Welcome to today's Covenant Logistics Group Q2 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. Mr. Grant, you may begin. Thank you, Jen. Good morning, everyone, welcome to the Covenant Logistics Group Q2 2023 Conference Call. As a reminder, this call will contain forward-looking statements under the Private Securities Litigation Reform Act, which we 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 prepared 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 results for the quarter, which showed comparative resilience in the midst of a very soft freight environment. Consolidated freight revenue was down 9% compared to a very tough prior year comparable when the freight environment peaked. The decline related primarily to operating approximately 11% fewer weighted average tractors in our truckload operations and less overfill flow freight handled by our managed freight segment due to lower overall demand. Adjusted operating income fell approximately $12 million, or 43%, compared to the prior year quarter. Primarily as a result of our expedited and managed rate segments, which declined by approximately $7.5 and 6.5 million, respectively, offset by an increase of approximately $2 million in our dedicated segment. Adjusted net, net income decreased 44% to $14.4 million, adjusted earnings per share decreased 34% to $1.07 per share compared to the year-ago quarter. Weighted average diluted shares decreased as a result of our share repurchase program. Key highlights for the quarter include all four of our. our business segments, including expedited, dedicated, managed freight, and warehousing, achieved sequential improvement in profitability in the Q2. The acquisition of Lew Thompson & Son Trucking, Inc., a dedicated contract carrier comprised of approximately 200 tractors, specializing in poultry and live haul transportation. We have been pleased with the operational results today and are excited about the growth opportunities that lie ahead. Within our combined truckload segments, operation and maintenance-related expenses declined on a cents per total mile basis by $0.06, or 21%, and fixed equipment costs, including lease revenue, equipment depreciation, and gains on sale, remained flat compared to the prior year. The average age of our fleet at 30 June remained flat sequentially at 26 months, compared to 31 March 2023, largely due to the equipment acquired from Lew Thompson & Son Trucking. For the remainder of 2023, based on our current equipment order, we anticipate sequential improvement to the average age of our equipment. Gain on sale of revenue equipment was $2 million in the quarter, compared to $0.4 million in the prior year. Our Transport Enterprise Leasing investment produced $0.29 per diluted share, compared to $0.33 per share versus a year ago period. Our net indebtedness at 30 June climbed to $187.2 million in the quarter, primarily as a result of the acquisition, yielding a leverage ratio of approximately 1.7 x and debt-to-equity ratio of 33.1%. On an adjusted basis, return on invested capital was 13% for the current quarter versus 17.6% in the prior year. Now Paul will provide a little more color on the items affecting the individual business segments. Thanks, Tripp. Taking a moment to dive deeper into what drove our results for the quarter. Starting with our expedited segment, freight revenue declined 7% compared to the prior year, largely due to a 6% reduction in the average fleet. Rates declined by just over 10%, but were offset by almost a 10% improvement in average total miles per truck compared to a year ago. The improvement in utilization was principally attributable to newer equipment in the fleet and reduced downtime. While we are pleased with the segment's utilization improvement, we recognize that year-over-year freight revenue per total mile comparisons will continue to be challenging for the remainder of 2023. While cost headwinds from salaries and wages and fixed equipment costs compressed margins, they were somewhat offset with improvements to variable-based equipment costs for the quarter. Our dedicated segment experienced an 8% reduction in freight revenue compared to the 2022 quarter as a result of a 217 or 15% reduction in the average number of total trucks, offset by an 8% increase in revenue per truck. Despite the addition of Lew Thompson & Son Trucking fleet, the overall fleet reduction in our dedicated segment 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 both the year-over-year and sequential improvement to the adjusted margin and expect to continue to improve upon this segment's profitability over the long term. Managed Freight experienced a 21% reduction of total freight revenue and a 76% reduction in adjusted operating profit. The significant reduction in revenue and operating profit was primarily attributable to little to no overflow freight from our asset-based truckload segments. The brokerage environment remains highly competitive, with numerous brokers aggressively competing for volumes at the expense of margin. We anticipate continued margin pressure in this environment. Our warehouse segment saw a 37% increase in freight revenue compared to the prior year, resulting from the startup of new customers during the previous 12 months. We are pleased with the top-line growth we've achieved in this segment, and the team has done a phenomenal job in executing these startups, which are both intense and time-consuming. However, despite the significant top-line growth of the segment, we've only seen about a 10% improvement in adjusted operating profit compared to the prior year. Although we're pleased with the sequential profitability improvement within this segment, we will continue to focus on improving profitability of the mid-single digits through improved labor utilization and rate increases with existing customers. Our minority investment in TEL contributed pretax income of $5.4 million for the quarter, compared to $7.1 million in the prior year period. The decline was largely due to reduced gains on the sale of used equipment compared to the year ago. TEL's revenue in the quarter grew 11% and pretax net income decreased by 26% versus the Q2 of 2022. TEL increased its truck fleet in the quarter versus a year ago by 210 trucks to 2,283, and grew its trailer fleet by 84 to 7,031. As a reminder, TEL focuses on managing lease purchase programs for clients, leasing trucks and trailers to small fleets and shippers, aiding clients in the procurement and disposition of their equipment through a robust equipment buy/sell program. Due to the business model, gains and losses on the sale of equipment are a normal part of TEL's business model and can cause earnings to fluctuate from quarter to quarter. Our investment in TEL is included in other assets in our consolidated balance sheet and has grown to $66 million as of 30 June 2023, from our original investment of $4.9 million in 2011. In 2022, we received $14.7 million in cash dividends from TEL, and we are anticipating approximately $19.8 million to be received during the second half of 2023. As we enter the Q3, we are optimistic that the trough of the freight cycle is behind us, but are cautious about the rate at which we will see improvements. Regardless of how the freight economy responds, 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. The acquisition of Lew Thompson & Son and our investments in new revenue-generating equipment, people, technology, are examples of this. Thank you for your time. I will now open up the call for questions. Thank you. If you would like to ask a question, please press star one on your telephone keypad now. You'll be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, if you have a question, please press star one on your phone now. Our first question today will come from Jason Seidl with TD Cowen. Thank you, operator. Gentlemen, good morning. Wanted to cue in on that last comment that you, you talked about in terms of the broader trucking industry. I'm with you guys that we're sort of off the, off the bottom here, but how should we think about pricing on a sequential basis? Because, you know, I'm still getting some feedback from some private truckers, from some just really lowball pricing out there, like, you know, PA to North Carolina have less than $1 a mile being offered. How should we think about that, at least in the near term? You know, Jason Seidl, here's what I would say, is we're still seeing that, too. As a reminder, most of our stuff's tied up under contract rates. You know, when we talked about continuing to see margin pressure in the brokerage, that's really where we've got exposure to that. On the dedicated and expedited side, I, I don't think we're gonna see any pricing pressure in, in the near term. You know, I think we'll, we'll see what contract rates do next year. I think that's probably what will have the larger effect on us, and, you know, I think it's probably too early to tell exactly what those are gonna do next year. A lot of the stuff that's out there in the spot market, I mean, it will negatively affect the brokerage a little bit, but it shouldn't affect expedited and dedicated for the balance of the year. No, that, that makes a lot of sense. You know, also, you called out a little bit of gains on sale. How should we look at gain on sale going forward, and what does the equipment market look like? Let me talk about the market. I'll let Tripp talk about gains on sale. Used equipment market has just continued to precipitously drop. You know, it dropped a little bit from January to March. Since March, it's been kind of in a free fall. Seems like July maybe has kind of hit a little bit of a floor in the used equipment market. March to July was a pretty big drop. Yeah, I agree. I, I, quite honestly, and this is just me speaking, I, I don't, I don't see the used equipment market getting any better in the next, you know, 6 to 8 months. It's especially when you look at the rate, it's continued. It has dropped over the last few months. You know, this is we've talked about this in previous calls, but this is a very heavy CapEx year for us, where, you know, really over the last year and a half, I would say, we've been really investing in upgrading the fleet, and we're gonna continue to do that, because we think it's for the best. you know, it, it provides an optimized way of operating the fleet for us both, I would say, on kind of the, the ongoing, you know, variable costs, and, and I think that there's some fixed cost benefits with uptime. Here's what I would say. You know, going forward, yes, we do have more newer equipment. You're not gonna see a lot of, you know, fleet count growth in the back half of the year, which means that we're gonna be selling a lot of equipment, too. It's just a matter of, you know, how much it continues to drop. I don't think you're gonna see huge gains on sale in Q3 and Q4. You may see a little bit, but, I don't think anything, you know. I also don't think you're gonna see significant losses either. It's marginal, I would say. You know, we depreciate it. We watch our depreciation on our equipment, make sure that we're depreciating it adequately, and, you know, I think we'll be okay there. Okay. Well, that's, that's great color. Last one, and I'll turn it over to somebody else here. You know, Lew Thompson, you got about 2/3 of a quarter. Looks like a good acquisition for you guys, getting you in a niche end market that you really weren't in. You know, when I was hosting some calls with industry people before, earlier this quarter, a lot of them were talking about how there's a lot fewer financial buyers in the marketplace for sort of smaller niche acquisitions. Do you foresee other opportunities for yourself down the road because multiples have come in a little bit? You know, Jason, here's what I would say. I agree, there's less financial buyers in the market. We're always looking for those really niche, value-add, you know, contractual type businesses, you know, we got to digest. Remember, we did AAT in February of 2022, we just did Thompson in April, you know, we got to digest. But any of that niche, good margin, contractual type businesses out there, yes, we continue to field calls and are gonna keep looking at stuff like that as it comes about. I just wanna, just adding to that a little bit, is making sure that, you know, our balance sheet could absolutely support an additional acquisition, and it's something we may look at in the future. Our main focus, whether it's AAT or, or Lew Thompson, most recently Lew Thompson, is really focusing on learning that business and, and starting off, you know, getting out of the gate on the right foot, which we have the first 2 months of, you know, since we acquired them. There's a lot of executional risk at play with, you know, anytime you do something different, I would say, or nichey, kind of as Paul had mentioned. We're really focused on execution. We want to make sure we do those the right way, and, you know, and I think we'll reap benefits for, from those that we've already done in the future if we can kind of continue to refine that and make sure we're executing at a high level. Well, thank you, gentlemen. I appreciate the time, as always. Thanks, Jason. Thanks, Jason. Our next question will come from Scott Group with Wolfe Research. Hey, thanks. Good morning, guys. Hey, Scott. Hey, Scott. Can you just talk us through how you're thinking about back half of the year from an earnings standpoint? Do you think we see further sequential earnings growth from Q2 into the back half of the year? What are the puts and takes? Yeah, I, I mean, I don't want to get into giving any sort of, like, defined guidance, but we feel like we've got... You've probably read it in the release, I mean, we're optimistic about the back half of the year. We said that there's, we feel like we're at the trough of the freight recession, and, you know, part of that may be, you know, due to our model. You know, we've got a lot of LTL, you know, customers and expedited. We've got, if you look at 2Q, we've got just two months of Lew Thompson. We've talked earlier about, you know, the optimism about how well Lew Thompson is, you know, running out of the gate, as well as, you know, some potential growth opportunities that may come to fruition later in the year and early next year. I think I'm optimistic about being able to, you know, increase earnings, you know, sequentially in Q3. I think there's a big question mark. Q4, there's some downtime with the holidays, you know, there's a big question mark about peak. Not that peak is a big part of our business, you know, last year it was virtually nothing, I'm just not sure how much that's gonna contribute this year in 2023. Yeah, I think we're bullish on the next half of the year for us. Yeah, Scott, let me add one thing to that. I agree with everything Tripp said. you know, I think the one thing to watch is, with our reduced share count, a few things going in the right direction could really be accretive in the back half of the year and, you know, one bad accident could pull it the other direction. I think that's one of the things everybody's got to remember with this reduced share count, is the earnings have a lot of leverage up, but, you know, you also have a bad accident or something, there's a lot of leverage on the downside. you know, on the balance, I agree with what Tripp said. I think we're optimistic about the back half of the year, and, you know, think we can continue to improve earnings quarter-over-quarter. Okay, helpful. You just mentioned you got a lot of LTL customers. What are you seeing in the market right now in the last week or so as shippers are scrambling to leave Yellow? Yeah. Is this a lot of calls? A lot of calls. Yeah. Yeah, we're filling a number of calls in the expedited division. As you know, we do business with practically every major LTL and freight forwarder in that division. So we continue to field a lot of calls as people need some incremental capacity. You know, it's probably, you know, maybe 5% growth on expedited revenue during the quarter. I mean, it's definitely gonna be a positive on expedited in the Q3. There was really none of that in the Q2, so it should be a positive for expedited in the Q3. And likely into the fourth. Yep. Just lastly, you mentioned the, you know, the increased sort of leverage earnings because of the buyback. What is the plan with the buyback going forward? Are you gonna be continuing to be aggressive with it? Do you pause it? How do you think about that? I mean, I can't really give specific. All I can say, I guess, for that is we do have an open buyback plan right now that has some parameters around it, that, you know, that the bank will repurchase based on those parameters. Here's what I would say: I really like how we've deployed capital over the last couple of years, and buybacks have been a big portion of that. I think that they're always gonna be on the playbook, you know, not saying that we're gonna buy back X amount of shares in Q3 or Q4, but I think as circumstances warrant, I think that they're always gonna be the go-to, a potential go-to in our playbook to activate, you know, as part of our capital deployment plan. We like them. We've seen benefits from them. you know, the question is, as circumstances change, how do you reprioritize those types of things and decisions? you know, I think they're always gonna be there, and I think that you guys will probably see us think about it or talk about it and move forward with another one in the future when circumstances warrant. Makes sense. Thank you, guys. Thanks. Thanks, Scott. Our next question will come from Jack Atkins with Stephens. Okay, great. Good morning, and thanks for taking my questions, guys. Congrats on a great quarter. I, I guess just kind of going back to the LTL and, you know, sort of the, the expedited comments there for a moment. How are you guys thinking about approaching, you know, deploying additional capacity into that market? I mean, is it... You know, you have some longer term partnerships there. Is it really a function of looking to, you know, secure longer term commitments for additional trucks that you'd be willing to deploy into that, you know, that LTL line haul part of the market? Yeah, Jack, you hit it. I mean, we, you know, we're I would say we're there's a few trucks here, a few trucks there to a lot of folks. You know, for us to add a significant volume of trucks, it's gonna be with the folks that we have longer term partnerships with. As we move those trucks around, they're gonna be more heavily weighted towards folks that are willing to sign up for those on a longer-term basis, and that have been partner, you know, we were partners with through the 21, 22 cycle, and they've been partners with us through this 23 cycle, and so that's how we're gonna, you know, allocate our resources on trying to grow these teams for them. As you think about this from an investor perspective, you know, I, I guess the, the point I'm trying to make there, or the question I'm asking is, you know, as you, you know, bring on new business there, this isn't just a short-term sort of, you know, a stopgap for some of these guys. This is potentially a, you know, longer-term sort of step-up in business activity, with this particular part of your customer base. Yeah, I, I think, you know, we'll keep a high percentage of whatever we add with these customers on a longer-term basis. It's your point, they're digesting this growth and their model's changing. Yeah, we're strategically trying to make sure where we grow the most is for people that it's gonna be sticky. Yeah. No, absolutely. Jack, keep in mind, about 55% to 60% of that expedited revenue is on guaranteed contracts. Right. Absolutely. that. Yeah. Yeah. We, as Paul was saying, when we add these trucks, what it would do is going on to those customers that have been partners to us, and we're partners. Part of that partnership that we got are long-term agreements between us. No, absolutely, and that's paid dividends over the last, you know, last couple of years for sure. I guess, you know, David, you know, good to hear your voice. I guess maybe would love to get your perspective, you know, as well in terms of just how you're thinking about the cycle. I know you bring a lot of perspective to this. You know, I guess could you maybe kind of. Yeah. Help us think about, you know, where, where we are, you know, in terms of, you know, coming off the bottom here. As you sort of think about capacity and, you know, all the puts and takes, are you more or less optimistic about sort of where we're headed from a cycle perspective over the next six months? Yeah. you know, I was on a panel last week at a conference with Thom Albrecht on insurance, but had a big carrier conference, carrier panel. 'Cause I think there's 2 things happening. We went around the room, the last question on the panel for that day was, when do you think, 'cause that whole group was a bunch of smaller carriers, and it's when do you think that things are gonna get better, and when's that day gonna come? The times, Jack, were anywhere from, I heard spring, I heard 12 months from now, I heard spring, I heard December, and I was the last 1 to answer a question on there, because this is the way I do believe, and I, I believe that we're gonna feel it in September. I believe in the next couple of months, the trucking industry, truckload guys are gonna feel capacity constraints. I'm not saying it's gonna be 2022 over again, but it's gonna feel better than the last 12 months that we've gone through. It's all because of. I'm not sure about the economy, but capacity has left, is leaving our industry, evident by the fact of what Paul said that's happened on the used truck prices just in the last 60 days. It hurts right now, it hurts this month, but overall it's good because as capacity leaves, the pricing power will return, and the pricing will make up for whatever shortfall we're disappointed in that we just sell a used truck for. That's all happened in the last 60 days. I really believe trucking will start sensing it in the next couple of months, a tightening of capacity, as long as the economy at least kind of stays and hangs where it's at today. Those are my thoughts. Okay. All right. No, I appreciate that. You know, maybe last question, long term strategically, I mean, as you guys think about the way you'd like to have, you know, your mix of assets, deployed, you know, within the truckload market, you know, you've been investing more, you know, outside of, you know, the kind of traditional long haul over the road, you know, highly cyclical parts of the truckload market into things like AAT, Lew Thompson & Son, you know, longer term commitments within your, you know, within your expedited team business for LTL. How do you think about the long-term mix of assets between traditional OTR truckload and, you know, and more niche parts of the market that really remove the cyclicality and where you can really see kind of compounding growth? I would say this. I would say that, you know, we've been on this journey now really in 2015 when we bought Delta Airlines, and I actually went to the board and said, "We're gonna change our company around. We're not gonna be this feast or famine and hope things get better tomorrow. We are going down another road." We started that in 2015. It really came into fruition in 2018 with the acquisition of Landair. It really came into fruition in 2020 when we shut down SRT and the over the road solo side of the Covenant expert, you know, the Covenant business, and we got out of the solo business. We were really in the market of, you know, expedited, dedicated, warehousing and managed freight, and managed freight and brokerage and TMS. We are really looking at those four avenues. As I look at the whole, two things got to happen. We got to bring value to the customer, but that customer's got to bring value to us. That's got to be a two-way street, that we're both bringing value, because at the end of the day, if we're not bringing value, if our customer is not bringing value, the relationship will eventually end. Something will happen. We were just so tired over all these years, 35 years or 33 years or whatever it's been, of, "Okay, the market's up, let's go increase rates 5%. The market's down, let's give it all back." Our model today is not doing that. It's because we're bringing value. Our expedited side of our business is teams. Everybody doesn't have teams. We're one of the largest team providers out there. If you truly need teams, then pay me for what it costs me to operate these teams, and we'll be there during the great times of 2022. The expedited side, it's not that they came in and slaughtered us on rate. They came in this last year and said, "Instead of 20 trucks, I need 17." We've worked with our customers on that, and we got to make sure that we got a pipeline to be able to take care of the ones that give you back. The brokerage side is really filling the OTR side of our business. As you know, brokerage is up and down, and barges are up and down, you know, it's a high ROI on that business. I'm very pleased with that. Paul talked about the warehousing. Those are the four areas that we're concentrating in, and those are the areas that we're going to continue to build, either through internal growth or through acquisitions, as you call it, niches and those kinds of things, because that's what we love. We love something that's hard and something that everybody doesn't do, and it brings value to the customer. That's our model. Thank you, David. It looks like it's clearly working. I'll hand it over. As a reminder, if you'd like to ask a question, please signal by pressing star one on your touchtone phone. Our next question comes from Barry Haimes with Sage Asset Management. Hi, guys. Thanks very much. Good quarter. I have two questions. One is, David, I wanted us to circle back on your comment about capacity leaving the industry. When you look at your brokerage segment, you might be able to get a read on that, you know, in terms of all the carriers that you work with. Is there anything either numerical or anecdotal you could talk about to flush that out a little bit more? Then my. Yeah. I had one other question, but go ahead. Thanks. Yep. I was just going to say, on the brokerage side, yes, you can. I would say the main thing that's happened on the brokerage side is that the small carriers have reached a point that they're not going no lower. That's what we have seen, is that we can't get the capacity for any lower rate than what's out there. It's showing you that capacity is starting to tighten a little bit because the rates are not falling like they were. Got it. Okay. Thank you. Then the other question is, on the asset-based businesses that, as you pointed out, are more contract, are most of those roll in the spring? Any feel for where contract rates are in the market now, you know, versus, you know, where they might have been six months or a year ago? Thanks. Yeah, most of our stuff is in the spring. I would say January to April is when most of the asset-based contracts reset. Pricing is probably down, you know, mid-single digits on, if you combine dedicated and expedited, you know, I would say our pricing is probably down mid-single digits if you kind of weight those. I would say people that have more of a OTR, you know, you cause able to say, "You call, we haul," type exposure, those are probably down a lot more than mid-single digits. Dave, any more color you want to add on that? No, I agree. It is. It's going to be it next year when rates start. Look, we start looking at rates again. I agree with Paul, what he just said. Great. Just one last quick follow-up on that. Looking at the cost side for next year, you know, as we start thinking about next year, are there any big puts or takes we should think about as we're thinking about cost structure in 2024 versus 2023? Thanks. On the cost side, I mean, we've been pleased with what we've seen, and, you know, with a lot of the costs, you know, we've been really laser focused, I would say, as an enterprise, starting in the Q4 of last year, kind of seeing... I think it's safe to say we kind of first felt it pretty significantly in November of 2022. As a response to that, you know, we've been laser focused on costs, and the enterprise as a whole has done a great job and just, you know, really focused on cost savings throughout the enterprise, whether in a business unit or a back office. You know, that being said, you know, that can only go so far. I think a big part of the success story of, you know, where we have seen success, I would say, is on the investment in our new tractors, and we've done a lot there. It was painful last year. We had to pull some trucks early and created some fleet disruptions and created some drag, a drag on the PNL, an impairment charge. If you go back and read the Q4 release, it was a little bit muddy, but we are seeing improved fuel economy, we're seeing improved maintenance costs, we're seeing improved retention because we're in, you know, it's a different market, but, you know, we'd like to think of it that they're in newer equipment and better equipment and they're more efficient, and so our utilization has improved as well. I do think that we'll continue to see cost improvements as we continue to upgrade and reduce the average age of our fleet. You know, fuel is kind of a wild card. It goes up one month and goes down another month. I think directionally it's going to be going down. You know, I, quite honestly, I don't see a lot of reduction in wages. It's a little bit of a mixed bag. I feel good about our cost journey to date, you know, 2024, will we have that type of leverage? We've squeezed the turnip pretty hard this year, you know, do we have the leverage to kind of offset some of those costs? Y ou know, it's kind of a hard question to answer because I think there's some ups and downs in there. we feel good about the things that we can control, and we're real happy with what we've done to date. Great. Thanks very much. Good luck. Thank you. Once again, if you'd like to ask a question, please press star one on your phone. We'll pause for just a moment to allow everyone an opportunity to signal. It appears there are no further questions at this time. Mr. Grant, I'll turn the call back to you for any additional closing remarks. Yeah, Jen, thanks so much. Just wanted to thank everyone for your time and participation today. We're excited about the quarter, pleased with our results, and are optimistic about the future. We look forward to speaking with everyone next quarter. Thanks very much, and have a good afternoon. This concludes today's conference call. Thank you for attending.