Covenant Logistics Group, Inc. Class A

Welcome to today's Covenant Logistics Group Q3 2025 Earnings Release and Investor Conference Call. Our host for today's call is Tripp Grant. At this time, all participants are 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, sir.

Good morning, everyone, and welcome to the Covenant Logistics Group third quarter 2025 conference call. As a reminder, this call will contain forward-looking statements under the Private Securities Litigation Reform Act, which are subsequent 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 www.covenantlogistics.com slash investors. Joining me today are CEO David Parker, President Paul Bunn, and COO Dustin Koehl. Our business remained resilient in the third quarter. Although margins were compressed, particularly in our asset-based truckload segments, due to an inflationary cost environment, persistently high claims expense, headwinds from excessive unproductive equipment, and continued pressure on volume and yields in our expedited and dedicated segments. Year-over-year highlights for the quarter include consolidated freight revenue increased by 4% or approximately $10.2 million to $268.9 million, consolidated adjusted operating income shrank by 22.5%, to $15 million, primarily as a result of year-over-year increases within our combined truckload segment. Our net indebtedness as of September 30th increased by $48.6 million to $268.3 million compared to December 31st, 2024, yielding an adjusted leverage ratio of approximately 2.1 times and debt-to-capital ratio of 38.8%. as a result of executing our share repurchase program and acquisition-related earn-out payments. The average age of our tractors at September 30th increased to 23 months compared to 20 months a year ago. On an adjusted basis, return on average invested capital was 6.9% versus 8.1% in the prior year. Now, providing a little more color on the performance of the individual business segments. Our expedited segment yielded a 93.6% adjusted operating ratio. While this result falls short of our expectations for this segment, we've been pleased with the resilience of this segment over the prolonged downturn. Compared to the prior year, expedited adjusted operating ratio increased 160 basis points. The average fleet size shrunk by 31 units, or 3.4%, to 861 average tractors in the period. We expect the size of this 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 94.7% adjusted operating ratio also fell short of both the prior year and our long-term expectations for this segment. We were successful in growing the dedicated fleet by 136 tractors, or approximately 9.6% compared to the prior year, as we have continued to win new business and specialized in high service niches within our dedicated segment. Going forward, we plan to reduce certain of our fleet in this segment that is exposed to more commoditized in markets where returns are not justified and continue to invest in areas that provide value-added services for customers. Managed freight exceeded both revenue and adjusted operating income compared to the prior year, but fell backwards sequentially due to the loss of a short-term customer that scaled up in the first half of 2025 and rolled off in Q3. Our team showed resilience through this difficult freight cycle with their ability to bring on new freight, handle overflow freight from expedited, and reduce costs to offset lost business. Over the longer term, our strategy is to grow and diversify this segment, and we know that an operating margin in the mid-single digits generates an acceptable return in capital given the asset-like nature of this segment. Our warehouse segment experienced freight revenue and adjusted operating income that was slightly below the prior year quarter and yielded an adjusted operating ratio of 92.1%. The adjusted operating profit and adjusted operating ratio in this segment was a solid improvement sequentially. Going forward, we anticipate top-line revenue growth and operating income growth as a result of a large customer startup scheduled for November. Our minority investment in TEL contributed pre-tax net income of $3.6 million for the quarter compared to $4 million in the prior year period. The impact of incremental bad debt expense in the quarter compared to the prior year reduced TAIL's pre-tax net income. Although TAIL's overall business remains strong, exiting capacity from the general freight environment is expected to impact them again in the fourth quarter and potentially beyond. Regarding our outlook for the future, we anticipate the fourth quarter of the year to remain challenging. with the continuation of a soft freight market combined with the impact of company-specific factors that will result in what we believe to be an unseasonably soft quarter, despite a slight positive impact from peak. Company-specific factors within our line of sight include the negative impact of increased claims accruals, the negative impact the U.S. government shutdown is having on volumes of freight we carry for the Department of Defense, and accelerated customer bankruptcies with tail will all prove to be challenges for the quarter. In addition, as capacity exits accelerate within the general market, we anticipate the cost to procure transportation will likely lead our ability to capture rate increases from our customers in our managed freight segment, resulting in constrained margins. Despite both the general market and company-specific challenges over the short term, we are increasingly optimistic about the pace at which the freight market should recover. Recent enforcement of government policies concerning English language and non-domicile drivers have seemed to accelerate the pace of capacity exiting the market. We believe the impact of this trend is being masked by consumer pause and uncertainty over as a result of elevated interest rates and volatility of global trade policy. Our belief is that consumer demand will improve with the continuation of monetary easing and the eventual settlement of trade tensions. In addition, the impact of recent tax policy will further facilitate demand. Regardless of when the market environment turns, our team is ready to move quickly to execute with urgency to capture additional market share and the appropriate amount of operational leverage that returns appropriate levels of capital to our shareholders. 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 1 on your phone now, and you'll be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, if you would like to ask a question, please press star 1 on your phone now. And our first question comes from Scott Groof of Wolf Research.