Welcome to today's Covenant Logistics Group, Inc. Q4 '21 earnings release 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.

Thanks, Ross, and good morning, everyone. Welcome to our Fourth Quarter 2021 conference call. As a reminder for everyone, the 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 risk and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. Please review our disclosures and our filings with the SEC, including without limitation, the Risk Factors section, and our most recent Form, 10-K, and our current year Form 10 - Q's. 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 new website at www. covenantlogistics.com in the Investors tab. I'm joined on our call today by our Senior Executive Vice President and the COO, Paul Bunn, and our Chief Accounting Officer, Tripp Grant. David Parker is not able to join us this morning for the call. 2021 was a record year by Covenant in many ways. Revenue, our minority investment and tail, earnings per share, and return on invested capital, all achieved record results. Our team battled through the continued effects of the pandemic, the most difficult driver market in history, huge growth in our Manage Freight division and leadership changes early in the year. We pushed through some large pay adjustments across the enterprise in all areas warehouse teammates and our office staff. And over the last year, we're excited to tackle 2000. The model of transformation that we started five years ago is really starting to prove out with continued opportunities and our results for 2021 are directly due to Covenant community. It's hard work and its commitment to each other and our customers.…

Thanks, Joey. For the quarter, our Managed Freight division was our largest division, both in terms of revenue and operating profit. Its revenue for the quarter grew 67%, and achieved record revenue of $321 million for 2021. Managed freight's favorable results for the quarter were primarily attributable to the robust freight market, executing on various spot right opportunities, and handling overflow freight from both Expedited and Dedicated truckload operations. This division remains a major strategic growth opportunity as we have invested more operations and sales resources into the division to continue its momentum into the future. We remain excited about this leadership team and the prospects going forward. The expedited division's revenue grew by 13% versus the year-ago quarter due to both strong rate and utilization improvements. We did invest in our driving workforce during the quarter with a significant pay increase, which after several quarters of sequential decline, we were able to hold the fleet size versus the third quarter and increase our stated truck down. The driver pay investment was our third pay increase for the year, and has given us momentum heading into 2022. We're very thankful that our customers value our service and supported our driving themes in this unprecedented time. The Dedicated division had a good quarter and achieved nice sequential and year-over-year margin improvement. Despite some unusual corporate expenses that hit both Expedited and Dedicated in the quarter. Had it not been for the 250 basis points of unusual expenses in the quarter, dedicated would have hit the mid-90's of our target set at the beginning of the year. Revenue per truck continues to improve as we push through our improvement plan with further rationalization coming in the first half. The 21% revenue per truck improvement in the quarter was a significant contributor to…

Please be prepared to ask your question when prompted. And our first question comes from Scott Group from Wolfe Research. Please go ahead, Scott.

Hey, thanks. Good morning, guys. In the earnings release, you had some comment in the outlook section about operating results similar. And can you give a little bit more color? I wasn't sure if that was a first-half comment or a full-year comment, if that's -- we're talking about earnings. Just any more color there would be great.

Yeah. I think Scott, what we were trying to do, so if we were confusing, I apologize for that, but we feel -- based on what we see today, we feel that a first half earnings will approximate first half of 2021 or higher. So we feel good between the combination of the commitments from the customers and what we see in the market. And -- so that's what we're intending to do. Second half, from a modeling and or planning purpose, we just -- if the continues to do their job then we're anticipating some slowdown in the second half but we were saying, we felt we could do at least what we did in '21 from an earnings perspective in the first half of '22.

Okay. Great. The -- you gave some helpful color on dedicated margins. I'm curious how you're thinking about the expedited margins this year?

Yeah, thanks, Scott. This is Paul. I think expedited margins will probably approximate '21 for '22. I think you could see margins -- Q1 is starting off really strong. We've dedicated and expedited. We've done a good job getting out of the gate on rate increases early in the year. And so I think you'll see margins maybe a little stronger. And then as costs continue to pile up, they could dilute a little bit, but the expedited specifically to your question, I think will be similar margins to what you saw in '21 on full-year basis.

Right. Maybe if I just take those two things combined, if Expedited is similar and Dedicated has got a lot of improvement. I would think there'd be some potential for earnings growth and better than flattish. So maybe just tie those two together.

I think in warehousing; you should see some small improvement there too. The pipeline is pretty descent. It's all going to come down to manage trans in the overall freight market. If things stay really tight and manage trans has a year like it had this year, then we will make more money in '22 than we made in '21. If things soften up a little bit in the second half of the year, you saw the large contribution that manage trans had especially in the third and fourth quarters. I think that's where we don't have the full visibility. And so that's what can determine are we a little bit under this year's earnings, or a little bit over this year's earnings. Is where manage trans ends up in the second half of the year.

Makes sense. And lastly, from a pricing standpoint, what you guys are seeing to start the year.

Yeah. Low single di -- high single-digits to low double-digits. From the right stand point.

Okay. Thank you guys. I appreciated it.

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

Thank you, Operator. Good morning, gentlemen, and my best to David, who's not on the call. I wanted to talk a little bit about the pricing in your script that you have out there online. You talked about how the contracts are elongating, excluding Dedicated. Can you give us a sense of, sort of, what percentage of your contracts now are over a year?

Yes, I'll speak. As you know, managed trends are there's not a lot of stuff that's over a year. It's pretty short-term opportunities. And as we've said before, that's where we play in the spot market. On the Expedited, we're probably somewhere in that 40% to 50% of contracts that are multiyear and nitric right now.

Okay. That's helpful. Wanted to switch back to the dedicated side when you said, if you exclude some of those unusual costs, which I'm assuming aren't going to happen again, reoccur in '22, you're about 95 at the end of the year. What's this -- what set of market do we need to get this business down to that low 90 level?

I mean, I think some of it is market and some of it is time. But if you look at -- on an adjusted basis, same with the year to '95 and the thing had been running a 100, or a 101. So we -- improvement through there. We continue the wheat and feed process, and you'll remember we entered some contracts and -- right on the heels of COVID, and had some contracts that were longer-term in nature that we've gotten the increases we could get, but they're still subpar to market. And as we roll out of those in the first half and second half of the year, and either replace those with business that is -- I would say more market right business and has more of a fixed variable processing margin, or renegotiate those contracts to be more, I'll call it true DCC with fixed variable. You're going to continue to see that improvement. I agree a 95 run rate for Q4, and I think you're going to continue to see that down a little bit each quarter for the balance of this year. And so, are we going to be at a at the end of Q1? No. Do we hope to be there by the end of the year, or first part of '23? Yes.

All right. Well, the progress is definitely there, I didn't want insinuate it wasn't.

Yeah.

You talked a little bit about the contracts that weren't really to DCC. Can you -- what percentage of the contracts that you have right now would you consider problematic?

Yeah, 30%, 40% of the contracts and -- but there's a -- half of those come up between now and August.

Okay. That's a good sign for sure. Well, fantastic gentlemen. Those are my few and I'll turn it over to a colleague. Thank you for the time as always.

Thanks, Jason

Thanks, Jason.

Our next question comes from Jack Atkins from Stephens. Go ahead, Jack.

Great. Good morning, everybody. Thanks for taking my questions.

Hey, good morning.

Good morning.

I guess maybe -- maybe to start; I'd like to ask maybe a two-part question. First just Joey, Paul, Tripp, whoever wants to take it. What do you see in the equipment market, both for trucks and trailers? And if you can maybe think -- help us think through, how that's going to put change, if it changes at all, over the course of 2022? And then I guess, as it relates to Covenant specifically, within your equipment leasing investment tell, it's obviously a very strong contributor to the bottom line, can you help us think through how that should maybe trend as we look forward?

Yeah. We had -- we did have some trucks pushed from '21 into '22. It was a small amount, about 50 trucks, that pushed into first part of '22. We'll have those by March, so they're satisfying the commitment from '21. Our '22 initial order, as well as everybody’s, what you wanted you didn't get, you got a percentage of that for '22. We've worked around that from various means, so we got about 70% of our requested order for '22. Now, for us, I don't want to say, quote, that's okay, but we're trying to pull some equipment forward that we're having problems with, that we wanted to transition to another manufacturer inside of our suppliers. For us it's okay. Trailer market, the pricing is up pretty meaningfully on the truck side. But I would say it's -- I would call it manageable. The trailer side is a different ballgame. You go look at our trailer capacity, it's pretty concentrated in a few years and so our big years to start trading, trailers will start in 2023 and will go on for five or six years. So we tried to start -- we tried to get an order place for '22 and got zero. Try to start moving that schedule forward to smooth out that concentrated purchase cycle. We got a zero. I mean, not even a quote of pricing. We're not a huge fleet, but we're not a small fleet. And so basically from all the suppliers, we can't commit anything, and we'll talk to you late in '22 for '23 and beyond. We've even tried to float a five-year commitment, five-year committed capacity. So again, no biters, but folks willing to talk in the end of '22. Pricing in that market from what I understand, is up…

And just to add on to Joey's point about the size, give you some context, and -- 2021 was a very light year from a capex perspective obviously. We've talked about it throughout the quarters and had a little bit of a bump up with some deliveries in Q4 of 2021. But over the course of the year, we had I think net proceeds of $10 million or such rounded. As we think back to 2022, just to give you an idea and the scale of what -- how it'll look with the equipment purchases, even though it wasn't as much as we had ordered with the cutbacks. And assuming things -- well, we're looking at a range of about $50 million to $70 million of net capex for the year. So there's quite a big swing as we try to normalize our capex flow in terms of maintaining capex and get it back to a normal course. A lot of which stems back to what we did in 2020 with the downsizing and the shrink and -- or downsizing of the fleet, and shrinking and selling a bunch of older equipment. It naturally made 2021 a light CapX year. So you're going to see a little bit of a rebound in 2022, and probably even a bigger rebound in 2023 as trailers come into the equation.

Okay. Got it. Got it. That's helpful. I guess when we think a bigger picture. Joey, going back to your comments in the -- in your prepared remarks around the market, as for the outlook for the market and how it could unfold this year. It doesn't seem like there's going to be influx of capacity coming just because of the items you just talked about on the equipment side, when you think about the idea of the second half, maybe being a little bit more of a moderation in terms of the marketplace versus the first half. Is that because of your outlook for the economy, just concerned about the Fed, or is it something that your customers are maybe telling you about their business in the second half of the year?

Just the economy. I mean, when the Fed starts raising rates, its intending to slow the economy down. And so if they do and there's a lot of rhetoric around that. Is it 4, is it 8, is it 3? But history shows that it's impactful. Now the question is, how big and when that we start seeing that. But we certainly notice within six months or so, that's what history shows. Now, if this is different because of broken out called clearing house, because of infrastructure spending, which is a natural competitor to our drivers. The construction market in general is hot and low inventories. Inventories to sales is still very low. Are there some things that overcome that to divide that impact into the economy that pushes it out, or the freight side is minimal impact because of that? I find that hard to believe but we'll see. So, that's just that. No, there's no indication from customers regarding any anticipated slowdown. No, nobody's talking about peak either, but it's way too early to be talking about peak.

Got it. No, that sounds good. I guess the question is, do we -- have we even stopped with peak yet, maybe not. But I guess last question then I'll turn it over. But it's on capital allocation. Obviously, there have been some just significant improvements to the balance sheet over the course of the last couple of years because of the actions that you guys have taken, business is hopefully more profitable through cycle. But I think that's -- I think folks are looking forward to that. If the stock is kind of back down to the levels where you guys sort of initiated the Dutch tender last year, you initiated the quarterly dividend. Help us think through ways to -- that you're contemplating returning capital to shareholders outside of the quarterly dividend. Would you look to maybe get more aggressive on open market purchases of the stock, just given that the Dutch tender really didn't yield the type of reduction in share count that maybe you were initially intending? Could you maybe walk us through some of the capital allocation strategies, just given the strength of the balance sheet here?

Let's go back to the expectations for cash generation for the year. So it depends on whatever modeling that everybody has, as far as what they expect, EBITDA to contribute for '22. We feel that even with $50 million to $70 million of net capex, we will still generate cash for 2022. The dividend relatively speaks in the cash impact of that a small it's around a million dollars to a quarter. And we felt there was not only a commitment, but a signal to the market and our shareholders that it's just because of where we are. Number two, what are we going to do with the cash generated this year and what we see into the future? I would say, Jack, it's all of that. We've firmly and fully intend to execute the Dutch Auction in full. Some people would say that we did -- we executed it without having to use the cash. Our intent was to use the cash. People that ran away from us because we just got -- I think we kind of woke the market up and is going to buy this too cheap and I'm not going to sell it at this price. Because it ran much higher than what our, generous at the time of the announcement, offer.

Sure. Absolutely.

And based on so it ran away from us. And our intention was to execute that. As we move forward, obviously, Jack, I can't. We're looking at M&A. Our last one of SaaS was 2018, and so we feel the model's at a place that our team can focus and execute another acquisition size, I don't know. There are some things, there are some strategic smaller ones that make sense, that are good complements, and there are some larger ones that are larger. Similar to what the Landair acquisition was back in '18. We're in the market looking -- we're in the marketing looking at further -- whether it's normal share repurchases, Dutches, whatever. We're going to move, and the dividend was a start, if you will, and we'll see how it plays out, but we're excited about -- it's neat to be in a cash-generation mode because it gives you a lot of opportunities and we're going to try to be diligent about deploying that cash in the right means.

Okay, that's great. Thanks so much.

Thanks, Jack.

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

Hey, good morning, everyone.

Good morning, Bert.

Hey, Joey, just a follow-up to your comments there. What is your view on inventory restocking? Seems like there has been some concerns that perhaps retail sales start to moderate through the year, inventory sales ratio is still at all-time lows. Are you noting any actions to rebuild inventories? And do you think that could be an offsetting tailwind is if the economy does moderate from high levels in upcoming quarters?

Paul. We met with a large customer yesterday, carries a lot of inventory. And yes, I think that restocking and carrying more inventories, building more warehouses. I mean, this company, basically said, everybody knows what they need to do post COVID, and -- which is keep more inventory domestically. They've just got to get there and it's just been a firefight ever since COVID and so, and again, that's a of one, but if it's a really large company that carries all inventory and their comment was that has not happened yet.

Oh yeah.

But they are making plans every day to try to do that, to increase inventory levels domestically. And you got to close it'll be in two phases. I think, whichever your favorite stores are, as we walk to the stores, as we see the empty shelves start filling, whenever it gets to fill, I think it'll be moving into the next phase, which is how do I fill the warehouse or do I add warehouses? And I think that's a general for the irradiated or hear directly. I think people are saying, okay, we got to skinning, obviously. Now, pandemic's once several hundred years, we hope. We've got one that's lasted a while. But even besides that, I think the market in general feels that we were too scanning. And then I think to your point, Bert is, depending on that view, it could delay. As I was saying earlier, it could delay that impact to the freight side of the economy as people are trying to push through that. And this depends on rates, some CFOs doing the plus and minus on cost of capital and when does it make sense? I'd rather have more inventory than empty shelves and then cost of capital is still pretty cheap. They can move a lot and it's still cheap, relatively speaking.

And that makes sense. Thanks for the commentary there. Paul, my fellow national champion, my follow-up question's for you. And how good do you think the improvement in Dedicated would have to be to more than offset what you're expecting to be, it sounds like some normalization to Managed Freight? Can you just give us a rough order of magnitude perhaps on OR improvement?

To offset it, dedicated would have to be -- it has to be in the 80s, to get anywhere close. Once, on a longer-term basis, but I don't think Dedicated will get there this year, but I don't think will drop off that much. I mean, it's going to drop probably in the second half of the year. So to fully offset it, it would have to be in the 80s, probably.

Okay. Thanks. And you can just

Go ahead.

Yes, thank you.

Our next question comes from Bruce Olephant from Oppenheimer. Please go ahead, Bruce.

Thank you. Congratulations on an excellent year. The one thing that I know we just covered, but I have to mention it. The one thing that's a little bit disturbing is that back in August, the company realized the stock was extremely undervalued and you decided to have a Dutch Auction to commit $40 million to purchase a roughly 1.7 million shares, which represented about 12% of the outstanding shares and that sent a signal to Wall Street and investors that you thought your stock was extremely undervalued. And now with the stock where it is today and selling it less than seven times earnings, it's disappointing that what we got was a small dividend for shareholders rather than management realizing some kind of buyback. It's almost like 80,000 shares got tended on the Dutch Auction. We never really raised the price which we could have done and it's disappointing that there's no action taken right now.

That's a fair question, Bruce. As I said earlier, we fully intended to do that, to spend that cash. Arguably, we still have that cash. And there are several things that go into the decision and the actions and the timing and we're still very interested and fill it, whether it's seven times earnings or a 1.3 times tangible book value. Where -- we agree with you and we're working diligently to, as I said earlier, to deploy our cash to the best means that we can.

Okay. Thank you. I hope something is done.

Okay.

And we have a follow-up question from Bert Subin. Please go ahead, Bert.

Hey, sorry. I get -- I got sort of cut off there at the end. I just had a quick follow-up to an earlier question. You guys said high single to low double-digit rate increases. Can you break that out amongst Dedicated and Expedited? Thank you.

Yeah, that's probably -- I would say they are pretty similar, Bert. I mean, there's not a ton of differentiation between the two. You've probably got Expedited is probably a little higher on the right side. They are probably in the low double-digits and Dedicated is probably in the high single-digits, and most business units were about the same size from a revenue perspective. And so if one's 11, or 12, or 13, the other one's eight, or nine.

Okay. That's helpful. Thanks, Paul.

And gentlemen, at this time, there are no further questions.

Okay. Well, thanks, everybody for being on the call. Thank you for your questions. Bruce, again, fair question and we agree with you so we're behind that. So look forward to meeting you all, and visiting with you after the first quarter. Thanks a lot.

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