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…

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 in 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 continue and 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 of 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 2024 quarter -- 2023 quarter. The brokerage environment remains highly competitive with numerous brokers aggressively competing for volumes…

[Operator Instructions] And our first question comes from Jason Seidl from TD Cowen. Please go ahead, Jason.

Thank you, operator. Good morning, gentlemen. Appreciate you guys taking my question. Can you talk a little bit about the experience of Lew Thompson? It seems to be going pretty well. I know initially when you, when you guys bought them -- sort of the theory was that you could really start helping them grow maybe sort of how should we expect that into '24 and beyond. And then maybe can you expand upon sort of uses of cash going forward? You've done a pretty good job of dispersing it between timely acquisitions and also the buyback.

Yes, yes. Jason, this is Tripp.

Hi, 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 200 and just call it 225 truck fleet because some of those folks are shuttle trucks, but had a really, really good business like good culture, good fit, fit with exactly, you know, what we were looking for in our strategic plan, and one of the silver linings behind that, which is one of the silver linings that we look for with any acquisition as the opportunity to grow. And if you look back at Lew Thompson and how they've operated in the past, they've really being confined to one, you know, smaller region and kind of call it Northwest Arkansas and one of the things that we've brought to them in terms of growth potential is something they've never had before. Certainly, the family had the capital to grow, but, you know, getting outside of that wheelhouse of their region as something that they have not done before, and that's something that we've experienced starting to the experiment with and see success with. Evidence being in the September this year, our first startup in Tennessee with a 20 truck fleet. I could see more substantial growth outside of the Northwest Arkansas or Tennessee wheelhouse step up in the next here. But because of that, you know, there's a couple of nuances with Lew Thompson that we've got to make sure that we're not as we grow this business that don't suffer and one its service and we have to maintain that gold level of service that Lew Thompson maintains. And so we're very careful about the growth and making sure that we're not sacrificing legacy business or new business by just trying to grow for the sake of growth. Two is, you know, capital and making sure that we can acquire the capital that we can grow with because they do -- one of the reasons why we like them is because of their unique capital requirements. Whether they're, you know, differently spec trucks or differently spec trailers, you know, it sets us apart a little bit. So capital is a big hurdle. But I do think that there is lots of opportunity. I'd be hesitant to kind of give numbers right now because we've got a lot of things in the pipeline. But that is a big kind of just call it feather in our cap next year with just the opportunities that I believe that we have with Lew Thompson over the next, you know, call it 15 months and beyond that.

Jason, to add on -- this is Paul. To add on to...

Hi, Paul.

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, I agree with Tripp. You know, it's, you know, getting the right equipment and, you know, we're in process on some customer contracts right now and there's a lot of stuff in the pipeline, so we'll stay balanced. But I think you'll see that business grow year-over-year for the foreseeable future.

And going back to your original questions on use of cash. And here's what I can say that, you know, if we can grow Lew Thompson, there will be some opportunities for some growth CapEx involved next year. And I can't really comment on, you know, future capital allocation plans or decisions that have been made. But what I can do is kind of talk about just in strategy, but giving you a glimpse of what we've done since January 1 of 2022. We've repurchased the $110 million of stock, paid $10 million of dividends, had three very accretive acquisitions for $156 million. So paid out a total of $275 million that are moving the business forward and moving the valuation forward. You know, in turn, we've had to sell capital. We've had to sell underperforming capital, two terminals for $56 million that weren't producing a return on investment. And, you know, certainly, you know, you guys have seen the truck counts come down over the previous quarters. We're selling off underperforming capital to help finance these things that are producing above-market, you know, returns on invested capital. And so the --without getting -- the secret sauce is doing more of what we've done in the past. But without getting into any more specifics about, you know, our specific plans about the next 12 months.

Listen, 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. And I think we're probably -- hopefully in the next six months, we would believe we have to get in some sort of more normalized restocking pattern. You know, if fuel prices stay high, hopefully, capacity continues to exit the market. And, you know, -- but maybe in the next six to nine months, we can get this thing back in balance a little bit.

Yes. 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. So Jack, are you on mute?

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're probably in it to have seen it, Jack. And I think some of us, the inventory destocking, I mean, you know, a lot of the -- you're seeing a lot of these brokers bid stuff at these crazy low rates. And then two weeks later, a month later, you turn around and the same freights back on the market because they can't get carriers to service it. And you're starting to see, you know, in addition, to small fleets be challenged and the capacity exiting there, you're starting to see some capacity exit in the broker space where this whole notion of buying business and just trying to grow revenue for the sake of growing and taking losses on it. I think people are seeing that model doesn't work. And so, you know, I do believe that over time and again over the next six to nine months, all that will continue to shake out. I mean, you're coming up on people having to buy tags and pay for their annual insurance and with all the geopolitical things, if fuel goes up. We're going to get to a breaking point here for long where, you know, folks can't run stuff and lose cash in perpetuity.

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, 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 -- Jack, I would tell you absent those, we probably would have been around flattish quarter-over-quarter.

Okay.

You know, there's less work days in Q4 with all the holidays and there's really -- you know, we don't play much in the peak anymore. There's not much peak out there. And so, you know, I would have told you we would have probably been flattish and, you know, kind of, like we said, I think we'll be down sequentially, but I still think it'll be a nice fourth quarter.

Okay. Yes.

The bottom is not going to fall out from under or anything. And so it will be -

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

You know, modest. Yes.

Okay. That makes sense, Paul. And I just -- I guess maybe kind of shifting gears to one other topic and that's the underlying Dedicated operations. You know, margins have improved a good bit there with the addition of Lew Thompson. But could you maybe -- you know, I know it's been sort of a longer-term strategic focus to improve the profitability of the core Dedicated business. You've got the auto strikes going on there. So I know that kind of clouds it a bit, but could you maybe talk about the progress you're making there in terms of the organic Dedicated operations?

Yes. You know, we talked a little bit and to go back to Lew Thompson and so I think you'll see that truck grow next year. I think we're probably 90% through the weed and feed plan. And so, you know, Dedicated has been hard to grow in this environment with the one-way truckload market being as low as it is. I would say our pipeline is really robust, but, you know, folks are reluctant to pull the trigger because they can save a little bit of money by running, you know, three months more or six months more or whatever in the one way world. But I think you'll see a lot of that capacity come back into Dedicated. When rates start heading north, I think you'll see a lot of Dedicated contracts start getting signed. And so again, just to summarize that, I think we're through the majority of the weed and feed. There's only, I would say, you know, 10% of the business we're probably still not happy with. I think you're going to see Lew Thompson grow, and we've got a strong pipeline on, call it, the non-poultry Dedicated. It's just going to be a function of, you know, when one-way truckload rates start moving in the other direction, you're going to see some folks, I think, start locking in on some of this, you know, pipeline work we've been working on for 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.

An amazing turn at the Company to be putting up these kind of numbers at a trough environment. Two quick things. When, when you're looking on the acquisition front and if there are -- what your pipeline looks like now? Are there more potential sellers coming to the market and the verticals that you're focusing on?

Yes, a couple of things. We continue to look in the market, Mike, for niche, you know, above-average return acquisitions that we think we can grow. That's the answer to the first question. As far as there are some of those in the market right now, and so we just continue to look and see what might be a fit. And that kind of answers the second part of your question. You know, we really look for something we can integrate within one of the verticals of the Company, you know, be it Expedited or Dedicated or Managed Trans or Warehousing. And so we're just going to -- Tripp said it early on, we're going to continue down that path of capital deployment that if investing in growth CapEx is the best return, that's what we're going to do. If it's buying shares back, that's what we'll do. If the right acquisition with the right profile comes along, that's what we'll do. And so I think Tripp laid it out really good earlier. We're just going to kind of keep working down that path because that -- it has really turned around the way we operate the business and the results, and you can see those evident from where we were to where we're at. So we're probably just keep doing more of the same.

Yes.

And I think, Mike, the key to that is being really disciplined with our approach. I mean, we get a lot of, you know, [SIMDEX] come our way and open them and then turn them down within, you know, five minutes of opening them. And then of those, maybe 2% of them, we look at them for a day and talk about them and then turn them down. And, you know, we've been real fortunate lately, I guess, with the last three that have just come up. And I think that, you know, we've talked about it internally when folks publicly know what we're after and what we're looking for and what we're interested in, we're getting to see more volumes of those. And so we're going to continue to be disciplined in our allocation approach, capital allocation approach as it comes to M&A. But it seems like the uptick has been really helpful or has really picked up, a lot of which is because we've been public about, you know, what we're trying to do.

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, the group trades closer to 20. So, you know, 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, you know, internally if the market is not going to reward us?

Hi, Mike. This is David. Hi, number one, I got your same sentiments.

Yes.

You know, I don't disagree with anything you just said there. Of course, we can't talk about going private or anything like that, but that's why we got aboard. We got aboard to talk about all the issues that are there and we're busting our butts. And as I said, you know, two or three years ago, when we started down this road of where we should be at in the market, somebody is going to love us. Wall Street can love us. We're going to love ourselves. We bought back 25% of the Company and, and we're doing a great job. This team is doing unbelievable. I could not be any more excited about what the group is doing and -- you know, just -- they're doing great. And I think that Wall Street will reward us I think one day that it will wake up and say they are doing well and we will get rewarded. But again, we bought back 25% of the Company. Somebody is going to love us. So we're going to have to determine who's going to love us.

Excellent. And then one other thing. When we look at, you know, -- let's say we're near the trough here and we're doing, you know, 400 to 450 of trough earnings. When we look at what we've added in here, layered in the acquisitions, what's on the table here, is there any reason to think we won't be getting back up to the 550 to 650 as we approach another peak? You know, is the earnings power stronger at the Company now than it was...

Got it down. We got it down. We're working on five-year strategy and, of course, you know, five-year strategies as we all know is -- I love our strategic planning and looking out the next five years because we've been doing this for about a solid three years during this time that you've seen us do what we've, you know, what we've achieved. It's been a great strategic plan and we got five-year plans and again those can change in a year depending upon, you know, the conditions out there. But, hi, at the end of those, I couldn't be any more happier. The numbers -- we are going to get back when things turn around. We're going to shoot off very nicely. There's no doubt in my mind that we've got the company positioned to have an outstanding future. Again, I couldn't be more proud of where we're at. I mean, we can compare it to '08, '09 and we all could say that it may even be worse than '08 or '09. Because, be honest with you, I never forget October of '08, ISM was a 38 and by June, July next, the following year, about eight months later, we were showing extremely nice positive internal numbers on utilization and revenue and, you know, those kind of things. And none of us, the industry is seeing that in this environment today. And we're all sitting there saying is it going to happen now? Is it going to happen in March? Is it going to happen in next June? And, and nobody knows that and performing the way we're performing, I say hallelujah.

Yes, for sure. Like, 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. Sorry about that earlier. I was just wondering, as you -- as we get to 2024 bid season, how are you thinking about Expedited rates, Dedicated rates? Do you think rates can start moving up next year? Do there -- do you think there is some further downside risk to rates? What's your approach early on to bid season?

Hi, Scott. This is Paul. You know, here's what I think. As you know, a lot of the bids are come out early in the year and, and so I'd tell you what we're thinking. Expedited is probably flattish to maybe down 1% or 2% and Dedicated, we think, is probably flattish, because a lot of that gets done early in the year. I think on the Managed Trans side, you know, a lot of that's more in the spot market. So I think they'll get the benefit of things as the year goes along next year. And so I think there will be some rate opportunity by this time next year. But I think there won't be in the early part of the year. So we're -- you can kind of say, we're kind of in the flattish world. Because, you know, a lot of the folks we talked to, I mean, it's costs keep going up, small guys keep going out of business and then this thing - it's getting to a point where folks are going to do this for practice, whether it's small carriers that are, you know, keeping rights depressed through brokerages or large carriers. Most people are kind of at the place where they are -- they are where they are.

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. I think -- we think we can incrementally grow earnings next year. I mean, I think there's a few, you know, key things. You know, what does our maintenance cost do? What does our insurance cost do? You know, what -- how is this -- some of this pipeline that we were talking about a minute ago, you know, when does that come on board, and how quick does it get to the, you know, kind of modeled profitability level? But yes, we think that we can have some incremental earnings growth in '24 of '23. Nothing significant next year. But as soon as we're talking about with Mike coming to go, as soon as things pop, I think it's going to -- you'll see a more material amount of earnings growth. And so that's kind of the way we're modeling it out right now.

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

Thank you.

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

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

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