Covenant Logistics Group, Inc. Class A

Welcome to today's Covenant Logistics Group third 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. Mr. Grant, you may begin.

Good morning, everyone, and welcome to the Covenant Logistics Group third 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 our 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 third quarter, overcoming softer than anticipated volumes in our expedited division as a result of a lingering weakness in our overall freight environment. Compared to a year ago, Consolidated freight revenue increased by approximately $5.2 million, or 2.1%. $258.6 million in adjusted operating income increased by $1.5 million, or 8.3%, to $19.3 million. The year-over-year increase in freight revenue was primarily derived from new business growth within our dedicated segment, partially offset by reductions from expedited segment and managed freight segments. The growth in adjusted operating income was partially derived from both dedicated and warehousing segments, offset by reductions from expedited and managed freight. Adjusted net income of $15.2 million for the quarter was essentially flat with the third quarter of 2023 primarily because higher adjusted operating income was offset by $0.6 million increase in pre-tax interest expense, and a $1.3 million reduction in pre-tax earnings from our equipment leasing company investment tail. Key highlights for the quarter include our asset-based truckload operations, consisting of expedited and dedicated, grew its average tractor count by 169 units, or 7.9%. grew freight revenue by $11.4 million, or 7.2%, and improved its adjusted operating income by $1.6 million, or 12.6%. Our asset-light operations, consisting of managed freight and warehousing, experienced a $6.2 million reduction in freight revenue, or 6.5%, but was able to improve margin in a manner so that total adjusted operating income was only reduced by $0.2 million, or 3%. Our net capital investment for the revenue-producing equipment was approximately $18 million for the quarter, consisting of both specialized equipment capex for growth and maintenance capex. The average age of our fleet at September 30th improved to 20 months compared to 23 months a year ago. The sale of revenue equipment resulted in a $0.2 million loss in the quarter compared to a $0.6 million gain in the prior year. TEL produced $0.22 per diluted share compared to $0.29 per diluted share versus a year ago period. Our net indebtedness as of September 30th declined sequentially by $36.6 million to $236.7 million, yielding an adjusted leverage ratio of approximately 1.6 times and debt-to-capital ratio of 35.4%. On an adjusted basis, return on invested capital was 8.1% for the current quarter versus 10% in the prior year. The decline is primarily attributable to the increase in the average invested capital base associated with acquisitions, growth capex, and reducing the average age of our fleet. Now I'd like to turn it over to Paul for some more color on items affecting the individual business segments.

Thanks, Tripp. Our expedited segment fell slightly short of our operating expectations this period, with freight revenue of $87.4 million and adjusted operating income of $7 million, resulting in an adjusted operating ratio of 92. The miss was primarily a result of declines in utilization that resulted from softer than anticipated volumes and an imbalanced network, particularly in the last month of the quarter. This softness is extended into the fourth quarter, and we are currently working hard to mitigate its impact through new business awards and repositioning equipment to optimize our network. Dedicated was successful in growing both freight revenue and operating income while yielding an adjusted operating ratio of a 91. Compared to the prior year, freight revenue grew 15.7 million, or 23.5%, and adjusted operating income grew 3.2 million, or 73.9%. and margin improved 260 basis points compared to the prior year. Managed freight experienced a 9.1% reduction in freight revenue and a 29.5% decrease in adjusted operating profit compared to the prior year, reporting an adjusted operating ratio of a 95.7. The reductions in freight revenue and adjusted operating income are attributable to the combination of lower volumes of profitable freight and cargo-related claim expenses incurred in the period compared to the prior year. Our warehouse segment saw a 0.5% increase in freight revenue and an 85.1% increase in adjusted operating profit compared to the prior year, reporting an adjusted operating ratio of 91.5. We are pleased with the improvement in profitability within this segment, which struggled to produce adequate returns during the prior two years, when the business was rapidly growing and labor inflation outpaced our ability to obtain rate increases from our customers. Our minority investment in TEL contributed pre-tax net income of $4 million for the quarter, compared to $5.3 million in the prior year period. The decrease was largely due to the continued softness in the equipment market, suppressing gains on the self-used equipment, and increased interest expense. TEL's revenue in the quarter increased 6%, and pre-tax net income decreased by approximately 24% versus the third quarter of 23. Till increased its truck fleet in the quarter versus the year ago by 133 trucks to 2,328 and increased its trailer fleet by 477 to 7,490. Regarding our outlook for the future, for the remainder of the year, we believe the general freight market will remain challenging despite overall fundamentals slowly improving with excess carrier capacity exiting an environment that has had unstable conditions. Absent an outside catalyst to facilitate improved demand, we remain uncertain about the pace at which general freight conditions will meaningfully improve, allowing us to improve our margins with customers who are not providing an adequate return on capital. Despite these challenges, we remain very optimistic about our business model business model is evidenced by the durability and growth of our core operations over the last 24 months. In the fourth quarter, we believe we have both the momentum and team to continue to improve the efficiency of our operations and execute on opportunities that present themselves regardless of the status of the freight market. Thank you for your time. We will now open up the call for any questions.