a reminder, a copy of our prepared comments and additional financial information are available on our website at CovenantTransport.com under the Investors tab. I am joined this morning by our Chairman and CEO, David Parker, and Co-Presidents John Tweed and Joey Hogan. In summary, the key highlights of the quarter were We experienced significant sequential improvement in revenue, adjusted cost per mile, and capital efficiency, resulting from significant progress in implementing our strategic plan, as well as industry-wide factors, including a bounce back in economic activity, inventory restocking, and ongoing shortage of qualified professional truck drivers. The freight environment for the quarter improved sequentially, with July being better than average, and August and September both being robust from a supply and demand perspective. The ability to attract and retain drivers became progressively harder from July through September. We downsized our fleet by 10% versus the average tractor count in the second quarter, and by 18% versus the prior year quarter, in an effort to focus on freight where we could earn an acceptable return on the related capital employed. We exited the factoring business by disposal of the related factoring assets in a transaction that generated $108 million in cash. We utilized the proceeds from the sale of the TFS portfolios and the sale of a portion of the aforementioned tractors to pay off $131 million in debt and reduce our leverage to levels not seen in over 10 years. The third quarter of 2020 was the second best of any third quarter in the past 15 years, only behind the third quarter of 2018. Turning to more detailed results for the quarter, the quarter included several non-GAAP adjustments that had a net positive impact of $0.08 per share related to discrete source third quarter items, plus the ongoing $0.04 per share ad back of non-cash and tangible amortizations. Our expedited segments revenue excluding fuel surcharges decreased 8%, primarily related to a 22% decrease of 270 tractors and average operating fleet compared to the 2019 period. Versus the year ago period, average freight revenue per total mile was down 14 cents or 7%, while average miles per tractor were up 28%, resulting in an 18% increase in average freight revenue per tractor per week. The significant fluctuations in the operating profile are the result of a change in mix to a more focused expedited model using a higher percentage of team-driven tractors and eliminating the majority of the solo refrigerated fleet and the related costs. Expedited adjusted operating ratio for the quarter was a 92. Our dedicated truckload segments revenue excluding fuel surcharges decreased 15% to $63.3 million, due primarily to a 15% or 274 tractor reduction compared to the 2019 period. Versus the year-ago period, Dedicated's average freight revenue for a total mile increased 9 cents, or 5%, while average miles per tractor were down 5%. The fluctuations in operating profile are the result of focusing on dedicated freight that has a better long-term operating profile. Dedicated's adjusted operating ratio for the quarter was a 94. Excluding the impact of the truckload-related third quarter adjustments, total operating expenses decreased 22 cents a mile, or 12%, compared to the year-ago period for our truckload operations. This decrease is the direct result of our strategic plan initiatives of downsizing our terminal network and solo driver fleet, short-term cost reductions to improve liquidity in response to COVID-19, and additional miles per tractor that more effectively spread fixed costs. Our managed freight segments operating revenue increased 43% versus the year-ago quarter to $47.6 million. This increase was driven by a 64% increase in our freight brokerage operating revenue The $39.4 million partially offset by a 12% decrease in the operating revenue of our TMS platform as a result of the ongoing COVID impact on a large customer. The growth in brokerage was primarily spot or project-type freight that should remain strong as long as capacity is constrained. Managed freight's adjusted operating ratio for the quarter was a 95%. Our warehousing segment's operating revenue increased 13% versus the year-ago quarter to $13.6 million. Adjusted operating income for the segment increased 9% to $1.7 million. Both operating revenue and adjusted operating income increased as a result of a new business startup that began in the third quarter of 2020. Warehouse's adjusted operating ratio was an 88%. Finally, we recognize the 1.2 million pre-tax income from our 49% equity method investment in Transport and Enterprise Leasing, compared with pre-tax income of 2.1 in the third quarter of 19, as TAIL continues to rebound from a key customer bankruptcy that occurred in the fourth quarter of 2019. At this time, I'll turn the call over to Joey Hogan to recap a few additional items.

Thank you, Paul. The main positives in the third quarter We're a robust freight market across all of our service offerings. Number two, a significant reduction in our net indebtedness. Number three, a significant reduction in fixed cost and better cost absorption given an increased asset utilization. Number four, tells sequential improvement in earnings. And lastly, subsequent to the end of the quarter, we were able to close a five-year extension. on our asset-based revolving credit facility with favorable terms, no fees, and retaining the flexibility that the current facility provides. The main negatives in the quarter were, one, it's one of the toughest driver recruitment and retention markets in over 20 years. Number two, there were several large prior period insurance claims eroding the limits of our nine X of one policy, creating both the charge to write off the remaining premiums recorded as a prepaid asset and a potential forward-looking exposure and volatility. Number three, less excess capacity for capitalization in the spot market. And then number four, the amended agreement related to the disposition of our factoring segment resulting in returning a portion of the consideration and taking on additional risk concerning the portfolio of assets that we sold. We've not recorded any reserve for potential claims under the risk sharing mechanism to date, and future amounts will be recognized when the requirements of GAAP for recording claims are satisfied. As we look to the fourth quarter, we're focusing on delivering superior service to our customers in what is expected to be a very robust peak shipping season with limited trucking capacity. Similar to the third quarter, a reduced fleet size and more focused and committed model provides limited capacity to flex up and take advantage of the peak spot market to the same extent we have in prior years. However, we do expect four-quarter volumes in pricing to be favorable and to support sequential margin improvements. In 2021 and beyond, our focus will be continued execution of our strategic plan, which consists of steadily and intentionally growing the percentage of our business generated by dedicated managed freight and our warehousing segments, reducing unnecessary overhead, and improving our safety, service, and productivity. This will be a gradual process of diversifying our customer base with less seasonal and cyclical exposure improving legacy contracts, investing in systems and technology, and people to support the growth of these relatively underinvested areas. As we undertake this multi-year effort, I would like to remind investors that our goal is to improve our earnings and returns in a manner that is sustainable and less susceptible to upward and downward market forces. The gradual improvements we expect will be offset at time by short-term forces. For example, In 2021, we expect underlying progress on efficiency and cost control, improved contract pricing, and improved safety. These benefits are expected to be offset to some extent by the return of certain cost pressures. Over time, we expect to exit the plan a stronger, more profitable, more predictable business with the opportunity for significant and sustained value creation. Thank you for your time. And now, Shelby, we'll open up the call for questions.