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Hogan: Strong quarter for Covenant, but costs of trucking keep rising

Covenant Logistics had one of the later earnings releases among truckload carriers. But some of the comments from President Joey Hogan on its earnings call Thursday summarized the market conditions facing carriers following a bountiful first three months of the year.

It was Hogan’s overview of the cost side of the ledger that could be applied to other truckload carriers as well.

Hogan noted that Covenant (NASDAQ: CVLG) raised wages several times last year “in a market where we had to move.” Margins overall in the past year have improved, “but it wasn’t like stupid improvement because costs were exploding. And even though wages might be moderating now, there are other increases still coming.”

“We had another pass-through on equipment last week that came out of nowhere,” Hogan said. He then listed other areas of expenses that are rising, over-the-road repair and parts among them.

One cost that got little attention: fuel. That would also be seen as a pass-through through the use of fuel surcharges. 

That means that Covenant and other trucking companies will need to continue to secure higher rates. “Will they be as frothy as this year?” Hogan asked. “No. But we’re still happy with what’s going on.”

In the prepared portion of the earnings call, Hogan said of the company’s relationship to spot rates that the contract market “is where most of our freight comes from” and “which our customers tell us will retain consistent demand for the remainder of the year.”

He also addressed whether higher driver wages were in the offing. The answer appears to be no. “After multiple increases in 2021, we feel our driver pay is in good shape at the present time but continue to watch closely,” Hogan said. 

Answering analyst questions on the call, Hogan said he believed Covenant was “going to have a really good second quarter.” The company boasted of the fact that the first quarter of 2022 was sequentially better than the fourth quarter of 2021, a rarity in the truckload world.

COO Paul Bunn, asked about the second quarter, said the company’s Expedited group could be “flattish” sequentially, and he used the same term to predict how Covenant’s significant warehousing business would do. Managed Freight, the company’s name for its brokerage division, is a “wild card,” Bunn said, but it will probably “pull back” from the first quarter.

Bunn and Hogan made several references to Covenant’s change in its model, which has been discussed on other earnings calls: It will no longer chase freight opportunities for the sake of the chase. That may have cost the company some opportunities in the quarter, but Bunn expressed no regrets.

“Over the last couple of years, we’ve really tried to make sure we are aligning ourselves with customers where we’re adding value,” he said. Covenant is no longer a “rate shop play,” he said, “and we don’t take as much advantage of the market as we could have.”

Although Covenant is known primarily as a truckload carrier, the shift to more contract business and away from heavy reliance on spot prices means that the Managed Freight segment — its brokerage arm — is going to be probably the major factor in determining whether the run of higher profits at Covenant can continue. Managed Freight and the Warehousing segment together provided about 50% of the company’s operating profit in the quarter. 

Managed Freight-produced operating income in the quarter was about 88% of the Expedited and Dedicated segments combined. Adjusted operating income for the brokerage arm was $10.87 million, while the combined truckload operations were $12.27 million. 

Bunn said brokerage at Covenant is “really going to determine” the performance of the company in the second quarter and going forward, in part because of the volatility of broker margins.  Hogan said brokerage margins this quarter so far are “about the same” as the first quarter, but that revenue is down. 

In another area of discussion, analysts asked about the Covenant acquisition of speciality hauler AAT Carriers in the first quarter. Hogan said AAT is “a small operation but profitable.” Much of the work it does is a “very specialized” operation that primarily works for the federal government, and the freight it carries is often munitions into federal facilities. 

Where the acquisition is particularly notable is the opportunity for Covenant drivers, Hogan said. Drivers needed to have a strong safety record. Trucks at AAT are all team drivers. 

Jobs in that group will pay “very, very well,” Hogan said. “We’ve got some neat growth opportunities, and it gives our drivers another opportunity in their career path.”

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