Covenant Logistics Group, Inc. Class A

Excuse me, everyone. We now have 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 to the procedure to follow if you would like to ask a question. I would now like to turn the conference over to Joey Hogan. Please begin.

Thanks, Victoria. Good morning, everybody. Welcome to Covenant Logistics Group third quarter conference call. As a reminder for everybody, this call will contain forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risk and uncertainties that could cause to differ materially from those contemplated by the forward-looking statements. Please review our disclosures and filings with SEC, including without limitation the risk factor section in 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, the Investors section of that new website. I'm joined this morning by our Chairman and CEO, David Parker, our Chief Operating Officer, Paul Bunn, and our Chief Accounting Officer, Trip Grant. We're going to start with a summary for the quarter. After a strong second quarter, we once again achieved record revenue and earnings per share. We're extremely proud and appreciative of our teammates' efforts as we continue to transform our business into a full-service logistics provider. We still have more work to do. We know what the issues are. We have good plans, and we remain focused on our strategic direction. Additionally, during this time of supply chain disruption, we will remain extremely proud to be a product of an industry that has stayed behind the wheel consistently since the pandemic began. The industry has shown great resolve, leadership, and sacrifice to keep goods moving on the road and within our warehouse communities. I'm certain we will continue. In summary, the key highlights of the quarter were freight revenue grew 28% to $250 million compared to the 2020 quarter. Our asset-based truckload group revenue grew 7% versus the third quarter of 2020 with 157 less trucks. Our less asset-intensive managed freight and warehouse segments combined grew 73% compared to the third quarter of 2020. On the safety side, we produced another solid quarter with our DOT accident rate per mile being 13% below the year-ago period, the lowest third quarter rate in 10 years. Although Rising insurance premiums and inflation and claims costs across our industry offset some of this benefit. Our tail leasing company investment produced another strong quarter contributing an additional nine cents per share versus the year ago period. And then lastly, we were able to continue to capitalize on strong cash flows by reducing our net indebtedness by another 25 million since the second quarter of this year for a total of 39 million since the year began. providing a little bit more color on the items affecting each of the business units. Our managed freight division continued its strong performance for the year. For the first time, it's our largest division inside the group. Its revenue for the quarter grew 88% versus the year-ago quarter and eclipsed the $200 million mark on a year-to-date basis in the quarter. The results for the quarter were primarily attributable to the robust freight market growing its own customer base handling overflow freight from expedited and dedicated, plus capitalizing on our heritage of providing pop-up capacity for various retail customers. This unit remains a strategic growth division for Covenant for both and its high return on investment dynamics. Even though we continue to be cautious about the long-term sustainability of the top-line revenue and operating ratio within this unit, The leadership team is doing a great job staying for our customers, but also diligent on adding and developing sustainable relationships with the right customers in the right industries. The expedited vision continues to produce strong results. The supply, demand, and balance in the marketplace continues to lead us to customers that really need and value team supply for the long term. We are focused on partners with shippers that are looking past today's frothy freight docking capacity that keeps our teams busy and productive, even during the slow times. We're very excited about where this project and strategic direction is today. We've been able to improve our operating ratio by 730 basis points to an 84.8 OR, led by a 21% increase in revenue per truck. Both pricing and utilization are up nicely. On the negative side, we've lost some capacity as our average tractors are down 156, with the driver market being as bad as it's ever been. Driver wages in this segment are up 15% on a cents per mile basis versus a year ago, with this being the number one issue in this division. The dedicated division fell slightly short of our goal of a high 90s OR in the third quarter. With the transition of mostly automotive but other businesses as well in July, July was a rough month with a lot of equipment movement, shutdown expenses, and driver wages. The months of August and September did hit our high 90s target. However, revenue per truck improvement is beginning to accelerate, being up 5% sequentially versus the second quarter and up 13% versus the quarter of 2020. Another positive end of quarter is that our open truck situation is the lowest we've seen in several quarters, with only 7% of the fleet open at quarter end. Continued progress on rates and utilization, particularly among a handful of customers, remain necessary. Nevertheless, we're on track for meaningful improvement in 2022. Despite the rare loss of one customer early in the quarter, the warehousing division continued to grow from a revenue perspective but took a step back from a profitability perspective in a quarter. We added one new customer late in the quarter with a strong pipeline for the next several months. Operating income was negatively impacted due to additional contract labor costs as it relates to the pandemic and tight labor market, and additional building rent for a relocated customer facility prior to resumption of revenue and additional revenue at that location. We remain very excited and committed to this strategic growth division. Regarding our outlook for the future, for the balance of 2021, our focus remains to improve the profitability of our dedicated segment and continue running expedited and managed freight for the long term. I quote, we're not getting caught up in the spot market, end quote, period. Additionally, peak will be small for us relative to our past further allowing us to remain focused on the previous initiatives. We continue to anticipate cost headwinds in driver and non-driver compensation and benefits along with equipment and parts supply. Inflation is definitely affecting transportation and logistics. On the bright side, we expect to be able to pass through cost increases to customers that value our services as we expect the supply-demand imbalance to continue for the next few quarters. All things considered, we feel we are going to close out 2021 on a very strong note with earnings approximating third quarter results. Thank you for your time for this opening, and Victoria will now open up the call for questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open. Please state your name by posing your question. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Great. We'll take our first question.