Covenant Logistics Group, Inc. (NASDAQ:CVLG) This autumn 2022 Earnings Name Transcript
Covenant Logistics Group, Inc. (NASDAQ:CVLG) This autumn 2022 Earnings Name Transcript January 26, 2023
Operator: Welcome to at the moment’s Covenant Logistics Group Fourth Quarter Earnings Launch Convention Name. Our host for at the moment’s name is Tripp Grant. I might now like to show the decision over to your host. Tripp, it’s possible you’ll start.
Tripp Grant: Thanks, Ross. Good morning, everybody, and welcome to the Covenant Logistics Group’s fourth quarter 2022 convention name. As a reminder, this name will include forward-looking statements below the Non-public Securities Litigation Reform Act, that are topic to dangers and uncertainties that might trigger precise outcomes to vary materially. Please evaluate our SEC filings and most up-to-date danger elements. We undertake no obligation to publicly replace or revise any forward-looking statements. Copy of the ready feedback and extra monetary data is accessible on our web site at www.covenantlogistics.com/traders. I am joined on the decision at the moment by David Parker, Joey Hogan, Paul Bunn. Earlier than leaping into the quarter, I might prefer to first take a second to mirror on 22 as a complete.
As it is a exceptional 12 months for us in some ways, it marked the second consecutive 12 months of report earnings, report income, capital returns and security outcomes. We repurchased roughly 20% of the excellent inventory of the corporate and purchased a small however extremely worthwhile specialised truckload service, all whereas sustaining reasonably low debt leverage. We additionally made progress on our working mannequin by means of improved contracts in our Devoted section and grew the core enterprise in our Asset-Mild segments comprised of managed freight and warehousing. Though the tailwinds of a robust freight cycle could be behind us, we imagine the mix of our improved working mannequin and our robust steadiness sheet has us effectively positioned for the long run.
Our firm at the moment is way improved, and we’re grateful to all of our group members whose dedication and dedication made this attainable. Focusing now on the fourth quarter. On an adjusted foundation, we imagine our group carried out effectively throughout a market of transition. Consolidated income was primarily flat in contrast with the fourth quarter of 2021, whereas improved income per tractor and brokerage margin greater than overcame the numerous inflationary value to generate a greater adjusted working ratio and better adjusted web revenue. Via buying and efficiently rising AAT, working with long-term clients to enhance the steadiness of contracted capability in our expedited fleet and selectively downsizing our least environment friendly devoted operations, we did extra with much less.
On an adjusted EPS foundation, the impression of our capital allocation in direction of share repurchase was appreciable, with adjusted EPS rising 28%. These outcomes had been earned in a tough surroundings. Freight charges had been up year-over-year however are below sequential stress. Freight volumes turned unfavorable previous to the fourth quarter and are persevering with to really feel mushy. As well as, value inflation and availability of kit and elements proceed to supply headwinds. And — trying forward, we anticipate tough year-over-year income and revenue comparisons for the primary time in lots of quarters. On this surroundings, our playbook stays constant and our urgency is excessive. The first changes to our reported outcomes resolve round our tractor fleet, significantly a bunch of underperforming leased items that wanted to be faraway from operations on account of unfavorable driver, buyer and value concerns.
A number of elements transpired within the quarter, together with receiving over half of our 2022 new tractor order within the interval. delaying lease turn-ins on account of elements availability for commerce prep on used tractors, whose lease phrases have expired and parking further lease tractors with future lease maturity dates, which have been the supply of great operational value headwinds all year long. The abandonment of those items within the interval earlier than the expiration of the leases brought on us to jot down down the right-of-use asset within the interval and accrue any estimated future disposal prices on these items, leading to a lease impairment cost. Though pricey within the quarter, we imagine that is our greatest alternative to start out the brand new 12 months in probably the most cost-efficient method attainable.
Key highlights for the quarter embrace adjusted web revenue growing 8% to $19.5 million and adjusted earnings per share growing 28% to $1.37 per share in comparison with the 12 months in the past quarter. As a proportion, earnings per share development outpaced web revenue development as a result of shares acquired all year long below our share repurchase program. In the course of the quarter, we repurchased roughly 450,000 shares, bringing the whole to $3.4 million for the 12 months. Complete freight income declined by 4.4% to $255 million in comparison with the 2021 quarter. Our asset-based truckload freight income grew 11% with 76 fewer vans — our asset-light Managed Freight and warehousing section’s mixed freight income declined by 22%, primarily due to the mix of a muted peak season and decreased volumes of overflow brokerage charge in comparison with the prior 12 months.
Truckload associated value headwinds proceed to play a significant position in our outcomes for the quarter, growing $0.20 per complete mile on an adjusted foundation in comparison with the prior quarter. Salaries and wages, upkeep and insurance coverage all contributed to this improve. Acquire on sale of kit was $1 million within the quarter in comparison with $0.1 million within the prior 12 months. On the security facet, we’re proud to report that our DOT accident charge per million miles for the 12 months was a brand new firm report, beating final 12 months’s earlier report by roughly 6%. The — regardless of 2 consecutive years of favorable security outcomes, unfavorable growth from a small variety of prior interval claims contributed to virtually a $0.06 per complete mile improve in insurance coverage expense in comparison with the prior 12 months quarter.
Photograph by Marcin Jozwiak on Unsplash
The typical age of our fleet at December 31 was 26 months, a 3-month discount from September 30. For 2023, we’ve got been capable of improve our authentic tractor order, and we anticipate sequential enchancment to the typical age of our tools all year long. Our Tel leasing firm funding produced $0.21 per diluted share in comparison with $0.23 per diluted share versus a 12 months in the past interval. Our web indebtedness at December 31 was $46.4 million yielding a leverage ratio of 0.34x and debt-to-equity ratio of 10.9%. Return on invested capital for 2022 was 15.3% versus 12.8% within the prior 12 months. Now, Paul will present a little bit extra coloration on the objects affecting the person enterprise segments.
Paul Bunn: Thanks, Tripp. Taking a second to dive deeper into what drove the consolidated outcomes for the quarter, our expedited working our expedited segments freight income grew 26% in comparison with the prior 12 months quarter on account of the mix of a 16% charge enchancment and working 67 further tractors. The will increase are associated to the AAT acquisition we had within the first quarter and the loosening driver market, permitting us to hunt extra tractors. We’re happy with expedited charge and utilization within the quarter, which was improved by FEMA freight in October that resulted from Hurricane Ian. Price headwinds from elevated sores and wages, upkeep and insurance coverage proceed to play a significant impression within the quarter and condensed our margins.
We imagine the mix of our work to resolve a major variety of prior interval claims and the impression of the tools substitute plan will assist enhance prices on this section going ahead. Driver pay stays steady these days. Our Devoted section had a 5% discount in freight income in comparison with the ’21 quarter on account of 143 or 10% discount within the common variety of complete vans within the interval, offset by a 5% improve in income per truck. Though we’re happy with each the year-over-year and sequential enchancment to the margin, we fell in need of our profitability goal, primarily due to the identical value will increase, which had been impacting our expedited section. The fleet discount we have skilled on this section is a product of two elements: deliberately exiting unprofitable enterprise and lowering fleet counts with present clients primarily based on decreased volumes.
We proceed to work diligently to enhance margins on this section by enhancing our buyer combine, contractual phrases and working a youthful, extra environment friendly fleet. Managed Freight skilled a 30% discount of complete freight income and a 20% discount in working revenue. The numerous discount in income was the product of much less overflow freight from our asset-based truckload segments, a discount in peak income, offset by them of freight within the quarter in comparison with the prior 12 months. We’re happy with the truth that Managed Freight was capable of maintain margins for the quarter, however we are actually experiencing a way more aggressive surroundings with opponents aggressively competing for volumes on the expense of margin. We anticipate important margin compression on this softening surroundings.
Our warehouse section, though the smallest of all of our enterprise segments noticed a 31% improve in income in comparison with the prior 12 months, ensuing from the start-up of 4 new clients within the 12 months, the biggest of which turned operational in December. We’re happy with the highest line income development we have achieved on this section, and the group has achieved an exceptional job in executing these start-ups, that are each intense and time-consuming. Nonetheless, regardless of the highest line development on this section, we have seen sequential deterioration in margins all year long. Our focus in 2023 will probably be to proceed to develop this section and restore profitability to the mid- to excessive single digits by means of improved labor utilization and charge will increase with present clients.
Our minority funding in TEL produced pretax web revenue of $3.9 million for the quarter in comparison with $5.2 million within the prior 12 months interval. Though the fourth quarter is usually mushy for tail, it was particularly mushy on account of an adjustment to speed up depreciation on a particular group of kit that’s anticipated to be bought within the close to time period. The adjustment negatively impacted the quarter’s outcomes by roughly $1.5 million. TEL has a robust monitor report of manufacturing positive aspects on sale of kit all through good and dangerous cycles, and we imagine this adjustment is remoted to a particular amount of comparable make and mannequin tools. TEL’s income within the quarter grew 47% and pretax working revenue decreased by 22% versus the fourth quarter of ’21.
TEL elevated its truck fleet within the quarter versus a 12 months in the past by 243 vans to 2,237 and grew its trailer fleet by 654 to 7,149. After receiving greater than a $7 million distribution through the quarter, our funding in tail, which is included in different property in our consolidated steadiness sheet was roughly $55 million. As a reminder, TEL focus is on managing lease buy applications for purchasers, leasing vans and trailers to small fleets and shippers and in purchasers within the procurement and disposition of their tools by means of a strong tools by sale program. As a result of enterprise mannequin, positive aspects and losses on the sale of kit are a standard a part of the enterprise and might trigger earnings to fluctuate from quarter-to-quarter. Concerning our outlook for the long run; there is no such thing as a doubt that 2023 will probably be a difficult 12 months, however it’s additionally a 12 months our group has been anticipating and dealing arduous to arrange for.
We view it as a check of the resiliency of our working mannequin and alternative to determine areas the place we are able to proceed to enhance. As such, our main focus stays a continued progress on our long-term strategic plan. We’re additionally centered on aggressively enhancing our working value profile. With our tools substitute plan and powerful security outcomes, we see alternatives to enhance value within the brief time period to enhance gas financial system, decreased operations, upkeep and insurance coverage prices in an surroundings that will probably be pressured from each at a charge and margin perspective. We anticipate market headwinds from a softer market through the contract renewals in addition to continued inflationary pressures. Nonetheless, primarily based on company-specific elements, together with investments we’ve got made in our gross sales group, the AAT acquisition, share repurchase program and the tools improve plan and decreased insurance coverage casualty prices ensuing from our improved security outcomes, we anticipate much less earnings volatility than in prior durations of financial weak spot.
Over the previous 5 years, our buyer base has been strategically shifted to much less cyclical industries by means of our full-service logistics focus. Even with a heavy tools funding 12 months, we anticipate our money technology, low leverage and out there liquidity to supply a full vary of capital allocation alternatives to learn our shareholders. Thanks to your time. I need to open up the decision for any questions.
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