Welcome to today's Covenant Logistics Group Q1 2022 Earnings Release and Investor Conference Call. Our host for today's call is Joey Hogan. 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, Mr. Hogan, you may begin. .

Thank you, Ross. Welcome everybody to the Covenant's Logistics Group first quarter conference call. As a reminder, this conference call will contain forward-looking statements, within the meeting of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are subject to risk and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. Please review our disclosures with the SEC, including, without limitation, risk factors and our most recent Form 10-K and our current recent Form 10-Qs.

We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances. The copy of our prepared comments and additional financial information is available on our website at covenantlogistics.com in the investor section.

I'm joined this morning by Paul Bunn, our Chief Operating Officer and Tripp Grant, our Chief Accounting Officer; and David Parker is available via the phone. In summary, we're very proud and pleased with our first quarter results, which represent yet another quarterly earnings record for any quarter in the company history.

In addition, it's the first time in our history where our first quarter earnings were greater sequentially than the fourth quarter. This is exciting achievement could not have been accomplished without the contribution from each of our business units. All business units improved it's OR versus the fourth quarter.

The small acquisition we made in February, combined with a purchase of 655,000 shares at an average price of $22.60 under our share repurchase program, produced earnings accretion to the quarter and is expected to continue.

With this strong start to the year and the hard work of our team transforming our business to a less cyclical model, we are confident that we will exceed 2021's full-year adjusted earnings per share for the full year of 2022, absent something truly unexpected.

The key highlights for the quarter were; our freight revenue group 28% to $258 million compared to the 2021 quarter. Adjusted earnings per share increased 141% to $1.35 per share from the year ago quarter. Our asset-based truckload freight revenue group 15% versus the first quarter of 2021 with 218 fewer trucks.

Our less asset-intensive or asset-light divisions of managed freight and warehouse combined grew 55% compared to the first quarter of 2021. On the safety side, our chargeable DOT accident rate was the lowest on record and 31% lower than year ago.

Our TEL leasing company investment produced a record quarter contributing $0.30 per share or an additional $0.17 per share versus the year ago period.

Due to the strong cash flow in the quarter, our net indebtedness increased only $22 million after utilizing a combined $52 million of cash and borrowings under our credit facility on the small acquisition and our share repurchases.

We finished the quarter with a leverage ratio of slightly less than 0.4 times, a debt equity ratio of 12% and return on invested capital 14%. Now, Paul will provide a little color on the items affecting the business..

Thank you, Joey. For the quarter, our asset-light business, which are comprised of our managed freight and warehouse, were once again our largest group, both in terms of freight revenue and adjusted operating profit. This group comprised 40% of our total freight revenue and 50% of our consolidated adjusted operating profit.

The sheer volume of overflow and special project freight dropped throughout the quarter, but overall revenue margin expanded, covering much of the volume decline. Our warehouse team's doing a great job building a nice pipeline with several startups planned for the remainder of the year.

This group remains our top priority for growth, focusing on talent acquisition and technology enhancements. We are very excited about the prospects within this group. The Expedited division was 31% of our consolidated freight revenue and produced 38% of our adjusted operating profit in the quarter.

It grew its revenue 16% versus the year ago quarter, due to a strong rate environment and contribution from the small acquisition. The acquisition contributed to the sequential weighted average growth of 36 tractors in the quarter.

Expedited produced a record first quarter with an 88 adjusted operating ratio, 260 basis points better than the fourth quarter, a first, for our company. Even in a slowing environment, new business startups continue and our team count is growing in the second quarter.

After multiple increases in 2021, we feel our driver pay is in good shape at present, but we'll continue to watch it closely. The dedicated division was 29% of our consolidated freight revenue and 12% of our adjusted operating profit in the quarter.

This division continued its steady sequential improvements with adjusted OR improving 180 basis points from the fourth quarter and 580 basis points from the year ago quarter. Revenue per truck continues with sequential improvement of 8% from the fourth quarter, which has been a big key to sustainable gains.

Also the leading fee plan for accounts continues with seven startups completed in the first quarter totaling 61 trucks and five or six planned in the second quarter for around 80 trucks. The pipeline for the remainder of the year is robust, supporting our expectation that margin improvement will continue.

We plan to begin briefly discussing each quarter of the performance of our 49% interest in Transport Enterprise Leasing or TEL. TEL is an investment that we've had since 2011. During that time, TEL has grown with over 2,000 tractors and 6,500 trailers in its portfolio.

Our investment in TEL's included in other assets in our consolidated balance sheet and has grown from our initial cash investment of 4.9 million to 51 million including the cumulative earnings we have recognized.

As a reminder, TEL focuses on managing lease purchase programs for its clients, leasing trucks and trailers to smaller fleets and shippers and aiding costs in the procurement and disposition of their equipment through robust equipment buying and selling program.

TEL contributed a total of $0.30 per share or overall results or an additional $0.17 a share versus the year ago quarter. TEL's revenue in the quarter grew 41% and pre-tax operating margin increased 43%.

Due to the business model gains and losses on self-equipment and is a normal part of TEL's business and can cause earnings to fluctuate from quarter-to-quarter. We are very happy with the TEL leadership team, its future and its contribution to Covenant's future. TEL is an untapped value for our shareholder. Joey, will now walk us through our outlook..

As we said in the release, we expect to have a good second quarter and deliver record full-year adjusted earnings per share in 2022. This expectation takes into consideration our expectation of a more balanced freight environment in the second half of the year.

On this point, we think it's important to differentiate between the spot market which has more volatile rates and volumes and receives a lot of analyst's and investor attention. And the contract market where most of our freight comes from and which our customers tell us will retain consistent demand for the remainder of the year.

Thus, while some of the froth may come out of our rates and volumes we expect the core to remain solid at least for the next couple of quarters, absent a major shock to the system.

Even in a moderating freight environment and with increased capital expenditures for the remainder of the year we expect to generate positive cash flow, given us resolved to stay focused on good, long-term strategic investments.

Looking further ahead, we also believe that 2023 will be a breakout year for Covenant, proving that our model is more durable than in the past. We stand firm that the changes we've made to our business model over the last few years will provide more consistent earnings and cash flows compared with our results in the past cycle troughs.

We believe time and performance will provide clarity to that. In the meantime we will continue to produce cash and maximize opportunities for our shareholders. Thank you, Ross. And now we'll open up the call for questions..

[Operator Instructions] Our first question comes from Scott Group from Wolfe Research. Please go ahead, Scott..

Hey. Thanks. Good morning guys..

Good morning, Scott..

Joey just wanted to follow-up on your outlook there.

We typically see a pretty nice sequential improvement in earnings from first quarter to second quarter, any thoughts on how to think about 2Q?.

Scott, I think what we said was intentional. We feel we're going to have a really good second quarter. I agree, history says that second quarter exceeds the first quarter. History doesn't say that first quarter exceeds the fourth quarter. So I think that we feel good about the second quarter. That's probably Scott what I'll say about that right now. .

Okay. Maybe talk about then like the individual segments and where you see the best potential for sequential earnings improvement from first quarter and where you see potential risk from quarter levels..

Yes Scott this Paul. I'll kind of walk you through it. I think expedited could be flattish probably with the first quarter. Dedicated I think they're going to see some continued improvement sequential improvement from the first quarter. Warehousing probably flat-ish with the first quarter. And then as you know the wild cards managed freight.

And I think you're going to see that pullback from the first quarter just from what's going on in the market. TEL, I think TEL also we started talking about TEL more this time. I think TEL could pull back a little bit. I don't think you'll see quite acceleration you saw from fourth quarter into the first quarter. So expedited and warehousing flat-ish.

Dedicated better. TEL and managed trans are the wild cards. And we really think managed trans margins you'll see those pull back as well as revenue for the second quarter..

Okay. Joey you are right that there's a lot of focus obsession on spot market right now.

Just curious your take of what's going on in the market is this the beginning of the end for spot rates? Is this temporary? And then what if any impact are you seeing on contractual pricing, negotiations or are you seeing any de-sell or slow down and contract pricing?.

Well, I just think first thing is the spot market on the truck side 1% I mean it's very small on the truck side of the business. So it doesn't "bother us." I think obviously, though it's a big part of the market and so it can impact the contract side eventually. We all know the spot moves first and then contracts potentially moves after that.

I think what we're seeing right now we're pretty confident that our rates will continue to grow from the first quarter to the second quarter. And so thus far our contract business looks good. Both expedited and dedicated have new business starting up in the second quarter.

So we feel good about that right now as well as a lot of work that our expedited team has done to let's call it solidify volumes into the future. We're confident that that's going help us nicely going into the year. I think where we do see it the most is potentially in our brokerage business. And Paul's already kind of commented on that.

I think what I point to though is revenue dropped pretty meaningfully from fourth quarter to the first quarter in that group about almost 20%.

So the peak-ish impact even though people small for us combined with the slow down into volume we did see it there but then what the results showed was that margins expanded a little bit from fourth to first, which again, we know that as well.

In a slowing spot market, brokerage side tends to expand at least its revenue margin What happens from this point forward? I think that our business pipeline looks good in our brokerage segment right now. The team's doing really good. We just continue to have the pedal down to continue to grow that business. So we'll see.

I agree with Paul revenue could be down a little. I don't know if it's going to drop a whole lot from where it was in the first quarter. Margins will be the question. Right now margins are holding. So we'll see how the rest of the quarter plays out, 1% down GDP in the first quarter. So there's no question.

We talked about that back in January that the economy is going to slow. But for us we're really encouraged how the year started out and the results of our work the last four or five years..

Scott, I'll add one thing to what Joey said. I think we've tried over the last couple years and you guys know what we've been doing. We've really tried to make sure we're aligning ourselves with customers where we're actually adding value.

And that's what gives us confidence that this isn’t a rate shock play, because we didn't maybe take as much advantage of the market as we could have.

And so, we've really tried to exit through these weed and feed process where we were just a commoditized player, and we still got a few of those accounts we're working on, but for the most part, I think we're in a better shape than we've been, because we're more value-add less commoditized..

Yeah..

Maybe just to that point, so remind us because expedited lost a little bit of money, I think in 2019.

What are the changes within expedited that you guys have made, and what is the new sort of peak to trough margin range you think for that business now?.

I think during the last couple years, as I said, we tried to partner with people who had brought us to the dance. And so I would say, it's a pretty concentrated business, and we've got some multi-year agreements with a number of those customers. And so, I think that's what we've done to try to tighten it up.

I think the peak to trough is from high-teens to high-single-digits is probably the peak to draw on the margin standpoint. .

And Scott, one more point I'd add back to that. If you're looking back at 2019, you remember we had a lot of solo trucks running including the reefer trucks formally known as SRT running in that division, formally known as highway services. And then in 2020, we kind of changed our segment profile to just purely be a teams-based operation.

The fleet count came down quite a bit but a lot of the volatility that really caused us to a breakeven if you will in 2019, it's been pulled out as part of that restructuring we did in 2020..

Thank you, guys. I appreciate the time..

Thanks, Scott..

Thanks, Scott..

Our next question comes from Jack Atkins from Stephens. Please go ahead, Jack.

Hello Jack, are you on the line? Are you muted?.

Yeah. Sorry about that. I was muted. Guys, good morning. Thanks for taking my question..

Good morning..

So I guess, maybe if we could started, I'd love to get you to maybe talk a little bit about the acquisition of the quarter AAT. From what you're saying, it was already accretive to results in the first quarter.

Tell us a little about sort of their business model and maybe how it fits into your longer-term sort of strategy around reducing some cyclicality within the business..

Yes. A, it's a small operation but profitable. And B, it's primarily all teams, which is obviously a complement to what we do. It's a very specialized group of trucks that work for the government. So, it hauls government munitions if you will. It's a high priority special clearance DOT number, all the drivers are cleared.

It's an asset that we've looked at for quite some time. I'm very pleased with the performance of the group. I'm very pleased with the Covenant Group that's assisting a very small operation, but making sure that we understand how to complement our existing team business. And so that's a very small segment in the marketplace.

There is some volatility to it, but it's consistent if you will from a volume standpoint. So not a lot of -- there is some pricing volatility but the volume is pretty stable. Revenue per truck parameters around that group is very high, much higher than our kind of existing expedited business.

So, the main thing is that it gives us a diversification with a customer base A. B, it gives our drivers and that's as much of it as anything another opportunity in their career path. So, you have to have a lot of experience, no accidents. It pays very, very, very well but there's high demands for that.

You're working with a lot of military bases across the country. So I'm excited. We've got some neat growth opportunities that we're exploring. We're taking it slow to make sure we don't overwhelm very specialized team. And I'm excited about our Covenant team. So, we're not required nor will we kind of disclose results separately.

And so, it's just a separate division as part of the overall expedited group..

Okay. No, that makes sense, but it sounds like that's a good acquisition and it's off to a good start..

Yeah, we're very pleased..

So I guess maybe shifting gears to your TEL investment. Obviously, that's becoming a bigger and bigger piece of the earning stream here.

I guess, when you think about maybe what we saw in the first quarter, how do you break that down between maybe what's more longer term maybe sustained improvement in the contribution from TEL relative to maybe some gains that could be flowing through there.

And I guess maybe I'm just trying to think bigger picture is that asset signing call it three, four-year type leasing agreements and maybe you've got some longer term visibility there.

Can you help us think about that?.

Yeah, a couple things just to kind of quick picture. As we've said, we've had the investments since 2011. It's made a cash distribution to Covenant virtually every year along the way. I think there was one year that we did not make a distribution. Every year it's made money. Every single year.

So through the 2018, 2019 recession through COVID 2020 it's made money. So it's a profitable operation. The business is stable as evidenced by that. It's been on a steady growth rate.

We made a large investment back in 2018, 2019, I want to say that that we had to work out of that did stall the growth for a little period of time, but the group did a great job of working our way through that investment. So it does as we said in the comments there's three distinct segments. So what you're referring to is the equipment sales business.

It's a really neat model from a standpoint if the client base on the lease purchase side or the small fleet leasing side has some weakness, the equipment sales side is a great compliment to that to move that equipment to the extent it needs to be moved or there's not a new customer to take that equipment. The lease purchase side is very stable.

It's medium to large fleets. And not of what I would call a lot of volatility in that segment. Small fleet leasing has just been steadily growing for several years. And credit profile strong, the team there does a great job on the credit side. As of right now there's zero, I'll just share this as an anecdotal point.

There's no receivables over 30 days, so very strong credit profile and process. The team does a good job and they're also very -- I call it creative working with clients. It is more than -- it's providing a service that they do as well. So it's truly a complimentary service.

How do we help you do better in your business? Yes we're here to make some money and produce profit. But it truly is a neat operation working with a client. So now the equipment sales side, yes, it has gains and losses in the markets right now. The market's really good to the extent it needs to move equipment. They're doing well now.

And so I think the benefit is always being in the market is the key. We're known as a good-sized buyer and seller. So good markets or bad markets and I think that's helping the model as for a long period of time..

Jack, specific to your question on the waterfall on the leases, I would say most of the portfolio is multi-year leases. There's a piece of the trailer pool that is not multi-year leases but it's a customer that's a 10-plus year customer in leasing those. And so it's not a -- here's a thing there's no rental component to it.

There's really hardly no short-term component to it. Most everything is either somebody they've worked with for eight, nine, 10 plus years or something that's probably got a three, four, five-year life attached to it. And as Joey said they've taken this most recent environment to really upgrade the credit quality of their customer base.

And so that's where they're at..

Okay. That makes sense. It sounds like that's a structurally -- another piece of the business that's just structurally more profitable this cycle than last cycle..

Yes, yes. .

You know, maybe shifting gears a little bit and going back to a prior question, but when you think about the expedited piece of the business and you talked about all the work you've done there to give yourself more visibility.

Any sort of update on what portion of that business is maybe under a longer term commitments that make you kind of feel pretty comfortable that no matter what kind of may happen with the cycle. You've got some pretty good visibility into sort of how the earning stream's going to flow there. .

Yes. 60%-ish. .

Okay. That's great. That's great. And then last question I'm going to take another stab at the second quarter and I understand the hesitancy to maybe get too granular, but when you, kind of, Paul take all the different puts and takes that you walk through from a segment perspective and, kind of, roll it all up.

Would you think that you'd be able to hold earnings flat quarter-over-quarter, or is it just too hard to say at this point given the potential volatility within expedite?.

It's really going to determine where managed freight shakes out Jack..

Right..

I mean, March a lot of times determines where you come out for the first quarter. And a lot of times June determines that on the just so many workdays, no holidays in both of those quarter-end months.

And a lot of customers shipping stuff out pre-4th of July and beverage season and produce season and seeing how those things materialize and how the port situation materializes. And so to Joey's point I'd hesitate to give you a number, but it's going to be a good number. You'll be happy. .

That sounds great. Well guys congrats again on the great quarter. I’ll pass it over..

Thanks, Jack..

Our next question comes from Jason Seidl from Cowen. Please go ahead, Jason..

Yes. Thank you, operator. Gentlemen, good morning and congrats on just a great quarter.

Wanted to piggyback a little bit on that question as you look, sort of, on the managed transport side quarter-to-date here what are you seeing in terms of your margins thus far as compared to 1Q?.

I would say margins are –yes, that’s same. Margins are about the same. Revenue's running a little lower, margin's running about the same..

And so it really is what our margins going to do in June situation in terms of determining the quarter for that section?.

Yes. .

Okay. Perfect. You guys have been aggressive on that buyback your bucket's almost empty now. Talk about plans to sort of re-up on the buyback and in terms of allocating capital. .

Yes, we're pushing -- we've been real pleased how the buyback has worked it's somewhat of a creative program. But nevertheless, it's performing well. And we expect to be completed in the program in the second quarter and we're looking very diligently to what's next.

So not ready to say whether we're going to re-up or not, but we're excited about what our opportunities are Jason. .

Okay. Well, fair enough.

Joey, I wanted to, sort of, go to a comment you made you talked a little bit about how sort of spot leads contract, are you seeing any degradation at all in the amount of increases you're getting in the contract side, or is it still up and to the right?.

It's still up. Last year was when we had to right? We raised driver wages three times if I recall. So we were in a market where we had to move and the carriers improved their margin overall last year but it wasn't like I'll call it stupid improvement and because our costs were just exploding.

And even though driver wages may be moderating now's probably the word I've put on it. There's other increases that are still coming. We had another pass-through three increase on equipment last week that just came out of nowhere.

And so the equipment market, the over the road repair market, labor availability parts all that is still there and it's still going up. And so I'm just using that group as a category of cost increases. So we need to continue to get some increases. Is it going to be as profit as it was last year? No it's not.

But I believe that we're still happy with what's going on and second quarter's a big quarter from a pricing standpoint, but it's not as big as it used to be for us because our dedicated kind of happens throughout the year if you will. Expedite is still heavy in the first half of the year. And then brokerage is kind of whenever those contracts come up.

So, we're not as heavily weighted as we used to be in the past because of how the model has changed. And our warehouse business is kind of it comes, when it comes with a new business. And so that renews annually with those contracts.

So, kind of what I'd ask you to think about is the impact of rate movement to the enterprise is going to be less than in the past because our model has changed. And so the impact of maybe slowing rate market is less of an impact today than it has been in the past for us..

Okay. That makes sense.

If I jump to manage transport for a minute here, are your length of your contracts changing in this business? And if so, how?.

You're saying basically how much spot versus how much contract are we on mainstream side?.

And even on your contract side, because one of the things, one of the providers said the other day was that they're seeing more of a shift to sort of the three to six-month type deals that are out there. I'm just curious….

I would say, we've been trying to shift the business a little more contract and spot. Last year it was more spot. A lot of brokers want to be 50:50, 60:40. And so I think, we're probably aiming to try to be 60:40 by the end of the second or third quarter on contract versus spot. And I would say Jason, most of our contracts are still 12 months..

They are still 12 months, okay. That makes sense. Well gentlemen, again impressive quarter. I appreciate the time as always and I’ll turn it over to somebody else..

Thanks, Jason..

Our next question comes from Bert Subin from Stifel. Please go ahead, Bert..

Thanks. Good morning, Joey, Tripp, Paul.

Hope you are doing well?.

Good morning..

Good morning, Bert..

I'll keep it pretty brief. I just had two questions for you.

On the topic of -- I think we're starting to get into this, but could you quantify like the spot exposure differential? Like, where is it today across the entire business and how does that compare to let's say 2018 or the last cycle? Like Joey, I know you've talked a lot about the resilience of the business, but I'm just curious how that's affecting things right now..

So let's go back to '17. This is a little dated. Actually in '17, what we called highway services had a fair amount of solo trucks in it. It was contractual. A lot of that was contractual, but there was some spot to that. The expedited piece of highway services has always been heavy contract as much to the markets not understanding.

It's just heavy, heavy, heavy contract. The spot if you will in the past has been what peak did to expedite in the fourth quarter, I could call that spot, because it doesn't happen every quarter. It's a one-time event year. That's much less today as we saw last year. It's almost nothing last year.

And what part of expedited success has been that is that, that impact to the fourth quarter and then the cost drain in the first quarter is now gone. And so they can stay focused on running business 52 weeks a year, not a 100% gone, but practically gone. In '17, we didn't have warehouse. It's a very stable cash flow.

We didn't have managed trans, which is a very stable cash flow. Brokerage was much less in 2017. So when I talk about if you really go back 2017 prior to the ramp-up in 2018 and the drop in 2019, I think, 2017 to let's call, it today's model is drastically different -- drastically different.

And so the spot impact back then was much greater back then even though it was small it was probably the solo piece and expedited was a much bigger piece of the pie. And so Bert, I'm not answering the question with specific numbers, but just kind of look at 2017 and today and it's just drastically different.

Today what I can say the spot impact today is inside of the brokerage piece of managed trans. But you have a hedge if you will in the sense that as things soften volume-wise typically your net revenue margins increase. So it offsets some of that volume decrease potentially, and so it's just a different just a totally different ballgame. .

Just to maybe put some numbers on it like just to frame it or ballpark it if it was like 20% and 2017 today at 10% something like that?.

Yes. Let me frame it for you Bert. I just said a minute ago let's just use the 50-50 spot versus contract mix and brokerage because as we said the rest of the business is pretty much contracts. It's contract dedicated, contract warehousing. Expedited is pretty much contract. So you got 50% of your -- probably let's just go with the managed trans cost.

35% to 40% of total managed trans is spot market. Spot and surge. And so that's where your exposure is -- is on that bucket of revenue. .

Okay. And just for my follow-up, I mean, it sounds like you have certainly an easier path to beating 2021 EPS. So if we were to think of you in, sort of, like a $4 EPS range this year like how do you think about the future? It seems like you have dedicated is just going keep, sort of, slowly getting better.

Expedited maybe you've talked about it being low 90s maybe in a tougher year.

And so then that makes just managed freight the concern potentially if things rollover -- how do you think about that? Are you just thinking that the revenue erodes and margins stay sort of positive or is there a situation if we were to stress it enough where OR would rise above a hundred in that business in a bad year?.

No, no, no. I don't see it rising above a hundred. I mean, we -- a lot of folks have been talking this kind of peak to trough and so you just gave us your number on peaks something with a four in front of it.

From a trough standpoint 25%, 30% pullback in total and a lot of that would be in the managed trans business or the brokerage side of the managed trans business and softening margins. But I think we would ascribe to that 25% to 30% kind of pull back from peak to trough wherever you define peak as.

And then we're hammered down every day trying to growth offline revenue and improve margins in other businesses offset as much of that as we can. But that's kind of your trough numbers. .

Yes. Just to clarify that just so I understand it. I mean, feels like to go down more than 25% earnings you would need sort of more than managed freight headwinds. Like you would probably need expedited to be materially worse.

Is that sort of how you would frame like a bear scenario for you guys?.

Yes. A bear scenario would be significant drop in brokerage before we're able to kind of add to the base business and expedited pulling back to mid-90s. .

Got it. Okay. Thank you very much, Paul and Joey..

[Operator Instructions] Gentlemen, it appears at this time there are no further questions. .

Ross, thank you for your help this morning and appreciate everybody's attention to the call. And look forward to talking with you in the second quarter. Thank you. .

This concludes today's conference call. Thank you for attending..