Q2 2023 Covenant Logistics Group Inc Earnings Call
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Welcome to today's Covenant Logistics group second quarter earnings release conference call or.
Our host for today's call is trip.
At this time, all participants will be at 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 Mister Grant you may begin.
Thank you Jim Good morning, everyone and welcome to the Covenant Logistics group.
Second quarter 2023 conference call.
As a reminder, this call will contain forward looking statements under the private Securities Litigation Reform Act.
Which were subject to risks and uncertainties that could cause actual results to differ materially.
Please review our SEC filings in most recent risk factors, we undertake no obligation to publicly update or revise any forward looking statements.
Copy of the prepared comments and additional financial information is available on our website at www Dot Covenant logistics Dot com slash investors.
<unk> on the call today by David Parker and Paul Bun.
We are pleased with our results for the quarter, which showed comparative resilience in the midst of a very frightened.
Very soft freight environment.
Consolidated freight revenue was down 9% compared to very tough very tough prior year comparable when the frayed environment peaked.
The decline related primarily to operating approximately 11% fewer weighted average tractors and our truckload operations and less over fill it flow <unk>.
Handled by our manage freight segment due to lower overall demand.
Adjusted operating income fell approximately $12 million or 43% compared compared to the prior year quarter.
Primarily as a result of our expedited and manage freight segments, which declined by approximately $7.5 million and $6.5 million, respectively, offset by an increase of approximately $2 million in our dedicated segment.
Adjusted Negent net income decreased 44% to 14.4 million and adjusted earnings per share decreased 34% to dollar O seven per share compared to the year ago quarter.
Weighted average diluted shares decrease as a result of our share repurchase program.
Key highlights for the quarter include all four of our opera R. R business segments, including expedited dedicated manage freight and warehousing achieve sequential improvement in profitability in the second quarter.
The acquisition of low Thompson, and son Trekking, Inc. Dedicated contract carrier comprised of approximately 200 tractors specialized specializing in poultry in life all transportation.
We have been pleased with the operational results today and are excited about the growth opportunities that lie ahead.
With that within our combined truckload segments operation and maintenance related expenses declined on a per total mile basis by six cents or 21%.
And fixed equipment costs, including least revenue equipment depreciation and gains on sale remained flat compared to the prior year.
The average age of our fleet of June 30th remained flat sequentially at 26 months compared to March 31st 2023, largely due to the equipment acquired from Lou Thompson and son tracking.
For the remainder of 2023 based on our current equipment order, we anticipate sequential improvement to the average age of our equipment.
Gain on sale of revenue equipment was $2 million in the quarter compared to point $4 million in the prior year.
Our tail leasing company investment produced 29 cents per diluted share compared to 33 per.
<unk>.
Per share versus a year ago period, or net indebtedness at June 30th climbed to $187.2 million in the quarter, primarily as a result of the acquisition acquisition, yielding alive leverage ratio of approximately 1.7 times in debt to equity ratio of 33.1%.
On an adjusted basis return on invested capital was 13% for the current quarter versus 17.6% in the prior year.
Now Paul will provide a little more color on the items affecting the individual business segments.
Thanks trip, taking a moment to dive deeper into it drove our results for the quarter, starting with our expedited segment freight revenue declined 7% compared to the prior year largely due to a 6% reduction in the average fleet writes declined by just over 10%, but we're all set by almost a 10% improve.
An average total miles per truck compared to a year ago.
The improvement in utilization was principally attributable to newer equipment in the fleet and reduce downtime.
While we are pleased with the segments utilization improvement, we recognize that year over year freight revenue for total mall comparisons will continue to be challenging for the remainder of 2023.
While call said winds from salaries and wages and fixed equipment costs compress margins. They were somewhat offset with improvements to verbal based equipment costs for the quarter.
Our dedicated segment experienced an 8% reduction in freight revenue compared to the 2022 quarter as a result of a 217 or 15 per cent reduction or the average number of total trucks all set by an 8% increase in revenue for truck.
The spots edition of Lou Thompson has some trucking fleet. The overall fleet reduction are dedicated segment aligns with our strategy of exiting unprofitable or underperforming business and replacing it when opportunities arise that made our profitability in return requirements.
We were pleased with both the year over year sequential improvement to the adjusted margin and expect to continue to improve upon this segments profitability over the long term.
Manage freight experienced 21% reduction of total freight revenue in a 76% reduction entrance and adjusted operating profit.
The significant reduction and revenue in operating profit was primarily attributable to little to no overflow for eight from our asset base truckloads segments. The brokerage environment remains 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 saw a 37% increase in fright revenue compared to the prior year, resulting from the startup of new customers. During the previous 12 months. We are pleased with the top line growth we've achieved in this segment.
Team has done a phenomenal job and executing the startups, which are both intents and time consuming however.
However, despite the significant top line growth in the segment, we've only seen about a 10% improvement and adjusted operating profit compared to the prior year. Although we are pleased with the sequential profitability improvement within a segment. We will continue to focus on improving profitability of the mid single digits through improved labor utilization rate increases with <unk>.
<unk> customers.
Our minority investment entail contributed pretax income a 5.4 million for the quarter compared to seven $1 million in the prior year period. The decline was largely due to reduce gains on the sale of used equipment compared to the year ago sales.
<unk> revenue in the quarter, 11% and pretax net income decreased by 26% versus the second quarter of 2002.
Increased truck fleet on the quarter versus year ago about 210 trucks to 2283.
Trailer fleet about 84 to 7031.
As a reminder, tell focuses on managing lease purchase programs for compliance leasing trucks and trailers to small fleets and shippers.
Aiding clients in the procurement and disposition of their equipment through a robust equipment Boswell program.
Due to the business model gains and losses on the self equivalent or a normal part of sales business model and Ken calls earnings to fluctuate from quarter to quarter or investment entails included in other assets and our consolidated balance sheet and has grown to 66 million as of June 32023 for not from our original investment of $4.9 million.
2011.
In 2022, we received 14.7 million in cash dividends from tail and we are anticipating approximately not 19.8 million to be received during the second half of 2023.
As we enter the third quarter, we are optimistic that the trial for the fries sokolow's behind us, but our cautious about the rate at which we will see improvements regardless of how the fried economy responds. Our primary focus remains on the longterm by continuing to invest in areas provide opportunities for us to make forward progress on our.
<unk> plan, the acquisition of Lou Thompson, and son, and our investments in new revenue generating equipment people technology or examples of this.
Thank you for your time, but when I open up the call for questions.
Thank you if you would like to ask a question. Please.
One on your telephone keypad now.
Q in the order received.
Please be prepared to ask you a question when pumpkin.
Once again, if you have a question please press star.
And your phone now.
Okay. Our first question today will come from Jason.
Kelly.
Thank you gentlemen, good morning.
Two Q in on that last comment that you talked about in terms of the broader trucking industry I'm with you guys that we're sort of off the off the bottom here, but how should we think about pricing on a on a sequential basis, because you know I'm still getting some feedback from some private truckers from so I'm, just really low ball pricing out there like you know.
In North Carolina at less than a buck a mile being offered so how should we think about that at least in the near term.
Okay.
Jason Here's what I would say is we're still seeing that too.
But as a reminder, most of our stuff's tied up under contract right. So.
Talked about consent, continuing to say margin pressure in the brokerage.
That's really where we've got exposure to that on the dedicated an expedited side I I don't think we're going to see any pricing pressure in the near term I think what we'll see what contract rights do next year I think that's probably what we'll have the orange or effect on us.
Think it's probably too early to tell exactly what those are going to do next year, but yeah, a lot of the stuff that's out there in the spot market I mean, it it will negatively affect the brokerage a little bit, but it shouldn't affect expedited dedicated for the balance of the year.
That makes a lotta sense also you called out a little bit of a game's on sale how shall we look again on sale going forward and what is the equipment market look like.
Let me talk about the market knowledge trip talked about gangs on sale used equipment market has just continued precipitously draw.
It dropped a little bit from January to March with since March. It's it's been kind of in a free fall seems like Jew or maybe his kind of hit a little bit of a as kind of hit a little bit of a four and a used equipment market, but Martin Marques did you I was a pretty big drop.
Yeah, I agree and I I <unk>.
Quite honestly it and this is just me speaking I don't I.
I don't see the used equipment market getting any better in the next six to eight months.
It's contained especially when you look at the rate. It's continue has dropped over the last few months.
You know this is a we've talked about this in previous calls, but this is a very heavy capex year for us where.
Really over the last year and a half I would say we've been really investing in upgrading the fleet and we're going to continue to do that because we think it's for the best.
It provides and optimize way of operating the fleet for US both I would say on kind of the the ongoing.
Variable cost and I think that there's some fixed costs benefits when that time.
But here's what I would say.
You know going forward, yes, we do have more newer equipment, we're not you're not going to see a lot of.
Fleet count growth in the back half of the year, which means that we're gonna be selling a lot of equipment to so it's just a matter of.
How much it continues to drop I don't think you're going to see huge gains on sale in Q3, and Q4 may see a little bit, but I don't think anything you know I don't.
Also I don't think you're going to see significant losses, either so it's it's marginal I would say, but.
Depreciated, we watch our depreciation on our equipment and make sure that we're depreciating adequately and you know I I think we'll be okay. There.
Oh, that's that's a great color last one I will turn it over to somebody else here.
Thompson, you've got about two thirds of a quarter it looks like a good acquisition for you guys getting you in Ah Ah Ah niche and market that you really weren't in.
I was hosting some calls with industry people before earlier this quarter.
A lot of them were talking about how there's a lot fewer financial buyers in the market place for smaller niche acquisitions.
Do you foresee other opportunities for yourself down the road because multiples have come in a little bit.
You know Jason here, Here's what I would say.
Agree there's less financial buyers in the market. They we're we're always looking for those.
Those really niche.
Value add contractual top businesses and so.
We got a digest memory did <unk>.
In February of 2002, and then we just did Thompson in April So, we got a digest, but but.
Any of that niche good margin contractual top business out there, yes, we continue to fail calls in and our don't keep looking at stuff like that as it comes about.
And I just want to just adding to that a little bit is making sure that you know.
Our balance sheet could absolutely support an additional acquisition and it's something we may look at in the future, but our main focus whether it's a T or leave Thompson. Most recently <unk> Thompson is really focusing on learning that business and starting off you know getting out of the on the right foot, which we have the <unk>.
First two months of since we acquired them, but there's a lot of executional risk. It play with you know anytime you do something bit for it I would say your niche kind of as Paul had mentioned, but you know, we're really focused on execution and want to make sure. We do those a right way and you know and.
And I think will reap benefits for it from those that we've already done in the future. If we can kind of continued to refine that and make sure we're executing at a high level.
Well. Thank you gentlemen, I appreciate the time is always.
Thanks, Jason Thanks Jess.
Next question will come from Scott Group with Wolf Research.
Hey, Thanks, good morning, guys.
Hey, Scott can you just talk us through how you're thinking about back half of the year from an earnings standpoint, you think we see.
Further sequential earnings growth from from Q2 into the back half of the year what are the puts and takes.
Yeah, I mean, I don't Wanna get into giving any sort of like.
Defined guidance, but.
We feel like we've got any probably read it in the release I mean, we're optimistic about the back half of the year. We said that there's we feel like we were at the trough of the the.
[noise] freight recession.
Part of that May be due to our model, we've got a lot of L. T L.
Customers an expedited we've got if you look at two Q, we've got just two months of Lou Thompson.
We've talked earlier about the optimism about how well Lou Thompson is.
Running out of the gate as well as some potential growth opportunities that may come to fruition later in the year and early next year. So.
I think I'm optimistic about being able to you know.
Increased earnings sequentially in Q3, I think there's a big question Mark queue for there's some downtime with the holidays and there's a big question Mark about Pete not that peak is a big part of our business, but you know last year was virtually nothing and you know I'm just.
Not sure how much that that's going to contribute this year and 2023.
But yeah. We're I think we're bullish on the next half of the year for us.
Let me add one thing to that I I agree with everything trips add.
I think the.
The one thing to watch us with our reduced share cow.
Few things going in the right direction could could really be accretive in the back half of the year and.
One bad accident could could pull it the other direction I think that's one of the things everybody's got to remember with this reduced share count as the earnings have a lot of leverage up but you also have you have a bad accident or something there's a lot of leverage on the downside. So on the balance I agree what trips that I think we're we're opt.
Domestic about the back half of the year.
Think we can.
Think we can continue to improve earnings quarter over quarter.
Okay helpful. And then so you just mentioned you got a lot of LPL customers, what what are you seeing.
In the market right now in the last week or so is is schippers are scrambling to leave yellow.
How is this a lot of calls.
Yeah Yeah.
Were filled in a number of calls will only in the expedited division.
As you know.
We do business with practically every major L T L and frightful order in that division and.
And so we continue that we continue to fill a lot of calls as people need some incremental capacity and it's.
It's probably.
Maybe 5% growth an expedited revenue during the quarter.
It's definitely going to be a positive one expedited in the third quarter. There was really none of that in the second quarter. So it should be a positive for expedited in the third quarter.
And likely into the fourth.
Yep.
And then just lastly, you mentioned the.
The increased sort of leveraged earnings because of the buyback what is the plan with the buyback going forward.
Continue to be aggressive with it deposit how do you think about that.
I can't really give specific all I can say I guess with that is we do have an open buyback plan right now that has some parameters are around at that.
That the bank will repurchase based on those parameters.
But here's what I would say I really like how we have deployed capital over the last couple of years and buybacks has been a big portion of that so I think that there are always going to be on the playbook.
Not saying that we're gonna buyback X amount of shares in Q3, Q for but I think as circumstances warrant.
<unk> I think that there are always going to be they go to a go to potential go to NR playbook to activate.
It was part of our capital deployment plan, we like them, we've seen benefits from them.
The question is as circumstances change how do you read the.
Re prioritize those types of things and decisions and you know I think they're always going to be there and I think that you guys will.
Probably see is think about it or talk about it and move forward with another one in the future when circumstances warrant.
Makes sense. Thank you guys.
Thanks, Thanks Scott.
And your next question will come from Jack Atkins with Stevens.
Okay, great. Good morning, and thanks for taking my questions guys. Congrats on a great quarter.
So I guess, just kind of going back to the L. T L.
Sort of.
Comments, there for a moment.
How are you guys thinking about approaching.
Deploying additional capacity ended up market I mean is it.
You have some longer term partnerships there is really a function of.
To you know.
Term commitments for additional trucks that you'd be willing to deploy into.
L T a line-haul.
Part of the market.
Yeah, Jack you hit it I mean, we were if it were I would say.
Trucks here, a few trucks there to a lot of folks but.
For us to add a significant volume of trucks, it's going to be with the folks that we have longer term partnerships with and and so yeah. It's the as we move those trucks around they're going to be more heavily weighted towards the towards folks that are willing to sign up for those on a longer term basis and.
That have been part we were partners with through the the 2100 22 cycle and they've been partners with us through.
Through this twenty-three cycle and so that's how we're going to.
Allocate our resources.
I'm trying to grow this.
These teams for them.
What did you think about this from an investor perspective.
The point I'm trying to make the era of the question I'm asking is.
As you as you.
Bring on new business there this isn't just a.
Short term.
You know.
Gap for some of these guys. This is this is potentially a longer term sort of step up in business activity.
With this particular part of your customer base, Yeah I think.
We'll keep it will keep a high percentage of of whatever we add with these customers on a longer term basis cause they're they're they're they're digestion. This growth in their models change and and so yeah. We're strategically trying to make sure. We're we grow the mouse is for people that it's going to be sneaky.
Absolutely because Jack Jack.
Giga byte about 50, 560% of that expedited remedies I'll guarantee contracts.
So that.
Yeah.
Paul the same when we add these drugs.
What's going on.
Customers that had been partners to us and we're partners are part of that partners ship that we got her long term agreements between us.
Absolutely and that's paid pay dividends over the last you know last coupla years.
David.
Good to good to hear your voice I guess, maybe we'd love to get your perspective, you know as well in terms of just how you're thinking about the cycle you bring a lotta.
A lot of perspective to this you know I guess I could you may be kind of.
Help us think about you know where where we are.
Terms of coming off the bottom here and as you sort of think about capacity and.
The puts and takes are you more or less optimistic about sort of where we're headed.
From a cycle perspective over the next the next six months.
Yeah, I was on it and the last week.
At a conference with the Tylenol brand cold insurance, but had.
Had a big carrier conference carrier panel and.
Because I think there's two things happening we went around the room. The last question on that.
That day was when do you think that whole group with a bunch of smaller carriers and.
When do you think that things are going to get better and win.
They are going to come in and the time, Jack or anywhere from her spring I heard 12 months from now spring December .
And I was the last one to answer a question on there because it's the way I do believe and.
I believe that we are going to feel it is September I believe in the next couple of bunch, the trucking industry truckload gouge, you're going to feel capacity constraints no I'm not saying, it's going to be 2022 over again, but it's gonna feel better than the last 12 months that we've gone through and it's all because of.
Because I'm not sure about the economy.
But capacity layout, leaving our industry edited by the fact of what Paul said that's happened on the use drug process just in the last.
Today, It hurts it hurts right now it hurts this month, but overall, it's good because that's capacity Lee.
Pricing power will return and the pricing will make up for whatever shortfall. We're disappointed in that we did <unk> and and that's all happened in the last 60 days. So I really believe Truckee, we'll start seeing it in the next couple of months attacking our capacity as long as the <unk>.
In the late stage it hangs where it's at today.
Those are my fault, Okay, alright, no I appreciate that.
Maybe last question longterm strategically I mean did you guys think about the way you would like to have your mix of assets.
Lloyd within that within the truckload market you know you've been you've been investing more.
Side of the.
Kind of traditional long haul over the road highly cyclical parts of the truckload market into things like a Thompson.
No longer term commitments within within your within your expedited team business for L. T L.
How do you think about the long term mix of assets between traditional OTR truckload and.
More niche parts of the market, but really remove a cyclicality and where you can really see kind of compounding growth.
I I would say I would I would say that.
We've been on this journey now really 25th Bravo Delta Airlines.
I actually went to the board and say, we're gonna change our company around we're not gonna be this feast or famine and hope things get better tomorrow, we are going down. Another road. So we started that in 2015. It really came into fruition at 2018 with the acquisition of land there. They really came into fruition in 2020, where we shut down <unk>.
<unk> and the <unk> the road, so low side of the covenant expert the covenant business and and we got out of the solo business and we're really in the market.
You know expedited dedicated warehousing and managed bright and Bedspreads brokerage at T. M. I S and we're really looking at those four avenues and as I look at look at the whole.
This is that we get Tuesday, it's gotta happen, we gotta bring value to the customer so that customers gotta bring value to us that's gotta be a two way street that we're both Britney value because at the end of the day, if we're not going in value.
Where is not bringing value the relationship will eventually add something will happen and we were just so tired over all these years 35 years or 33 years or whatever.
Okay. The market's up let's go increased rates five per cent of the market's down let's give it all back and Ah model today is not doing that and and.
And it's because we're bringing value I expedited side of our business.
<unk> everybody doesn't have team, where one of the largest team providers out there if you truly knee pain and pay me for what it cost me to operate these teams it will it will be there during the during the great times of 2022.
Nevada God, it's not that they came in in Florida gets downright <unk>.
Last year instead of instead of 20 trust that 817, and we work with our customers on that and we got to make sure that you get a pop line to be able to take care of that once they give you back and then the brokerage that is really.
Failing the OTR side of our business.
And and as you know brokerage is up and down and bargains are up and down but.
As long as we can <unk>, oh that business and so I'm very pleased with added and Paul talks about the warehouses, but those are the four areas that we're concentrating.
Concentrating in and those are the areas that we're going to continue to build either through internal growth or through acquisitions as you call. It did those kind of things cause that's what we love we love something that's hard it's something that everybody does it do.
It brings value to the customer so that our model.
David It looks like it's currently working.
As a reminder, if you'd like to ask a question. Please signal by pressing star one on your Touchtone phone.
And our next question comes from bearing.
With age asset management.
Hi, Hi, guys. Thanks, very much good corner.
Two questions one is.
David went on to circle back on your your comment about capacity, leaving the industry.
Is there so when you look at your your brokerage segment, you might be able to get a read on that you know in terms of all the carriers that you work with so.
Is there anything either numerical orienting total you could.
Talk about Flushing, it out a little bit more and then.
Okay and one other question, but go ahead.
Yep Yep, Oh, I was just going to say on the brokerage that yes, you KN and I would say the maintain this happened on the brokerage that is at the small carriage I've reached the point that they're not going to lower and that's what we have seen is that we can't get the capacity for any lower rate than what's out there. So.
Showing you that.
<unk> is starting to tighten a little bit because the rates are not falling Luckily work.
Got it okay. Thank you.
Then.
The other question is on the on the asset based businesses then she pointed at our more contract.
Are most of those role in the spring and.
Any feel for where.
<unk> contract rates are in.
In the market now versus you know, where they might've been six months a year ago. Thanks.
Yeah, most of our spare most of our stuff.
Yeah, most of our stuff is in the spring and I would say January to January to April is when most of the most of the asset based contracts reset.
Pricing is probably down.
Mid single digits, all if you combine dedicated an expedited.
I would say our pricing is probably mid single digits. If you. If you kind of white those I would say people that have more of a Oh T. R. You know you cause David to say you call. We haul top exposure those are probably down a lot more than mid single digits.
More color you want to add on that.
No I I agree with you visit bring a bit next year.
Great start we start looking at right again, and I agree with Paul what did you say.
Great and just one last quick file off on that so looking at it the cost side for next year.
As we started thinking about next year are there any big puts her takes we should think about as we're thinking about cost structure in 24 versus twenty-three. Thanks.
So on the cost side I mean, we've been pleased with what we've seen in.
You know with a lot of the cost.
We've been really laser focused I would stay as an enterprise starting in the fourth quarter of last year kind of scene.
Yeah, I think it's safe to say, we kind of first felt it pretty significantly in November of 2022, and as a response to that.
We've been laser focused on cost and the fries as a whole has done a great job and just.
Really focused on.
Cost savings throughout the enterprise, whether in a business unit or back office and.
That being said that that that.
Can only go so far but I think a big part of the success story of.
Where we have seen success I would say is is on the investment in our new tractors and we've done a lot. There. It was painful last year, we had to pull some trucks early and created some fleet disruptions and created some drag drag on the P&L an impairment charge. If you go back and read the queue for release.
It was a little bit muddy, but we are seeing improved fuel economy, we're seeing improve maintenance cost we're seeing improve retention because we're in you know it's a different market boat, we'd like to think of it there and newer equipment and better equipment and the more efficient and so our utilization is <unk>.
Proved as well so.
Do you think that will continue to see cost improvements as we continue to upgrade and reduce.
<unk> average age of our fleet fuel is kind of a wildcard. It goes up one month and goes down another month, I think directionally, it's going to be going down.
But you know I I quite honestly I don't see a lot of reduction in wages.
So it's a little bit of a mixed bag I feel good about our calls journey to date, but.
2024, do well, we have that type of leverage we squeeze a turn it pretty hard this year and you know how can do we have the leverage to kind of offset some of those costs.
But it's kind of a hard question to answer because I think there's some ups and downs in there, but but we feel good about the things that we can control and we're real happy with what we've done today.
Great. Thanks, very much good luck.
Thank you.
Once again, if you would like to ask a question. Please press star one on your phone.
Pause for just a moment to allow everyone an opportunity to signal.
And it appears there are no further questions at this time Mister Grant I'll turn the call back to you for any additional closing remarks.
Yeah Jen. Thanks, so much just wanted to thank everyone for your time and participation today.
We're excited about the quarter pleased with our results in.
Are optimistic about the future and uhm.
We look forward to speaking with everyone next quarter. Thanks.
Thanks, very much and have a good afternoon.
This concludes today's conference call. Thank you for example.
The House has ended this call goodbye.