Covenant Logistics Group, Inc. Class A

Welcome to today's Covenant Logistics Group second quarter earnings release conference call. Our host for today's call is Tripp Grant. 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. Grant, you may begin.

Thank you, Jen. Good morning, everyone, and welcome to the Covenant Logistics Group second quarter 2023 conference call. As a reminder, this call will contain forward-looking statements under the Private Securities Litigation Reform Act, which were subject to risks and uncertainties that could cause actual results to differ materially. Please review our SEC filings and most recent risk factors. We undertake no obligation to publicly update or revise any forward-looking statements. A copy of the prepared comments and additional financial information is available on our website at www.covenantlogistics.com slash investors. I'm joined on the call today by David Parker and Paul Bunn. We are pleased with our results for the quarter, which showed comparative resilience in the midst of a very soft freight environment. Consolidated freight revenue was down 9% compared to a very tough prior year comparable when the freight environment peaked. The decline related primarily to operating approximately 11% fewer weighted average tractors in our truckload operations and less overflow freight handled by our managed freight segment due to lower overall demand. Adjusted operating income fell approximately $12 million or 43% compared to the prior year quarter. primarily as a result of our expedited and managed freight segments, which declined by approximately $7.5 million and $6.5 million respectively, offset by an increase of approximately $2 million in our dedicated segment. Adjusted net income decreased 44% to $14.4 million, and adjusted earnings per share decreased 34% to $1.07 per share compared to the year-ago quarter. Weighted average diluted shares decreased as a result of our share repurchase program. Key highlights for the quarter include all four of our business segments, including expedited, dedicated, managed freight and warehousing, achieved sequential improvement and profitability in the second quarter. The acquisition of Lou Thompson & Son Trucking, Inc., a dedicated contract carrier comprised of approximately 200 tractors specialized specializing in poultry and live haul transportation. We've been pleased with the operational results today and are excited about the growth opportunities that lie ahead. Within our combined truckload segments, operation and maintenance related expenses declined on a cents per total mile basis by six cents or 21% and fixed equipment costs including least revenue equipment depreciation and gains on sale remain flat compared to the prior year. The average age of our fleet at June 30th remained flat sequentially at 26 months compared to March 31st, 2023, largely due to the equipment acquired from Lou Thompson and Sun Trucking. For the remainder of 2023, based on our current equipment order, we anticipate sequential improvement to the average age of our equipment. Gain on sale of revenue equipment was $2 million in the quarter compared to $0.4 million in the prior year. Our tail leasing company investment produced $0.29 per diluted share compared to $0.33 per share versus a year ago period. Our net indebtedness at June 30th climbed to $187.2 million in the quarter primarily as a result of the acquisition, yielding a leverage ratio of approximately 1.7 times and debt-to-equity ratio of 33.1%. On an adjusted basis, return on invested capital was 13% for the current quarter versus 17.6% in the prior year. Now Paul will provide a little more color on the items affecting the individual business segments.

Thanks, Tripp. Taking a moment to dive deeper into what drove our results for the quarter, starting with our expedited segment, freight revenue declined 7% compared to the prior year, largely due to a 6% reduction in the average fleet. Rates declined by just over 10%, but were offset by almost a 10% improvement in average total miles per truck compared to a year ago. The improvement in utilization was principally attributable to newer equipment in the fleet and reduced downtime. While we are pleased with the segment's utilization improvement, we recognize that year-over-year freight revenue per total mile comparisons will continue to be challenging for the remainder of 2023. While cost headwinds from salaries and wages and fixed equipment costs compressed margins, they were somewhat offset with improvements to variable-based equipment costs for the quarter. Our dedicated segment experienced an 8% reduction in freight revenue compared to the 2022 quarter as a result of a 217 or 15% reduction in the average number of total trucks, offset by an 8% increase in revenue per truck. Despite the addition of Lou Thompson & Son Trucking Fleet, the overall fleet reduction in our dedicated segment aligns with our strategy of exiting unprofitable or underperforming business and replacing it when opportunities arise that meet our profitability and return requirements. We were pleased with both the year-over-year and sequential improvement to the adjusted margin and expect to continue to improve upon this segment's profitability over the long term. Managed Freight experienced a 21% reduction of total freight revenue and a 76% reduction in adjusted operating profit. The significant reduction in revenue and operating profit was primarily attributable to little to no overflow freight from our asset-based truckload segments. The brokerage environment remains highly competitive with numerous brokers aggressively competing for volumes at the expense of margin. We anticipate continued margin pressure in this environment. Our warehouse segment saw a 37% increase in freight revenue compared to the prior year, resulting from the startup of new customers during the previous 12 months. We're pleased with the top-line growth we've achieved in this segment, and the team has done a phenomenal job in executing these startups, which are both intense and time-consuming. However, despite the significant top-line growth in the segment, we've only seen about a 10% improvement in adjusted operating profit compared to the prior year. Although we're pleased with the sequential profitability improvement within this segment, we will continue to focus on improving profitability of the mid-single digits through improved labor utilization and rate increases with existing customers. Our minority investment in tail contributed pre-tax income of $5.4 million for the quarter compared to $7.1 million in the prior year period. The decline was largely due to reduced gains on the sale of used equipment compared to the year ago. Till's revenue in the quarter grew 11% and pre-tax net income decreased by 26% versus the second quarter of 22. Till increased its truck fleet in the quarter versus a year ago by 210 trucks to 2,283 and grew its trailer fleet by 84 to 7,031. As a reminder, Till focuses on managing lease purchase programs for clients, leasing trucks and trailers to small fleets and shippers, aiding clients in the procurement and disposition of their equipment through a robust equipment buy-sell program. Due to the business model, gains and losses on the sale of equipment are a normal part of TEL's business model and can cause earnings to fluctuate from quarter to quarter. Our investment in TEL is included in other assets in our consolidated balance sheet and has grown to $66 million as of June 30, 2023, from our original investment of $4.9 million in 2011. In 2022, we received $14.7 million in cash dividends from tail, and we are anticipating approximately $19.8 million to be received during the second half of 2023. As we enter the third quarter, we are optimistic that the trough of the freight cycle is behind us, but are cautious about the rate at which we will see improvements. Regardless of how the freight economy responds, our primary focus remains on the long-term. by continuing to invest in areas that provide opportunities for us to make forward progress on our strategic plan, the acquisition of Lou Thompson and Son, and our investments in new revenue-generating equipment, people, technology are examples of this. Thank you for your time. We will now open up the call for questions.