Welcome to today's Covenant Logistics Group Third Quarter Earnings Release Conference Call. Our host for today's call is Tripp Grant. 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. Tripp, you may begin.

Thanks, Ross. Good morning, everyone, and welcome to the Covenant Logistics Group third quarter 2023 conference call. As a reminder, this call will contain forward-looking statements under the Private Securities Litigation Reform Act, which are subject to risks and uncertainties that could cause actual results to differ materially. Please review our SEC filings and most recent risk factors. We undertake no obligation to publicly update or revise any forward-looking statements. A copy of the proposed comments and additional financial information is available on our website at www.covenantlogistics.com/investors. I'm joined on the call today by David Parker and Paul Bunn. We are pleased with our third quarter's results, which benefited from the full-quarter effect of the Lew Thompson & Son Trucking acquisition in the second quarter reflected in our Dedicated segment. In addition, our Expedited segment benefited incrementally from the increase in demand for team-driver freight as a result of the closure of Yellow. However, more broadly, the overall freight environment remained challenging with few signs of immediate macroeconomic improvement. Compared to a year ago, consolidated freight revenue was down 5%. The decline is primarily attributable to the combination of little to no overflow freight handled by our Managed Freight segment and a lower tractor count in our Dedicated segment. The reduction of tractors assigned to Dedicated resulted from exiting underperforming legacy contracts partially offset by acquiring Lew Thompson and Son. The result was higher earnings on fewer trucks. Adjusted operating income declined approximately $4.6 million or 20% compared to the prior year quarter, primarily as a result of our Managed Freight segment which declined by approximately $4.7 million. Adjusted net income decreased 32% to $15.3 million and adjusted earnings per share decreased 26% to $1.13 per share compared to the year-ago quarter. Weighted average diluted shares decreased as a result of our share repurchase program. Key highlights include freight revenue for the quarter was the highest for any quarter of the year, surpassing the second quarter by 4%. The Lew Thompson and Son Trucking operation continued to perform well with our first new poultry-related customer start-up in late September and a strong pipeline of additional bids. The average age of our fleet at September 30th improved to 23 months compared to 29 months in the prior year and 26 months at June 30th, 2023. Within our combined truckload segments, compared to the prior year, operations and maintenance-related expenses declined by $0.06 or 21%, and fixed equipment costs, including leased revenue equipment expenses, depreciation, and gains on sale remained flat on a total cents per mile basis. Gain on sale of revenue equipment was $0.6 million in the quarter, compared to $0.2 million in the prior year. Our TEL leasing Company investment produced $0.28 per diluted share, compared to $0.38 per diluted share versus the year-ago period. Our net indebtedness as of September 30th was $183.4 million, yielding a leverage ratio of approximately 1.7 times and debt to equity ratio of 31.8%. On an adjusted basis, return on invested capital was 10.6% for the current quarter versus 17.5% in the prior year. And now Paul will provide a little more color on the items affecting the individual business segments.

Thanks, Tripp. The performance of Expedited during the third quarter provided for 90.7% adjusted OR in the midst of a historically weak freight environment. We believe this says a lot about the work we have done to deploy assets with the right customers to lower our cost per mile, improve our utilization, and focus on what we can control. In the context of an 8% decline in revenue per mile, we believe a 12% improvement in utilization and lower cost per mile are significant accomplishments. The improvement in utilization was principally attributable to newer equipment in the fleet and reduced downtime, which we will look to continue as year-over-year freight revenue per total mile comparisons are expected to be challenging for the remainder of 2023 and into 2024. Dedicated reflected another success story centered around our disciplined approach to capital allocation. Dedicated improved its adjusted operating ratio to approximately 93.6% by effectively weeding and feeding. We reduced the overall size of the fleet by 170 trucks while nearly doubling adjusted operating income. Trading out approximately 400 legacy contract units for Lew Thompson and Son aligns with our strategy of exiting unprofitable or underperforming business and replacing it when opportunities arise that meet our profitability and return requirements. We are pleased with the year-over-year improvement to adjusted margin and expect to continue to improve upon both this segment's size and profitability over the long term. Managed Freight experienced an 11% reduction in total freight revenue and a 57% reduction in consolidated adjusted operating profit. The significant reduction in revenue and operating profit was primarily the product of little to no high-margin overflow freight from our asset-based Truckload segments in the 2023 quarter. The brokerage environment remains highly competitive with numerous brokers aggressively competing for volumes at the expense of profit or margin. We anticipate continued margin pressure in this environment. Our Warehouse segment saw a 15% increase in revenue and an 82% increase in adjusted operating profit compared to the prior year. The top-line growth is a result of new customer startups over the last 12 months, and the operating profit improvement was a result of the combination of new customer business and improved rates for existing customers. Although we were pleased with the improved profitability within this segment, we will continue to focus on improving profitability more through improved labor utilization and rate increases with existing customers. Our minority investment in TEL contributed pre-tax net income of $5.3 million for the quarter, compared to $7.4 million in the prior year period. The decline was largely a result of reduced gains on sale of used equipment compared to a year ago. TEL's revenue in the quarter declined 8% and pre-tax net income decreased by 28% versus the third quarter of 2022. TEL increased its truck fleet in the quarter versus the year-ago by 42 trucks to 2,195 and grew its trailer fleet by 153 to 7,013. Due to its business model, gains and losses on the sale of equipment is a normal part of the business for TEL and can cause earnings to fluctuate from quarter to quarter. Our investment in TEL is included in other assets on our consolidated balance sheet and it has grown to $61.6 million as of September 30, 2023, from our original investment of $4.9 million back in 2011. In 2022, we received $14.7 million in cash dividends from TEL, and year-to-date, we received $9.8 million in dividends in the third quarter of 2023. For the fourth quarter, we expect our revenue and earnings to experience a modest decline sequentially due to cyberattacks on a major customer and the ongoing United Auto Workers strike, which has temporarily depressed load volumes and revenue per truck in our Expedited and Dedicated divisions. More broadly, however, we are optimistic that the trough of the freight cycle is behind us but remain cautious about the rate at which we will see improvements. For 2024, we believe that the first half of the year may continue to be challenging and expect capacity to continue exiting the market. Although we are eager for the freight environment to improve, our primary focus remains on the long term, by continuing to invest in areas that provide opportunities for us to make forward progress on our strategic plan by exiting underperforming capital tied to underperforming customers, and investing capital in business units and customers that provide adequate returns, improving our safety culture and investing in our people. Thank you for your time, and we will now open up the call for questions.

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

Thank you, operator. Good morning, everyone. I appreciate your willingness to take my question. Could you provide some insights on Lew Thompson's performance? It appears to be going quite well. Initially, when you acquired them, the idea was to support their growth. How should we anticipate this progressing into 2024 and beyond? Additionally, could you elaborate on your plans for cash usage moving forward? You've been effective in balancing timely acquisitions with stock buybacks.

Yes, yes. Jason, this is Tripp. I'll be happy to talk about Lew Thompson first. You know, when we first got Lew Thompson in April of this year, they were about a 225 truck fleet, some of those being shuttle trucks, but had a really good business with a good culture that fit exactly what we were looking for in our strategic plan. One of the silver linings of that acquisition has been the opportunity to grow. Historically, Lew Thompson has been confined to a smaller region, specifically Northwest Arkansas, and one of the things that we have brought to them is growth potential in areas they've never explored. Evidence of this is that in September this year, we started our first operation in Tennessee with a 20 truck fleet. I anticipate more substantial growth outside of the Northwest Arkansas or Tennessee area in the next year. However, we must be cautious about our growth to ensure we maintain Lew Thompson's gold standard of service and carefully manage capital for acquisition, as their unique capital requirements set us slightly apart. While I'd be hesitant to provide specific numbers right now, I see many opportunities with Lew Thompson in the pipeline for the next 15 months and beyond.

This is Paul. To add on to what Tripp said, there is an intentional plan to grow Lew Thompson each and every year for the foreseeable future. The exact pace of that growth is still in process as we work on customer contracts, but I think you'll see that business grow year-over-year for the foreseeable future.

And going back to your original question on the use of cash. If we can grow Lew Thompson, there will be opportunities for growth capital expenditures involved next year. While I can't comment on future capital allocation plans, I can share that since January 1 of 2022, we have repurchased $110 million of stock, paid $10 million in dividends, and completed three accretive acquisitions totaling $156 million, for a total distribution of $275 million, moving the business and valuation forward. To finance these efforts, we've sold underperforming capital, two terminals for $56 million, which weren't producing a return on investment. The path we've taken is really about doing more of what we've done successfully in the past, but I won't go into specifics about our plans for the next 12 months.

That makes sense. And one question. One more question. I'll turn it over to some other people here. So, you know, we hear a lot on the drive-in side about sort of where we are with sort of the destocking. It seems like that's largely over. When do you think the sort of restocking will take place? What are your customers telling you about sort of what to expect in the coming quarters?

You know, Jason, I agree with you. I think the destocking is behind us. I'm hopeful that in the next six months we will start to see some sort of more normalized restocking pattern develop. If fuel prices remain high, we hope that capacity will continue to exit the market. Thus, maybe in the next six to nine months we can achieve a more balanced situation.

I'll keep my fingers crossed for you guys. Appreciate the time as always, gentlemen.

Thank you, Jason.

And our next question comes from Scott Group from Wolfe Research. Please go ahead, Scott.

Hello? Looks like Scott actually went out of the queue. So, our next question comes from Jack Atkins from Stephens. Please go ahead, Jack.

I'm here. Sorry about that. Yes, can you hear me now, guys?

Yes, sir.

Okay. Sorry about that, and thanks for taking my questions, and good morning. So I guess maybe just a couple of follow-up questions here. I'd love to maybe go back, Paul, to your comments in the prepared remarks about, you know, the trough of the cycle is behind us and I know you maybe touched on it a bit in that last answer to Jason's question. But I mean, what's kind of driving that confidence? Is it maybe you're seeing capacity exit? Is it a function of maybe, you know, the comments around inventory destocking being behind us? What's giving you confidence that we are beyond the trough of the cycle or maybe we've seen the trough?

Yes. I think we've probably seen the trough, Jack. Inventory destocking seems to be behind us. Many brokers are bidding at very low rates, and it has become apparent that they're unable to secure carriers for service on those loads. Additionally, small fleets are being challenged, and we are starting to see capacity exit not only small carriers, but the brokerage space as well. The trend of buying business just for growth, often at a loss, doesn’t seem to be sustainable. As people face upcoming costs like tags and annual insurance payments, they will have to face hard realities that make it harder to run successfully in this environment. I believe the shakeout will continue over the next six to nine months.

Yes. No, that makes, that makes sense. I just wanted to kind of get you to flesh out a bit. So just a, you know, couple of other questions for me and I'll hand it over. But, you know, we think about the fourth quarter and some of the, you know, shorter-term impacts related to the auto strikes or the cyberattack at a customer. You know, is there any way to maybe frame up the impact that that's having to your fourth quarter results? I mean, absent those, you know, would you have expected maybe, you know, results to be flat or maybe improve sequentially from an earnings perspective?

I would tell you that without those issues, we likely would have experienced a quarter that was relatively flat compared to the previous one.

Okay.

You know, there's fewer workdays in Q4 with all the holidays and not much peak volume. So, I would have expected we would have been flattish. With the impact, I think sequentially we will see a modest decline, but it should not fall off significantly.

Right. I mean, you said modest, it's just a modest decline, right?

Yes, modest.

Okay, that makes sense, Paul. I would like to shift gears to another topic regarding the underlying Dedicated operations. The margins have seen significant improvement with the addition of Lew Thompson. Could you discuss the progress being made in the profitability of the core Dedicated business? Given the ongoing auto strikes, I understand it complicates the situation, but any updates on the organic Dedicated operations would be appreciated.

Yes. We discussed Lew Thompson earlier, and I believe you'll see that truck grow next year. We're probably 90% through the weeding and feeding plan. Growth in Dedicated has been difficult with the current low one-way truckload market prices. However, we have a robust pipeline. Companies are hesitant to make decisions while trying to save money by running their assets longer. I believe once rates start rising, we may see a lot of dedicated contracts signed from the strong pipeline we've been working on over the last year.

Okay. All right, guys. I'm going to hand it over to somebody else. Really appreciate the time. Thank you.

And our next question comes from Michael Vermut from Newland Capital. Please go ahead, Michael.

Hi, guys. How are you doing?

Hi, Mike.

Hi, Mike.

It's remarkable for the Company to achieve these results during such challenging conditions. I have two quick questions. Regarding acquisitions, what does your current pipeline look like? Are there more potential sellers entering the market in the sectors you are targeting?

Yes, a couple of things. We continue to look in the market, Mike, for niche, above-average return acquisitions that we think we can grow. That's the answer to the first question. There are some of those in the market right now, so we continue to explore potential fits. We really look for something we can integrate within one of the verticals of the Company, be it Expedited, Dedicated, Managed Transport, or Warehousing. We're going to continue down that path of capital deployment, investing in growth CapEx for the best return, buying shares back, or pursuing the right acquisition when it comes along. Our recent acquisitions have significantly improved our operations and results, as you can see from comparing where we were to where we are now. I expect we will keep this approach moving forward.

And I think, Mike, the key to that is being really disciplined with our approach. We receive many inquiries but frequently turn them down within minutes. Of those, perhaps 2% are discussed longer before being declined. Recently, we've been fortunate with the last three acquisitions which have come available, and being public about our interests has generated more opportunities. We will remain disciplined in our capital allocation approach concerning M&A, and we've noticed an uptick in viable prospects as we've been more transparent about our strategies.

Got it. Next question. I guess maybe this is for David or I don't know. Yes. We've done such a phenomenal job changing this Company and reducing the volatility. And our valuation is pretty much where it was five years ago, right? We're trading under 10 times, nine times, while the group trades closer to 20. There's nothing really comparable to us. No one has performed like we have through this cycle. Is there a point where you think about taking the Company private or doing something internally if the market is not going to reward us?

Hi, Mike. This is David. I share your sentiments. I don’t disagree with anything you just said there. Of course, we can't discuss going private or anything specifically like that. But that was our goal. We intended to address all the issues and are working hard. As I noted, when we started our journey two or three years ago, we’re confident Wall Street will recognize our efforts sooner or later. We've repurchased 25% of the Company and made significant progress. The team is doing an excellent job, and I'm excited about what we are accomplishing. I believe Wall Street will eventually reward us for our performance. Someone will eventually recognize the value we bring.

Excellent. Is there any reason to believe that as we approach another peak, we won't be able to return to earnings in the range of 550 to 650, especially considering our current trough earnings of 400 to 450 and the acquisitions we've made? Is the company's earnings power now stronger than it was previously?

Got it. We have a solid five-year strategy in place. We have been executing our strategic planning for about three years now, and I couldn't be happier with the progress we’ve made. We will reach our goals when the market conditions are right. I am confident that, when the turnaround happens, we will see very positive results. We will emerge in a strong position. There is no doubt in my mind about our capacity for an outstanding future. The comparisons to '08 and '09 are also significant. We experienced a sharp dip in October of '08 when ISM was at 38, but by June or July, we were showing positive internal metrics on utilization and revenue. The industry seems to be waiting for a similar shift today, which could happen at any moment.

Yes, for sure. Like, there's no Company that I can find right now in this environment that's performing as well as we are. So, you know, you said it five years ago, and the Company is a completely different Company now. So, you know, great job guys.

All right. Thank you, Mike.

Thanks, Mike.

And our next question comes from Scott Group from Wolfe Research. Please go ahead, Scott.

Hi, thanks. Good morning. I was wondering, as we approach the 2024 bid season, how are you considering Expedited rates and Dedicated rates? Do you believe rates could start to increase next year? Is there a possibility of further downside risk to rates? What's your strategy as we begin the bid season?

Hi, Scott. This is Paul. You know, here's what I think. As you know, a lot of the bids come out early in the year, and so I'd tell you what we're thinking. Expedited is probably flattish to maybe down 1% or 2%. Dedicated, we think, is probably flattish since a lot of that gets done early in the year. On the Managed Transport side, much of that is tied to the spot market, which may benefit from better rates as the year progresses. We expect some opportunity for rates to improve by this time next year but likely not in the early part of the year. So, I guess we're sort of in the flattish range. Many folks we talk to are seeing their costs escalating, small operators exiting the market, and it's getting to the point where others are realizing this practice can't continue, whether among small carriers, which are keeping rates lower through brokerages or larger ones.

Makes sense. And so in an environment where rates are flat to maybe down slightly you said. We saw some cost inflation. Are we confident about the ability to sort of grow earnings from this low $4 level next year?

Yes. We think we can incrementally grow earnings next year. I think there are a few key considerations, such as our maintenance cost, insurance cost, and how quickly our pipeline of opportunities comes online at a profitable level. We're not anticipating anything significant next year in terms of growth, but as we noted earlier, once things pick up, it should lead to a much wider earnings growth opportunity.

Okay. Makes sense. Thank you guys for the time. Appreciate it.

Thank you.

And at this time, there are no further questions. I would like to turn the call back over to Tripp for closing remarks.

Yes. We would just like to thank everybody for your participation today and wish everybody a good rest of the week and a good weekend. We'll talk to you next quarter. Thank you very much.

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