Covenant Logistics Group, Inc. (NASDAQ:CVLG) Q3 2023 Earnings Call Transcript

Covenant Logistics Group, Inc. (NASDAQ:CVLG) Q3 2023 Earnings Call Transcript October 29, 2023

Operator: Welcome to today’s Covenant Logistics Group Third Quarter Earnings Release Conference Call. Our host for today’s call is Tripp Grant. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. I would now like to turn the call over to your host. Tripp, you may begin.

Tripp Grant: Thanks, Ross. Good morning, everyone, and welcome to the Covenant Logistics Group third quarter 2023 conference call. As a reminder, this call will contain forward-looking statements under the Private Securities Litigation Reform Act, which are subject to risks and uncertainties that could cause actual results to differ materially. Please review our SEC filings and most recent risk factors. We undertake no obligation to publicly update or revise any forward-looking statements. A copy of the proposed comments and additional financial information is available on our website at www.covenantlogistics.com/investors. I’m joined on the call today by David Parker, and Paul Bunn. We are pleased with our third quarter’s results, which benefited from the full-quarter effect of the Lew Thompson & Son Trucking acquisition in the second quarter reflected in our Dedicated segment.

In addition, our Expedited segment benefited incrementally from the increase in demand for team-driver freight as a result of the closure of Yellow. However, more broadly, the overall freight environment remained challenging with few signs of immediate macroeconomic improvement. Compared to a year ago, consolidated freight revenue was down 5%. The decline is primarily attributable to the combination of little to no overflow freight handled by our Managed Freight segment and a lower tractor count in our Dedicated segment. The reduction of tractors assigned to Dedicated resulted from exiting underperforming legacy contracts partially offset by acquiring Lew Thompson and Son. The result was higher earnings on fewer trucks. Adjusted operating income declined approximately $4.6 million or 20% compared to the prior year quarter, primarily as a result of our Managed Freight segment which declined by approximately $4.7 million.

Adjusted net income decreased 32% to $15.3 million and adjusted earnings per share decreased 26% to $1.13 per share compared to the year-ago quarter. Weighted average diluted shares decreased as a result of our share repurchase program. Key highlights include freight revenue for the quarter was the highest for any quarter of the year, surpassing the second quarter by 4%. The Lew Thompson and Son Trucking operation continued to perform well with our first new poultry-related customer start-up in late September and a strong pipeline of additional bids. The average age of our fleet at September 30th improved to 23 months compared to 29 months in the prior year and 26 months at June 30th, 2023. Within our combined truckload segments, compared to the prior year, operations and maintenance-related expenses declined by $0.06 or 21% and fixed equipment costs, including leased revenue equipment expenses, depreciation, and gains on sale remained flat on a total cents per mile basis.

Gain on sale of revenue equipment was $0.6 million in the quarter, compared to $0.2 million in the prior year. Our TEL leasing Company investment produced $0.28 per diluted share, compared to $0.38 per diluted share versus the year-ago period. Our net indebtedness as of September 30th was $183.4 million, yielding a leverage ratio of approximately 1.7 times and debt to equity ratio of 31.8%. On an adjusted basis, return on invested capital was 10.6% for the current quarter versus 17.5% in the prior year. And now Paul will provide a little more color on the items affecting the individual business segments.

Paul Bunn: Thanks, Tripp. The performance of Expedited during the third quarter provided for 90.7% adjusted OR in the midst of a historically weak freight environment. We believe this says a lot about the work we have done to deploy assets with the right customers to lower our cost per mile, improve our utilization, and focus on what we can control. In the context of an 8% decline in revenue per mile, we believe a 12% improvement in utilization and in lower cost per mile are significant accomplishments. The improvement in utilization was principally attributable to newer equipment in the fleet and reduced downtime, which we will look to continue as year-over-year freight revenue per total mile comparisons are expected to continue and be challenging for the remainder of 2023 and into 2024.

Dedicated reflected another success story centered around our disciplined approach to capital allocation. Dedicated improved its adjusted operating ratio to approximately 93.6% by effectively weeding and feeding. We reduced the overall size of the fleet by 170 trucks while nearly doubling adjusted operating income. Trading out approximately 400 legacy contract units for Lew Thompson and Son aligns with our strategy of exiting unprofitable or underperforming business and replacing it when opportunities arise that meet our profitability and return requirements. We are pleased with the year-over-year improvement to adjusted margin and expect to continue to improve upon both this segment’s size and profitability over the long term. Managed Freight experienced an 11% reduction in total freight revenue and a 57% reduction of consolidated adjusted operating profit.

The significant reduction in revenue and operating profit was primarily the product of little to no high-margin overflow freight from our asset-based Truckload segments in the 2024 quarter — 2023 quarter. The brokerage environment remains highly competitive with numerous brokers aggressively competing for volumes at the expense of profit or margin. We anticipate continued margin pressure in this environment. Our Warehouse segment saw a 15% increase in revenue and an 82% increase in adjusted operating profit compared to the prior year. The top-line growth is a result of new customer startups over the last 12 months and the operating profit improvement was a result of the combination of new customer business and improved rates for existing customers.

Although we were pleased with the improved profitability within this segment, we will continue to focus on improving profitability more through improved labor utilization and rate increases with existing customers. Our minority investment in TEL contributed pre-tax net income of $5.3 million for the quarter, compared to $7.4 million in the prior year period. The decline was largely a result of reduced gains on sale of used equipment compared to a year ago. TEL’s revenue in the quarter declined 8% and pre-tax net income decreased by 28% versus the third quarter of 2022. TEL increased its truck fleet in the quarter versus the year-ago by 42 trucks to 2,195 and grew its trailer fleet by 153 to 7,013. Due to its business model, gains and losses on the sale of equipment is a normal part of the business for TEL and can cause earnings to fluctuate from quarter to quarter.

Our investment in TEL is included in other assets on our consolidated balance sheet and it has grown to $61.6 million as of September 30, 2023, from our original investment of $4.9 million back in 2011. In 2022, we received $14.7 million in cash dividends from TEL, and year-to-date, we received $9.8 million in dividends in the third quarter of 2023. For the fourth quarter, we expect our revenue and earnings to experience a modest decline sequentially due to cyberattacks on a major customer and the ongoing United Auto Workers strike, which has temporarily depressed load volumes and revenue per truck in our Expedited and Dedicated divisions. More broadly, however, we are optimistic that the trough of the freight cycle is behind us, but remain cautious about the rate at which we will see improvements.

For 2024, we believe that the first half of the year may continue to be challenging and expect our capacity — and expect capacity continue exiting the market. Although we are eager for the freight environment to improve, our primary focus remains on the long term, by continuing to invest in areas that provide opportunities for us to make forward progress on our strategic plan by exiting underperforming capital tied to underperforming customers, and investing capital in business units and customers that provide adequate returns, improving our safety culture and investing in our people. Thank you for your time and we will now open up the call for questions.

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Q&A Session

Operator: [Operator Instructions] And our first question comes from Jason Seidl from TD Cowen. Please go ahead, Jason.

Jason Seidl: Thank you, operator. Good morning, gentlemen. Appreciate you guys taking my question. Can you talk a little bit about the experience of Lew Thompson? It seems to be going pretty well. I know initially when you, when you guys bought them — sort of the theory was that you could really start helping them grow maybe sort of how should we expect that into ’24 and beyond. And then maybe can you expand upon sort of uses of cash going forward? You’ve done a pretty good job of dispersing it between timely acquisitions and also the buyback.

Tripp Grant: Yes, yes. Jason, this is Tripp.

Jason Seidl: Hi, Tripp.

Tripp Grant: I’ll be happy to talk about Lew Thompson first. You know, when we first got Lew Thompson in April of this year, they were about a 200 and just call it 225 truck fleet because some of those folks are shuttle trucks, but had a really, really good business like good culture, good fit, fit with exactly, you know, what we were looking for in our strategic plan, and one of the silver linings behind that, which is one of the silver linings that we look for with any acquisition as the opportunity to grow. And if you look back at Lew Thompson and how they’ve operated in the past, they’ve really being confined to one, you know, smaller region and kind of call it Northwest Arkansas and one of the things that we’ve brought to them in terms of growth potential is something they’ve never had before.

Certainly, the family had the capital to grow, but, you know, getting outside of that wheelhouse of their region as something that they have not done before, and that’s something that we’ve experienced starting to the experiment with and see success with. Evidence being in the September this year, our first startup in Tennessee with a 20 truck fleet. I could see more substantial growth outside of the Northwest Arkansas or Tennessee wheelhouse step up in the next here. But because of that, you know, there’s a couple of nuances with Lew Thompson that we’ve got to make sure that we’re not as we grow this business that don’t suffer and one its service and we have to maintain that gold level of service that Lew Thompson maintains. And so we’re very careful about the growth and making sure that we’re not sacrificing legacy business or new business by just trying to grow for the sake of growth.

Two is, you know, capital and making sure that we can acquire the capital that we can grow with because they do — one of the reasons why we like them is because of their unique capital requirements. Whether they’re, you know, differently spec trucks or differently spec trailers, you know, it sets us apart a little bit. So capital is a big hurdle. But I do think that there is lots of opportunity. I’d be hesitant to kind of give numbers right now because we’ve got a lot of things in the pipeline. But that is a big kind of just call it feather in our cap next year with just the opportunities that I believe that we have with Lew Thompson over the next, you know, call it 15 months and beyond that.

Paul Bunn: Jason, to add on — this is Paul. To add on to…

Jason Seidl: Hi, Paul.

Paul Bunn: What Tripp said, there is an intentional plan to grow Lew Thompson each and every year for the foreseeable future. The exact pace of that growth, I agree with Tripp. You know, it’s, you know, getting the right equipment and, you know, we’re in process on some customer contracts right now and there’s a lot of stuff in the pipeline, so we’ll stay balanced. But I think you’ll see that business grow year-over-year for the foreseeable future.