Welcome to today's Covenant Logistics Group Q4 2021 earnings release conference call. Our host for today's call is Joey Hogan. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. I would now like to turn the call over to your host. Mr. Hogan, you may begin.
Thanks, Ross, and good morning, everyone. Welcome to our fourth quarter 2021 conference call. As a reminder for everyone, the conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risk and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. Please review our disclosures and our filings with the SEC, including, without limitation, the Risk Factors section in our most recent Form 10-K and our current year Form 10-Qs. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances. A copy of our prepared comments and additional financial information is available on our new website at www.covenantlogistics.com in the Investors tab.
I'm joined on our call today by our Senior Executive Vice President and COO, Paul Bunn, and our Chief Accounting Officer, Tripp Grant. David Parker's not able to join us this morning for the call. 2021 was a record year by Covenant in many ways. Revenue, our minority investment in Transport Enterprise Leasing, earnings per share, and return on invested capital all achieved record results. Our team battled through the continued effects of the pandemic, the most difficult driver market in history, huge growth in our managed freight division, and leadership changes early in the year. We pushed through some large pay adjustments across the enterprise in all areas conditions, warehouse teammates, and our office staff. Over the last year, we're excited to tackle 2022. The model transformation that we started five years ago is really starting to prove out with continued opportunities.
Our results for 2021 are directly due to the Covenant community, its hard work, and its commitment to each other, and our customers. In summary, the key highlights of the quarter were freight revenue grew 27% to $267 million compared to the 2020 quarter. Our asset-based truckload group freight revenue grew 9% versus the fourth quarter of 2020 with 186 less trucks. Our less asset-intensive managed freight and warehouse segments grew a combined 56% compared to the fourth quarter of 2020. On the safety side, we produced another solid quarter with our DOT accidents rate per mile being 19% below the year ago period, the second lowest fourth quarter on record. 2021 for the year finished the best year on record.
Our Transport Enterprise Leasing investment produced a record quarter and year, contributing an additional $0.10 per share versus the year ago period. We finished the year with an all-time low leverage ratio of 0.72, an all-time low net debt total capitalization ratio of 15.8%, and an all-time high return on invested capital of 13%. Additionally, we're very excited to announce the commencement of a quarterly cash dividend program. The work over the last few years to deleverage the company and improve our operating model to produce more consistent results led our board to this approval. Net indebtedness has decreased by almost $240 million over the last two years, with the potential to be close to debt-free by the end of 2022.
The goal is to yield 1% on an annualized basis, and at our current share count will impact cash by about $1 million per quarter. We continue to evaluate a full range of capital allocation alternatives to effectively deploy our cash. Now I'm gonna turn it over to Paul to provide a little bit more color on the items affecting the business units.
Thanks, Joey. For the quarter, our managed freight division was our largest division, both in terms of revenue and operating profit. Its revenue for the quarter grew 67% and achieved record revenue of $321 million for 2021. Managed Freight's favorable results for the quarter were primarily attributable to the robust freight market, executing on various spot rate opportunities, and handling overflow freight for both expedited and dedicated truckload operations. This division remains a major strategic growth opportunity as we have invested more operations and sales resources into the division to continue its momentum into the future. We remain excited about this leadership team and the prospects going forward. The expedited division's revenue grew by 13% versus the year ago quarter due to both strong rate and utilization improvements.
We did invest in our driving workforce during the quarter with a significant pay increase, which after several quarters of sequential decline, we were able to hold the fleet size versus the third quarter and increase our seated truck count. The driver pay investment was our third pay increase for the year and has given us momentum heading into 2022. We are very thankful that our customers value our service and supported our driving teams in this unprecedented time. The dedicated division had a good quarter and achieved nice sequential and year-over-year margin improvement. Despite some unusual corporate expenses that hit both expedited and dedicated in the quarter. Had it not been for the 250 basis points of unusual expenses in the quarter, dedicated would have hit the mid-90s OR target set at the beginning of the year.
Revenue per truck continues to improve as we push through our improvement plan, with further rationalization coming in the first half. The 21% revenue per truck improvement in the quarter was a significant contributor to the margin improvement. The pipeline for this division is very encouraging as we start 2022. The warehouse division grew 11% due to the impact of new business late in the third quarter and pricing to offset cost increases. Operating income was negatively impacted due to higher labor costs as it relates to the tight labor market and escalating real estate costs for newly leased facilities. We remain committed to our current asset light model and continue to pursue opportunities to accelerate our growth. We are excited about this year as the operating model continues to be refined.
We expect a good freight environment for the first half of the year with some moderation in the second half. Cost pressures will be meaningful in terms of wages, equipment, and over-the-road repairs for the year, but the market should allow us to pass the majority of those increases through to our customers in the form of rate increases. The first few weeks of the year were tough from a working per truck percentage, as many of our drivers were impacted by the virus after the holidays. The fleet working percentage has improved greatly in recent days, and we are especially pleased with where the team count is today. The dedicated improvement plan continues to make progress, and we are confident that we will continue to improve the margins to high single digits in 2022.
Net indebtedness is already dropping and should generate free cash in 2022, providing further opportunities to deploy cash for growth and/or share repurchases. Thank you for your time. We'll now open up the call for any questions.
Our first question comes from Scott Group from Wolfe Research. Please go ahead, Scott.
Hey, thanks. Good morning, guys.
Good morning.
In the earnings release you had some comment in the outlook section about operating results, similar, and maybe just can you give a little bit more color? I wasn't sure if that was a first half comment, a full year comment, if that's. You're talking about earnings. Just any more color in there would be great.
Yeah. I think, Scott, what we were trying to do. If we were confusing, apologize for that, but we feel based on what we see today, we feel that the first half earnings will approximate first half of 2021 or higher. We feel good between the combination of commitments from the customers and kind of what we see in the market. That's what we're intending to do. Second half from a modeling and/or planning purpose, we just you know, if the Fed continues to do their job and we're anticipating some slowdown in the second half. We were saying we felt we could do at least what we did in 2021 from an earnings perspective in the first half of 2022.
Okay, great. You gave some helpful color on dedicated margins. I'm curious how you're thinking about the expedited margins this year.
Yeah. Thanks, Scott, this is Paul. You know, I think expedited margins will probably approximate 21% for 2022. I think you could see margins. Q1 is starting off really strong. We've dedicated and expedited. We've done a good job getting out of the gate on rate increases early in the year. I think you see margins, you know, maybe a little stronger. As costs continue to pile up, they could dilute a little bit. Expedited, specifically to your question, I think will be similar margins to what you saw in 2021 on a full year basis.
Right. Maybe if I just take those two things combined. If expedited is similar and dedicated's got a lot of improvement, I would think there'd be some you know, potential for more, for earnings growth and better than flattish. Maybe just tie those two together.
I think in warehousing, you should see some small improvement there too. Pipeline is pretty decent. It's all gonna come down to managed trans in the overall freight market. If things stay really tight and managed trans has a year like it had this year, then we'll make more money in 2022 than we made in 2021. If you know, if things soften up a little bit in the second half of the year, you saw the large contribution that managed trans had, especially in the third and fourth quarters.
I think that's where we don't have the full visibility and so that's what could determine are we a little bit under this year's earnings or a little bit over this year's earnings, is where managed trans ends up the second half of the year.
Makes sense. Just lastly, just from a pricing standpoint, what you guys are seeing to start the year.
Yeah. High single digits to low double digits.
Okay.
From a rate standpoint.
Very helpful. Okay. Thank you, guys, appreciate it.
Scott.
Our next question comes from Jason Seidl from Cowen. Please go ahead, Jason.
Thank you, operator. Good morning, gentlemen, and my best to Dave who's not on the call. Wanted to talk a little bit about the pricing. In your script that you have out there online, you talked about how the contracts are elongating. You know, excluding dedicated, can you give us a sense of sort of what percentage of your contracts now are over a year?
Yes. I'll speak. You know, as you know, managed trans, there's not a lot of stuff that's over a year. It's pretty short-term opportunities, and as we've said before, that's where we play in the spot market. On the expedited, you know, we're probably somewhere in that 40%-50% of contracts that are multi-year in nature right now.
That's helpful. I wanted to switch back to the dedicated side. Now, you said if you exclude some of those unusual costs, which I'm assuming aren't going to reoccur in 2022, you're about 95 for the end of the year. You know, what sort of market do we need to get this business down to that low 90 level?
Yeah, I mean, I think some of it's market and some of it's time. I mean, if you look at the, you know, with on an adjusted basis, Jason, with, you know, you're at 95% and the thing had been running 100% or 101%, so, you know, we've improvement through there. We continue the weed and feed process. You'll remember, we entered some contracts in, you know, right on the heels of COVID and had some contracts that were longer term in nature that, you know, we've gotten the increases we could get, but they're still subpar to market.
As we roll out of those in the first half and second half of the year and either replace those with business that is, let's say, more market rate business and has more of a fixed variable pricing margin, or renegotiate those contracts to be more, I'll call it true DCC with fixed variable, you're gonna continue to see that improvement. I agree, you know. You're on about a 95% run rate for Q4, and I think you're gonna continue to see that, you know, inch down, you know, a little bit each quarter for the balance of this year. Are we gonna be at a 92% OR at the end of Q1? No. Do we hope to be there by the end of the year or first part of 2023? Yes.
All right. Well, it's the progress is definitely there. I didn't wanna insinuate it wasn't.
Yeah, yeah.
You talked a little bit about the contracts that weren't really true DCC. What percentage of the contracts that you have right now would you consider problematic?
Yeah. 30%, 40% of the contracts. There's, you know, half of those come up between now and August.
Okay. Well, that's a good sign for sure.
Yeah.
Well, fantastic, gentlemen. Those are my few, and, I'll turn it over to a colleague. Thank you for the time, as always.
Thanks, Jason.
Thanks, Jason. Our next question comes from Jack Atkins from Stephens. Please go ahead, Jack.
Great. Good morning, everybody. Thanks for taking my questions.
Good morning.
Good morning.
I guess maybe to start, I'd like to ask maybe a two-part question. First, you know, Joey, Paul, Tripp, whoever wants to take it, what are you seeing in the equipment market, both for trucks and trailers? If you could maybe think, help us think through how that's gonna change, if it changes at all, over the course of 2022. Then I guess kind of as it relates to Covenant specifically, you know, within your equipment leasing investment tell, you know, it's obviously a very strong contributor to the bottom line. You know, can you help us think through how that should maybe trend as we look forward?
Yes. We did have some trucks pushed from 2021 into 2022. It was a small amount about 50 trucks that pushed into first part of 2022. We'll have those by March, so they're satisfying the commitment from 2021. Our 2022 initial order, as well as everybody's, what you wanted, you didn't get. You got a percentage of that for 2022. You know, we've worked around that from various means. We got about 70% of our requested order for 2022. Now, for us, I don't say quote, "That's okay," but we're trying to pull some equipment forward that we were having problems with that we wanted to kind of transition to another manufacturer inside of our suppliers. For us, it's okay.
Trailer market, the pricing's up pretty meaningfully on the truck side, but I would say it's manageable. The trailer side is a different ballgame. You go look at our trailer capacity, it's pretty concentrated in a few years. Our big years to start trading trailers will start in 2023 and will go on 5 or 6 years. We tried to get an order placed for 2022 and got zero to try to start moving that schedule forward to smooth out that concentrated purchase cycle. We got zero. I mean, not even a quote of pricing. I mean, we're not a huge fleet, but we're not a small fleet.
You know, basically from all the suppliers, look, we can't commit anything, and we'll talk to you late in 2022 for 2023 and beyond. We've even tried to float a five-year commitment, five-year committed capacity. Again, no biters, but folks willing to talk in the end of 2022. Pricing in that market, from what I understand, is up significant, just significant. There's various theories and reasons why, but it's up significantly. TEL, on the other hand, our investment is TEL, it's in this business. It's in the truck trailer sale, resale, leasing business. Obviously, it had a good record actually. I believe strongly we'll have another record 2022. They were able to get some trailer capacity. That's their business.
They're paying about 25%ish more, and they will pay more for that in 2022. Reefer pricing, I can't even say the number, and I won't say the number because it's almost ridiculous what I'm hearing what he's having to pay for reefer. On the other hand, the pricing he's been able to get out in the market to lease that equipment is unbelievable also. TEL's doing really well. I mean, the $5 million-ish number in the fourth quarter that they contributed to our results, you know, some of that was gain on sale. They're a very opportunistic buyer also in the marketplace, and they do a great job. But it's definitely gonna be higher than what we've seen over the last year or so in 2022.
They're gonna have a really good year. We buy trucks and trailers together. Between the two of us, we obviously have a pretty good size fleet between trucks and trailers. We chose to let them have the trailer capacity because they had opportunities this year, and between the two of us, we'll sort it out in 2023 for going forward. Equipment market's real tight. Just one other note, our trucks that were pushed in the fourth quarter into the first quarter are being delivered slightly early, which is a blessing versus over the last year or so. The schedule that's been committed to on the schedule and no further delays that we know of.
Just had to add on to Joey's point about kind of the size, give you some context. In 2021, it was a very, very light year from a CapEx perspective, obviously. We've talked about it throughout the quarters and had a little bit of a bump up with some deliveries in Q4 of 2021. Over the course of the year, we had, I think, net proceeds of ten million dollars or such rounded. As we think back to 2022, just to give you kind of an idea of the scale of what, you know, how it'll look, you know, with the equipment purchases, even though it wasn't as much as we had ordered with the cutbacks and assuming things well, you know, we're looking at a range of about $50 million-$70 million of net CapEx for the year.
There's quite a big swing as we try to normalize our CapEx flow in terms of maintenance CapEx and get it back to a normal course. A lot of which stems back to what we did in 2020 with the downsizing of the fleet and shrinking it and selling a bunch of older equipment. It naturally made 2021 a light CapEx year. You're gonna see a little bit of a rebound in 2022 and probably even a bigger rebound in 2023 as trailers come into the equation.
Okay. Got it. That's helpful. I guess when we're thinking bigger picture, you know, Joey, going back to your comments, you know, in your prepared remarks, you know, around the market and sort of the outlook for the market and how it could unfold this year, you know, it doesn't seem like there's going to be an influx of capacity coming just because of the items you just talked about on the equipment side.
You know, when you kind of think about the idea of the second half maybe being a little bit, you know, more of a moderation in terms of the marketplace versus the first half, is that because of your outlook for the economy, just concerned about the Fed, or is it something that your customers are maybe telling you about their business in the second half of the year?
Just the economy. I mean, when the Fed starts raising rates, it's intending to slow the economy down. If they do, and there's a lot of rhetoric around that, is it four? Is it eight? Is it three? History shows that it's impactful. Now, the question is how big and when do we start seeing it? We certainly know it's within six months or so. That's what history shows. Now, if this is different because of Drug and Alcohol Clearinghouse, because of infrastructure spending, which is a natural competitor to our drivers, the construction market in general, you know, is hot and low inventories. Inventories to sales is still very low.
You know, is there some things that overcome that to delay that impact into the economy that pushes it out, you know, or the freight side is minimal impact because of that? I find that hard to believe, but we'll see. That's just that. No, there's no indication from customers regarding, you know, any anticipated slowdown. Now, nobody's talking about peak either, but it's way too early to be talking about peak.
No, that sounds good. I guess the question is, have we even stopped with peak yet? Maybe, maybe not.
That's right.
I guess last question, and I'll turn it over. You know, it's on capital allocation. You know, obviously, there have been some just significant improvements to the balance sheet over the course of the last couple of years because the actions that you guys have taken. Business is hopefully more profitable through cycle. You know, I think that's. I think folks are looking forward to that. You know, the stock is kind of back down to the levels where you guys sort of initiated the Dutch tender last year. You initiated the quarterly dividend. Help us think through, you know, ways that you're kind of contemplating returning capital to shareholders, outside of the quarterly dividend.
You know, would you look to maybe get more aggressive on open market purchases of the stock, just given that the Dutch tender really didn't yield the type of, you know, reduction in share count that maybe you were initially intending? Could you maybe kind of walk us through some of the capital allocation strategies, just given the strength of the balance sheet here?
I think, let's go back to you know, the expectations for cash generation for the year. Depends on whatever modeling that everybody has as far as what they expect, you know, even now to contribute for 2022. We feel that even with $50 million-$70 million of net CapEx, we will still generate cash for 2022. The dividend, relatively speaking, the cash impact to that is small. It's around $1 million a quarter. We felt it was not only a commitment, but a signal to the market and our shareholders that, you know, it's time just because of where we are. Number two, you know, what are we gonna do with the cash generated this year and what we see into the future? I would say, Jack, it's all of that.
We firmly and fully intended to execute the Dutch auction in full. You know, some people would say that we executed it without having to use the cash. Our intent was to use the cash. You know, people, they ran away from us because we just, I think, we kind of woke the market up, and Covenant's gonna buy this too cheap, and I'm not gonna sell it at this price because it ran much higher than what our generous, at the time of announcement, offer.
Sure. Yeah, absolutely.
Based on history though. It ran away from us, and our intention was to execute that. As we move forward, obviously, Jack, I can't. I mean, we're looking at M&A. You know, our last one of size was 2018, and we feel the model's at a place that our team can focus and execute, you know, another acquisition size. I don't know. I mean, there's some things, there's some strategic smaller ones that make sense, that are good complements, and there's some larger ones that, you know, are larger, you know. Similar to what the Landair acquisition was back in 2018. We're in the market looking. We're in the market looking at further, you know, whether it's normal share repurchases, Dutchs, whatever.
We're gonna move, and the dividend was a start, if you will, and we'll see how it plays out. We're excited about it. It's neat to be in a cash generation mode because it gives you a lot of opportunities, and we're gonna try to be diligent about deploying that cash in the right means.
Okay, that's great. Thanks so much.
Thanks, Jack.
Our next question comes from Bert Subin from Stifel. Please go ahead, Bert.
Hey, good morning, everyone.
Morning, Bert.
Morning, Bert.
Hey. Joey, just to follow up to your comments there, what is your view on inventory restocking? Seems like there's been some concerns that perhaps retail sales start to moderate through the year. You know, inventory sales ratio is still at all-time lows. Are you noting any actions to rebuild inventories? Do you think that could be an offsetting tailwind as if the economy does moderate from high levels in upcoming quarters?
You know, Bert, we met with a large customer yesterday that carries a lot of inventory. Yes, I think that restocking and carrying more inventories, building more warehouses. I mean, this company basically said, everybody knows what they need to do post-COVID, which is keep more inventory domestically. They've just gotta get there, and it's just been a firefight ever since COVID. Again, that's a poll of one, but if it's a really large company that it carries a lot of inventory, and their comment was that that has not happened yet.
Oh, yeah.
They are making plans every day to try to do that, to increase inventory levels, domestically.
It'll in two phases. I think, you know, whichever your favorite stores are, as we walk through the stores, as we see the empty shelves start filling, you know, whenever it gets to fill, I think it'll be moving into the next phase, which is how do I fill the warehouse or do I add warehouses? I think that's a general, whether you read it or hear it directly, I think people are saying, "Okay, we got too skinny," obviously. Now, you know, pandemics once every hundred years, we hope. We've got one that's lasting a while. Even besides that, I think the market in general feels that
We were too skinny. I think to your point, Bert, is depending on that view, it could delay, you know, as I was saying earlier, it could delay that impact to the freight side of the economy as people are trying to push through that. It just depends on rates. Some CFOs doing the plus and minus on cost of capital and when does it make sense. I'd rather have more inventory than empty shelves. The cost of capital is still pretty cheap. They can move a lot, and it's still cheap, relatively speaking.
That makes sense. Thanks for the commentary there. Paul, my fellow national champion, my follow-up question is for you. How good do you think the improvement in dedicated would have to be to more than offset what you're expecting to be, it sounds like some normalization in managed freight. Like, can you just give us, like, a rough order of magnitude perhaps on OR improvement?
Yeah. To offset it, dedicated would have to be. It would have to be in the eighties to get anywhere close. Once, you know, on a longer-term basis. I don't think dedicated will get there this year, but I don't think managed trans will drop that much. I mean, it's gonna drop probably in the second half of the year. To fully offset it'd have to be in the eighties probably.
Okay. Thanks. Can you just.
Go ahead.
Our next question comes from Bruce Olephant from Oppenheimer. Please go ahead, Bruce.
Thank you. Congratulations on an excellent year. The one thing that I know was just covered, but I have to mention it, the one thing that's a little bit disturbing is that, back in August, the company realized their stock was extremely undervalued, and you decided to have, you know, a Dutch auction. It took me $40 million to purchase roughly 1.7 million shares, which represented about 12% of the outstanding shares. That sort of sent a signal, you know, to Wall Street and investors that you thought your stock was extremely undervalued.
Now with the stock, you know, where it is today and selling at less than 7x earnings, it's sort of disappointing that what we got was a small dividend, you know, for shareholders rather than you know management realizing, you know, some kind of buyback. It's almost like the only 80,000 shares got tendered on the Dutch auction. We never really raised the price, which we could have done, and it's sort of disappointing that there's no action, you know, taken right now.
Yeah, it's a fair question, Bruce. As I said earlier, we fully intended to do that, spend that cash. Arguably, we still have that cash. There's several things that go into the decision and the actions and the timing. We're still very interested and feel it, whether it's 7x earnings or 1.3x tangible book value, we agree with you and we're working diligently to, as I said earlier, to deploy our cash in the best means that we can.
Okay, thank you. I hope something is done.
Yep.
We have a follow-up question from Bert Subin. Please go ahead, Bert.
Hey, sorry. I got sort of cut off there at the end. I just had a quick follow-up to an earlier question. You guys said high single- to low double-digit rate increases. Can you break that out among dedicated and expedited? Thank you.
Yeah, it's probably. I would say they're pretty similar, Bert. I mean, there's not a ton of differentiation between the two. You know, you probably got expedited, it's probably a little higher on the rate side. They're probably in the low double digits, and dedicated is probably in the high single digits. Both business units are about the same size, you know, from a revenue perspective. You know, if one's 11% or 12%, or 13%, the other's 8% or 9%.
Okay. That's helpful. Thanks, Paul.
Gentlemen, at this time, there are no further questions.
Okay. Well, thanks, everybody, for being on the call. Thank you for your questions. Bruce, again, fair question, and we agree with you. Everybody hang tight. We look forward to meeting with you all and visiting with you after the first quarter. Thanks a lot.
This concludes today's conference call. Thank you for attending.