Covenant Logistics Group, Inc. Class A

Welcome to today's Covenant Logistics Group Q222 Earnings Release and Investor Conference Call. Our host for today's call is Joey Hogan. At this time, I'll participate in a listen-only mode. Later, we will conduct a question-and-answer session. I'll now turn the call over to your host. Mr. Hogan, you may begin.

Thanks, Erica. Good morning, and welcome to our second quarter conference call. As a reminder, this 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. We ask that you 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 website at covenantlogistics.com, the Investors section. I'm joined on the call this morning by David Parker, Paul Bowen, and Trip Grant. To start with, we are grateful to our teammates for again producing record earnings per share for any quarter in our history. The transformation of the company that we have been working on for the past five years continues to build our confidence in our direction and our leadership team. Our asset-based truckload operations led the charge in the second quarter, improving its operating income 76% despite a significant headwind in operating costs. primarily insurance claims expense and less gain on sale. The combined increased cost has affected us by about 20 cents a share in the quarter. Additionally, the small acquisition we made in the first quarter, plus the continued pursuit of investing in our undervalued company stock, contributed nicely to the improved results versus a year ago. Despite the murky economic outlook, we are bullish on Covenant. In summary, the key highlights for the quarter were Our freight revenue grew 15% to $267 million compared to the 2021 quarter. Adjusting earnings per share increased 70% to $1.63 per share from the year-ago quarter. Our asset-based truckloads freight revenue grew 16% versus the second quarter of 2021 with 80 fewer trucks. Our less asset-intensive or asset-light Managed freight and warehouse segments combined grew 14% compared to the second quarter of 21. On the safety side, our DOT rate was 2% higher than a strong quarter last year, but development of a small number of prior period claims contributed to almost $0.06 per mile increase in insurance expense. Gain on sale was only $400,000 compared to $1.9 million in the year-ago quarter. Our tail leasing company investment produced another record quarter, contributing $0.33 per diluted share or an additional $0.17 per share versus the year-ago period. Through the strong cash flow in the quarter, our net indebtedness increased only $10 million after utilizing $28.5 million of cash on share repurchases. We finished the quarter with a leverage ratio of 0.43%, debt-to-equity ratio of 14.6%, and a record return on invested capital of 15.7%. Now Paul will provide a little more color on the items affecting the business units.

Thanks, Joey. For the quarter, our asset-light businesses comprised of managed freight and warehousing were 37% of total freight revenue and 34% of consolidated adjusting operating profits. As we have discussed in the past few quarters, the managed freight revenue growth versus a year ago is beginning to cool as the market softens and surge demand recedes. However, the net revenue margin continues to be strong, and we have an active pipeline for new business. By the end of the third quarter, our warehouse team will have stood up three startups for the year, primarily in the second quarter. We will focus the remainder of the year on maximizing the revenue and margin opportunities and to grow incomes. The asset-like growth remains a priority for growth, focusing on talent acquisition and technology enhancements. The expedited division was 35% of consolidated freight revenue and 55% of adjusted operating profit in the quarter. It grew its revenue 23% versus the year-ago quarter due to strong revenue per truck improvements and the growth of 40 trucks. The first quarter acquisition contributed to the revenue growth nicely. Expedited produced a record 83 adjusted OR, a 310 basis and point improvement over the second quarter of last year. Our freight network is not overbooked, but remains balanced. Maintenance, insurance costs, and less gain on sale were major headwinds in the quarter, but we feel driver pay is in good shape at the present time. Our expedited leadership team is doing a great job managing through this economic transition. The dedicated division was 28% of consolidated freight revenue and 11% of adjusted operating profit in the quarter. The division continued its steady improvement with adjusted OR improving slightly versus the first quarter of this year and 360 basis points from the year-ago quarter. Revenue per truck per week grew 70% versus the year-ago quarter, while cost increases in maintenance and insurance and lower gains on sale also consumed some of the margin improvements. The weed and feed process continues with another 122 trucks planned to be upgraded in the third quarter through either replacement and or revenue per truck pricing improvements. Based on what we see today, we feel good about our goal of an additional 200 basis points sequential OR improvement in the third quarter. The pipeline for the remainder of the year remains robust, supporting our expectation that margin improvement will continue. Our minority investment in TEL continues to produce strong, positive results. TEL's revenue in the quarters grew 33%, and pre-tax operating profit increased by 123%, both versus the second quarter of 2021. TEL decreased its truck fleet by 60 trucks to 2,013 and grew its trailer fleet by 117 to 6,869. Our investment in TEL is included in other assets on our consolidated balance sheets and grew $7.1 million to $58.1 million. As a reminder, TEL focuses on managing lease purchase programs for clients, leasing trucks and trailers to small fleets or shippers, and aiding clients in the procurement and disposition of their equipment through a robust equipment buy, sell, and maintenance program. TEL contributed a total of 33 cents per share to our overall results, or an additional 17 cents per share versus the year-ago quarter. Due to the business model, gains and losses on sales of equipment is a normal part of TEL's business and can cause earnings to fluctuate from quarter to quarter. TEL's future is very bright. As we said in our press release, we expect the second half of 2022 to exceed the adjusted earnings per share of the second half of 2021, bringing the full year 2022 to a minimum of $5 of earnings per share. We do believe There will be market headwinds from continued inflationary pressures and softening freight demand, but based on company-specific factors, the investments we have made in the sales team, the small acquisition, the share repurchase, and returning insurance costs to a more normalized level, we are confident in the second half and planning for 2023. Over the last five years, our customer base has been intentionally moved to less cyclical industries that are full-service logistics-focused. We said last quarter that 2023 will be a breakout year for Covenant, and we remain firm on that statement and confident that we will continue to produce cash and maximize opportunity for our shareholders. Thank you for your time, and we'll now open up the call for any questions.