Excuse me, everyone. We now have all of our speakers in conference. [Operator Instructions].

It is now my pleasure to turn today's conference over to Mr. Richard Cribbs. Please go ahead, sir. .

All right. Thank you, Carie. 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 SEC, 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, at covenanttransport.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 for the quarter were our Truckload segment's revenue, excluding fuel, increased 4.2% to $151.2 million, due primarily to a 486 or 18.7% average truck increase, partially offset by a 12.2% decrease in average freight revenue per truck in the 2019 period as compared to the 2018 period. .

Of the 486 increased average trucks, 467 trucks were contributed by the Landair acquisition, as Landair contributed $20.6 million of freight revenue to truckload operations in the second quarter of 2019. .

Versus the year-ago period, average freight revenue per total mile was down $0.018 per mile or 1%, and our average mile per tractor were down 11.3%.

The main factors 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, partially offset by the Landair dedicated fleet's higher average freight revenue per total mile. .

The main factors impacting the decreased utilization included the softer freight environment in our one-way truckload business and the impact of Landair operations on the combined truckload division, including an approximate 640 basis point decrease in the percentage of our total fleet comprised of team-driven trucks, partially offset by a lower average seated truck percentage.

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Landair's 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. .

Versus the prior year quarter, freight revenue per tractor at our Covenant Transport subsidiary experienced a decrease of 11.1%. The SRT subsidiary experienced a decrease of 7.8% and our Star subsidiary experienced a decrease of 5.1%. .

The Truckload segment's operating cost per mile, net of surcharge revenue, were up approximately $0.07 per mile compared to the year-ago period.

This was mainly attributable to higher professional driver wages, group health insurance claims costs, net fuel expense, operations and maintenance expense and the impact of Landair truckload operation's higher cost per mile model.

These increases were partially offset by a 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 for such restricted stock grants. .

Our Managed Freight segment's revenue, excluding fuel, increased 70.8% versus the year-ago quarter to $43.7 million from $25.6 million. Of the $18.1 million of increased revenue, Landair 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 or $0.09 per diluted share in the second quarter of 2019 compared with a $1.8 million contribution to pre-tax earnings or $0.07 per diluted share in the prior year quarter. .

The average age of our tractor fleet continues to be young at 2.2 years as of the end of the quarter, slightly up from 2.1 years a year ago. Since December 31, 2018, total indebtedness net of cash and including lease obligations has increased by approximately $39.9 million to $294.5 million. .

At June 30, 2019, our stockholder's equity was $351.7 million for a ratio of net indebtedness to total capitalization of 45.6% compared to a 42.6% ratio as of December 31, 2018. In addition, our leverage ratio has increased to 1.8x as of June 30, 2019, from 1.5x as of December 31, 2018. .

The main positives in the second quarter were improvement in the operating income at our Managed Freight segment, including successful integration of Landair's 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 at Landair and Star.

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The main negatives in the quarter were the operating margin declines of our expedited and solo refrigerated service offerings; two, an approximate 10.6% decrease in average freight revenue per truck for our Truckload segment, excluding Landair's truckload operations versus the second quarter of last year; an increased truckload operating cost on a per mile basis, primarily from the increased professional driver wages, group health insurance, net fuel cost and ops and maintenance expense.

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Our fleet size remained basically flat sequentially with 3,101 trucks at the end of June. .

For the second half of the year, our focus will be on identifying 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 in our dedicated truckload transportation management and warehouse service offerings. .

Thank you for your time. We will now open up the call for any questions. .

[Operator Instructions] Our first question will come from Jack Atkins with Stephens. .

David, Joey and Richard, this is actually Scott on for Jack. 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're starting to see early signs of capacity correction.

I'm wondering when you can start seeing that the market starts to rebalance itself, what your expectations are from this point?.

Thanks, Scott. This is Joey. I think a couple of things..

We saw the one-way market, I'll call it, bottom about the middle of May. It's pretty precipitous decline from early February through the middle of May on the one-way side. Saw it bottom then, started seeing it move up in the middle of May through the end of June. The first couple of weeks of July, you felt it step back a little bit.

I think that July 4th being on a Thursday, 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 -- feel it kind of trying to move again back to the positive. I think when do we expect? That's the big guess.

We know that capacity is coming out, just networking heavily with our manufacturers, our [ OEM ] truck manufacturers order -- we all know this off [ public ] orders -- orders are dropping quickly, cancellation rates are increasing. One OE, I don't want to name the names, said it doubled from a normal rate.

So that's some good signs of, let's call it, capacity rationalization on the truck side. .

And then through our brokerage operations, you're seeing there -- you're seeing that, let's call it, bankruptcies for a second or folks kind of exiting the market continuing to increase. So we're seeing signs of the capacity rationalizing itself.

We've kind of thought through in our current view as we think if it continues, we think that sometime this fall, but that's just a guess for a lot of reasons, there are several macroeconomic issues that could impact it, and I don't want to get into all those politically and things of that nature.

But I think we are holding our course on our truck plans for this year just because we're trying to get as many automatics in the fleet as we can. And so our used equipment sales are still good. So we're still able to move equipment to continue our plans. .

Not planning on growing any between now and the end of the year on the truck side. May take it down slightly depending on the opportunities what we're able to bring on in the business from a new business standpoint. So this is kind of a feel from where we are. .

That's helpful. 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 Landair and the cash that should be more stable, how are you thinking about the balance sheet and capital allocation and returning shareholder value?.

Well, net CapEx should be -- it was over $60 million in the first half of the year. I expect that number to finish the year somewhere between $80 million and $85 million. So there's going to be a lot less net CapEx as we have more proceeds coming in from trucks being disposed of than what we're bringing on in the last half of the year.

And so I think there's a good opportunity that continue to pay down some debt -- or to pay down some debt in the last half of the year. .

As our capital allocation has moved to trying to grow the less-capital-intensive businesses of the Brokerage and the Transport Management and the Warehousing business, we're also growing the dedicated side, which is capital intensive, but we're trying to grow the others at a faster percentage, that I do expect you'll see our return on invested capital start to decline a little bit, especially as you look forward into the future years.

But we're really trying to grow those that will also reduce the volatility as well as, it's not the only reason to do it. We do believe that it'll provide a better return for our shareholders. .

Our next question is from Jason Seidl with Cowen and Company. .

Wanted to touch a little bit on 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 good thing for that division. But if you can give us some color there, I'd love to hear it. .

Yes. We were just talking about that, Jason, before we got on the call. David has got some handy numbers there, but I think as far as -- it was late. Some of our larger shippers that we participate in produce with were behind in April and May versus their commitments to us. June came back quite nicely, met commitments.

And 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, trying to look for some solo opportunities in the produce market, something [ in our team side. ] But it did start late this season, no question about that. .

And talk a little bit about -- I don't know if you touched on it because I hopped on a little bit of late from another overlapping call, but touch on driver recruiting, particularly on the team side, and what you're seeing in terms of the difficulty level and also on the pay level as well?.

On the team side, we've actually increased a few teams over the last 90 days, I would say, probably 20-ish, 30-ish or so. Getting teams is extremely difficult. There's no question, the largest part of the market is solos. Teams are just a small, small, small percentage of the overall freight market.

And demographically, it's -- continues to be [ as large ]. So the way to get a team or an individual interested in teaming is you've got to make sure that the pay is significantly over what they can make as a, let's call it, a comparable solo operation, and that's a challenge. .

Some markets, shippers are willing to pay for that; and some, they're not. Some of the challenge with an expedited product is it's more -- much, much more cyclical. When they need it, they need it in a hurry; when they don't, they don't. So there's -- you look for the 52-week freight that you can build a network around, but it is volatile. .

So in our experiences, to be able to grow teams, you need to -- 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 will lean themselves to the solo operation because it's "not worth it" to try to match up with someone that they may not know. .

So that's a constant battle. What will your shippers [ willing to work, what ] will your customers be willing to pay for that service versus what you can offer to your teams. I think if you look inside of CTG, I think of the mix out of the 3,100 trucks, today, we're a solo fleet from an enterprise standpoint.

2,300 of the trucks are solos and 800 of the trucks are team. Just kind of a simple way to think about it. .

So our solo fleet is 3x the size of our team fleet.

So as I think about -- as we think about diversification inside our portfolio, that's kind of what we're doing, is the strategy of growing our dedicating model because it is -- when those folks are tired of teaming and they like the company, but they're just tired of teaming, what options do you have [ for me? ] Obviously, the majority of the options in the marketplace are solos.

And we're trying to make sure we have a good competitive product that can keep those professional drivers that want to stay with the enterprise there. .

So teams continue to be a challenge. I think long term, we'd like to grow them a little bit, but I'm not going to say a lot, and continue to look for those shippers that value that service and are willing to pay for that service. The cost of capital is higher and it's much, much higher. .

So making sure that we've got a good return on that asset is critical, and we've had some years over the last 2 or 3 that we've achieved, our OR targets for that fleet, but obviously this year, it's backed up quite quickly with the market that we're in. .

That's some great color. Now I have one more and I'll turn it over to the next person.

In talking to your customers, especially the Retail ones, have they expressed any details about the tariffs and how that's impacted the flow in their supply chain in the first half of the year and how they would anticipate the second half of the year playing out?.

David, I'm going to let you take that one. .

Thanks, Jason. Most of them, there's no doubt that as we all know that 2018 was a roller coaster as it related to build-up of inventories because of tariffs. I was talking to one of our customers about a month ago, and it was interesting, the -- as you know, the tariffs would go into effect when the boat hits the ports of L.A.

or Long Beach, wherever they were going to, it's basically 21 days from China into L.A. And this particular customer as the tariffs were getting ready to go up the last time it went up, which is I believe is January, so 10%. They said that we -- the boat was running 1 day behind. It got there the 22nd day.

And on the 22nd day, the tariff went into effect and it cost them $10 million on that boat..

Yes. I mean unbelievable when it comes to those kind of discussions that you have. So there's no doubt that they played it. We all felt -- all the truckers felt it, you saw it, inventories.

So I think one of the things that capacity exploded in 2019, all of 2018, but the end of 2018 to 2019, inventory levels have had to start working their way down, and they have, but slowly. It's nothing dramatic. They'll continue. But I think most of the Retail customers out there today have got a position where they want it.

And there's just now working off of inventories. I think if we see another [ heighten ] of insecurity of not getting a China deal done, I think the same thing will happen. .

And I think -- so that they get inventory levels to an acceptable number, they feel like tariffs are going to be part of the future, we will relive another 2018 as it relates to the tariffs in China and the increase in inventory levels. And therefore, it will come another feast or famine. Of course, right now, we'd like to have a feast.

Give me a feast. I'd like to have some feast going on, but I say the best thing that I feel out there Jason also is that, as it relates to that, as it relates to the whole economic environment, as it pertains to trucking, is that I feel pretty confident that this industry has hit the bottom.

And I think that we hit it sometime in May and I think that we will start seeing it increase to stable off a lower base. But I think that at least we have found a bottom, and we're working our way back up is the way I feel. .

Our next question is Scott Group with Wolfe Research. .

Can you talk about the underlying yield and utilization trends in the quarter, ex-Landair? And then maybe what you're seeing in July or what you expect for the third quarter on yield and utilization?.

Well, Scott, without Landair, utilization was down about 7.9%. The overall consolidated was down 11.3%. So you see the impact of the Landair miles. As we move forward, we purchased Landair July 3 of last year.

So we basically have a good full comp versus last year going into the third quarter, and I still expect utilization to be down slightly versus last year, but more in a, probably 2% to 3%, 4% range, nothing like the 11%, 12%, and really a little better than the 7.9% we saw as we were talking about April and May, where we're 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?.

Yes. Our rate per mile -- our rate per total mile, without Landair, in second quarter was down 2.9%, and I think that we'll 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 5% to 6%, 5% to 7% on rate per total mile for the group.

And then -- that's all I can tell you for third quarter [ peak ]. We haven't really contracted anything yet. So there's 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 in the third quarter, sometimes earnings are better than the second, sometimes worse than second.

Is this one of those years when you think third quarter earnings are going to be worse than second?.

I don't know. We didn't really give any guidance on third quarter in the release, and I think we have some headwinds and tailwinds that are kind of going -- kind of equally both ways without saying exactly where I think that would end up. I do think we kind of have kind of equal forces coming from -- sequentially from Q2. .

I think one thing, Scott, I would add to Richard's comment. If you kind of break down just how we feel about the various service offerings, second quarter or third quarter, we do believe our one-way business is going to be better sequentially in the third quarter than the second quarter. I mean it was pretty rough early part of the quarter.

As I said, early February to the middle of May, it was a drop. Where is the bottom of this thing on the one-way side? You've already heard -- I said it, David said it. So I think sequentially, the one-way side should be better.

Our dedicated side, we had some execution issues out of a couple of our locations that I think we have done a good job of improving those -- so let's just say dedicated total, I believe sequentially should be a little better. .

Our brokerage operation is going through a lot of growth. Compared to a year ago, there's a lot of noise in there from a big agent that we lost that we had last year..

It'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, just kind of bullheaded last year, excluding those, the business is up dramatically. And there is some neat opportunities coming. I haven't closed them yet but could help them nicely, later in the third quarter.

So I feel pretty good about that. Our managed freight business and our warehousing business, let's just say kind of flattish because those are long sales cycles. 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, 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 just because of where we feel the one-way market is and kind of addressing sort of the dedicated issues we had over the couple of locations.

So that's some color around what Richard was talking to relative to expectations. .

Okay. That helps.

And then just lastly, what were -- can you talk about gains on sales and then the expectations there? And just what you're seeing in the used truck market?.

Gain on sale in the second quarter was $65,000 down from $400,000 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 $500,000 to $600,000 in the third quarter. And because we're still -- like Joey said, we're still seeing used truck sales hold up pretty well.

I mean used truck pricing is down a little bit, but maybe not so much on the later model trucks that we are able to sell versus what's out there in the full market. And so we're still seeing decent returns on those as well as on the few trailers that we are selling. .

[Operator Instructions].

Okay. If there are no other questions, that will wrap up the call today. Thank you for your time and interest in our future. We look forward to speaking with you again soon. .

Thank you. .

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect..