Covenant Logistics Group, Inc. Class A

Welcome to today's Covenant Logistics Group second quarter earnings release and investor 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 Grant. You may begin. Thank you.

Thank you. Good morning, everyone, and welcome to the Covenant Logistics Group's second quarter 2024 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 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. Our core business performed well in the second quarter, overcoming lingering weakness in the overall freight environment. Compared to a year ago, consolidated freight revenue increased approximately $12.8 million to or 5.3% to $256.5 million, and adjusted operating income increased by $2.4 million, or 15% to $18.7 million. The year-over-year increase in freight revenue was primarily derived from growth in average tractor counts within our asset-based truckload segments consisting of expedited and dedicated. The growth in adjusted operating income was principally derived from our asset-based dedicated segment in both of our asset light segments consisting of managed freight and warehousing. Adjusted net income of $14.5 million for the quarter was essentially flat with the second quarter of 2023, primarily because higher adjusted operating income was offset by a $1.7 million increase in pre-tax interest expense and a $1.3 million reduction in pre-tax earnings from our equity leasing company investment tail. Key highlights for the quarter include our combined truckload segments grew the average total tractor count by 191 units, or 9.1%, and improved freight revenue per tractor by approximately 0.8% compared to a year ago. Our dedicated fleet achieved the lowest adjusted operating ratio in company history with a 90.9% and grew its average tractor count by 136 units, or 10.9%, compared to the prior year. Within our combined truckload segments, compared to the prior year, operations and maintenance-related expenses declined by 2 cents per total mile, or 10%. Fixed equipment-related costs, including leased revenue equipment expenses, depreciation, and net gain loss on sale increased 3 cents per total mile, or 8%, as a result of operating newer, more costly equipment, and a soft-used equipment market. Insurance and claims expense increased $0.08 per total mile, or 56%, compared to the prior year as a result of increases in new current period claims expense and the development and settlement of one large prior period claim. Our net capital investment for revenue-producing equipment was approximately $43 million for the quarter, consisting both Specialized equipment capex for growth and maintenance capex. The average age of our fleet at June 30th improved to 21 months compared to 26 months a year ago. The sale of revenue equipment resulted in a $0.9 million loss in the quarter compared to a $2 million gain in the prior year. TEL produced $0.23 per diluted share compared to $0.29 per diluted share versus a year ago period. Tel's contribution to pre-tax net earnings declined primarily as a result of the year-over-year softening in the used equipment market, suppressing gains on sale, and increased interest expense. Our net indebtedness as of June 30th was $273.3 million, yielding an adjusted leverage ratio of approximately two times and a debt-to-capital ratio of 39.5%. On an adjusted basis, return on an average invested capital was 8% for the current quarter versus 13% in the prior year. The decline is attributable to reduced year-over-year trailing 12 months operating income, particularly from our asset-light managed freight segment, and the increase in average invested capital base associated with acquisitions, growth capex, and reducing the average age of our fleet. And now Paul will provide a little more color on the items affecting the individual business segments.

Thanks, Tripp. Expedita was successful in growing freight revenue by approximately $3 million, or 3.4%, but experienced a 330 basis point deterioration in profitability compared to the prior year with an adjusted operating ratio of 94. Although our average tractor count grew by 6.4%, profitability fell short of our expectations primarily as a result of cost headwinds from significant casualty claims and year-over-year declines in both rate and utilization. Dedicated was successful in growing both freight revenue and operating income while yielding the best adjusted operating ratio in company history with a 90.9, representing 170 basis point improvement compared to the prior year. During the quarter, the team successfully executed a second large startup for the year, increasing the fleet's average tractor count by 10.9% year-over-year. Managed freight experienced a 4.6% reduction in freight revenue and a 73.6% increase in adjusted operating profit compared to the prior year, reporting an adjusted operating ratio of 94. The significant improvement to adjusted operating profit was primarily the result of a combination of improved purchase transportation costs, the year-over-year impact of the Sims transport acquisition, and reduced cargo-related claims compared to the prior year quarter. Our warehouse segment saw a 0.7% increase in freight revenue and a 104.7% increase of adjusted operating profit compared to the prior year, reporting an adjusted operating ratio of a 91. We are pleased with the improvement in profitability within this segment, which struggled to produce adequate returns during historical periods of rapid growth and significant labor inflation. Our minority investment entail contributed pre-tax income at $4.1 million for the quarter, compared to $5.4 million in the prior year period. The decrease was largely due to the continued deterioration in the equipment market, suppressing gains on sale of used equipment. Tel's revenue for the quarter declined 4.1%, and pre-tax income decreased by approximately 24% versus the second quarter of 2013. Tel decreased its truck fleet in the quarter versus a year ago by 77 trucks to 2,206, introduced its trailer fleet by 2017 to 2014. Regarding our outlook for the future, as we head into the third quarter of the year, we believe freight fundamentals are continuing to improve by excess carrier capacity slowly exiting the market with unsustainable conditions. Absent an outside catalyst to facilitate improved demand, we remain uncertain about the pace at which general freight conditions will meaningfully improve. Despite these challenges, we remain optimistic about our business model as evidenced by the durability and growth of our core operations over the last 12 months. In the third quarter, we believe we have the momentum necessary to produce sequential operating income growth throughout the year. Although much of this growth will be offset by higher interest costs and reduced earnings contributions from tail, we are excited about the direction of our company. Lastly, it is with sad news that we recognize the passing of Doug Carmichael, founder and CEO of Tail. Doug was a true partner with Covenant and a friend to all who worked with him. Known for his entrepreneurial spirit, quick wit, and deep generosity, Doug will be missed dearly by all who were fortunate enough to know him. Although we will miss Doug, he leaves behind the most talented management team Tail has ever had, We look forward to working with this team more closely to honor Doug's legacy and ensuring the continued success of this business. Thank you for your time, and we'll now open up the call for questions.