Covenant Logistics Group, Inc. Class A

Excuse me, everyone. We now have our speakers in conference. Please be aware that each of your line is in a listen-only mode. At the conclusion of today's presentation, we will open the floor for questions, and at that time, instructions will be given. I would now like to turn the conference over to Paul Bunn. Sir, please go ahead.

Hey, thank you, Katie. Welcome to the Covenant Logistics Group fourth 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, and actual results could differ materially from those contemplated in the forward-looking statements. Please review our disclosures and filings with the SEC, including without limitation the risk factor section and our most recent Form 10-K and 10-Qs. We undertake no obligation to publicly update or revise any forward-looking statements for subsequent events or circumstances that may occur. A copy of our prepared comments and additional financial information is available on our website at CovenantTransport.com on 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 for the corridor were the strong freight market continued across all segments and markets of our business, attributable to expanding economic activity, inventory restocking, and ongoing shortage of qualified professional truck drivers. Against this backdrop, our strategic plan showed significant progress, resulting in better adjusted margins, improved capital efficiency, and a deleveraged balance sheet that affords significant flexibility going forward. Our revenue is approximately the same on a fleet that is nearly 18% smaller than the same quarter last year. We have paid down over $200 million in debt and lease obligations versus December 31, 2020, and $51 million since the end of our third quarter. The ability to attract and retrain drivers was very difficult, as any market in recent history, and COVID complicated driver availability due to downtime of drivers and our shop technicians. Our mix was impacted in terms of revenue and profit as a result of shifting our Freight to our managed freight segment, when expedited and dedicated, did not have a driver available. Our 49% equity investment in transport and enterprise leasing returned to its historical profitability levels, generating a pre-tax income in-tax contribution of $3 million, compared to a loss of $500,000 in the 2019 quarter. And we reported a $44 million non-cash charge in relation to discontinued factoring operations that could become a cash item in future periods. This is nearly our entire exposure of the $45 million indemnification obligation. Together with other adjustments related to our restructuring, the total adjustments were $47.8 million for the quarter. Turning to more detailed results, notable financial results for the quarter included our expedited truckload segments revenue, excluding fuel surcharge, decreased by 13.9%, primarily related to a 27.5% decrease in our average operating fleet compared to the 2019 period. Versus the year-ago period, average freight revenue per total mile was down 10 cents, or 5.1%, while average miles per tractor was up 25.2%, resulting in an 18.8% increase in average freight revenue per tractor. The significant fluctuations in the operating profile are the result of First, a change in the mix to a more focused expedited model using a higher percentage of team-driven tractors and eliminating the majority of our solo refrigerated fleet and related costs in the second quarter of 2020. Expedited's adjusted operating ratio for the quarter was 91.2. Our dedicated truckloaded segment's revenue, excluding full fuel surcharge, decreased 14.2% to $62 million, due primarily to a 10.5% average operating fleet reduction compared to the 2019 period. Another key driver of the reduction was utilization. Compared to the fourth quarter of 2019, total miles per unit declined 10.2% as a result of driver shortages in 2020. This miss in utilization was partially offset by a 13 cent or 6.9% increase in rate per mile. Dedicated's adjusting operating ratio for the quarter was 99.9%. As Joey will explain in detail, this is really a tale of two cities, as half of our dedicated fleet operated in acceptable margins and the other half operated under contracts that need to be replaced or repriced. Excluding the impact of the truckload-related fourth quarter adjustments, total operating expenses decreased 13 cents per mile compared to the year-ago period. This decrease is a 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 our fixed cost. Our managed freight segment's operating revenue increased 51.3% versus the year-ago quarter to $64.9 million. This significant improvement in revenue is primarily attributable to the robust freight market, executing various spot rate opportunities, cost structure improvements that were implemented as part of our strategic plan, and handling overflow freight from both expedited and dedicated truckload operations when they did not have a driver available. Managed freight's adjusted operating ratio for the quarter was 91.5. Our warehousing segment's operating revenue increased 25.8% versus the year-ago quarter to $14.6 million, primarily as a result of new customer business that began operation in the third quarter of 2020. Adjusted operating income for the segment decreased 3.9% to $1.5 million from the prior year quarter. Warehousing's adjusted operating ratio for the quarter was 89.6%. The decline in the adjusted operating ratio is primarily due to labor inefficiencies that spiked in the fourth quarter as a result of the COVID-19 pandemic. At this time, I will turn the call over to Joey to recap a few additional items. Thank you, Paul.

The main positives in the second quarter were a robust freight market across all our service offerings. Number two, a significant reduction in our net indebtedness. Number three, reduction in our fixed costs and better cost absorption, giving increased asset utilization. Number four, tells improvement in earnings. Five, flexibility in customer service provided by the efficient use of our managed freight segment to cover customer needs when expedited and dedicated like to drive. The main negatives in the quarter were, number one, one of the toughest driver recruiting recruitment and retention markets in 20 years. Number two, COVID's negative impact on driver availability. Three, less excess capacity for capitalization on the spot market. Number four, the increase in casualty insurance costs versus both the prior year and prior quarter, resulting from several severe accidents in the third quarter and fourth quarter of 2020. And then number five, the loss contingency accrued related to the TBK indemnification. Going forward, Our focus will be the continued execution of our strategic plan, which consists of steadily and intentionally growing the percentage of our business generated by our dedicated managed freight and warehousing segments, reducing unnecessary overhead, 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, and investing in systems, technology, and people to support the growth of these previously underinvested areas. Approximately one-half of our dedicated fleet operates under contracts that generate insufficient returns and require replacement or renegotiation. Freight environment and our new business pipeline are both currently robust, which we believe will support our commercial plan. While this will take time, We believe our existing pipeline will reduce ongoing sequential progress during 2021. Going into 21, we are facing cost increases from the end of our short-term COVID-19 programs, increased wages, and higher insurance and claims expense. Effective January 4th of 21, we implemented the largest pay increase in the company's 35-year history for our expedited driving force and effort to increase our team count to targeted levels. In addition, we have replaced our former $9 million and excess of $1 million layer of auto liability insurance with a new $7 million and excess of $3 million policy that were run from February 1 to 21 through March 31 of 2024. While the combination of the increased retention and premiums is forecasted to increase our insurance and claims costs, eliminating the gap in coverage created in the third quarter of 2020 that resulted in a self-insured retention layer of $10 million per claim has been a focus here to minimize our forward-looking volatility. Additionally, yesterday, we announced a share repurchase program, which affords us significant flexibility to allocate capital toward the expected most favorable results for our shareholders. Our stock has traded around book value for the last several months, and we believe the flexibility resulting from the reduction in debt over the last nine months may create an opportunity or has created an opportunity for us to invest in our sales, given doing so is less disruptive than an acquisition or alternative use of cash flow. Now I'll turn it over to John for a few comments.