Q2 2022 Covenant Logistics Group Inc Earnings Call

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Welcome to today's Covenant Logistics Group Q222, Earnings Release and Investor Conference Call. Our host for today's call is Joey Hogan. At this time, I'll participate in a listen-only mode. Later we will conduct a question and answer session. I'll now turn the call over to your host. Mr. Hogan, you may begin. Will the house become closed immediately?

Thanks, Erica. Good morning and welcome to our second quarter conference call.

As a reminder, 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.

We ask you please reveal your disclosures in our filings with the SEC, including without limitation the risk factor section and our most recent form 10K and our current year form 10Qs. We undertake no obligation to public update or revise any forward looking statements to reflect subsequent events or circumstances.

A copy of our prepared comments and additional financial information is available on our website at covenantlogistics.com, the investors section. I'm joined on the call this morning by David Parker, Paul Bunn, and Tripp Grant.

To start with, we are grateful to our teammates for again producing record earnings per share for any quarter in our history.

The transformation of the company that we have been working on for the past five years continues to build our confidence and direction and our leadership team.

Our asset-based truckload operations led the charge in the second quarter, improving its operating income 76% despite a significant headwind in operating costs, primarily insurance claims expense and less gain on sale. The combined increase cost has affected us by about 20 cents a share in the quarter.

Additionally, the small acquisition we made in the first quarter, plus the continued pursuit of investing in our undervalued company stock contributed nicely to the improved results versus year ago. Despite the murky economic outlook, we are bullish on covenant.

In summary, the key highlights for the quarter were our freight revenue grew 15% to $267 million compared to the 2021 quarter. Adjusting earnings per share increased 70% to $1.63 per share from the year ago quarter.

Our asset base truck loads freight revenue group 16% versus the second quarter of 2021 with 80 fewer trucks. With 80 fewer trucks.

Our less asset and tensor, our asset, less asset and tensor, our asset light, managed freight and warehouse segments, combined grew 14%, compared to the second quarter of 21. ter

On the safety side, our DOT rate was 2% higher than a strong quarter last year, but development of a small number of prior period claims contributed to almost 6 cents per mile increase and interest expense.

Gain on sale was only $400,000 compared to $1.9 million in the year ago quarter.

Our tail leasing company investment produced another record quarter, contributing 33 cents per unit and almost overall to one in months the year-old starts with an average shoulders

Do the strong cash flow in the quarter are net indebtedness increased only $10 million after utilizing $28.5 million of cash on share repurchases.

We finished the quarter with a leverage ratio of.43, debt to equity ratio of 14.6%, and I record return on invested capital of 15.7%.

Now Paul will provide a little more color on the items affecting the business units.

Thanks, Joey, for the quarter for asset light businesses comprised of managed freight and warehousing, where 37% of total freight revenue and 34% of consolidated adjusting operating profit. As we have discussed in the past few quarters, the managed freight revenue growth versus Jericho is beginning to cool as the market softens and surge demand receipts.

However, the net revenue margin continues to be strong.

We have an active pipeline for new business. By the end of the third quarter, our warehouse team will have stood up three startups for the year primarily in the second quarter.

We will focus the remainder of the year on maximizing the revenue and margin opportunities into grow income.

The asset-like route remains a priority for growth focusing on talent acquisition and technology enhancements.

The expedited division was 35% of consolidated freight revenue and 55% of adjusted operating profit in the quarter. It grew its revenue 23% versus the year ago quarter due to strong revenue per truck improvements and the growth of 40 trucks.

In the first quarter, the first quarter acquisition contributed to the revenue growth nicely. over the second quarter of last year.

Our freight network is not overbooked but remains balanced.

Maintenance, insurance costs, and less gain on sale were major headwinds in the quarter, but we feel driver pay is in good shape at the present time. Our expedited leadership team is doing a great job managing through this economic transition.

The dedicated division was 28% of consolidated freight revenue and 11% of adjusted operating profit in the quarter.

The division continued its steady improvement with adjusted OR improving slightly versus the first quarter of this year and 360 basis points from the year ago Corb.

Revenue per truck per week grew 17% versus the year go quarter, while cost increases in maintenance and insurance and lower gains on sale also consumed some of the margin improvements.

The Weed and Feed Process continues with another 122 trucks planned to be upgraded in the third quarter through either replacement and or revenue for truck pricing improvements.

Based on what we see today, we feel good about our goal of an additional 200 basis points sequential OR improvement in the third quarter. The pipeline for the remainder of the year remains robust, support our expectation that margin improvement will continue. The pipeline for the remainder of the year remains robust, support our expectation The pipeline for the remainder of the year

Our minority investment in TALE continues to produce strong, positive results.

Tills revenue in the quarters of Group 33% and pre-text operating profit increased by 123%. Both vrs. 2nd quarter of 2021.

TEL decreased its truck fleet by 60 trucks to 2013 and grew its trailer fleet by 117 to 6,869.

Our investment in tail was included in other assets on our consolidated balance sheet and grew $7.1 million to $58.1 million. The

As a reminder, TEL focuses on managing lease purchase programs for clients.

leasing trucks and trailers to small fleets or shippers, and aiding clients in the procurement and disposition of their equipment through a robust equipment buy, sell, and maintenance program.

Till contributed a total of 33 cents per share to our overall results, or an additional 17 cents per share versus the year ago quarter. Or an additional 17 cents per share versus the year ago quarter.

Due to the business model, gains and losses on sales of equipment is a normal part of Tails business and can cause earnings to fluctuate from quarter to quarter.

Tale's future is very bright.

As we said in our press release, we expect the second half of 2022 to exceed the adjusted earnings per share of the second half of 2021, bringing the full year 2022 to a minimum of $5 of earnings per share. We do believe there will be market headwinds from continued inflationary pressures and softening freight demand, but based on company-specific factors, the investments we have made in the sales team, the small acquisition, the share repurchase, and the short-term

In returning insurance costs to a more normalized level, we are confident in the second half and planning for 2023.

Over the last five years, our customer base has been intentionally moved on less cyclical industries to our full service logistics focus.

We said last quarter that 2023 will be a breakout year for Covenant, and we remain firm on that statement and confident that we will continue to produce cash and maximize opportunity for our shareholders.

Thank you for your panel and now open up the call for anything.

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Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad now. You'll be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, if you'd like to ask a question, please press star 1 now. Our first question comes from Jason Seidel from Cowan. Please state your question. Hey, thank you, operator. Good morning, guys, and congrats with the quarter. Wanted to talk about some of the puts and takes for the second half of the year in terms of some of the...

tailwind you might see versus some of the headwinds. On the tailwind side, how should we look at gains on sale for 2H compared to 1H, and then how should we look at the insurance side of things? I imagine since you had not a great insurance quarter that things would be coming down, at least only expectations for 3G.

Yeah, Jason, this is Trip. Hope you're doing well today. Yeah, so I think you're going to see some pretty strong gains on sale of equipment in the second half of the year, particularly on the tractor side.

I think if you look back the last four quarters it's been very, very light, so you'll see some tailwinds there. So you'll see some tailwinds there.

on the from an insurance perspective, I think you'll start to see that normalized a bit. We're not gonna run 20-cent insurance each quarter. It was exceptionally, you know, strong during the third quarter, but I think you'll start to see that soften just for a little perspective.

You know on average last year our insurance was about 15 cents per mile I'm not saying it'll go to 15 cents per mile in the third quarter, but I think you'll see it you know somewhere between Where it landed last year and in the 20 cents per mile Cost for Q3 or Q2 Okay, that's very helpful trip and and how about some of the headwinds? Can you talk a little bit about the contract pricing marketplace sort of how it trended through the quarter and what you're seeing in early 3Q?

Yeah, well, I'll turn a part of that over to Paul, but I think from a cost headwind perspective, we're continuing to see new equipment costs coming in pretty strong from a cost perspective. Also seeing ops and maintenance costs continue to be cost headwinds that have haunted us for a while.

for the majority of this year, but you know, as we get that new equipment in and we're working on to get as much as we can as possible, you'll start to see the average age of the equipment decline a bit, which should help that from a back half of the year, beginning of next year perspective.

Paul, you want to talk a little bit about the contracts? Yeah, Jason, a couple of things. On the contract business, I would call it flattish. We're not having a lot of customers come back on the contract side of the business and ask for rate. I think, just a reminder, we...

We said it a minute ago in the script that, we moved to a lot of less cyclical type customers and really didn't overstep our bounds, I think, in the last 18 to 24 months. And I think thus far that's paying dividends on folks sticking with us through times that are no doubt softer than they were earlier in the years. So on the straight up contract pricing, I would say, fly outish. I mean, we're not getting a lot of rate increases, but we're not getting pressure, a lot of pressure either.

on the managed freight side of the business. You know, that's, as we've said before, that's where our exposure to the spot market is and we are seeing things soften up. So, I think you'll see dedicated margins improve, expedited margins hold, you know, to maybe get a little worse and you're gonna see on the managed freight sides of the tier-ration in margin in the second half of the year. So, I would say that's a headwind.

No, that makes a lot of sense. And Tripp, just if I can get back to your sort of share repurchase program, obviously, you know, that helped you out here in the quarter, you were able to buy a bunch of stock back. You know, how should we think about the second half of the year? Obviously, I'm assuming less, but sort of just how much less active are you? Do you plan to be in the marketplace given the positive reaction to the stock? So it's obviously a good thing, but I'm just looking at it from a modeling perspective.

Yeah, so it's, let me just, I don't know if I can answer your question directly, but here's what I'll say. We put this program in place, which is a fairly large program, $75 million program in place in May, and we designed it specifically for the longer term duration and we built some parameters in place that help, you know, we can't control what's purchased once the plan goes into place, but what I would say is as long as we're, you know, trading at a

what we would consider a lower tangible book multiple and have, you know, what I'll call moderate to low leverage from a debt perspective, we're going to continue to repurchase shares. Now, to your point, with the uptick in the stock price just over the last few weeks, you'll start to see that soften because our tangible book multiple will start to go up. So, I don't think, you know, I'm not going to predict what the stock price is going to do, nor could I if I tried, but...

think you'll start to see that soften a bit but we've been purchasing in a really good clip as we disclosed you know from a historical perspective and we even had some July numbers out there that were pretty strong so if we slow down the purchase that doesn't mean the plan doesn't go you know obsolete or we turn the plan off we'll continue to keep it in play and be opportunistic about repurchasing shares in the future. It might just slow down in the second half of the year.

OK. I appreciate the color there and appreciate the time as always, gentlemen. Yeah.

Hello.

Our next question comes from Scott Group from Wolf Research. We've got to take your question. We've got to take your question.

Hey, thanks. Morning guys, nice quarter. I know you talked about the pricing environment, but maybe can you just share some perspective on how the demand environment played out throughout to QQ and what you're seeing so far in July ?

Yeah, I mean, I would say the demand environment, Scott.

What was good was good in Q2. I mean it probably wasn't as good as Q1 and definitely not as good as Q4 last year You know we were talking about July earlier You know July is generally you know one of our top two to three but a lot of times it's two as far as kind of second worst months with the holiday and communications and kind of the the lag before the get back to school and folks start ramping up for

you know, for fall season and whatnot. And so there's a seasonality to it. The no doubt July is softer than any month. We saw in the second quarter, but it hadn't fallen off a cliff. And so, you know, David Naratalkin and he said, he said, well, let's just, let's see how August goes. I think we'll be able to make a call when we see two or three weeks into August . How August is going, you know, kind of where really is the man. So.

you know, Ju-Az worse than Jean, but Ju-Az always worse than Jean. I know it matters less to you guys now, but any early thoughts about...

Pig season.

pretty muted, pretty muted. That's, you know, to your point, we've talked about, we've, Peak has continued to be a less and less of an impact item for us. And, you know, we've got a couple customers, two or three customers that we do Peak for, and those are commitments that we make with them every year and we'll do it again. And so, yeah, there'll be a little bit of an uptick for Peak, but nothing anywhere near as dramatic or material as what you saw in years past.

muted, pretty muted. That's, you know, to your point, we've talked about, we've, Peak has continued to be a less and less of an impact item for us. And, you know, we've got a couple customers, two or three customers that we do Peak for, and those are commitments that we make with them every year and we'll do it again. And so, yeah, there'll be a little bit of an uptick for Peak, but nothing anywhere near as dramatic or material as what you saw in years past. So probably a little bit like last year.

Okay, and then maybe my last question. So we're in a pretty softer spot environment in Expedite it still did a lower 80s.

OR which is pretty remarkable. Now that we've got this acquisition, it's small but very profitable. How are you thinking about the right range of expedited margins?

throughout a cycle now.

You know, thanks God this is Joey.

It's still going to have more than our other services. So if you look back at it through history, I think it would show if ExpoDited was presented as it was today, which is not out there, it's kind of the old company structure. But as we've gone back in turn, I look back at ExpoDited, as best as we can, what it looks like today, you kind of see an eight to 10 point swinging an oar from peak to trough.

So what we've been working hard to do with some other things that we talked about last year throughout the year, if we're trying to solidify some longer term relationship with some customers is to narrow that down. Take that eight to 10, six to eight, kind of the range of that. And I think time will tell if we've been successful that. As you look at where expedited is today.

Where's peak and trough? Is an 83 the best, if you will?

It's the best we've ever done. And I think probably as it stands today with the opportunities we have, I would say probably, you'll be in work of working hard to get expedited in the low 80s. So I'd probably say low 80s. And I would be hard to debate, you know, 92, you know, 83 to 92 as a range. But again, we're working hard to keep that 92 down. And I think we got a shot to keep expedited in total in the 80s.

And, but I think we need to kind of play out this cycle to see if that actually holds. But I think we're with the acquisition we made and some of the work that the leadership team has done on the base customers, legacy customers. I think things are looking really good right now. I think things are looking really good right now.

Okay, super helpful. Thank you, Joey. Appreciate the time guys. Thank you. Thank you. Thank you, Mr. Schgauch. Thanks, God. Thank you.

Our next question comes from Jack Abgen from Stevens. Please say your question.

Okay, great. Good morning and congratulations guys on these great results.

Thanks, Jack.

Paul, if I were going to go back to your prepared comments from moment, you know, you reference 2023 as being a breakout year for covenant. And I'm guessing that's because you think you're going to be able to show the resiliency of the business. You know, you're going to be able to show the

through a more challenging freight market to the degree that fully materializes. We've talked about $5 or more in earnings this year. Some companies have been proactive, helping us think about what trough earnings power could look like. I'm just curious if you guys could maybe help us think about trough earnings power for Covenant. I think raising the floor on trough would really help expand the multiple on the stock. I'm just kind of curious about that.

You know, Jack, I think we're confident sticking with where we were last quarter is probably, you know, similar to a lot of our peers kind of a 25 to 30% reduction peak to trough.

Those numbers as we've modeled them out still hold we still hold on those numbers so wherever you think peak is you know 25 to 30% off of that we think that's probably about where it's wrong for me. So wherever you think peak is you know 25 to 30% off of that we think that's probably about where it's wrong for me.

Okay, okay, and I guess maybe playing into that the cycle versus the last cycle you've got tell which is a bigger bottom line contributor.

You know, how are you thinking about the, you know, that contribution in the back half of this year? And as we kind of go into 23, are there some additional investments that are coming there that can grow that further? They continue to grow and, you know, if you think about it, Jack...

trucks have kind of been limited trailers have been limited in the market and tell over the last four or five years has just grown dramatically and and a lot of these equipment providers what folks are getting allocated if you kind of use that word allocated that you can buy is a percentage of your last three four or five years equipment so they don't you know they only need a portion of the trucks and trailers that they get to service replacement

And so the other is basically just built in growth and there's a high demand for what they're doing. They're executing incredibly well, whether it's leasing trucks, leasing trailers. I mean, it's not just small trucking companies. It's shippers, it's large trucking companies. It's private fleets, it's maintenance programs they're doing. And so out, you know. And so out, you know.

I think we think TEL is going to be on a similar clip to what they've been on. We don't see TEL going backwards a lot. Just to add to that, last quarter we talked about them having some exceptionally strong gain on sales of equipment, which is all true. I would say for the last two quarters they have. That's part of their business model, as Paul mentioned, is a sale of equipment and they always have gain.

on sale of equipment. You know it's just probably been a little bit higher just recently with the equipment market. But what I would say to that and people are worried about you know tail falling off of a cliff and that's not truth because to Paul's point they're growing other pieces of their other business which may help offset you know some of the reductions or as a for as the equipment Michael is the equipment market softens a bit you'll start to see pickup from other areas of their business.

Okay, okay, that's great. And I guess maybe last question, the AAT acquisition is clearly paying some nice dividends. You know, I guess as you sort of look out at the market and maybe what could be coming to market over the next, maybe three, four, five quarters, are there other businesses like AAT that you think you could acquire? That would make sense. I'm just trying to think through capital allocation.

buyback versus maybe deploying that in the end up strategic m&a yeah i mean i here's what i think if if it's uh... nichi high-margined business i think it's something that has a strategic fit with one of the other business units then then absolutely that's something that we would look at are we just gonna chase

Something just for the psychic, growing revenue? No, it's gonna need to be something that's, you know, solidly accretive.

has a strategic play with something else that we're doing is nichey and has minimal integration combined with where our stocks trade at that point.

We'll put that in the blender and see what comes out the other side.

Okay, all right. Well, that sounds good. Thanks so much for the time, guys. Really appreciate it.

Thanks Jack.

Next, question comes from Bert Subdyn from Stifle. Stay Your Question.

Hey, good morning guys.

More about skirt.

Hey, Jeff is probably for Joey, but maybe Paul's well. So Walmart took down its guidance last night, called out inflationary pressures that they said are eating into general merchandise sales. So, they said are eating into general merchandise sales.

Are there any freight categories that you guys would call out as being weaker in recent months and perhaps some that have been stronger than you initially expected? And then just in addition to that, can you give some color on what you're hearing from your customers today around the back to school and holiday season? OKy ready.

I didn't even say hello. Thank you. Oh, that's okay. So far through June .

I really can't, we really can identify that they have this segment as, our business with Walmart continues to go very well. I mean, as you know, we really concentrate on the Walmart side on their produce that comes off the West Coast. And so their store side has been, you know, has done quite well. And so our business with Walmart has been extremely well. Has it been hiccups? Yeah, because of employment can't get everybody into the warehouses, but the freight itself has been just as strong as it was six months ago.

expedited and inventories have risen as we all know so they made a decision that hey we're okay with slow we don't have to we don't have to this does not have to be expedited it doesn't have to be there in 48 hours etc and so we were able to transition that into our managed freight side where it can go with a solo operation instead of expedited so we kept the business we kept the margins we're just

took it from one bucket and put it into the other bucket. And so I looked last week as Paul was saying.

that July is July , as we all know. I've only been through about 50 years of them. So July is July and it has slowed. I expect that August we're gonna get a school rebound and we'll start digging into the Christmas season shortly thereafter. So I do think there will be a uptick, but so far we have not seen the downtick. Or let's say this, business that we've lost.

Then there's been ups and downs. Business that we've lost, we've replaced every bit of it with new business.

And so that's kind of the tail of the tape so far. And I think that as we get through July , and we're not dissatisfied with July at all. But as we get through July , I think that August will start telling us, you know, is this recession that we're in? You know, what's it going to do to trucking? What thing we do know? There's hundreds of thousands of trucks that are coming out of this market. We're coming out of this market.

There's a lot of trucks exiting the market, the one and two trucks that lived on the spot market for the last two years are leaving and shutting their doors. And so us and their layoff, you know, that's gonna be a nice little tailwind from a capacity standpoint. So it's gonna be interesting. I think the next three or four weeks, though, in August , we'll give it all of it's an idea of what to expect. In August , we'll give it all of it's an idea of what to expect.

Thanks for that, David. Maybe just sort of dovetailing on that, on the expedited side, obviously, that's been brought up a couple times, and that's been very strong, both on the revenue and the profit side. You guys do a fair amount of LTL line haul business there, and it sounds like that's held in there quite well. Do you have the expectation that that can persist just if we start to see durables demand, industrial demand start to wane a little bit? Do you have any colors, sort of what you're hearing from your LTL clients?

Yeah, yeah, yeah, I think some only industrial side of the business.

There's gonna be pressure that is there. Excuse me, there's gonna be pressure that is there. And you know, we have, and already in the last 60 days, we've seen some of our LTL customers that have decreased. We have just been fortunate enough to spread because at the end of the day, where we, you know, when we in 2020, when we took out 500 solo trucks out of this expat, and truly went to a model.

that is we are expedited. Do you really need a team? And so that forced us and the customers to answer a question two and a half years ago, two years ago, that said, do I really need these teams or not? Because we all know there's not a whole lot of them in the marketplace. And so we've got a lot of agreements with a lot of our customers, not all of them. But we've got a lot of agreements with our customers or not all of them. And so if you are ready, let's move. And so if you are ready, let's move. and

Even if their business slows down, that we will be the last person standing from an obligation standpoint. And so I feel very comfortable that even though some has been reduced, it's not our shattering to us so far. Shattering to us so far...

Great, thanks so much, David. And then just one final question probably for Paul. If 23 ends up being a weaker year, as I think most people are speculating, would you expect revenue per truck per week to still be positive on the dedicated side, or do you think there could be some pressure there?

They're thinking flat and positive.

I don't think it'll go backwards. Next year.

Thanks for our thanks David.

Thanks.

Once again, if you would like to have a question, please press star one on your telephone and keep hot now.

At this time, we have no further questions.

Okay, Erica, we appreciate everybody's time this morning and look forward to sharing how we did in the third quarter later. Everybody have a great day.

It concludes today's conference call. Thank you for attending.

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