Q2 2019 Earnings Call
Excuse me everyone. We now have all of our speakers in conference.
Please be aware that each of your lines is in a listen only mode and at the conclusion of todays presentation well open the floor for questions at that time further instructions will be given as to the procedure to follow if you would like to ask a question. It is now my pleasure to turn today's conference over to Mr. Richard Cribbs. Please go ahead Sir.
All right. Thank you Carrie good morning, welcome to our second quarter Conference call.
Joining me on the call. This morning are David Parker and Joey Hogan.
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 risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward looking statements.
Please review, our disclosures and filings with the FCC, including without limitation the risk factor section in our most recent Form 10-K , and our current year Form 10-Q .
We undertake no obligation to 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 that covenant transport dot com under the investors tab.
Our prepared comments will be brief and then we will open the call for questions.
In summary, the key highlights of the quarter were our truckload segment revenue, excluding fuel increased 4.2% $251.2 million due primarily to a 486 or 18.7% average truck increase.
Partially offset by 12.2% decrease in average freight revenue per truck and the 2019 period as compared to the 28 day period.
Of the 486 increased average trucks 467 trucks were contributed by the land or acquisition.
As lander contributed $20.6 million or freight revenue to truckload operations in the second quarter of 29.
Versus the year ago period average freight revenue per total mile was down 1.8 cents per mile or 1%.
And our average miles per tractor were down 11.3%.
The main factor impacting the decreased freight revenue per total mile was a higher percentage of lower rate dedicated freight revenue at the covenant transport Southern refrigerated transport and star subsidiaries.
[noise], partially offset by the lander dedicated fleets higher average freight revenue per total mile.
The main factors impacting the decreased utilization include the softer freight environment and our one way truckload business.
And the impact of land or operations on the combined truckload division.
Including an approximate 640 basis point decrease as a percentage of our total fleet comprised of team driven trucks.
Partially offset by lower average seated truck percentage.
Landay or shorter average length of haul and dedicated contract solo driven truck operations generally produce higher revenue per total mile and fewer miles per tractor than our other truckload business units.
[noise] versus the prior year quarter.
Freight revenue per tractor at our Covenant transport subsidiary experienced a decrease of 11.1%.
Yes, our t. subsidiary experienced a decrease of 7.8% and our star subsidiary experienced a decrease of 5.1%.
The truckload segments operating cost per mile net of net of surcharge revenue.
Were up approximately seven cents per mile compared to the year ago period.
This was mainly attributable to higher professional driver wages group health insurance claims cost net fuel expense operations and maintenance expense and the impact of land air truckload operations higher cost per mile model.
These increases were partially offset by reversal of $1.8 million in compensation expense related to certain equity grants accrued between January 2018, and March 2019, as reduced earnings have made performance vesting not probable presets restricted stock grants.
Our managed freight segments revenue, excluding fuel increased 70.8% versus the year ago quarter.
The $43.7 million from $25.6 million.
Of the $18.1 million of increased revenue landauer contributed $21.2 million of revenue.
Offset by $3.1 million reduction in freight revenue from our brokerage subsidiary.
Our minority investment in transport enterprise leasing contributed $2.4 million to pre tax earnings were nine cents per diluted share in the second quarter of 2019.
Compared with a 1.8 million dollar contribution to pretax earnings or seven cents per diluted share in the prior year quarter.
The average age of our tractor fleet continues to be young at 2.2 years as that they ended the quarter.
Slightly up from 2.1 years a year ago.
Since December 30, Onest 2018, total indebtedness net of cash.
And including lease obligations.
Has increased by approximately $39.9 million to $294.5 million.
At June Thirtyth 2019, our stockholders' equity was $351.7 million for a ratio of net indebtedness to total capitalization at 45.6% compared to a 42.6% ratio as of December 30, Onest 2018.
In addition, our leverage ratio has increased to 1.8 times as of June Thirtyth 2019 from 1.5 times as of December 30, Onest 2018.
The main positives in the second quarter were improvement in the operating income at our managed freight segment, including the successful integration of lenders warehousing and transportation management service offerings.
Two improved year over year earnings contributed from our investment in transport enterprise leasing.
And three consistent demand and profitability from our growing dedicated businesses Atlanta Air and Star.
The main negatives in the quarter.
Where the operating margin declines of our expedited and solo refrigerated service offerings.
To an approximate 10.6% decrease in average freight revenue per truck for our truckload segment, excluding land, there's truckload operations versus the second quarter of last year.
And increased truckload operating cost on a per mile basis.
Primarily from the increased professional driver wages group health insurance net fuel cost it ops and maintenance expense.
Our fleet size remained basically flat sequentially with 3101 trucks at the end of June .
For the second half of the year, our focus will be on identified opportunities to improve the performance of our one way truckload service offerings, and adding profitable contract logistics service customers with more predictable long term contracts and our dedicated truckload transportation management and warehouse service offerings.
Thank you for your time, we will now open up the call for any questions.
Thank you at this time, we'd like to open the floor for questions you would like to ask a question. Please press the star key followed by the one key.
Phone now questions will be taken in which the order. They are received if at any time you need to remove yourself the question in queue.
Darren Keith again Star one audio question.
Our first question will come from Jack Atkins with Stephens.
Hi, David Joe and Richard This is actually Scott on for Jack How are you guys doing.
Good how are you doing Scott.
Good I guess my first question is on what you're seeing in July from a freight market perspective demand and supply I know you talked about in your release you are starting to see early signs of capacity correction I'm wondering when you can start seeing that the market start to rebalance itself. What are your expectations are from this point.
Hey, Scott This is Joey I think couple of things.
We saw the one way market.
I call it bottom about the middle of May a it was a pretty.
Precipitous declines from early February through the middle of May and the one way side. So bottom then started seeing it move up a middle of May through the end of June .
The first couple of weeks of July filled it stepped back a little bit.
I think the July 4th being on a Thursday Uh huh.
Combined with just general freight market situation. It did drop back I'm not saying it went all the way back to where it was in may but it did drop back a bit.
The last week or so you've seen it could you feel it kind of trying to move again back to the positive.
I think you know when do we expect a that's that's the big yes, [laughter], we know that capacities coming out I just working heavily with.
Our.
Manufacturers are only Mack truck manufacturers order, we all know this all public order.
Orders are.
Dropping quickly cancellation rates are increasing went away I don't want to name. The name. So said it doubled from a normal rate. So that's that's some good signs of let's call. It capacity rationalization on the truck side and then through our brokerage operations.
You're you're you're seeing.
There.
You are saying that the let's call. It bankruptcies for a second are folks kind of exiting the market continuing to increase so we're seeing signs of that capacity rationalizing itself.
We kind of thought through and now our current.
You as we think if it continues.
We think it sometime this fall, but that's just a guess for a lot of reasons yeah. There are several.
Macroeconomic issues that could impact us I want to get into all those you know politically and.
Ah things of that nature, but.
You know I think where we are holding our course on our trip plans for this year just because we're.
We Oh, we're trying to get as many automatics and fleet as we can and so you know our used equipment sales are still good and so we're still able to move equipment to continue our plants not plan on growing any.
Between now and ended the year on the truck side may take it down slightly dependent on.
Opportunities, what we're able to bring on and the business from a new business standpoint. So it's just kind of a feel from where we are.
That's helpful. Thanks, and I guess, a follow up question for Richard You mentioned your leverage ratio ticking up slightly as you think about your more steady contributions from land there ER and the cash that should be more stable. How are you thinking about the balance sheet and a capital allocation and returning shareholder value.
[noise] well net capex should be you know it was over $60 million in the first half of the year I expect that number to finish the year somewhere between 80, and 85 million or so there's going to be a lot less net capex as we have more proceeds coming in from trucks being disposed of then and what we're bringing on.
In the last half of the year and so I think there's a good opportunity to continue to pay down some debt or to pay down some debt in the last half of the year.
You know as our as our capital allocation has moved to trying to grow the less capital intensive businesses, the brokerage and the transport management and the warehousing business and we're also growing the dedicated side, which is capital intensive, but we're trying to grow the others at a at a faster percentage that I do expect you'll see our return on invested capital start to climb a little bit.
Especially as you look forward into into future years, but.
We're really trying to.
Trying to grow those that will also reduce the volatility as well as its not the only reason to do it Oh, we do believe that it will provide a better return for our shareholders.
Great. Thanks, that's all from me.
Thank you Scott our next question will be from Jason Seidl with Cowen and company.
Thanks. Thank you operator morning, guys wanted to touch a little bit on the.
The refrigerated side, maybe if you could talk to us about some of the trends that you saw obviously.
We had a very late start to the produce season and that probably wasn't a wasn't a good thing for that division, but if you can give us some color there I'd love to hear it.
Yeah. We were we were just talking about that just before we go call a davids got some handy numbers, there, but I think as far as it was late you know some of our larger shippers that we participate in produce with.
We're behind in April and May versus their commitments to us June came back quite nicely.
Commitments and Ah July thus far is okay from that standpoint, so we did see a late season. There's no question about that still feel really good about the business. There are trying to look for some so opportunities in the produce market to supplement our team side, but it did it did start late this season no question about that.
Okay and talk a little bit about I don't know if you've touched on inside to hop on a little bit late from another overlapping call but.
Touch on on driver recruiting, particularly on on the team side and and and what you're seeing in terms of.
Difficulty level and also on the pay level as well.
[noise] Tameside.
We've actually increased a few teams over the last 90 days I would say, probably twentyish thirtyish or so.
Getting teams is is extremely difficult you know there's no question the largest part of the market is solos teams or just a small small small percentage of the overall.
Freight markets and demographically. It's can you know continues to be a swatch itself.
The way to get a team or an individual interested in teaming and you've got to make sure that the pay is significantly over what they can make as a let's call. It a comparable so operation that's a challenge.
Some markets shippers are willing to pay for that and sometimes they're not that's some of the challenges with an expedited product is it's more much much more cyclical when they need it they need in a hurry and when they don't they don't and so there's there's.
Do you look for the 52 week freight [laughter] or that you can build a network around but it but it is it is volatile so.
And our experience is you know to be able to grow teens you need to.
Your your team business or your team pay needs to be at least 20% higher than what a comparable solo opportunity is in your fleet. If it's not those drivers who are lean themselves to the solo operation because this quote not worth it to try to match up with someone that they may not know.
So that's a constant battle yeah, what were your shippers will it what are your customers be willing to pay for that service versus what you can offer to your teams I think you look inside of CTG and think of the mix out of the 3100 truck.
About diversification inside our portfolio.
That's kind of what we're doing it's with the strategy of growing our dedicated model because it is.
When those folks are tired of teaming.
And they like the company, but they just tired of teaming what options do you have for me obviously, the majority of the options in the marketplace or solo. So we're trying to make sure that we have a good competitive product that can keep those professional drivers that want to stay with with enterprise. There. So teams continue to be a challenge I think long term, we like to grow a little bit, but I'm not going to say a lot and Ah continue to look for those shippers that value that service.
And are willing to.
Pay for that service or the cost of capital is higher.
And it's much much higher and so making sure that we've got you know a good return on that asset is critical and we've had some years over the last two or three that we've achieved.
Our our oh or targets for that fleet, but obviously this year. It's it's backed up quite quickly with market that we're in.
Well, that's some great color I have one more and I'll turn it over the next person.
In talking to your customers, especially the retail ones have they expressed.
Any details about the <unk>, the tariffs and how that's impacted.
The from their flow in their supply chain and the first half of the year in and how they would anticipate the second half the year playing out.
So I'm going to let you take that one.
Yeah, I think I'd say, Jason most of them, there's no doubt that as we all know that 2018 was up a roller coaster as it related to build up of inventory or because of tariffs.
You know I was talking to one of our customers about a month ago and it was interesting the as you know that the tariffs would go into effect.
And when the both hit the ports of Los L.A. or long beach wherever they're going to there's basically 21 days.
Oh from China into L.A., and this particular customer as the tariff was getting ready to go up the last time that it went up which was why I believe in January or so 10%.
They said that we are the boat, which is one of them one day behind it got there the 22nd day and on the 22nd day. The tariff went into effect in the cost of $10 million on them.
Yeah, I mean, I believe one when it comes into those kind of discussions that you have so there is no doubt that they play that we all felt to all the truckers felt that you saw it.
Inventories and so you know I think one of the things that capacity.
Exploded and 20, $19 2018, but they into 2018 to 2019 inventory levels of add to start working the write down and they have but slowly nothing dramatic and though they'll continue.
But.
I think if that most of the most of the retail customers out there today have got it position, where they won't it and.
There are just now working off of inventories I think if we see another hatton of up.
You know insecurity of not getting a China deal done I think that they will happen and I think that theres. So they get inventory levels to an acceptable number if they felt like tariffs are going to be part of the future they're going to we will really open the other 2018 as it relates to.
The trade tariffs in China, and the increase in inventory levels, and therefore become another feast or famine.
Of course, right now we'd like to have a base to give me a feast I'd like to have some face going on.
But I'd say the best thing that I fell out there. Jason also is that as it relates to that as it relates to the whole economic environment.
As pertains to trucking is that I feel very confident that the industry has hit the bottom.
And I think that we hit it sometime in may that data would start seeing it increased the stable.
Off a lower base, but.
I think that that at least we have found the bottom and we're working our way back up as the way I feel.
I got my fingers crossed that we have gentlemen, I appreciate the time as always.
Thank you Jason.
Thank you. Our next question will be from Scott Group with Wolfe Research.
Hey, Thanks, good morning, guys.
Hey, Scott.
Can you talk about the underlying yield in utilization trends in the quarter ex land there and then maybe what you're seeing in July or what you expect for third quarter on yield and utilization.
Well.
Yes, Scott without without land their utilization was down about 7.9%.
Overall consolidated it was down 11.3, so you see the impact of the land air miles.
As we move forward, we purchased land Air July 3rd of last year. So we basically have a.
Good full comp.
Versus last year going into third quarter, and I still expect utilization to be down slightly.
Versus last year, but more in a in a probably.
Two to three 4% range.
Nothing like the 11, and 12 and really a little better than the 7.9, we saw as we were talking about April and May were well below our seasonal expectations and things have picked up a little bit. So that's kind of where I see it going into at least into July but really for the full third quarter.
And the same thing for price.
Yeah right per mile on rate per total mile without land there in second quarter was down 2.9%.
And I think that we will see that drop a little further on a consolidated basis. It was down 1% on a consolidated basis.
And so for third quarter, I think you're going to see that number down five to five to six 5% to 7%.
On rate per total mile for the for the group.
And.
And then you know anyway, that's that's all I can tell you for third quarter.
Peak, we haven't really contracted anything yet so I mean, there were there some talks but we haven't contracted anything yet so I really don't have any indications on fourth quarter yet.
Okay. That's helpful and then.
Third quarter, sometimes earnings are better than for a second sometimes worse than second. It is this one of those years, where you think third quarter earnings are going to be worse than the second.
[noise] yeah.
I don't know, we Didnt really give any guidance on on third quarter in the release and and.
I think we have some headwinds and tailwinds that are they're kind of going kind of equally both ways without saying exactly where or I think that would end up.
I do think we kind of have.
Kind of equal forces coming from sequentially from Q2.
I think what do they know when listening Scott.
I would like to add to Richard's comment if you kind of break down just how we feel about the.
The various service offerings.
Second quarter third quarter, we do believe our one way business is going to be a better sequentially in the third quarter than the second quarter. I mean is per use pretty rough or early part of the quarter.
As I said early February through the minimum I. It was a it was a drop where's the bottom of this thing on the one way side.
Oh, you've already heard I've said it David said it so I think sequentially. The one way so that should be better our dedicated side.
We had some executional issues out of couple of our all of our locations that I think we've done a good job of.
[noise] improving those Ah so, let's just say dedicated total.
I believe sequentially should be a little better.
Our brokerage off right operation is going through a lot of growth compared to year ago. There's a lot of noise in there from a big agent that we lost a that we had last year.
That's a pop up business with a large customer that we don't have but if you strip it out and go apples to apples kinda.
Well, we had last year, excluding those the business is up dramatically and there's some.
There's some neat opportunities come and haven't closed them yet that could help them nicely later in the third quarter. So I feel pretty good about that are managed freight business and our warehousing business, let's just say kind of flattish.
Because those are long long sales cycles. So the pipeline looks pretty good I won't say, it's robust, but it looks good but.
So, let's say that's flat. So I think you put that in the Hopper I kind of think about it from a business standpoint forget EPS for a second.
We are feeling better sequentially from the second quarter to the third quarter or just because of where we feel the the one way market is and kind of addressing.
Some of the dedicated issues, we had with a couple of quick location. So.
That's some color around what Richard was talking to relative to expectations.
Okay that helps and then just lastly, what we're talking about gains on sales and then expectations. There and then just what you're seeing in used truck market.
[noise] a gain on sale in the in the second quarter was $65000.
Down from 400000 last year expectations are that we're going to have a good bit more proceeds in the third quarter and so I expect that number to be.
Closer to 500 to $600000 in the third quarter.
And because we're still like like Joey said, we're still seeing used truck sales hold up pretty well I think used truck pricing is down a little bit, but maybe not so much on the on though.
Uh huh.
Later model trucks that we are able to sell versus what's out there and the full market and so we're still seeing decent decent returns on those.
As well as on a on a few trailers that were selling.
Okay. Thank you guys appreciate it.
Thank you and once again that is star one to ask an audio question now.
Okay.
If there's no other questions that will wrap up our call today. Thank you for your time and interest in our future. We'll look forward to speaking with you again soon thank you.
[noise] today's teleconference. You may now disconnect.