Covenant Logistics Group, Inc. Class A

Welcome to today's Covenant Logistics Group Q3 22 Earnings Release and Investor 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. Welcome, everyone, to the Covenant Logistics Group third quarter conference call. As a reminder to everyone, 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. Please review our disclosures and filings with the SEC, including, without limitation, the risk factor section in our most recent Form 10-K and our current 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 now available on our website at www.covenantlogistics.com, the Investor section. I'm joined on the call this morning by David Parker, Paul Bond, and Tripp Grant. Kind of an opening for the call, despite the challenges of a negative of negative GDP growth, overstocked inventories, and industry-wide overcapacity that have increased over recent months. Combined with major inflationary pressures, we remain grateful to our teammates for producing record adjusted earnings per share for any third quarter in our history. On a consolidated basis, adjusted net income was up 31% and adjusted earnings per share was up 49% on the strength of revenue growth flat adjusted operating margin, growing contribution from tail, and a 12% reduction in diluted share count resulting from our ongoing share repurchases. Return on capital for the trailing four quarters was 23% compared with 12% for the trailing four quarters of 2021. On the truck side, we were pleased with how our utilization and rates held sequentially from the second quarter. but the impact of delayed deliveries of new equipment and escalating costs of parts, maintenance, and other line items compressed our margins in the quarter. Our managed freight group did a great job in holding margin despite reductions in overflow freight from the truck side, and our warehouse team withstood cost headwinds associated with new customer business and investments in additional warehouse capacity for future growth. The contributions of the AAT acquisitions. which operates in a less economically sensitive market. Tail, dedicated, and stock repurchases provided most of the improved earnings per share despite a weaker market compared to the historically strong market a year ago. In summary, the key highlights of the quarter were our freight revenue grew 6.5% to $267 million compared to the 2021 quarter. Adjusted earnings per share increased 49% to $1.52 per share compared to the year-ago quarter. Our asset-based truckloads freight revenue grew 15% versus the third quarter of 21 with 53 fewer trucks. Our asset-like managed freight and warehouse segments combined freight revenue shrank by 5% compared to the third quarter of 21. On the safety side, our DOT accident rate was the lowest third quarter on record. 11% lower than the third quarter of last year, but development of a small number of prior period claims contributed to almost $0.03 per mile increase in insurance expense. Gain on sale was only $200,000 compared to $900,000 in the year-ago quarter. Our tail leasing company investment produced another record quarter, contributing $0.38 per share or an additional $0.24 per share versus the year-ago quarter. We purchased another million shares during the quarter, bringing the total to 3 million shares through September 30 for this year. Due to the strong cash flow in the quarter and the sale of the California terminal, our debt indebtedness decreased by almost 29 million after utilizing 27.5 million of cash on share repurchases. We finished the quarter with leverage ratio of 0.23 times, debt-to-equity ratio of 7.8%, And again, a return on invested capital of 23.3%. Now, Paul will provide a little bit 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 38% of total freight revenue and 41% of consolidated adjusted operating profit. In the managed trans side of the business, while we believe revenue has stabilized, we expect margin compression into a softening environment. Our warehouse revenue stream has accelerated due to the impact of three startups for the year, receiving the full revenue impact in the third quarter. We expect startup costs and unoccupied lease costs to decline in the first quarter, improving our margins. The asset-like group remains a priority for growth, focusing on talent acquisition and technology enhancements. The expedited division was 34% of consolidated freight revenue and 48% of adjusted operating profit in the quarter. It grew its revenue 26% versus the year-ago quarter due to strong revenue per truck per week improvements and growth of 80 trucks, with the first quarter acquisition contributing to revenue growth nicely. Increased salaries and wages, equipment and maintenance costs, and insurance costs continue to be a major headwind in the year. Sequential operations and maintenance costs were significant in the quarter, but we feel third quarter was our peak from a cost perspective on equipment and maintenance costs due to an aggressive replacement plan between now and the end of 2023. Driver pay remains stable at the present time. The dedicated division was 28% of consolidated freight revenue and 11% of adjusted operating profit in the quarter. Revenue per truck growth was 14% versus the year-ago quarter, while cost increases in salaries and wages, equipment, and maintenance eroded some of our progress on margin improvement. We missed our sequential OR improvement goal for the quarter, mainly due to the increased cost during the quarter. We continue to work diligently to improve margins through fleet reductions, a reduction of approximately 60 trucks in the quarter, equipment upgrades, and asset allocation to more profitable accounts. Our minority investment in tail continues to produce strong and positive results. Tail's revenue in the quarter grew 45%, and pre-tax operating profit increased by 125% both versus the third quarter of 2021. Tail increased its truck fleet in the quarter versus a year ago by 279 trucks to 22,153 and grew its trailer fleet by 492 to 6,860. After receiving more than a $7 million distribution during the quarter, our investment in TEL, which is included in other assets in our consolidated balance sheet, remained at $58 million. As a reminder, TEL focuses on managing lease purchase programs for its clients, leasing trucks and trailers to small fleets and shippers, and aiding clients in the procurement and disposition of their equipment through a robust equipment buy, sell, and management program. Tell contributed a total of 38 cents per share to our overall results, or an additional 24 versus the year-ago quarter. Due to the business model, gains and losses on the sale equipment are a normal part of the business and can cause earnings to fluctuate. I'll turn the call back to Joey.