Covenant Logistics Group, Inc. Class A

Excuse me, 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 the floor for questions. Instructions for asking questions will be given at that time. I would now like to turn the conference over to Joey Hogan. Please go ahead.

Thanks, Olivia. Welcome to Covenant Logistics Group's second quarter conference call. As a reminder, everyone, this conference call will be contain forward-looking statements within the meeting of 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 our filings with the SEC, including without limitation the risk factor section and our most recent Form 10-K and our current year Form 10-Qs. We undertake no obligation to publicly 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 new website at www.covenantlogistics.com in the Investors section. I'm joined this morning by Paul Bunn, our Senior Executive Vice President and Chief Operating Officer, Tripp Grant, our Chief Accounting Officer, Our chairman and CEO, David Parker, is sick today and is on the phone but won't be participating on the call. First of all, we'll start with an adjusted EPS perspective. We've reported our best quarter in our history, and the team was able to improve on our record first quarter results by 71% to $0.96 per share and significantly versus the difficult second quarter of 2020. As we discussed in the first quarter, the multi-year transformation into a full-service logistics provider that we began in 2015 is really starting to gain traction. Second, I'd like to take a moment and thank our teammates for their contribution to these results. It's been a most difficult period, especially the last year, 18 months, for everybody, the industry, not only our company, and I'm very proud to participate in this industry, and I think our teammates, the industry as a whole, has performed exceptionally, all things considered, to keep the economy moving and to continue to work hard in the supply chain. So we want to say thank you to our teammates that are participating on this call. In summary, the key highlights of the quarter were our operating freight revenue grew 29% to $232 million compared to the 2020 quarter. Second, our asset-based truckload revenue grew 9% versus the second quarter of 2020, with 369 less trucks. Our less asset-intensive managed freight and warehouse segments grew a combined 89% compared to the second quarter of 2020. On the safety side, despite rising casualty insurance premiums, we produced another solid quarter, with our DOT accidents per mile being 7% below the year-ago period and our total cost down approximately 3 cents a mile. After a strong first quarter, our tail leasing company investment produced another good quarter, contributing an additional 12 cents per share versus the year-ago period. And then lastly, we're able to continue to capitalize on strong cash flows by reducing our net indebtedness by 35.2 million since the first quarter of this year. Regarding the business units, I'd like to make a few comments. First of all, the expedited division continued its strong performance in the second quarter. The freight market continues to be strong and offers rate and lane improvement opportunities, evidenced by 43% improvement in revenue per truck per week. Please recall that last year we still had our solo division and the closure of that unit. contributed to the 342 reduction in this unit. The resultant mixed change is producing some big swings in comparisons, but nevertheless, an outstanding quarter with an 86 OR. Versus a very weak freight market last year during the second quarter, revenue per mile for expedited increased 10%, despite the length of haul increasing 31%, and miles per truck increased a large 31%. The driver market continues to be a challenge with us instituting a second large driver pay increase in July of this year. Our overall team count has remained flat versus the first quarter of 2021. For the future, we are working diligently to solidify long term capacity commitments with key expedited customers, which today we are very pleased with the results. Our dedicated division made progress in the second quarter. We discussed at length during the first quarter call our improvement plan and we're slightly ahead of that schedule. There were huge growth in this division throughout 2020 as we merged three separate dedicated fleets under common leadership and operating systems. The leadership structure has been resolved and the system merger was complete in May. Revenue per truck is beginning to move nicely. It's up 10% sequentially versus the first quarter and 17% versus the second quarter of 2020. All that is giving us great confidence toward reaching our mid to high 90s OR target for the third quarter. The second quarter includes the results of a lot of execution changes with key customers, and we're extremely appreciative of the hard work of our dedicated and equipment management teams as we work through this quarter. The new business pipeline growth with existing targeted accounts is very encouraging, which further feeds our optimism regarding our improvement plan. Our managed freight division doubled its revenue base versus a year ago, primarily driven by increases in some of our larger TMS customers and by significant growth in our brokerage freight. This unit works very closely with our expedited and dedicated divisions, providing both committed and overflow and project capacity. The robust freight market plus continuing to capitalize on the full enterprise sales and service capabilities excite us as we continue to drive this strategic growth unit. We are cautious about the long-term sustainability of the top line revenue and operating ratio in this unit as gross margins and volumes can be volatile. The division leadership team is working diligently with current customers to currently satisfy their needs, but also help provide long-term stability for this business unit. Nevertheless, even at lower margins, the return on capital is extremely high for this non-asset based business. The warehousing division continues its solid profitable growth. We had one large startup last year in the second half that is affecting first half results. with revenue being up 33% versus the second quarter of last year. As a reminder, around the current revenue size, the growth in this unit can be choppy as we expect revenue growth versus year ago to level out in the second half unless we have an additional startups in the second half. We do have a small startup planned early this fall. Overall, we're very pleased with the direction of this unit and may invest more in this unit in both sales and operations to facilitate Faster growth in this high return on asset service. Regarding our outlook for the rest of the year, although we are not providing specific earning guidance, we expect to have a very strong second half of 2021, which should mean meaningful improvement over a good second half of 2020 and likely continued generation of discretionary cash flows that can be allocated across a broad range of growth, debt pay down, and stockholder return alternatives. We intend to remain acutely focused on three main areas. Number one, upgrade and improve our dedicated division. Number two, stabilize and diversify within our managed freight division. Number three, sustainability and long-term capacity plans within our expedited business unit. We believe all have good, accountable plans with each leadership team focused on results. Achievement of each of these, though, will greatly benefit our goal of driving a stronger, more profitable, and more predictable business with the opportunity of significant and sustained value creation. Olivia, that's all our prepared comments, and now we'll open it up for questions.

Thank you. At this time, we will open the floor for questions. If you would like to ask a question, please press star followed by 1 on your telephone keypad. Questions will be taken in the order in which they are received. If at any time you would like to remove yourself from the questioning queue, press star 2. Again, to ask a question, press star 1 now. Our first question comes from Jack Atkins with Stevens. Please go ahead.