Covenant Logistics Group Inc. Q1 2023 Earnings Call
Welcome to today's Covenant Logistics group Q1, 'twenty three earnings release conference call. Our host for today's call is <unk> at this time, all participants will be in a listen only mode. Later, we will conduct a question and answer session I would now.
I would like to turn the call over to your host trip you may begin.
Yeah. Thank you Ross.
Good morning, everyone and welcome to the Covenant Logistics group first quarter 2023 conference call.
As a reminder, this call will contain forward looking statements under the private Securities Litigation Litigation Reform Act, which are subject to risks and uncertainties.
That could cause actual results to differ materially.
So you should 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 Dot Covenant logistics Dot com slash investors.
I'm joined on the call today by David Parker, Joey Hogan and Paul bonds.
First I'd like to start by welcoming the new the Leu Thompson and son trucking team to the cabinet family. We pursued this acquisition because it aligns with our strategic plan of becoming a niche year well diversified service provider in a market that is less sensitive to typical freight cycles.
Blue Thompson and son tracking reputation.
Of providing first class service to their customers in the poultry industry combined with opportunities for future growth added to the attractiveness of our goal is to maintain their service standard and to provide the financial support required to allow our combined team to grow in their home territory and then territories that they do not currently offer.
Right.
Their results will be included in our dedicated segment operations.
Consistent with our focus on profits and returns on capital through the first quarter, we had reduced the dedicated fleet by 200 trucks since the first quarter of 2022.
Exiting low return contracts with today's action, we are Regrowing, our fleet with Lou Thompsons, approximately 225 trucks, which are expected to generate a double digit return on invested capital.
And the immediate accretion to our earnings per share.
Now focusing on the first quarter's results given the softness in the freight market. We are pleased with ourselves and how our team responded in a market that quickly transition.
Impaired to a year ago consolidated freight revenue was down 9%.
This decline was expected and related.
Related primarily to less overflow freight handled by our managed freight segment due to lower overall demand.
The dedicated segment also experienced reductions in freight revenue, primarily as a result of our efforts to carve out underperforming contractual business.
Adjusted operating income fell approximately $12 million or 48% compared to the prior year quarter, primarily as a result of our asset light managed freight and warehousing segments, which declined approximately $10 million and $1 million respectively.
On the truckload side, we were pleased with the resiliency of our year over year margins, particularly in dedicated which improved its margin compared compared to any reportable period in the prior year adjusted.
Net income decreased 43% to $12 9 million and adjusted earnings per share decreased 31% to 93 cents per share compared to the year ago quarter.
Weighted average diluted shares decreased as a result of our share repurchase program.
The primary adjustment to our reported results exclude the approximately $7 6 million pretax gain on sale of a Tennessee based terminal during the quarter proceeds on the transaction were approximately $12 $4 million.
Key highlights for the quarter.
Include.
Within our combined truckload operations operations and maintenance related expense declined on a cents per total mile basis by two cents or 6% fixed.
Fixed equipment costs, including leased revenue equipment, depreciation and gain on sale decreased year over year by over three cents per total mile or 9% as a result of our equipment replacement plan.
Gain on sale of revenue equipment was $1 1 million in the quarter compared to point 2 million the prior year.
The average age of our fleet at March 31st was 26 months flat sequentially compared to December 31, 2022 for.
For the remainder of 2023 based on our current equipment order, we anticipate sequential improvements to the average age of our fleet.
Our tell leasing company investment produced 31 cents per diluted share compared to 30% 30 cents per share versus a year ago period.
Our net indebtedness at March 31 was $65 million, yielding a leverage ratio of 40 point for X and debt to equity ratio of 14, 9%.
Return on invested capital was 19, 8% for the current quarter versus $15 seven in the prior year.
We purchased approximately 610000 shares in the quarter, representing approximately $4 five of the outstanding shares as of December 31st 2022.
Giving effect to the low Thompson transaction, we expect net indebtedness of approximately 165 million our leverage ratio measured by net indebtedness divided by our run rate adjusted EBITDA of approximately 1.2 to 1.1 times and $60 million of remain.
Liquidity, including cash and availability on our line of credit.
Now Paul will provide a little more color on the items affecting the individual business segments.
Thanks true, taking a moment to dive deeper into what drove the consolidated results for the quarter.
Our expedited segments freight revenue grew 1% compared to the prior year. Despite a 2% reduction in the average fleet. The increase was largely driven by a 4% improvement in average total miles per truck offset with an approximate 1% decrease in average rate per total mile compared to the year ago period.
While we were pleased with the segment's utilization improvement, we recognize that year over year freight revenue per total mile comparisons will become increasingly challenging as we progressed throughout the year, while cost headwinds from salaries and wages and insurance condensed margins. These were somewhat offset with improvements to both fixed and variable bikes equipped.
<unk> cost for the quarter.
Our aggressive equipment replacement plan, which was initiated in the second quarter of 2022 is beginning to pay off we expect this trend to continue as we progress throughout 2023, and the average age of our fleet decline sequentially.
Our dedicated.
Segment experienced a 10% reduction in freight revenue compared to the 2022 quarter as a result of 194 or 14% reduction in the average number of total trucks offset by a 5% increase in revenue per truck.
The fleet reduction in our dedicated segment aligns with our strategy of replacing unprofitable or underperforming business with business that meets our profitability and return requirements.
We were pleased with both year over year and sequential improvement to adjusted margin and expect to continue the improvement in this segment's profitability as the year progresses.
Managed freight experienced a 29% reduction in total freight revenue and an 89% reduction in consolidated adjusting profit.
<unk> operating profit.
The significant reduction in revenue and operating profit was primarily was the product of little to no high margin overflow freight from our asset based truckload segments.
In addition, our results include an approximate $2 million of cargo related claim in the period. The environment is 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, although the smallest of all of our segments saw a 41% increase in freight revenue compared to the year ago period, resulting from the startup of four new customers during the previous 12 months.
We are pleased with the top line growth we've achieved in this segment and the team has done a phenomenal job executing these startups, which are both in tents and time consuming.
However, despite the top line growth in this segment, we've seen sequential deterioration in margins our focus for 2020 through a way to continue to grow this segment and restore profitability to mid single digits through improved labor utilization and rate increases with existing customers.
Our minority investment until contributed pretax net income of $5 9 million for the quarter compared to $6 8 million for the prior year period that economy was largely a result of reduced gains on sale of used equipment compared to the year ago period sales revenue in the quarter grew 25% and pretax net income.
Decreased by 11% versus the first quarter of 'twenty two.
So increases truck fleet in the quarter versus a year ago period by 128 trucks to 2201 and grew its trailer fleet by 404 to 7116.
As a reminder, tell focuses on managing lease purchase programs leasing trucks and trailers to small fleets for shippers and aiding costs in the procurement and disposition of their equipment.
<unk> business model gains and losses on sale of equipment of the normal part of the business and can cause earnings to fluctuate from quarter to quarter.
Our investment in sales included in other assets on our consolidated balance sheet and has grown to 61 million as of March 31, 2023 from our original investment of $4 9 million.
In 2022, we received $14 7 million in cash dividends from tail and we anticipate a similar amount during 2023, although we have no confirmation of dividend plans at this time.
Regarding our outlook for the future. There is no doubt that 2023 will be challenging while we are pleased with our first quarter's results. We also see opportunities to improve upon them are working diligently to do so in this environment. We are intensely focused on cost savings to improve our operating cost profile. However, our primary folk.
<unk> is the long term is and remains on the long term by continuing to invest in the areas that provide opportunities for us to make forward progress on our strategic plan by investing in new revenue generating equipment people and technology for.
For the remainder of the year, we expect market headwinds from a softer market.
As well as continued inflationary pressures however, based on company specific factors, we expect less earnings volatility than in prior periods of economic weakness.
We have worked hard to strategically shift our customer base to less cyclical industries through our full service logistics offering even with a weak freight market. We expect our cash generation moderate leverage and available liquidity to continue to provide for a full range of capital allocation opportunities to benefit our shareholders. Thank you for your time.
Well now open up the call for questions.
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And our first question comes from Jack Atkins from Stephens. Please go ahead Jack.
Hey, great. Good morning, guys and congrats on both the acquisition and a really strong quarter. Despite all the challenges out there so congratulations.
Thanks, Chad.
So I guess, maybe if we could start.
Hi.
David or Paul I'd Love to get your take on sort of what's what's going on out there, but it just it feels like there's just a lot of volatility depending on end market and customer.
An individual company. So could you maybe talk a little bit about how you think.
Both the next couple of months could shake out with the spring sort of peak and build up and then.
Or are you are you expecting much of a second half build back I know that was kind of a thought not just from you guys, but for a lot of folks three months ago is that view changing at all if you could maybe kind of give us your market take first.
Yeah, Hey, Jack.
Yes, the market is flat.
I really think that what we saw in the around Thanksgiving in November the market dropped and it's just been there that's where it has been we have not seen a second downward spiral of of economic activity from a business standpoint price standpoint, but we have just been on that same.
Both said November and we.
We were anticipating that it would start getting better in the second half, but I think that we're going to continue then this sluggishness that we're at for the rest of this year is kind of where I am at it my thoughts there is no doubt that I was glad to see first quarter GDP number that inventory levels were reduced because that's why all of.
On this call are writing one is for inventory levels to be reduced because I don't care. What the economy is doing if if theyre going to have to read a brief fail. Some inventories eventually as that continues to go so that was a bright spot and I think that as we all know no matter what.
The economy is doing as we as we start grilling out and go into the Lake and open up Coca Cola as well, there's going to be more freight available and so that is going to help but again. It is a sluggish I think capacity.
It's in the process of being taken out that will help I think that what we have seen.
So far this year is that.
Anybody the onesie Twosies crazy foresee that that operated in the spot market. Those folks are gong those onesie Twosies are gone now that said that capacity is lay up but all of those drivers are now driving for us and Warner and swept and everybody else that.
Filled all of our fleet so capacity as a whole has not lay up. It's just it's been you know they just shifted one from one to the other so as we go forward and with some of the pricing that is out there today carriers cannot stay in business you cannot operate it.
And 30, and 40 cents a mile under your cost and that's why it is happening.
And a lot of areas today, so capacity is going to be leaving so we will fill that but the background of all of that is that up I think it's going to remain sluggish for the remainder of this year.
Okay, well that David I think that.
That makes sense.
Hope things pick up but I think that's a that's a good base case to have I guess for my follow up question I'd love to dig in some more on the Loo Thompson acquisition.
It seems like that that's a business that kind of helps further insulate the company from sort of the volatility in the freight cycle.
Do you see.
Opportunities to.
That business more either with existing customers or new new customers as you can put some more capital in there and.
Just love to kind of get you to talk a little bit more about Lou Thompson.
Yes, Jack it's Paul.
Yeah, we're really excited I mean, if you think about it it's a true dedicated business more.
Three year contracts and with specialized equipment.
And so you know that those businesses are always attractive. The other is okay. You got a dedicated business with specialized equipment, but then you start looking at the commodities and the.
The protein, especially the poultry proteins space is one that as you know I'm not going to say repressed recession proof, but I would say recession resistant.
And so.
That and then you hit it on the potential for growth I mean, we think there is trips that earlier opportunities for growth not only in the region they operate but expanding that into other our other regions with the same customers and new customers because they've just got a stellar reputation.
And provide a really great product from a service perspective, and just how that things wired up.
Worked really well and so we do see the ability to sue start expanding that in the months to come.
It'll be a slow grow I mean, that's not a that's not a business that you just you know that can take golf, but but it's as we've talked about it's sticky it's Nancy.
Good good return on capital business and so we couldn't be more excited the strip said to welcome them to the family.
Last question I'll hand, it over but when you kind of think about the.
Acquisition, and the incremental accretion from that.
Maybe a little bit of seasonality in May and June .
C.
Combined with continued actions to improve profitability dedicated and some things like that do you feel like you can you can improve earnings quarter over quarter <unk>, just given the freight backdrop, that's just to do top of a hill.
Will decline this year.
Yeah. So I think we will improve earnings quarter over quarter and I would tell you. We were kind of if you go back to the previous calls.
Compared to the prior year, we're still in that with the old Thomson acquisition, we're still standing by the we think that will be down 25% to 30% from last year's EPS.
Okay. Thanks, guys.
And our next question comes from Berkshire, who bid from Stifel. Please go ahead Bert.
Hey, good morning.
Hey, Bob Greenberg.
Hey, Paul maybe just a follow up to that last answer there. So you know the loot top lumen Thompson and son acquisition looks like we could add sort of north of 15% annualized EBITDA and then your net interest right that something in the ballpark of $5 million and this is all on a full year basis. So you know just some simple math gets you know roughly 30 cents of EPS for a full year.
Do you think that is like relative to where we were 90 days ago and in sort of the outlook you gave.
Do you think that.
Offsets the incremental weakness in the market or do you think that offsets the weakness and then theres some top up and as that business grows just trying to think about sort of how things are sequentially change maybe in the last three months and then layering the deal layering in the deal to that to that equation.
Couple of things if you think about it.
You know and we've talked about it in the release in the script.
We're replacing some some I'll call it unprofitable or marginally profitable business with the old Thomson and and so I think.
Thompson combined with exiting some some marginally profitable business and to your point barring some other things going backwards I think it's kind of what I just said the jackets, it's all a big offset and the combination of all of that still kind of puts us on the same path. We were thinking Q2, Q3 and <unk>.
Q4 last year, where we said hey, our goal as you know 25% to 30% reduction in year over year EPS, because that's a lot better than places we've been in the past so I <unk>.
Think when it all comes out in the wash and you're still within that kind of same range.
Okay. That's super helpful, Paul and maybe to follow up to Jacks. Other question, there and David's response.
I think theres been this consensus view, that's forming the 'twenty three now will be weak and maybe theres a little bit of improvement later in the year, but that's getting discounted and David sort of noted that as we think beyond 'twenty. Three is it your view that 'twenty four is the inflection point and then 25 is better than that and if that is your view on how things unfold does that make you want to be.
Ulster your expedited and managed freight businesses adjust.
As you think about an impending multiyear up cycle.
Yeah.
David Yes, I do I think that we're here for 'twenty three I think that.
24 election year, we'll start getting some better things go on on the economy and I think it does set it up for a good 25. So what you said is what I agree with Ed.
So the cycle I think is going to be good over the next over the next couple of years for all of us, but we will continue to.
Show growth or continued to attempt to grow and all of these verticals that we've work we're going on five years July 31, we purchased land air of 18 so.
So we're going on five years here in a couple of months I've truly becoming a logistics I don't think of us as a drug company I don't think you know we're not a OTR carrier you call way, how and I hope that I get enough phone calls today. We are we are into the niches that we wanted to be and are bringing value to.
Our customers customers that need what we are giving out there today and and so that that our goal is to grow all four of these areas in the next couple of years and I do think that as we come out whatever sluggish as we're in in 'twenty three and it starts turning around in 'twenty.
<unk> set up for 25, I think it presents a lot of great opportunities in all four of those segments.
Add on Barton, what David said.
Getting big volumes of new business right now is tough just because you know a lot of folks don't have it to give but we're still doing really well on adding new badges and expedited in brokerage managed trans and warehousing and dedicated and it's exactly what you saw.
Said.
We may not be getting the exact volumes, we want out of these folks right now, but when it turns and we're gonna have contracts set up my sales person in there and we're gonna have already been working with them and so yes, we're focusing on what you talked about.
Great. Great response I'm just my final question, you know a couple of quarters ago. Joey It highlighted that he thought expedited can run at 92 or sort of in the you know the worst of years and you write in the eighties and good years as we've seen as you've seen the bid season start to unfold and gotten a little bit of a greater appraisal of the fray.
Recession do you still think that's the case.
I think we're still in that range I mean, we've got a couple of contracts left.
That have been signed but the effect of a means to roll in but yeah. I think we're still in that in that range of reasonableness.
Thanks, Paul and thanks, David.
Thanks Bert.
Our next question comes from Scott Group from Wolfe Research. Please go ahead Scott.
Hey, Thanks morning, guys, So hi, Scott.
Just wanted to follow up on the sequential earnings growth from Q1 to Q2 can you just maybe go through the different businesses and walk through that and where you expect.
Yeah Man.
We're not you.
Here's what I would tell you I think expedited Scott will be flattish.
Just based on what we're seeing today, I think dedicated or get a little better.
I think warehousing, albeit small probably.
Signed a snide better and and managed freight.
That's the wildcard I mean, that's as you say, that's where we've backed up the most and we did have the cargo claim in Q2 that negatively affected earnings I would say that it's softer in April than it was in Q1 and so I could argue managed freight is flat warehousing is flat dedicate is better.
Expedited is better.
Our to flat.
Okay.
Then <unk>.
Expedited rate per mile.
Down 1%.
What how does that look like for the for the year.
Yeah, Here's what I think I think youre going to see the expedited rate probably go down a little bit in Q2.
But I think youll see it come back up a little bit in three and four where we don't have hardly any spot market freight, but theres a little bit of broker freight in there in a minute ago when I start talking about the team, adding new badges and stuff. There's some really good stuff in the pipeline is just how quickly do we get it started up and you know because we've got a few contractual reduction.
Actions that are they're going to we will see the full quarter effect in Q2. So I think the rate will go down in Q2.
We'll be working to get that new business onboarding replace broker freight and I think it could come back up a little bit in Q3 or Q4 and the other thing Scott on that expedited side, you know over 50% of our business and long term agreements.
And those that we've got long term agreements with their really holding and they have been a very good partner with us.
And we entered those agreements there in 'twenty two when they couldnt find any trucks and we made great relationships and partnerships and now they're showing that they really do need our teams and they have not came back to the way I'll say and do this and do that they've been extraordinary a partner and so the.
The other 45% of the volume, it's where it's gone up and down to only have a 1% negative but we do have a couple as Paul said a couple more that are rolling through as we speak they're going to be at a negative hit to that up to the right, but that said our to give you have.
Pad the as you know this but to give you how bad the brokerage side of the business out there in today's environment is that you know our brokerage are dependent upon brokerage freight has gone from 1% therefore per se yet. So you know, we're only doing 4%, but the 4% rates are.
So bad that it is bringing our total write down about four cents a mile. So as we replace that 4% and get it back down to 1% kind of number it's always going to be like take it to.
Two and a half 3% rate increase and so there's some great things the possibilities that we're working on.
All set.
Right.
Yeah.
Yeah.
And then how many you seem to you guys seem to be able to have found now too.
Small niche, but really profitable trucking companies, how many are there how many.
How many of these can you do as one a year the right kind of number do you want to keep doing them.
Here's like I think we're going to watch leverage.
But were hunting for them every day.
Scott.
I can add on to this I think we've been really really disciplined in our approach to how we've looked at M&A over the last few years and you know.
And my position I I get.
Dozens of Sim decks every week it seems like and you know, we're turning down things and turning down things just consistently for about every hundred I get we will get three or four that it'll kind of passed to the next level will talk about in general They will turn those down pretty quickly but over the last two years you know as we've.
Worked harder and identifying some things in our strategic plan and where we want to look for it. It has helped us really identify kind of where we want to play and where we want to expand in and these two.
Out of the hundreds that have showed up these two transactions that have really just popped up and we knew pretty quickly. After some diligence. It was it was done that we wanted to pursue these things and we did all of the legwork and and they've been really positive and I'm, especially I E T and I'm I think low Thompson and <unk>.
It's just going to be just as good and.
So we're excited about both of them and I think we're going to continue to be disciplined like Paul said, we're going to kind of watch leverage but I also think that we've still got a moderately leveraged balance sheet and we have the opportunity to do more if we need to.
But again, we're not going to lose that discipline of of you know really sticking to our plan on acquisitions, we're not just going to grow to grow.
It makes sense.
Try and never say Ah Congrats on these earnings calls, but if you were to ask me heading into a pretty nasty trucking downturn, if we'd be talking about.
$4 of earnings for you guys I would have said no shot so yeah, well done guys kudos.
Thank you Scott Thank you.
And our next question comes from Elliot Alper from C. D. Cohen. Please go ahead Elliot.
Great. Thanks, guys so far.
Doctors are in dedicated decreased 13, 5% in the quarter I know you talked about some existing business.
Our underperforming business.
And then can you talk about kind of how far along you are in that process kind of if there are any other factors at play I guess, how much of that is customers just needing kind of a less trucks given the volume environment.
It's a mix Eliot of just underperforming business and customers that I had 29 817 I had 35 now may 31, Here's what I'd tell you I think we've a waiver.
I think we've already absorbed most of the people that were doing reductions they kind of know.
They kind of know where they are from a demand standpoint, and so and I think we're probably by the end of Q2 will be 1990, 5% through this wait and feed effort. So as chip talked about truck count came down truck count go back up by the by the end of Q2 back up to that 1400.
Some odd number you know a couple of hundred trucks more than we ran this quarter and so we're probably about 90 to answer both your questions about 90% through the waiting feed process.
And it's a mix all of us.
US waiting and fading because it just didn't meet profitability requirements and customers that theres just changes in their demand profile and they've downsized.
Okay.
Okay, great. Thanks.
So you bought back a lot less stock in the quarter kind of compared to 2022, how are you thinking about capital allocation going forward, maybe what should we assume for buybacks and I guess kind of Dovetailing on the last question in terms of M&A kind of.
You're focused primarily going to be in dedicated.
Well to answer your first question.
You know we bought back about.
610000 shares during the 2023 quarter and we don't consider that a small amount. It was actually about four 5% of the shares outstanding from December 31, 2022, we still have an open Tim B five plan, but we generally don't comment about any forward kind of plan.
So you know the plan itself has certain non disclosed purchases purchasing criteria associated with it. So we don't comment on that but.
Now what is public is that there is an open timber five playing out there and you know we like what it does for us, but where we're going to stick with what we've got out there today.
In terms of M&A going forward I think that you know will.
Continue to look and it would have to be a perfect fit I think we want to first of all make sure that we.
We are working with Lou Thompson and son in that new business in a way that will help them understand us and help us understand them. So there'll be a lot of attention on that just over the next few months in.
Working with them on some integration stuff theyre going to continue to operate out of there headquartered operations and so no kind of integration plans beyond just trying to work together and understand each other.
So youll, probably we're not <unk>.
Actively kind of hungry and looking for immediate M&A opportunities, but like Paul had mentioned you know there always crossing our desk and were always analyzing them for the right deal. So if the right thing came along it could be possible, whether it's in dedicated or.
Or you know one of the other segments you know before we have been pretty vocal about not growing the expedited fleet until we came along a T.
And a T met the criteria that we were looking for was an opportunity to do something different in expedited that we werent doing.
And it checked all the boxes of what we look for strategically and so.
So there could be something else that comes along like that that we would love to look at but.
It would be hard to really tell you yeah. We're absolutely we're all in on dedicated but and dedicated is something that we really love and we plan on growing but you just never knows what comes up.
Okay, great. Thanks, guys.
And as a reminder, if you'd like to ask a question. Please press star one on your phone now.
Okay.
And gentlemen at this time there appears to be no further questions.
Yeah.
Alright, well, thank you everybody for joining today and we.
This concludes today's conference call. Thank you for attending.
The host has ended this call goodbye.