Labor, rising fuel and insurance costs, and the “frothy freight market” were key talking points on Covenant Logistics Group’s third-quarter earnings call Thursday with analysts.
Covenant beat analysts’ earnings-per-share and total revenue estimates for Q3, owing in large part to strength in its managed and expedited divisions. But Chairman and CEO David Parker said inflation is affecting the entire trucking industry and could wreak havoc on smaller carriers over the next year or so.
“There is a big inflation that we all have got to deal with, but the small carriers, it’s going to be decimating to them,” Parker said. “We’re negotiating equipment right now on numbers that are not earning, and I don’t know what a smaller company does. They are going to have a wall that they are going to have to go through.”
Company officials said inflation is increasing the cost of fuel, insurance premiums, labor, rent and equipment.
“If there’s any slowdown in the economy, some of those costs are not going to stop, and it’s going to be very difficult for the smaller carriers, there’s no doubt about it,” Parker said.
Covenant reported third-quarter earnings per share of $1.02 Wednesday, which beat analysts’ estimates by 2 cents. The company posted total revenue of $274.5 million, beating estimates of $234 million.
Covenant’s third-quarter net income of $16.4 million was a 119% increase from the same quarter last year.
Company officials said they expect to generate over $1 billion in revenue and the highest annual earnings per share in the company’s history during 2021.
Covenant (NASDAQ: CVLG), a truckload carrier headquartered in Chattanooga, Tennessee, offers expedited, dedicated and irregular route truckload capacity, as well as warehousing, transportation management and freight brokerage solutions.
Revenue per tractor per week increased 14% year-over-year to $4,644 during the third quarter, partially offset by a 6% decline in average tractor count at 2,370 units.
Joey Hogan, Covenant’s president, said the company aims to improve the profitability of its dedicated segment, to continue running expedited and managed freight for the long term, without getting caught up in the spot market.
“We’re focused on partnerships with shippers that are looking past today’s frothy freight market, and locking capacity that keeps our teams busy and productive, even during the slow times,” Hogan said.
| Covenant Logistics Group | Q3/21 | Q3/20 | Y/Y Gross Change | Y/Y % Change |
| TL Combined: | ||||
| Freight revenue (ex fuel millions) | $145.66 | $135.01 | $10.65 | 8% |
| Average tractors | 2,370 | 2,527 | -157 | -6% |
| Revenue per total mile | 2.16 | 1.83 | $0.33 | 18% |
| Average/revenue/week | $4,644 | $4,065 | $579 | 14% |
| Revenue/miles/quarter | 28,240 | 29,223 | -983 | -3.4% |
| Adjusted OR% | 92.4% | 93% | -60 bps | -0.6% |
| Expedited revenue | $85.29 | $78.41 | $6.88 | 8.8% |
| Dedicated revenue | $83.48 | $71.10 | $12.38 | 17.4% |
| Managed freight: | $90.00 | $47.60 | $42.5 | 89% |
| Operating income | $9.4 | $2.2 | $7.2 | 327% |
| Adjusted OR % | $89.5 | $95.3 | -580 bps | -6% |
| Consolidated: | ||||
| Revenue (ex fuel) | $250.26 | $196.21 | $54.05 | 28% |
| Adjusted operating income | $21,235 | $13,410 | $7,825 | 58% |
| Adjusted OR % | 91.5% | 93.2% | 170 bps | -1.8% |
| Adjusted EPS | $1.02 | $0.56 | $0.46 | 82% |
Covenant’s managed freight segment revenue grew 89% year-over-year during the third quarter, to $90 million, with operating revenue of $9.2 million. The results for the quarter were primarily attributable to the robust freight market, growth in customer base and handling of overflow freight from the company’s expedited and dedicated divisions.
“Managed freight was the largest division in the quarter, 36% of the revenue. Expedited and dedicated were about the same at 9%. Warehouse is at 6% and growing,” Hogan said.
Covenant’s dedicated freight segment reported revenue excluding fuel surcharges increasing 13% year-over-year, to $71.6 million during the quarter. However, the company reported an operating loss of $659,000 for the quarter in the dedicated freight segment.
Paul Bunn, Covenant’s senior executive vice president and chief operating officer, attributed part of the loss in the dedicated segment to driver issues, such as wages and availability, as well as equipment utilization.
“We did a lot of driver pay increases in the dedicated and expedited divisions; unseatedness was still pretty rough in July and August,” Bunn said. “I would say the team count on the expedited side actually went backwards, throughout the quarter, even in light of the pretty material increase in pay the first or second week of July.”
Parker said whether the trucking industry remains strong depends on whether supply chains improve and the economy keeps moving forward.
“Next year could depend on whether the economy stays where it’s at today or does it go backwards. That is something that we’ll have to watch and figure out,” Parker said.
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