Covenant Logistics Group, Inc.

Welcome to today's Covenant Logistics Group Q1 2025 Earnings Release and Investor Conference Call. Our host for today's call is Grant. At this time our participants will be in a listen-only mode. Later we will conduct a question and answer session. I will now like to turn the call over to your host. Mr. Grant, you may begin. Good morning everyone. Welcome to the Covenant Logistics Group

first

quarter 2025

conference call. As a reminder, this call will contain forward-looking statements under the Private Securities Litigation Reformat, which are subject to risks and uncertainties that could cause actual results to differ materially. Please review our SEC filings and most recent risk factors. We undertake no obligation to

publicly update or revise any forward-looking statements. Our prepared comments and additional financial information

are available on our website at .covenantlogistics.com slash investors.

Joining me on

the call today are CEO David Parker, President Paul Bunn, and COO Justin Cale. Before diving into the details, I'd like to begin by saying that the -over-year changes in the rate of fixed cost per mile and employee cost per mile and fixed cost per mile all increase. The -over-year changes are more indicative of business necks than -to-apples rate and cost increases. Even with the change in business necks, miles remain an important part to our business. In the combination of weather and avian influenza took its toll on

We

had lower fixed cost coverage, higher layover costs, and worse equipment damage than a normal first quarter. Lower miles enhance the impact of business necks on our statistics. While our margins did not meet our standards, we navigated a difficult general freight market, absorbed inefficiencies from startups, overhead from lower-based business and dedicated, and weather better than most first quarters in our history and many companies in our industry. Overall, our strategy is on track and Covenant is well positioned to grow revenue and earnings over time, recognizing that a variety of external factors are creating both uncertainty and opportunity in our business. -over-year highlights for the quarter include consolidated freight revenue declined by 1.8 percent or approximately $4.5 million to $243.2 million. Primarily as a result of our managed freight segment, which generated $6 million less freight revenue but exceeded our profit expectations by improving adjusted operating income by $0.8 million. Consolidated adjusted operating income shrank by 26.6 percent to $10.9 million, primarily as a result of adverse operating conditions in the quarter that reduced utilization of our revenue producing equipment. Salaries, wages, and related expenses increased with business necks as well as poor workers' compensation experience. Combined costs of depreciation, interest, rent, and gain loss on sale increased due to lower fixed cost absorption from lower miles per unit. Our net embeddedness as of March 31st increased by $5.8 million to $225.4 million, yielding an adjusted leverage ratio of approximately 1.55 times and -to-capital ratio of 33.7 percent. The average age of our tractors at December 31st decreased to 20 months compared to 21 months a year ago. On an adjusted basis, return on average invested capital was 7.6 percent versus 8.3 percent in the prior year. Now providing a little more color on the performance of the individual business segments, our expedited segment yielded a 94.2 adjusted operating ratio. While this result falls short of our expectations, we were pleased with improvement we witnessed late in the period as operating conditions improved. Compared to the prior year, expedited average fleet size shrunk by 48 units or 5.3 percent, 852 average tractors in the period. We expect the size of this fleet to flex up and down modestly based on various market factors. Going forward, our focus will be on improving margins through rate increases, exiting less profitable business and adding more profitable business. Dedicated experience average fleet growth in the first quarter of 212 units or approximately 16.7 percent and grew freight revenue by 9.5 million dollars or 13.1 percent compared with the 2024 quarter. Revenue for tractors fell by 3.1 percent principally as a result of the impact of inclement weather and reduced volumes associated with avian influenza. The result was an operating ratio of 90.1, far short of our expectations for this segment. Going forward, we remain focused on our strategy of growing our dedicated fleet, specifically in areas that provide value-added services for customers. We believe that if we are successful in providing -in-class service and controlling our costs, growth and improved profitability will result. Managed freight exceeded profitability expectations for the quarter by focused execution on profitable freight, assisting our expedited fleet with overflow capacity and reducing insurance-related claims, expense as a result of improvements to our cargo control procedures. Going forward, we seek to grow managed freight with profitable revenue from new customers. Work closely with our -debt-based segments to capitalize on overflow opportunities when available and optimize costs to yield longer term margin goals for the mid-single digits, which will generate an acceptable return on capital given the asset-like nature of this business. Our warehouse segment saw a 6 percent decrease in freight revenue and a 42 percent decrease in adjusted operating profit compared to the prior year. The significant reduction in adjusted operating profit is largely due to facility-related cost increases, for which we have not yet been able to negotiate rate increases with our customers and startup-related costs and inefficiencies related to the new business. For the remainder of the year, we anticipate improvement in revenue and adjusted margin for this segment. Our minority investment in TEL contributed pre-patch net income of $3.8 million for the quarter compared to $3.7 million in the prior year period. TEL's revenue in the quarter increased by 25 percent compared to the prior year by increasing its truck fleet by 431 trucks to 2,513 and increasing its trailer fleet by 1,000 to 7,824.

Regarding our outlook for the future, although

our

first quarter's

operational results fell short of our expectations, we were pleased with the improvement we witnessed late in the period. Momentum we have taken into the second quarter. Although April is shirking up to be a good operational month with better weather conditions and better poultry volumes, we recognize volumes can quickly shift negatively as port volumes are reduced with fewer imports. Although we were expecting 2025 to be a year of recovery for the freight economy, we recognize that economic uncertainties may create a delay to an improved freight environment. Regardless of what the remainder of 2025 has in store for us, we remain positive about our team and strategy which is focused on disciplined capital allocation, executing with a high sense of urgency, improving operational leverage as conditions improve, growing our dedicated fleet, and improving our cost profile. Thank you for your time and we will

now open the call for any questions. If you would like to ask a question, please press star one on your phone telephone keypad now. You will be placed in the queue in your order of please be prepared to ask your question when prompted. Once again if you would like to ask a question, please press star one on your phone now. And our first question comes from Jason Seidel from TV College. Please go ahead, Jason.

Hey, thanks Robert. Good morning gentlemen. We're going to talk a little bit about the dedicated side. You know obviously you know you have some issues with the with the bird flu epidemic here, but I'm wondering to talk about the competitive nature of sort of the non-poultry business that you're seeing out there. You know what we should expect going forward and how do you think that's going to play with margins as we move throughout 25 and maybe even into 26 given the long-term nature of those contracts?

Yeah, hey Jason. Paul, how you doing? Good, Paul. Here's what I would say splitting out the non-poultry. It's really competitive out there and the I would say I'll break dedicated into two worlds specialized and non-specialized and so because some of what we have is specialized that is not poultry. In that business where we've got a specialized truck, a specialized trailer, a specialized driver, I would say it's still there's not as much pressure there. The business that is you know more 53 foot drive-in dedicated is it's tough right now and there's a lot of competition and so you know I think the longer this one-way market has stayed down the more competition and more folks are moving straight to the one-way market and more one-way people are running the dedicated and so it is it is hurt. That said I think you know like you've seen in cycle paths whenever the one-way market goes the other way and the premium for dedicated is not as high as it is today you'll probably see you know more see that loosen up from a customer perspective a little bit so but it's definitely a pretty competitive environment out there. As it relates to you know just margins in total, I think on the I think we'll see dedicated margins improve for a couple things. I think the weather just like Exit I did the weather significantly affected dedicated in the first quarter so just with better weather and and whatnot it'll help it'll help dedicated and then as we continue to laugh the the bird flu you know the the worst of the bird flu was probably over in in January early February but little chickens don't eat as much as big chickens and it takes a little while to kind of get this to get the train back on track and you know get the pump primed again and so the combination of those two margins and dedicated in total should improve but but in the non-commodicized space it in the commodified dedicated stuff it's a it's a tough market right now.

And how should we view your presence in the market as you look to continue to move away from the commoditized market and trying to get more into specialty?

Yeah I would say every time we can find a specialty deal that's what we're looking for and I think most of our you know we've purged through most of the most of the commoditized stuff is true commodity. I think a lot of that stuff is left and gone to the one-way market or kind of

Yeah I would say Jason that's been our strategy probably for the last couple of years and Luke Thompson the acquisition of Luke Thompson was probably the biggest indicator of you know that being our strategy and our biggest investment in that but one I would say it's difficult to move the needle right now and two I think that over time you will see us continue to move our percentage more specialized dedicated to a larger percentage of our fleet because there's no doubt about it we're going to have to constantly you know redefine what we consider as specialized or what we consider as defensible or nichey because it is becoming increasingly competitive and I think it's going to even become more so after this cycle ends.

Interesting you know Given all the macro uncertainties out there you know what's that doing to the deal market because I know you guys are constantly in the market to do probably on the smaller type deals but talk to me a little bit about how that's been impacted

in the world. You know I hear what I

say there are a lot of what I call little bitty deals out there right now oh I mean and I think that's a signal of capacity exits and and folks that are struggling for capital you know I would say we continue to kind of sort through the intermediate size deals as they come through and but I would say the volume of those is about the same as it's been the last couple years I mean you know there's one or two things a quarter that are interrupting and that we evaluate.

I think there's one or two a quarter that's interesting that we evaluate and then 15 a quarter nope nope nope nope you can just see people wanting out and

a lot of

those are on the

smaller scale or the OTR market. Yeah I agree.

Gentlemen appreciate the time as always. Thank you. And our next question comes from Daniel Embrow from Stephen Hayes. Good morning guys. I think I get the question. Maybe

we want to start on the day on the ex-bredded business a little bit. There's obviously a LTL line haul within that. I'm curious any company commentary from your standpoint on how that end market is shaping up. We're seeing any signs of improvement kind of with you with your LTL customers there and then how the AAP or the government business trending has moved here through the

side. It's really a smorgasbord. I mean I see some of our LTLs that are doing better than others and I see that our national LTLs are probably being hurt more so than the regional LTL guys but we had a discussion on that just in the last few days. You know I see a lot of the industrial side that the LTL guys are involved in that is hurting some of those guys and what I mean by that is down two to three percent kind of numbers but yeah I'm seeing some stress on the LTL side on probably half of our business. So that is something that we're just having to work through and see what happens and as well as when I say LTL I'm often included in their freight borders and air freight industry that we haul forward on that segment of justice and servants. How

about AAP David?

Yeah AAP Daniel they've had a good first quarter and are looking good going into the second quarter so that business has continued to perform nicely. We've done some things strategically to continue to expand equipment types that we offer in that space and so we get more at bats and that's been a really good strategic move and and we're going to continue to do that have more some more things in the hopper so we can continue to get more you know the more at bats the more times you're going to hit and so continue to be really happy with that business and its performance.

Got the double and then maybe Chris you know David just talked about how many deals are out there in the M&A market but how's your appetite -M&A in this environment given the uncertainties? I think you did introduce a new $50 million dollar re-purchase program so should we take that as an indication that you view the buyback as a higher risk adjusted return than M&A or how should we think about your appetite for deploying capital?

Now I think it's the same our playbook has basically remained unchanged we think we've got a good deal now with the share repurchases and we continue to look at M&A deals as they come up but I think the the key that we always talk about is being disciplined on what we need and what we what fits our strategy what fits our culture what fits our segments and what we can execute on well so we're going to continue to look at M&A deals and I think what you'll see is deploy capital in that manner but if the right one doesn't come along we may not do one so that's that's that's the biggest trap I think we could fall into is trying to do one just to do one and not being right for the long term.

Daniel I'll add to what you said having the share repurchase is not going to preclude us from doing the right deal if the right deal comes across that said we're not we're not in love we're just doing a deal just to do a deal so I would say you could you know we're going to keep looking and keep doing the share repurchase and over time I think it'll work out. And I would just

input and we we noted this in the release that our capex this year is going to be much less than what it was last year and I think on a we'll probably have more EBITDA this year just with the growth year over year growth in some of the truckload business the poultry business and so I anticipate you know we don't have a stated goal on leverage but I'm not concerned about getting over two times I think you know somewhere between one and two times is where we want to operate EBITDA leverage and with the reduced capex this year it kind of affords us the opportunity to do these things without getting too extended in a situation like this.

And then maybe let's clarify there on the capex outlook is what part of the capex budget are you reducing is just fewer you know new trucks going soft? It's not

what I would say is last year from a capex perspective we had a ton of growth in poultry a very capex intensive business and essentially doubled the size of that business and so we had a lot of growth capex in our 2024 number and 2025 is while there is some growth and we do anticipate some growth in our asset-based businesses it won't be nearly as much as we saw last year and so I'm thinking that this year is a more normalized capex like a maintenance capex year so just think about it in the 75 million to 80 million dollars total of which we did almost 20 of net capex in the first quarter so we're on pace and you know if I think we'll generate a good sufficient a lot more free cash this year than we did last year. Great appreciate

it.

And Dan one other thing about LCL one of the statements that our LCL guys were making in the last week is that they just haven't seen the seasonal trend that's normal they haven't seen a kickoff so that's

another side note. And our next question comes from Jeff Hoffman from Vertical Research Partners. Please go ahead Jeff. Thank you very much. Hi everybody. Hi Jim.

I was just kind of curious could you dive a little deeper into this protein business and how avian flu impacted I know it happens every year but you've only had this for about what two years so it's still kind of new to us when it happens I guess fleets get slaughtered and then they get populated and then we eventually grow back. Where are we in that process and when should we see this I know you mentioned little chicken meat lots of big chickens but when should we see this start to

normalize? Here's what I tell you Jeff is that the let's go back to the beginning with you're right there's some amount of bird flu every year I would say just in talking to the instant industry this year is probably the as bad as any year it has been you know let's say in the in the top two in the last 15 years the timing of it is generally the same kind of flu season that you know us as humans have kind of early to mid fall to mid winter to kind of an October to February kind of thing and it has to do with the migratory birds that's that's what carries the bird flu and actually that's how the poultry fleets or flocks get it is from migratory birds that are to migrate and from you know up in Canada to either the southern U.S. or for central America and so they get it their migratory patterns and so you said it exactly right I mean they when these flocks get it infested with this the regulations the Department of Ag regulations in those states they go in and they'll terminate those flocks so what that does it kind of it kind of hurts you on two sides it hurts you from on the live hall side where there's no birds to take to the processing plant and then and then the other part is as you quoted me they repopulate it little birds and the little birds eat less than the big birds so your feed volumes are down and so it just takes some time to get the pump kind of prime back up when all that happens and I would say we are we felt it you know in the fourth quarter I'd say we felt it January February March we're feeling it a little bit April I would say by June we should be back to the hundred percent we're probably at we're probably at 85 percent today we'll be at you know 90 something percent in May and back at 100 percent in June as far as capacity and and so there should be some again improvements in the results once we get that back on plane.

When you came into this business you ever thought you'd be talking about migratory bird patterns on an animal? So I think I kind of understand what's happening in dedicated and expedited can you give me uh oh you did with the tucking acquisition you did in dedicated could you talk a little bit about and then could you also give me an idea of what's hitting revenue in warehouse and managed transportation and how we should think of that moving forward?

Yeah let me uh the little tucking acquisition it was uh you know Coller earlier asked about M&A and so we had the opportunity to do a tuck in on kind of a specialty uh a specialty dedicated fleet and you know when we talk about specialty trucks specialty drivers specialty trailer that business met one of those criteria it's a business that gave us not had a little bit of history with the owner it was a good business and it was on the smaller side but the owner was in a place he wanted to exit and it was a business we thought we could fold in and then actually grow and so I mean it was it's a you know 60 70 truck kind of deal and we think long term we can turn into 125 130 truck kind of deal um at at solid revenue for truck for weeks solid margins and it's in a pretty defensible space that not everybody's in because of some of the specialty nature so again just um just another example of how some deals are big some deals are little it was a little deal we've seen basically none of the earnings from it um we'll start seeing a little bit of that in the in the second quarter as it relates to warehousing and and manage freight the warehousing business I would say revenue is is relatively consistent the um the margins were down a little bit in q1 but I think you know some of that was I mean again the weather affected them storms and ice and warehouses shut down you can't bill for the services if none of the employees can show up and so I think you'll see warehouse feel a little better in q2 and and and continue to get better throughout the year we had a had a start up a good start up in q1 on the warehousing side that we hadn't seen the full benefit of and it got a another pretty large start up coming later in the year and and so we have a small startup in q2 so again I would say that business is kind of steady as she goes the pipeline looks good the team looks good the margins look good the return investment capital is great and so we'll just keep going down the path on that business manage freight I would say we're doing some things differently you know we hired about a year ago you guys know we hired Dustin Hales our new chief operating officer and so he's brought some some new wrinkles to the game plan and I think we're starting to see better overflow freight between some of our asset businesses and our non-asset businesses and so and then we've had some customer growth in managed freight as well and I think you'll see revenue in that business up in q2 and q3 and margins compared to what you saw last year so really happy with managed freight and warehousing hey not only where they're

at but where they're going all right thank you very much and as a reminder if you would like to ask a question please press star one on your phone now gentlemen at this time there appears to be no further questions all right everyone thank you for joining our

first quarter earnings call appreciate everybody attending and we look forward to speaking with you next quarter thank you