Covenant Logistics : 4TH QTR 2020 SCRIPT

Covenant Logistics Group 4th Quarter 2020 Conference Call

Mr. Bunn - Welcome to the Covenant Logistics Group fourth quarter conference call.

As a reminder:

This 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 risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. Please review our disclosures in filings with the Securities Exchange Commission, 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 the prepared comments and additional financial information is available on our website at www.covenanttransport.com/investors. I'm joined this morning by Chairman & CEO, David Parker, and co-Presidents John Tweed and Joey Hogan.

In summary, the key highlights of the quarter were:

• The strong freight market continued across all segments and markets, attributable to expanding economic activity, inventory restocking, and an ongoing shortage of qualified professional truck drivers. Against this backdrop, our strategic plan showed significant progress, resulting in better adjusted margins, improved capital efficiency, and a de-leveraged balance sheet that affords significant financial flexibility going forward.
• Our revenue was approximately the same on a fleet that is nearly 18% smaller than the same quarter last year,
• We paid down over $200 million in debt and lease obligations versus December 31, 2020 and $51 million since the end of the third quarter.
• The ability to attract and retain drivers was as difficult as any market in recent history and COVID complicated driver availability due to downtime of drivers and shop technicians
• Our mix was impacted in terms of revenue and profit, as the result of shifting freight to our Managed Freight segment when Expedited and Dedicated did not have a driver available
• Our 49% equity investment Transport Enterprise Leasing returned to its historical profitability level, generating a pre-tax income contribution of $3 million compared to a loss of $0.5 million in the 2019 quarter
• We recorded a $44 million non-cash charge in relation to discontinued factoring operations that could become a cash item in future periods. This is nearly our entire exposure of $45 million. Together with other adjustments, the total adjusted number was $47.8 million for the quarter.

Turning to more detailed results, notable financial results of the quarter included the following:

• Our Expedited truckload segment's revenue, excluding fuel surcharges, decreased 13.9%, primarily related to a 27.5% decrease (or 353 tractors) in average operating fleet compared to the 2019 period. Versus the year ago period,

average freight revenue per total mile was down 10 cents or 5.1%, while average miles per tractor was up 25.2%, resulting in an 18.8% increase in average freight revenue per tractor. The significant fluctuations in the operating profile are the result of 1) change in mix to a more focused expedited model using a higher percentage of team- driven tractors, and 2) eliminating the majority of the solo refrigerated fleet and related cost. Expedited' s adjusted operating ratio for the quarter was 91.2%.

• Our Dedicated truckload segment's revenue, excluding fuel surcharges, decreased 14.2% to $62.0 million due primarily to a 10.5% (or 183 tractors) average operating fleet reduction compared to the 2019 period. Another key driver of the reduction was due to utilization. Compared to the fourth quarter of 2019, total miles per unit declined 10.2% as a result of driver shortages in 2020. This miss in utilization was partially offset by a 13 cent or 6.9% increase in rate per mile. Dedicated' s adjusted operating ratio for the quarter was 99.9%. As Joey will explain in detail, this is really a "Tale of Two Cities," as half of our Dedicated fleet operated at acceptable margins, and the other half operated under contracts that need to be replaced or repriced.
• Excluding the impact of the truckload-related fourth quarter 2020 adjustments, total operating expenses decreased 13 cents per mile, compared to the year ago period. This decrease is a direct result of our strategic plan initiatives of downsizing our terminal network and solo-driver fleet, short term cost reductions to improve liquidity in response to COVID-19, and additional miles per tractor that more effectively spread fixed costs.
• Our Managed Freight segment's operating revenue increased 51.3% versus the year ago quarter to $64.9 million. The significant improvement in revenue is primarily attributable to the robust freight market, executing various spot rate opportunities, cost structure improvements that were implemented as part of our strategic plan and handling overflow freight from both expedited and dedicated truckload operations Managed Freight's adjusted operating ratio for the quarter was 91.5%.
• Our Warehousing segment's operating revenue increased 25.8% versus the year ago quarter to $14.6 million, primarily as a result of new customer business that began operations in the third quarter of 2020. Adjusted operating income for the segment decreased 3.9% to $1.5 million from the prior year quarter Warehousing's adjusted operating ratio for the quarter was 89.6%. The decline in adjusted operating ratio is primarily due to labor inefficiencies that spiked in the fourth quarter as a result of the COVID-19 pandemic.

At this time, I will turn the call over to Joey to recap a few additional items.

Mr. Hogan - Thank you for that summary Paul.

The main positives in the second quarter were 1) a robust freight market across all of our service offerings, 2) a significant reduction of our net indebtedness, 3) a reduction in fixed costs and better cost absorption given increased asset utilization,

1. TEL's improvement in earnings and 5) the flexibility and customer service provided by the efficient use of our Managed Freight segment to cover customer needs when Expedited and Dedicated lacked a driver. The main negatives in the quarter were 1) one of the toughest driver recruitment and retention markets in 20 years, 2) COVID's negative impact of driver and

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truck availability, 3) less excess capacity for capitalization in the spot market, 4) the increase in casualty insurance cost versus both the prior year and prior quarter resulting from several severe accidents in the third and fourth quarter of 2020 and 5) the loss contingency accrued related to the TBK indemnification.

Going forward, our focus will be continued execution of our strategic plan, which consists of steadily and intentionally growing the percentage of our business generated by Dedicated, Managed Freight, and Warehousing segments, reducing unnecessary overhead, and improving our safety, service, and productivity. This will be a gradual process of diversifying our customer base with less seasonal and cyclical exposure, improving legacy contracts, and investing in systems, technology, and people to support the growth of these previously under- invested areas. Approximately one-half of our Dedicated fleet operates under contracts that generate insufficient returns and require replacement or renegotiation. The freight environment and our new business pipeline are both currently robust, which we believe will support our commercial plan. While this will take time, we believe our existing pipeline will produce ongoing sequential progress during 2021.

Going into 2021 we are facing cost increases from the end of our short term COVID-19 programs, increased wages, and higher insurance and claims expense. Effective January 4, 2021, we implemented the largest pay increase in the Company's 35-year history for our Expedited driving force in an effort to increase our team count to targeted levels. In addition, we have replaced our former $9 million in excess of $1 million layer of auto liability insurance with a new $7 million excess of $3 million policy that will run from February 1, 2021, through March 31, 2024. While the combination of the increased retention and premiums is forecasted to increase our insurance and claims cost, eliminating the gap in coverage created in the third quarter of 2020 that resulted in a self-insured retention of $10 million per claim has been a focus area to minimize forward looking volatility. Additionally, yesterday, we announced a share repurchase program affords us significant flexibility to allocate capital toward the expected most favorable results for our shareholders. Our stock has traded around book value for the last several months and we believe the flexibility resulting from the reduction in debt over the last 9 months may create an opportunity for us to invest in ourselves, given doing so is less disruptive than an acquisition or alternate use of cash flow.

Mr. Tweed - Thanks' Joey.

I wanted to say a few words around my transition into a consulting role, effective July 2020.

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First, let me reiterate how well the integration of Landair, the Company I sold Covenant over two and a half years ago, has gone. We have capitalized on the strengths of both companies and are better positioned now than ever before. I could not be prouder of how things have developed and set-up for long-term success.

We are ahead of schedule on a number of the goals and objectives that were scheduled for 2021 and 2022. My strengths are in building customer relationships, establishing accountability, and managing overhead and returns. The next generation has greater strength in institutionalizing these processes, and they are ready to take over. I will continue to transition customer relationships and add training and development as needed. I have as much confidence in the team we have assembled as any team I have worked with in my career.

Thank you for your time and we will now open the call for any questions.

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