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 Covenant's Logistics Group first quarter conference call. 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 with the SEC, including, without limitation, risk factors and our most recent Form 10-K and our current Form 10-Qs. We undertake no obligation to publicly 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 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 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. Additionally, it's the first time in our history where our first quarter earnings were greater sequentially than the fourth quarter. This exciting achievement could not have been accomplished without the contributions from each of our business units. All business units improved their Operating Ratio versus the fourth quarter. The small acquisition we made in February, combined with the 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 grew 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 grew 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 the year before. 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 this 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 of 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 comprises our managed freight and warehouse, was 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 is 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 comprised 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 adjusted operating ratio of 88, 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 represented 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 operating ratio 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 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's 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 is included in other assets on 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 programs. TEL contributed a total of $0.30 per share to overall results and an additional $0.17 per share versus the year-ago quarter. TEL's revenue in the quarter grew 41%, and pre-tax operating margin increased 43%. Gains and losses on self-equipment are 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 shareholders. 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 analysts’ 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 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, giving us the resolve 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.

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 the second quarter exceeds the first quarter. History doesn't say that the 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. I think you're going to see that pull back 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 the acceleration you saw from the 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 the spot market right now. Just curious your take on 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 slowdown in contract pricing?

Well, I just think the 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 move 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. Thus far our contract business looks good. Both expedited and dedicated have new business starting up in the second quarter. 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 to help us nicely going into the year. I think where we do see it the most is potentially in our brokerage business. Paul's already kind of commented on that. I point out, though, that 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 would consider it small for us, combined with the slowdown in 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, the 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 push forward 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 about how the year started out and the results of our work over 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 of 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. 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. We've really tried to exit through this 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.

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 brought us to the dance. I would say, it's a pretty concentrated business, and we've got some multi-year agreements with a number of those customers. 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 trough 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. Then in 2020, we 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 break even in 2019 has 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 start, 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 strategy around reducing some cyclicality within the business.

It's a small but profitable operation primarily consisting of teams, complementing our existing efforts. This specialized fleet works with the government to transport munitions, requiring high-priority clearance and trained drivers. We've had our eye on this asset for a while, and I'm pleased with its performance, as well as with the Covenant Group that supports this small operation in enhancing our current team business. While it represents a niche market with some volatility, the volume remains stable despite occasional pricing fluctuations. The revenue per truck in this segment is significantly higher than our existing expedited business, providing diversification in our customer base and offering our drivers additional career opportunities. It requires experienced drivers with clean records, and while it offers excellent pay, the demands are substantial since the work involves military bases nationwide. I'm enthusiastic about the growth prospects we're investigating, though we're proceeding cautiously to avoid overwhelming our specialized team. While we won't disclose results separately, this division operates as an integral part of our 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?

We have made investments since 2011, and those investments have provided cash distribution to Covenant almost every year, with just one exception. Each year has been profitable, including during the 2018-2019 recession and COVID in 2020. This indicates that the operation is stable and profitable, demonstrating a steady growth rate. A significant investment made in 2018 or 2019 temporarily stalled growth, but the team managed that investment effectively. There are three distinct segments in our business, one of which is equipment sales. This segment complements our lease purchase and small fleet leasing sides, especially if there's a weakness in those areas, by moving equipment as needed. The lease purchase side has a stable client base of medium to large fleets with minimal volatility, while small fleet leasing has shown steady growth over the years. Our credit profile is strong; currently, there are no receivables over 30 days, thanks to our team's expertise and creativity in working with clients. We focus on providing a service that helps our clients improve their business. While we aim to generate profit, our operation is built on client collaboration. The equipment sales side does experience market fluctuations, but being active in the market is beneficial. We are recognized as a significant buyer and seller, which supports our model in both good and bad market conditions.

Jack, specific to your question on the waterfall on the leases, I would say most of the portfolio is multi-year leases. There is 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. There's hardly any short-term component to it. Most everything is either with somebody they've worked with for eight, nine, or ten 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 another part of the business that is simply more profitable this cycle than last cycle.

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 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 depend on where managed freight shakes out, Jack.

Right.

March a lot of times determines where you come out for the first quarter. A lot of times June determines that with just so many workdays, no holidays in both of those quarter-end months. A lot of customers shipping stuff out pre-4th of July and beverage season and produce season, seeing how those things materialize and how the port situation materializes. To Joey's point, I would 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 Q1?

I would say 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 are pleased with how the buyback has performed. It's a somewhat innovative program, but it is delivering good results. We expect to finish the program in the second quarter and are actively considering our next steps. While we are not ready to confirm whether we will continue or not, we are enthusiastic about the opportunities ahead.

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. 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 will call it stupid improvement and because our costs were just exploding. Even though driver wages may be moderating now's probably the word I'd put on it. There are other increases that are still coming. We had another pass-through three increase on equipment last week that just came out of nowhere. The equipment market, the over the road repair market, labor availability, parts, all that is still there and it's still going up. I'm just using that group as a category of cost increases. 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 the 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. 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. Our warehouse business kind of it comes when it comes with new business. So that renews annually with those contracts. 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. 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 would say, we've been trying to shift the business a little more onto contracts versus spot. Last year it was more spot. A lot of brokers want to be 50:50, 60:40. We're probably aiming to try to be 60:40 by the end of the second or third quarter on contract versus spot. I would say, 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 brief. I have two questions for you. Regarding the spot exposure differential, could you quantify where it stands today across the entire business and how it compares to 2018 or the last cycle? Joey, you've mentioned the resilience of the business, but I'm curious about its current impact.

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 expedited in the fourth quarter, I could call that spot because it doesn't happen every quarter. It's a one-time event per year. That's much less today as we saw last year; it's almost nothing last year. What part of expedited's success has been that is that, that impact to the fourth quarter and then the cost drain in the first quarter is now gone. It's not 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. 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 today's model is drastically different. And so the spot impact back then was much greater, even though it was small it was probably the solo piece and expedited was a much bigger piece of the pie. I'm not answering the question with specific numbers, but just look at 2017 and today, it's just drastically different. Today what I can say is that 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% in 2017 today at 10% something like that?

Yes, to give you an idea Bert, I previously mentioned that we should consider a 50-50 mix between spot and contract in brokerage. As we noted, our other operations mainly consist of contracts, including dedicated and warehousing contracts. Expedited services are also primarily contract-based. So, if we look at managed transportation costs, about 35% to 40% of the total managed transportation is derived from the spot market, which includes spot and surge. This is where our revenue exposure lies.

Okay. For my follow-up, it seems you have a clearer path to surpassing 2021 EPS. If we consider you at around a $4 EPS this year, how do you view the future? It looks like dedicated services will gradually improve. You mentioned expedited might be in the low 90s during a tough year. This raises concerns about managed freight if conditions worsen. How do you perceive that? Do you anticipate that revenue might decline while margins remain positive, or could we see a scenario where the operating ratio exceeds 100 in that segment during a challenging year?

No, no, no. I don't see it rising above 100. I mean, a lot of folks have been talking this kind of peak to trough, and you just gave us your number on peaks. Something with a four in front of it, from a trough standpoint, a 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. We would ascribe to that 25% to 30% kind of pullback from peak to trough wherever you define peak as. We're hammered down every day trying to grow offline revenue and improve margins in other businesses to offset as much of that as we can. 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 a significant drop in brokerage before we're able to add to the base business, and expedited pulling back to mid-90s.

Gentlemen, it seems there are no additional questions at this time.

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

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