Covenant Logistics Group, Inc. Class A

Welcome to today's Covenant Logistics Group Q2 2025 earnings release and investor conference call. Our host for today's call is Tripp Grant. 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. Grant, you may begin.

Good morning everyone and welcome to the Covenant Logistics Group's second quarter 2025 conference call. As a reminder, this call will contain forward-looking statements under the Private Securities Litigation Reform Act, 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 ask A to revise any forward-looking statements. Our prepared comments and additional financial information are available on our website at .covenantlogistics.com slash investors. Joining me today are CEO David Parker, President Paul Bunn, and COO Dustin Cale. Revenue rebounded during the second quarter to a new record high thanks to growing our dedicated fleet, strong new business awards and managed trade, small acquisition, and receding impact of weather and avian influenza. However, margins remain compressed, particularly in our asset-based workload segments, due to an inflationary cost environment, persistently high claims expense, a quarter-end jump in fuel prices, and continued pressure on volume and yields in our expedited and legacy dedicated segments. During the quarter, we repurchased approximately 1.6 million shares, or .7% of the average diluted shares outstanding for a total cost of $35.2 million. The average price per share we purchased was $22.69. Approximately $13.8 million remains available under our $50 million share repurchase authorization. We retain the full range of capital allocation alternatives based on our current financial profile. -over-year highlights for the quarter include consolidated trade revenue increased by .8% or approximately $20 million to $276.5 million. Consolidated adjusted operating income shrank by .6% to $15 million, primarily as a result of -over-year cost increases within our threat load segment. Our net indebtedness as of June 30 increased by $49 million to $268.7 million, compared to December 31, 2024, yielding an adjusted ledgers ratio of approximately 2 times and -to-capital ratio of 39.2%, as a result of executing our share repurchase program and acquisition-related earn-out payments. The average age of our fractures at June 30 has increased slightly to 22 months compared to 21 months a year ago. On an adjusted basis, return on average invested capital was 7% versus 8% in the prior year. Now, providing a little more color on the performance of the individual business segments. Our expedited segment yielded a 93.9 adjusted operating ratio, a result only slightly better than the year-ago quarter. While this result falls short of our expectations for this segment, we were pleased with the -over-year consistency. Compared to the prior year, expedited average fleet size shrunk by 50 units or .5% to 860 average fractures in the period. We expect the size of the fleet to flex up and down modestly based on various market factors. As market conditions improve, our focus will be on improving margins through rate increases, exiting less profitable business and adding more profitable business. Dedicated's 95 adjusted operating ratio improved sequentially, but fell short of both the prior year and our long-term expectations for this segment. On a positive note, we were successful in growing the dedicated fleet by 162 fractures, or approximately .7% compared to the prior year, and grew freight revenue by $8.3 million or .2% compared with the 2024 quarter. We continue to win new business in specialized and high-service niches within our dedicated segment and reduce exposure to more commoditized and markets where returns have not justified continued investment. Going forward, we remain focused on our strategy of growing our dedicated fleet, specifically in areas that provide value-added services for customers. Managed freight exceeded both revenue and profitability expectations for the quarter. We were pleased by the team's ability to bring on new freight, handle overflow freight from expedited, and reduce costs. The quarter benefited from non-recurring business that is expected to roll off during the third quarter, and we point out that this segment generally is susceptible to volatility of revenue gains and losses and to margin expansion and compression related to the cost of sourcing capacity during market cycles. Over the longer term, our strategy is to grow and diversify this segment, and we note that an operating margin in the mid-single digits generates an accessible return in capital given the asset-like nature of this segment. Our warehouse segment experienced freight revenue that was effectively flat to the prior year of quarter, but adjusted operating profit fell by approximately 45%. 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 new business. We anticipate improvements to adjusted margin during the remainder of the year. Our minority investment in TEL contributed a pre-fac net income of $4.3 million for the quarter compared to $4.1 million in the prior year period. TEL's revenue in the quarter increased by 34% compared to the prior year, primarily by increasing its truck fleet of 429 trucks to 2,635 and increasing its trailer fleet by 866 to 7,880. The revenue increase was largely offset by lower margins on lease revenue and equipment sales due to a soft market. Regarding our outlook for the future, our team is performing well while keeping the pedal down on roads and shifting next to more contracted, specialized and high-service niches. Devon Logistics is one of the few companies in our industry to grow revenue and flow count year over year while the combination of -to-general freight market and startup costs and new dedicated accounts along with inflationary costs has pressured margins more than we'd like. We see a path to improving fundamentals as the year develops. Our baseline expectations for the second half of the year includes additional startups in our dedicated segment, a slowly improving general freight market and modest peak season that will benefit expedited and dedicated, and a wide range of outcomes and managed freight. If the general freight market fails to improve, we still expect mixed change and seasonality to generate better results in the second half of the year. And the general freight market improves and a typical peak season takes place, we believe leverage exists and are model to capitalize and expedite certain dedicated accounts and managed freight. Regardless of what the remainder of 2025 has in store for us, our team is aligned and focused on continuing to execute on our strategy and plan, which includes a disciplined approach to 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