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Covenant Reports Strong Revenue Growth, But Number Of Team Drivers Falls Again

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Covenant Reports Strong Revenue Growth, But Number Of Team Drivers Falls Again
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Covenant Transportation Group (NASDAQ: CVTI) reported a total revenue jump of 19.5 percent to $196.3 million in the second quarter of 2018 during its earnings call Thursday. The company also posted a 17.2 percent increase in freight revenue to $170.6 million year-over-year.

Covenant Chairman and CEO David David Parker attributed the increase in freight revenue to a 14.2 percent increase in average freight revenue per tractor, partially offset by a $3.3 million year-over-year reduction in intermodal revenues.

The reduction came because the company "effectively discontinued [that] consistently unprofitable service offering within [its] solo-driver refrigerated truckload unit during December 2017," according to Parker.

Average freight revenue per tractor per week increased to $4,287 during the second quarter, a 14.2 percent climb since the second quarter of 2017. Average freight revenue per total mile also jumped 14.7 percent to $1.86 and average miles per tractor fell 0.4 percent.

"The main factors impacting the decreased utilization was the 560 basis point decrease in the percentage of our fleet comprised of team-driven trucks and a lower average seated truck percentage," Parker said. "Team-driven trucks decreased to an average of 878 teams (or 33.7 percent of the total fleet) in the second quarter of 2018 versus an average of 1,012 teams (or 39.3 percent of the total fleet) in the second quarter of 2017. On average, approximately 5.2 percent of our fleet lacked drivers during the 2018 quarter compared with approximately 4.8 percent during the 2017 quarter."

During last quarter's earnings call, Parker said the company was 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.

Covenant reported fewer team-driven trucks during the second quarter of 2018 than the first quarter of 2018. Last quarter, the company reported an average of 894 teams (or 34.9 percent of the total fleet.) It has, however, brought its number of unseated trucks down from 6.2 percent during the first quarter to 5.2 percent during the second quarter.

Covenant's fleet increased to 2,632 trucks by the end of June, a 56 truck increase from the company's fleet size at the end of March. Covenant experienced a 27-truck increase in independent contractor trucks during the quarter.

Total truck miles increased 0.7 percent over 2017, while the average length of haul rose to 894 miles from 880 miles in that same time. The company's deadhead percentage dropped to 8.3 from 10.4 last year.

Driver wages and related expenses climbed 7.3 cents per total mile, which Parker attributed to employee pay adjustments since the second quarter of 2017. He said this figure was partially offset by the drop in team-driven trucks and "improved workers' compensation expense."

Covenant's rate of accidents per million miles remained essentially the same when compared to the second quarter of 2017, but insurance and claims expenses climbed from 10.1 per mile in 2017 to 12.6 cents per mile in 2018. Parker called this jump "the expected outcome of certain casualty insurance claims.".

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The company reported a net fuel expense decrease of 3.4 cents per total mile, thanks to improved fuel hedging activity. It reported $0.5 million of fuel hedge gains in the 2018 quarter compared with $1.5 million of fuel hedge losses in the 2017 quarter.

"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 said. "These favorable items were partially offset by increased fuel pricing. Ultra-low sulfur diesel prices as measured by the Department of Energy averaged approximately $0.65/gallon higher in the second quarter of 2018 compared with the 2017 quarter."

Covenant's average tractor was 2.1 years old in the second quarter of 2018 compared to 2.2 years old in the second quarter of 2017.

"Between December 31, 2017 and June 30, 2018, total indebtedness, net of cash and including the present value of off-balance sheet lease obligations decreased by $56.2 million to $163.9 million," Covenant leaders said in the earnings call. "This subsequently increased to approximately $269.0 million pro forma for the acquisition of Landair and its subsidiaries announced July 5"

The company reported a net operating income of $14.1 million and an operating ratio of 91.8 percent, compared with operating income of $4.0 million and an operating ratio of 97.3 percent in the second quarter of 2017.

Covenant's net income came in at $10.0 million, or $0.54 per diluted share, compared with net income of $1.5 million, or $0.08 per diluted share in the second quarter of 2017.

In Covenant's Transport Solutions non-asset based managed freight subsidiary, total revenue jumped 53.4 percent to $19 million versus $25.6 million. Operating income was approximately $2.3 million for an operating ratio of 90.9 percent, compared with operating income of approximately $1.6 million and an operating ratio of 90.5 second in the second quarter of 2017.

"Due primarily to a more competitive market for sourcing third party capacity, Solutions' net revenue margin declined by 510 basis points versus a strong 2017 quarter," Parker said. "However, the revenue growth in the 2018 quarter helped spread the SG&A costs so that the operating ratio did not slip significantly as compared to the 2017 quarter."

Parker said he expects margins to be in the mid-to-high teens for the balance of 2018.

Executive Vice President and Chief Financial Officer Richard Cribbs predicted that business conditions will remain favorable throughout the second half of 2018 and into 2019, thanks in part to high freight demand and the anticipation of a robust peak season.

"From a capacity perspective, attracting and retaining highly qualified, over the road professional truck drivers remains our largest challenge," Cribbs said. "Low unemployment, alternative careers, and an aging driver population are creating an increasingly competitive environment. In this environment, we continue to work actively with our customers to improve driver compensation, efficiency, and working conditions while providing a high level of service and generating acceptable financial returns."

Cribbs said he expects the third quarter operating ratio to be similar to the consolidated operating ratio for the second quarter, with the addition of revenue from Landair's operations. He said Covenant expects to remain a major participant in peak season shipping, and as such expects consolidated operating ratio and consolidated earnings per diluted share to improve compared with the fourth quarter of 2017.

"However, due to changes in team versus solo-driver mix, dedicated versus irregular route capacity, and managed freight capacity, as well as the need to complete purchase accounting entries relating to the Landair transaction, we are not offering more specific earnings guidance," Cribbs said. "In addition, our prior comments about expectations for the second half of 2018, including percentage rate improvements versus prior periods, are superseded."

Covenant's stock had dropped 3.92 percent as of 12:51 p.m. Thursday.

 IMAGE: SONAR CHART OF COVENANT STOCK PRICE YEAR TO DATE

IMAGE: SONAR CHART OF COVENANT STOCK PRICE YEAR TO DATE

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