Covenant Transportation Group (NASDAQ: CVTI) reported adjusted earnings per share (EPS) of $0.35, in-line with its previously lowered guidance and the new consensus estimate of $0.34.
The Chattanooga-based carrier recently announced that it wouldn’t be able to meet its prior guidance, which called for second quarter 2019 adjusted EPS to be “fairly consistent with the prior year quarter” in which it reported EPS of $0.54. CVTI said the lowered EPS guidance range for the second quarter of 2019 of $0.34 to $0.35 was due to a sluggish freight environment caused by excess inventory levels, a soft produce season and excess truck capacity.
Takeaways from the call
Management said that “the Industry has hit a bottom.” They believe that the one-way truckload (TL) market bottomed in mid-May, as conditions improved throughout June with a little bit of a retreat seen in July. They believe that capacity is coming out the market as truck orders have fallen off and cancellations have increased. They said that one heavy-truck original equipment manufacturer indicated that recent order cancellations have doubled.
CVTI didn’t provide official third quarter 2019 earnings guidance, but noted that there should be some sequential improvement in the third quarter compared to the second quarter. They have struggled with their refrigerated business this year as produce season was negatively impacted by prolonged inclement weather. That said, they saw improvement in June as more capacity commitments from their customers were met and said that July was “okay.” They said that they had some execution issues in the dedicated business that have been resolved and believe that this offering, along with one-way, will improve sequentially.
Additionally, utilization should improve, likely only down 2 to 3 percent as tough comps from the Landair (warehouse and logistics provider) acquisition lift. That said, they believe that rate per total mile, which was down 2.9 percent year-over-year in the second quarter excluding Landair, will be down in the range of 5 to 7 percent for the third quarter. In summary, they are “feeling better about the business” as they move from the second quarter of 2019 to the third quarter.
Financial results
CVTI reported total revenue of $219.3 million, up 11.7 percent year-over-year, with freight revenue increasing 14.2 percent to $194.9 million. Adjusted operating income of $9.6 million declined 31.9 percent year-over-year, producing an adjusted operating ratio (OR) of 95.1 percent, 330 basis points worse.
“Our financial results for the second quarter illustrate the reason for our strategy of becoming more embedded in our customers’ supply chains. Our dedicated contract operations in our Star and Landair subsidiaries, along with our managed freight and factoring businesses, and our investment in [Transport Enterprise Leasing], performed quite well. On the other hand, our less contracted expedited and solo refrigerated operations suffered from over-supply in relation to demand and a late-developing produce season. We intend to continue to pursue a more predictable and consistently profitable business model as we allocate assets across our operations,” said Covenant’s Chairman and Chief Executive Officer David R. Parker.
CVTI’s TL division reported revenue of $151.2 million excluding fuel surcharge revenue, which was 4.2 percent higher year-over-year. This was a combination of a 485-unit increase in average tractors for the period with average freight revenue per tractor per week declining 12.1 percent to $3,767. Average freight revenue per loaded mile increased 0.6 percent to $2.04. The bulk of the growth in the average truck count was related to the Landair acquisition, which contributed $20.6 million of freight revenue to TL operations.
Management attributed the decline in truck utilization to the Landair acquisition, which resulted in a decline in the percentage of the total fleet that was operated by team drivers and a shorter length of haul. These factors were only partially offset by a 90 basis point decline in CVTI’s seated truck percentage to 4.3 percent.
The company’s managed freight division (brokerage, transportation management services, shuttle and switching services, warehousing, and its accounts receivable factoring business) reported revenue of $43.7 million, which was 70.8 percent higher year-over-year. Operating income in the division was $3.7 million, $1.4 million higher year-over-year with an 80 basis point deterioration in OR at 91.7 percent. Without the Landair acquisition, revenue would have been $3.1 million lower than the second quarter 2018 period.
Total debt, net of cash, was $294.5 million ($249 million in the first quarter of 2019) for a net debt-to-capitalization ratio of 45.6 percent. Net debt-to-last four quarters’ earnings before interest, taxes, depreciation, amortization and rental expense (EBITDAR) adjusted for the Landair acquisition increased to 1.8x from 1.7x in the first quarter of 2019 and 1.5x at the end of 2018.
CVTI took delivery of 726 new company tractors, disposing of 304 used tractors in the first half of 2019. The company expects to see full-year delivery of approximately 1,340 new company tractors, disposing of 1,250 used tractors. In total, management expects the tractor fleet to decline 2 to 3 percent in 2019 compared to the 3,154 tractors it was operating at the end of 2018. The tractor replacement activity will depend on “our ability to secure additional long-term dedicated contracts from shippers and our ability to hire and retain professional drivers to seat our tractors.”
Covenant’s Chief Financial Officer Richard B. Cribbs concluded, “For the second half of the year, our focus will be on identifying opportunities to improve the performance of our one-way truckload service offerings and adding profitable contract logistics service customers with more predictable long-term contracts in our dedicated truckload, transportation management and warehousing service offerings.”
Shares of CVTI are up nearly 3 percent.
