Covenant Logistics Group, Inc. Class A

Welcome to today's Covenant Logistics Group third 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.

Tripp you may begin. Thanks Ross. Good morning everyone and welcome to the Covenant Logistics Group third quarter 2023 conference call. As a reminder This call will contain forward-looking statements under the Private Securities Litigation Reform Act which are 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 proposed 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 Porker and Paul Bunn. We are pleased with our third quarter's results, which benefited from the full quarter effect of the Lou Thompson & Son trucking acquisition in the second quarter reflected in our dedicated segments. In addition, our expedited segment benefited incrementally from the increase in demand for team driver freight as a result of the closure of Yellow. However, more broadly, the overall freight environment remained challenging with few signs of immediate macroeconomic improvement. Compared to a year ago, consolidated freight revenue was down 5%. The decline is primarily attributable to the combination of little to no overflow freight handled by our managed freight segment and a lower tractor count in our dedicated segment. The reduction of tractors assigned to dedicated resulted from exiting underperforming legacy contracts partially offset by acquiring Lou Thompson and Son. The result was higher earnings on fewer trucks. Adjusted operating income declined approximately 4.6 million or 20% compared to the prior year quarter. primarily as a result of our managed freight segment, which declined by approximately $4.7 million. Adjusted net income decreased 32% to $15.3 million, and adjusted earnings per share decreased 26% to $1.13 per share compared to the year-ago quarter. Weighted average diluted shares decreased as a result of our share repurchase program. Key highlights include freight revenue for the quarter was the highest for any quarter of the year, surpassing second quarter by 4%. The Lou Thompson and Sun Trucking operation continued to perform well with our first new poultry-related customer startup in late September and a strong pipeline of additional bids. The average age of our fleet at September 30th improved to 23 months compared to 29 months in the prior year and 26 months at June 30th, 2023. Within our combined truckload segments, compared to the prior year, operations and maintenance-related expenses declined by 6 cents, or 21%, and fixed equipment costs, including leased revenue equipment, expenses, depreciation, and gains on sale remained flat on a total cents per mile basis. Gain on sale of revenue equipment was 0.6 million in the quarter compared to 0.2 million in the prior year. Our tail leasing company investment produced $0.28 per diluted share compared to $0.38 per diluted share versus a year ago period. Our net indebtedness as of September 30th was $183.4 million, yielding a leverage ratio of approximately 1.7 times and debt-to-equity ratio of 31.8%. On an adjusted basis, return on invested capital was 10.6% for the current quarter versus 17.5%, in the prior year. And now Paul will provide a little more color on the items affecting the individual business segments.

Thanks, Tripp. The performance of Expedited during the third quarter provided for a 90.7 adjusted OR in the midst of a historically weak freight environment. We believe this says a lot about the work we have done to deploy assets with the right customers to lower our cost per mile, improve our utilization, and focus on what we can control. In the context of an 8% decline in revenue per mile, we believe a 12% improvement in utilization and a lower cost per mile are significant accomplishments. The improvement in utilization was principally attributable to newer equipment in the fleet and reduced downtime, which we will look to continue as year-over-year freight revenue per total mile compressions are expected to continue and be challenging for the remainder of 2023 and into 2024. Dedicated reflected another success story centered around our disciplined approach to capital allocation. Dedicated improved its adjusted operating ratio to approximately 93.6 by effectively weeding and feeding. We reduced the overall size of the fleet by 170 trucks, while nearly doubling adjusted operating income. Trading out approximately 400 legacy contract units for Lou Thompson & Son aligns with our strategy of exiting unprofitable or underperforming business and replacing it when opportunities arise that meet our profitability and return requirements. We are pleased with the year-to-year improvement to adjusted margin and expect this to continue to improve upon both the segment size and profitability over the long term. Managed freight experienced an 11% reduction in total freight revenue and a 57% reduction of consolidated adjusted operating profit. The significant reduction in revenue and operating profit was primarily the product of little to no high margin overflow freight from our asset-based truckload segments in the 2023 quarter. The brokerage environment remains highly competitive with numerous brokers aggressively competing for volumes at the expense of profit or margin. We anticipate continued margin pressure in this environment. Our warehouse segment saw a 15% increase in revenue and an 82% increase in adjusted operating profit compared to the prior year. The top line growth is a result of new customer startups over the last 12 months, and the operating profit improvement was a result of the combination of new customer business and improved rates for existing customers. Although we are pleased with the improved profitability within this segment, We will continue to focus on improving profitability more through improved labor utilization and rate increases with existing customers. Our minority investment in tail contributed pre-tax net income of $5.3 million for the quarter compared to $7.4 million in the prior year period. The decline was largely a result of reduced gains on sale of used equipment compared to a year ago. Tail's revenue in the quarter declined 8% and pre-tax net income decreased by 28% versus the third quarter of 2022. Tail increased its truck fleet in the quarter versus a year ago by 42 trucks to 2,195 and grew its trailer fleet by 153 to 7,013. Due to its business model, gains and losses on the sale of equipment are the normal part of business for tail and can cause earnings to fluctuate from quarter to quarter. Our investment in TAIL is included in other assets in our consolidated balance sheet and has grown to $61.6 million as of September 30, 2023, from our original investment of $4.9 million back in 2011. In 2022, we received $14.7 million in cash dividends from TAIL, and year-to-date, we have received $9.8 million in dividends in the third quarter of 2023. For the fourth quarter, we expect our revenue and earnings to experience a modest decline sequentially due to cyber attacks on a major customer and the ongoing United Auto Workers strike, which is temporary to press load volumes and revenue per truck and our expedited and dedicated divisions. More broadly, however, we are optimistic that the trough of the freight cycle is behind us, but remain cautious about the rate at which we'll see improvements. For 2024, we believe that the first half of the year may continue to be challenging and expect capacity to continue exiting the market. Although we're eager for the freight environment to improve, 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 by exiting underperforming capital tied to underperforming customers and investing capital in business units and customers that provide adequate returns improving our safety culture, and investing in our people. Thank you for your time, and we will now open up the call for questions.