Covenant Logistics Group, Inc. Class A

Welcome to today's Covenant Logistics Group Q421 Earnings Release Conference Call. Our host for today's call is Joey Hogan. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. I would now like to turn the call over to your host. Mr. Hogan, you may begin.

Thanks, Ross, and good morning, everyone. Welcome to our fourth quarter 2021 conference call. As a reminder for everyone, the 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 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 10Qs. 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 tab. I'm joined on our call today by our Senior Executive Vice President and COO, Paul Bunn, and our Chief Accounting Officer Tripp Grant. David Parker is not able to join us this morning for the call. 2021 was a record year by Covenant in many ways. Revenue, our minority investment in tail, earnings per share, and return on invested capital all achieved record results. Our team battled through the continued effects of the pandemic, the most difficult driver market in history, Huge growth in our managed freight division and leadership changes early in the year. We pushed through some large pay adjustments across the enterprise in all areas. Warehouse teammates and our office staff. And over the last year, and we're excited to tackle 2000. The model transformation that we started five years ago is really starting to prove out with continued opportunities. And our results for 2021 are directly due to the Covenant community, its hard work and its commitment to each other and our customers. In summary, the key highlights of the quarter were freight revenue grew 27% to $267 million compared to the 2020 quarter. Our asset-based truckload group freight revenue grew 9% versus the fourth quarter of 20 with 186 less trucks. Our less asset intensive managed freight and warehouse segments grew a combined 56% compared to the fourth quarter of 2020. On the safety side, we produced another solid quarter with our DOT accidents rate per mile being 19% below the year ago period, the second lowest fourth quarter on record. And 2021 for the year finished the best year on record. Our tail leasing company investment produced a record quarter and year, contributing an additional 10 cents per share versus the year-ago period. We finished the year with an all-time low leverage ratio of 0.72, an all-time low net debt total capitalization ratio of 15.8%, and an all-time high return on invested capital of 13%. Additionally, we're very excited to announce the commencement of a quarterly cash dividend program. Work over the last few years to deleverage the company and improve our operating model to produce more consistent results led our board to this approval. Net indebtedness has decreased by almost $240 million over the last two years, with the potential to be close to debt free by the end of 2022. The goal is to yield 1% on an annualized basis, And at our current share count, we'll impact cash by about a million dollars per quarter. We continue to evaluate a full range of capital allocation alternatives to effectively deploy our cash. Now I'm going to turn it over to Paul to provide a little bit more color on the items affecting the business units.

Thanks, Joey. For the quarter, our managed freight division was our largest division, both in terms of revenue and operating profits. Its revenue for the quarter grew 67% and achieved record revenue of $321 million for 2021. Managed Freight's favorable results for the quarter were primarily attributable to the robust freight market executing on various spot rate opportunities and handling overflow freight from both expedited and dedicated truckload operations. This division remains a major strategic growth opportunity as we have invested more operations and sales resources into the division to continue its momentum into the future. We remain excited about this leadership team and the prospects going forward. The expedited division's revenue grew by 13% versus the year-ago quarter due to both strong rate and utilization improvements. We did invest in our driving workforce during the quarter with a significant pay increase, which after several quarters of sequential decline, we were able to hold the fleet size versus the third quarter and increase our seated truck camp. The driver pay investment was our third pay increase for the year and has given us momentum heading into 2022. We are very thankful that our customers value our service and supported our driving teams in this unprecedented time. The dedicated division had a good quarter and achieved nice sequential and year-over-year margin improvement despite some unusual corporate expenses that hit both expedited and dedicated in the quarter. Had it not been for the 250 basis points of unusual expenses in the quarter, dedicated would have hit the mid-90s OR target set at the beginning of the year. Revenue per truck continues to improve as we push through our improvement plan with further rationalization coming in the first half. The 21% revenue per truck improvement in the quarter was a significant contributor to the margin improvement. The pipeline for this division is very encouraging as we start 2022. The warehouse division grew 11% due to the impact of new business late in the third quarter and pricing to offset cost increases. Operating income was negatively impacted due to higher labor costs as it relates to a tight labor market and escalating real estate costs for newly leased facilities. We remain committed to our current asset-light model and continue to pursue opportunities to accelerate our growth. We're excited about this year as the operating model continues to be refined. We expect a good freight environment for the first half of the year with some moderation in the second half. Cost pressures will be meaningful in terms of wages, equipment, and over-the-road repairs for the year, but the market should allow us to pass the majority of those increases through to our customers in the form of rate increases. The first few weeks of the year were tough from a working truck percentage as many of our drivers the virus after the holidays, but the fleet working percentage has improved greatly in recent days, and we are especially pleased with where the team count is today. The dedicated improvement plan continues to make progress, and we are confident that we will continue to improve the margins to high single digits in 2022. Net indebtedness is already dropping in January. We will generate free cash in 2022, providing further opportunities to deploy cash for growth and or share repurchases. Thank you for your time and I'll open up the call for any questions.