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Covenant rushes into dedicated; beats the Street


(Photo: TruckStopImages)

(Photo: TruckStopImages)

Covenant Transportation Group (NASDAQ: CVTI) announced its third quarter results yesterday, its first report inclusive of Landair Holdings. This morning, CEO David Parker, President Joey Hogan, and CFO Richard Cribbs conducted an earnings call so that investors and analysts could ask questions.

CVTI reported diluted earnings per share of $0.63, beating the Wall Street consensus estimate of $0.61. Total revenue for the quarter was $243.3M, up 36.2% year-over-year. A series of wage increases this year allowed Covenant to seat an additional 1% of its tractors, bringing its unseated truck count down to 3.9% of the fleet. Length of haul fell dramatically to 665 miles, down from 867 miles for the third quarter of 2017 (much of this involves the addition of Landair’s 428 truck fleet averaging 168 mile length of haul). Covenant’s proportion of team drivers remained relatively stable at an average of 880 teams for the quarter.

Covenant said increasingly expensive insurance claims were a headwind to further improvements in the company’s operating ratio, which came in at 93.3% for the quarter, down from 94.9% in the third quarter of 2017. Still, Covenant was able to reduce its debt to 1.5x EBITDA, down from 1.9x year-over-year.

The asset-light side of the business, representing 19% of revenue, has grown steadily over the past few years to $46.3M in topline revenue for the quarter (+80.9% YOY), but margins have continued to fluctuate between 90-4%, coming in at 91%. Normally we find that carriers’ logistics and truckload businesses have lopsided operating ratios, depending on freight market conditions, but both Covenant numbers seem stuck in the low 90s.

The biggest shift in the company was a dramatic expansion of its dedicated business to roughly 50% of its fleet from 32% a year ago, accelerated by the Landair acquisition. Parker said that Covenant continues to move away from the unprofitable “you call, we haul” model of irregular over the road trucking. Parker expects Covenant to add “another couple hundred trucks” to dedicated next year out of its present fleet of 3,080.

Covenant is continually asking “how do we get deeper into the supply chain,” Parker said, emphasizing the long-term contracts and mutually beneficial partnerships with shipper customers that Covenant is pursuing. Hogan said that integrating Landair and Covenant’s sales forces will provide crossover lead generation, but cautioned the dedicated contract sales cycle is longer and that “big wins” will begin accruing next year.

“On sales generation, we’re early. The lead generation workflow and pipeline has been put in place, and capital constraints on Landair have been lifted,” said Hogan.

Parker said that about 25% of Covenant’s dedicated contracts come up every year for renegotiation, and Cribbs pointed out that shippers cannot exit the agreements without paying substantial financial penalties.

Analysts were interested in David Parker’s view of the freight market and macroeconomic environment.

“We came out of June and everybody was on fire,” Parker recounted, “but to be honest, it was an unhealthy fire. When your customers can’t get their freight delivered, it’s not good. After July 10th, there was a moderation. Instead of 20 loads per truck it was ten per truck; in August it was five for one truck. The peak started for us in the latter part of September. Hurricanes produced for us about 50% of what they produced last year in revenue. [Freight demand] continues to ratchet up and get strong, I’m very pleased with the way I’m seeing the freight environment. Between now and Black Friday and Cyber Monday is when peak will start. We’re just at the beginning stages of it, and I’m very, very pleased with the freight environment.”

Covenant expects between 4-7% in rate increases next year, with a similar increase in driver wages. 

Hogan also said that SRT, Covenant’s reefer subsidiary, has been improving its performance. 

“I think that it’s come a long way in the last year. The management team has done a really good job, but there’s still some opportunity there. The non driving workforce has also stabilized greatly,” said Hogan.