Covenant Transportation Group (NASDAQ: CVTI) sees mixed results in the first quarter of 2020, but said April was breakeven and May has shown stabilization in volumes and price.
The Chattanooga, Tennessee-based truckload (TL) carrier reported an adjusted net loss of $1.7 million, or 9 cents a share — a penny ahead of the consensus estimate.
“Our first quarter was marked by three big themes: internal energy around our strategic plan, our response to COVID-19 and a declining used equipment market,” stated Chairman and CEO David Parker.
Parker was referring to the company’s strategic plan, which includes increasing business in offerings like contract logistics and expedited, lowering overhead costs, and optimizing its terminal network. Recent progress on the plan included several changes to the C-suite, naming John Tweed and Joey Hogan as co-presidents, and disposing of terminals in Orlando, Florida, Dallas and Texarkana, Texas.
Covenant recently shut down the terminal and headquarters of solo-driven reefer subsidiary Southern Refrigerated Transport (SRT) due to economic weakness caused by the pandemic and efforts to streamline operations. The unit’s operations were to be relocated to Chattanooga and Greeneville, Tennessee, locations.
Covenant reported a 1.7% year-over-year decline in TL freight revenue to $147 million as average tractors declined 133 units. Revenue per tractor per week increased 1.6% to $3,782 as miles increased 5.5% and revenue per loaded mile moved 3.5% lower.
TL freight revenue per tractor increased 5.1% in the company’s highway segment as miles per tractor increased 9.1% and freight revenue per total mile declined 3.7%. Dedicated freight revenue per tractor increased slightly as miles per tractor increased 2.2% and freight revenue per total mile declined 1.6%.
On a consolidated basis, the company’s adjusted operating ratio deteriorated 240 basis points to 99.3%.
Insurance and claims expense increased by more than 5 cents per mile due to “increased claims accruals associated with the estimated outcome of certain auto liability claims.” The carrier also noted a $500,000 increase in insurance premium expense effective April 1 and said it has increased the self-insured portion of its insurance program, “which could contribute to earnings volatility.”
Operations and maintenance expense declined slightly more than 3 cents per mile, in part due to a decline in the average tractor age. Covenant ended the period with an average tractor age of 1.8 years versus 2.3 years in the year ago period. Gains on sale were $1.4 million higher year-over-year given a $1.7 million real estate sale.
Management said volumes moved lower in April, pushing spot rates lower. The carrier had a greater percentage of its freight mix in the spot market in April, given a “reduction in dedicated automotive freight.” Cost actions taken allowed the carrier to essentially break even during the month. Covenant has seen volumes and price stabilize in May.
The period included a $500,000 net loss at fleet leasing outfit Transport Enterprise Leasing (TEL), in which it holds a 49% interest, due to “ongoing weakness in the truck sales and leasing market.”
The company ended the quarter with $75.3 million in liquidity with plans to improve their position by another $40 to $45 million through strategic capital and cost initiatives. Net debt increased $32.2 million to $336.8 million as it repurchased stock, prior to the suspension of the program, and further funded its factoring business, which saw operating income improve $700,000 to $2.2 million in the period.
Covenant plans to continue to trim its fleet size as it focuses on higher margined businesses. The carrier expects its tractor fleet to be 12% to 14% lower year-over-year by the end of 2020.
Covenant pulled its earnings outlook for 2020.
“We are encouraged by the initial positive results of our strategic plan execution and structural advancements, as an improved business mix and our cost control efforts offset the impact of a challenging volume and pricing environment in April,” said Parker. “However, we expect volatility from month to month over the remainder of the year due to external factors as well as gains and losses associated with our internal initiatives and changes in our revenue and cost structure.”
The company will host a conference call to discuss these results with analysts and investors on Wednesday at 11 a.m. Eastern time.