Covenant Logistics Group, Inc. (NASDAQ:CVLG) Q1 2024 Earnings Call Transcript

Covenant Logistics Group, Inc. (NASDAQ:CVLG) Q1 2024 Earnings Call Transcript April 25, 2024

Covenant Logistics Group, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to today's Covenant Logistics Group First Quarter Earnings Release Conference Call. Our host for today's call is Tripp Grant. [Operator Instructions] I would now like to turn the call over to your host. Mr. Grant, you may begin.

Tripp Grant: Yes. Thank you. Good morning, everyone, and welcome to the Covenant Logistics Group First Quarter 2024 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 prepared comments and additional financial information is available on our website at www.covenentlogistics.com/investors. I'm joined on the call today by David Parker and Paul Bunn. We were pleased with our first quarter's operational results despite the lingering weakness in the overall freight environment and the severe weather that challenges early in the quarter.

Compared to a year ago, consolidated freight revenue increased by approximately $14.3 million or 6.1%. While each of our business segments grew freight revenue, the asset-based segments consisting of expedited and dedicated were the primary contributors with growth in the average tractor fleet and improved utilization compared to a year ago. Adjusted operating income increased approximately $2.2 million or 17.3% compared to the prior year quarter. Our asset light segments consisting of managed freight and warehousing grew adjusted operating income by a combined $3.3 million partially offset by $1.1 million of reduced adjusted operating income from our asset-based segments. Compared to the prior period, increased interest expense of $2.6 million and reduced pretax income from our equipment leasing company investment TEL of $2.3 million, resulted in a decline in adjusted net income of approximately $9.7 million to $11.6 million.

Key highlights include all 4 of our reportable operating segments were successful in growing freight revenue compared to the prior year quarter. Our combined truckload segments navigated difficult weather conditions and improved utilization by 5.4% compared to a year ago, partially offsetting the impact of rate reductions of approximately 1.7%. We successfully executed 2 new start-ups in our dedicated fleet during the quarter and added to the pipeline of new customers in our expedited fleet. Our net capital investment for revenue-producing equipment was approximately $12 million for the quarter, consisting primarily of specialized equipment CapEx for poultry-related growth. The average age of our fleet at March 31 improved to 21 months compared to 26 months a year ago.

Within our combined truckload segments compared to the prior year, operations and maintenance-related expenses declined by $0.07 per total mile or 27%. Fixed equipment-related costs, including lease revenue equipment expenses, depreciations and gains on sale increased $0.09 per total mile or 25% as a result of operating newer, more costly equipment and a soft used equipment market. The sale of revenue equipment resulted in a $0.7 million loss in the quarter compared to a $1.1 million gain in the prior year. TEL produced $0.20 per diluted share compared to $0.31 per diluted share versus the year ago period. TEL's contribution to pretax net earnings declined primarily as a result of the year-over-year softening in the used equipment market, suppressing gains on sale.

Our net indebtedness as of March 31 was $252.1 million, yielding adjusted leverage ratio of approximately 2.1x and debt-to-capital ratio of 38.2%. On an adjusted basis, return on average invested capital was 8.3% for the current quarter versus 14.8% in the prior year. The decline is attributable to reduced year-over-year trailing 12-month operating income, particularly from our asset-light Managed Freight segment and the increase in the average invested capital base associated with acquisitions growth CapEx and reducing the average age of our fleet. And now Paul will provide a little more color on the items affecting the individual business segments.

Paul Bunn: Thanks, Tripp. Expedited performed well in a seasonally soft quarter, compounded by severe inclement weather, yielding a 93.9% adjusted operating ratio. In this segment, rates have declined by approximately 5% as a result of the rate reset in the second quarter of 2023. The utilization has improved approximately 7%. The improvement in utilization was principally attributable to more engineered routes and newer equipment in the fleet with less downtime. Dedicated reflected another success story, yielding a 93.5% adjusted OR and successfully executing on 2 key customer start-ups during the quarter. Over the past 3 years, we have worked hard to improve the profitability in this segment by exiting unprofitable business and adding profitable business.

This weed and feed approach has been uneven, but over time has served us well in deploying capital towards opportunities 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 this segment's size and profitability over the longer term. Managed Freight experienced a 3% increase in freight revenue and a 102% increase in adjusted operating profit. The significant improvement in adjusted operating profit was primarily the result of a large cargo-related claim in 2023. 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 4% increase in revenue and a 795% increase in adjusted operating profit compared to the prior year as a result of stabilizing labor market where employee retention has improved and the cost of labor is no longer outpacing the rate at which we can capture rate increases from our customers. Our minority investment in tail contributed pretax income of $3.7 million for the quarter compared to $5.9 million in the prior period. The decrease was largely due to continued deterioration in the equipment market, suppressing gains on sale of used equipment. TEL's revenue in the quarter declined 14% and pretax net income decreased by approximately 35% versus the first quarter of 2023. TEL decreased its truck fleet in the quarter versus a year ago by 119 trucks to 2,082 and introduced its trailer fleet by 292,000 to 6,824.

Regarding our outlook for the future. Despite the continuation of a soft freight market, we remain optimistic about our model as a result of the durability of our earnings for the past 6 quarters and the positive momentum we have taken with us into the second quarter in the form of a strong pipeline of new customers in our expedited segment, fleet growth in our Dedicated segment, operational efficiencies that come with a young fleet and improve margins in our warehousing segment. We anticipate adjusted operating income growth from our core operations to sequentially improve each quarter as we execute throughout the year, although much of this growth will be offset by higher interest costs and reduced earnings contributions from tail, we are excited about the direction the company is headed.

Thank you for your time, and we will now open up the call for questions.

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