Covenant posts revenue increase, expects rates to climb in second quarter

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The economy, ELDs and capacity issues combined to help drive up revenue for Covenant Transportation Group (NASDAQ/GS: CVTI) in the first quarter, said David Parker, chairman & CEO, during the company’s first quarter earnings call Wednesday morning. Covenant posted a 9.3% revenue increase in the first quarter over the first quarter of 2017 on total freight revenue of $150.5 million excluding fuel surcharges.

Parker said revenue per tractor per week increased to $3,993 during the first quarter of 2018. That is up from $3,755 in the same period in 2017. Average freight revenue per total mile also increased by 15.4 cents (9.5%) compared to 2017 while average miles per tractor fell 2.9%.

Covenant Transportation Group financial results

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Weighing down the results are the ELD impact and unseated trucks. “We have a lot of trucks that are running out of hours that are running solo that a month ago they weren’t running out of hours because they have to take breaks,” he said. Parker noted that the company is trying to add at least another 100 teams for its operations as more customers that have been squeezed by the ELDs are asking for teams.

Team-driven trucks fell to an average of 894 teams (34.9% of the total fleet) in the first quarter of 2018 versus 1,003 teams (or 39.1% of the total fleet) in the first quarter of 2017. The lack of drivers also worsened in the quarter, with the company now sitting with 6.2% empty trucks versus 4.2% in the same time period of 2017.

Parker said he is thrilled with the company’s expedited services and believes “expedited is going to be an unbelievable opportunity” in the next 2 to 4 years.

The company grew its fleet slightly in the first quarter, taking delivery of 286 new company tractors and disposing of “approximately 252 used tractors,” said Richard B. Cribbs, executive vice president and CFO. For the entirety of 2018, Cribbs expects the company to take delivery of 650 new tractors and remove 690 from its fleet. He said for the year, the size of the fleet should be flat to up 1% compared to 2017.

The strength of the economy continues to please Parker, but he also noted the current environment is not something that was unforeseen. “What we’ve all been talking about for the last 10 years, from capacity, from the driver shortage, from ELDs, we’re seeing it,” he said.

Parker said the company remains “overbooked” with loads, but it has eased a little which is helping customers who are seeing some easing of pricing pressure. Still, he believes the freight revenue per mile, which was up 15.4 cents (9.5%) in the first quarter over 2017’s first quarter, will be even higher in the second quarter.

“From a volume standpoint, we have some major accounts coming online from a rate perspective,” Parker said. Cribbs said that about half of the company’s contracted rate increases go into effect during the second quarter.

Driver pay is also on the rise, with salaries, wages and related expenses increasing 3.8 cents per total mile, mostly due to pay increases, Parker said. Those costs could still go higher as the company is now discussing contracts with customers and asking those customers to absorb some of the cost of higher driver pay to ensure capacity or face fewer trucks.  

Net fuel costs declined, even as the price of diesel has risen in 2018, thanks to the company’s successful fuel hedging activity, with a fuel hedge gain of $0.2 million in the first quarter of 2018 measured against a $1.2 million fuel hedge loss in 2017.

“In addition, our fuel surcharge recovery was more effective during the 2018 quarter and we expect to continue to experience improved fuel economy as we upgrade our tractor fleet,” Parker noted. “These favorable items were partially offset by increased fuel pricing. Ultra-low sulfur diesel prices as measured by the Department of Energy averaged approximately $0.45/gallon higher in the first quarter of 2018 compared with the 2017 quarter.”

The Chattanooga, TN-based carrier announced operating income of $6.4 million and an operating ratio of 95.7% compared with $0.3 million and 99.8% in 2017. Net income increased to $4.4 million (24 cents per diluted share) following a net loss of $39,000 in the first quarter of 2017. The loss in 2017 was attributed to a $600,000 claim due to a cargo claim judgment stemming from a cargo loss in 2008, the company noted.

Cribbs said that 2018 is shaping up well as the company expects continued economic growth as well as continued regulatory and demographic capacity constraints on driver availability.

“We expect year-over-year average freight revenue per total mile to be positive over the remainder of the year by a high single digit percentage,” he said. “The percentage may be greatest in the second quarter, when a large portion of our annual contractual rate revisions are scheduled and the comparison to last year's quarter is most favorable. The expected increase in yield will be offset in part by higher employee wages, the potential for miles per tractor to remain lower than last year, and inflationary factors. All in all, we expect meaningful year-over-year improvements in earnings per share each quarter of 2018.”

Noting specific company operations, Parker said the company’s three asset-based units – expedited, dedicated and solo refrigerated – produced an improved operating margin compared to the first quarter of 2017. Both expedited and solo refrigerated posted an approximately 500 basis points each improvement while dedicated posted a 100 basis points improvement.

Total revenue in the asset-based units increased $8.9 million to $154.5 million. On a per-tractor basis, revenue was up 6.3% for a total of $4.4 million higher freight revenue.

Intermodal revenues, though, fell $3.2 million. Parker attributed this to the winding down and closing of the company’s “unprofitable service offering within our solo refrigerated business unit during December 2017.”

In Covenant’s Transport Solutions non-asset based managed freight subsidiary, total revenue jumped 45% to $19 million versus $13.1 million in 2017 Q1. Operating income was approximately $1.1 million for an operating ratio of 94.4%, compared with operating income of approximately $1.4 million and an operating ratio of 89.0% in the first quarter of 2017.

Net margin in the unit declined due to competition for sourcing third-party capacity, Parker said, falling 800 basis points. Parker said operating ratio could fall further due to planned investments in employees and a new transportation management system.

Cribbs noted that Covenant expects to work closer with partners and increase capital spending toward dedicated, 3PL and other managed freight solutions.

“As we allocate our capacity in the currently robust freight market, we are seeking to partner with customers that will integrate us deeper into their supply chains, offer operationally friendly and seasonally manageable volumes, and respect our drivers’ time and value,” he said, noting that years of running electronic logging devices has helped the company maximize efficiencies in the current environment.

“As we pursue our goals, we expect the professional driver environment to continue to offer significant challenges as well as the opportunity to differentiate the Covenant group of companies as the carrier of choice for many drivers,” Cribbs said. “Many small competitors face the prospect of network disruption and substantially lower paid miles for their drivers due to the enforcement of mandatory electronic log requirements. Our network has been built on years of electronic log compliance, and we are actively working with our customers to maximize the efficiency and utility of our drivers’ hours of service. We expect to continue to reward our drivers with pay increases to maintain or improve our seated truck percentage.”

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