Covenant Logistics Group Q1 2025 Earnings Call Transcript

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Provided by Quartr
April 24, 2025

Key Takeaways

  • Negative Sentiment: Consolidated results weakened: Freight revenue fell 1.8% to $243.2M and consolidated adjusted operating income declined 26.6% to $10.9M, while net indebtedness rose to $225.4M (adjusted leverage ~1.55x).
  • Neutral Sentiment: Business mix is shifting toward specialized dedicated protein operations, which raise revenue per mile but also increase cost per mile and reduce miles per tractor, contributing to short-term margin pressure but intended to drive long-term returns.
  • Positive Sentiment: Managed freight outperformed expectations by focusing on profitable freight, reducing insurance claims, and assisting asset fleets with overflow; management targets mid‑single‑digit margins and continued growth in this asset‑light business.
  • Negative Sentiment: Warehouse performance lagged with a 6% revenue decline and a 42% drop in adjusted operating profit due to facility cost increases and startup inefficiencies, though management expects improvement later in the year.
  • Positive Sentiment: Capital allocation stance is cautious but constructive: a $50M share repurchase program, materially lower 2025 CapEx (toward maintenance levels), and expectation of stronger free cash flow while maintaining leverage comfortably below 2x.
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Earnings Conference Call
Covenant Logistics Group Q1 2025
00:00 / 00:00

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Operator

Welcome to today's Covenant Logistics Group Q1 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 will now like to turn the call over to your host, Mr. Grant. You may begin.

Tripp Grant
Tripp Grant
EVP and CFO at Covenant Logistics Group

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 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 update or revise any forward-looking statements. Our prepared comments and additional financial information are available on our website at www.covenantlogistics.com/investors. Joining me on the call today are CEO David Parker, President Paul Bunn, and COO Dustin Koehl. Before diving into the details, I'd like to give an overview of changes in our business mix that impact our revenue and expense comparisons year over year. We continue to increase assets and people invested in our dedicated protein business and reduce assets and people allocated to lower-return business.

Tripp Grant
Tripp Grant
EVP and CFO at Covenant Logistics Group

In general, specialized dedicated customers have higher revenue per mile, higher cost per mile, and fewer miles per tractor per year than our other asset-based customers. As this specialized business grows, revenue per mile, driver and other employee cost per mile, and fixed cost per mile all increase. The year-over-year changes are more indicative of business mix than apples-to-apples rate and cost increases. Even with the change in business mix, miles remain an important part to our business. The combination of weather and avian influenza took its toll on miles, we had lower fixed cost coverage, higher layover costs, and worse equipment damage than a normal first quarter. Lower miles enhanced the impact of business mix on our statistics.

Tripp Grant
Tripp Grant
EVP and CFO at Covenant Logistics Group

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. Year-over-year highlights for the quarter include: consolidated freight revenue declined by 1.8%, 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% to $10.9 million, primarily as a result of adverse operating conditions in the quarter that reduced utilization of our revenue-producing equipment.

Tripp Grant
Tripp Grant
EVP and CFO at Covenant Logistics Group

Salaries, wages, and related expenses increased with business mix, as well as poor workers' compensation experience. Combined cost of depreciation, interest, rent, and gain loss on sale increased due to lower fixed cost absorption from lower miles per unit. Our net indebtedness as of March 31 increased by $5.8 million to $225.4 million, yielding an adjusted leverage ratio of approximately 1.55 times and debt-to-capital ratio of 33.7%. The average age of our tractors at December 31 slightly decreased to 20 months compared to 21 months a year ago. On an adjusted basis, return on average invested capital was 7.6% versus 8.3% 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.

Tripp Grant
Tripp Grant
EVP and CFO at Covenant Logistics Group

While this result falls short of our expectations, we were pleased with the 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%, to 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 experienced average fleet growth in the first quarter of 212 units, or approximately 16.7%, and grew freight revenue by $9.5 million, or 13.1%, compared to the 2024 quarter. Revenue per tractor fell by 3.1%, principally as a result of the impact of inclement weather and reduced volumes associated with avian influenza.

Tripp Grant
Tripp Grant
EVP and CFO at Covenant Logistics Group

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 best-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 asset-based segments to capitalize on overflow opportunities when available, and optimize costs to yield longer-term margin goals in the mid-single digits, which will generate an acceptable return on capital given the asset-like nature of this business.

Tripp Grant
Tripp Grant
EVP and CFO at Covenant Logistics Group

Our warehouse segment saw a 6% decrease in freight revenue and a 42% 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-tax 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% 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.

Tripp Grant
Tripp Grant
EVP and CFO at Covenant Logistics Group

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 shaping 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.

Tripp Grant
Tripp Grant
EVP and CFO at Covenant Logistics Group

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

Operator

If you would like to ask a question, please press star one on your telephone keypad now. You will be placed into the queue and you are to proceed. 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. Our first question comes from Jason Seidl from TD Cowen. Please go ahead, Jason.

Jason Seidl
Jason Seidl
Managing Director at TD Cowen

Hey, thanks, Robert. Good morning, gentlemen. I wanted to talk a little bit about the dedicated side. Obviously, you had some issues with the avian influenza epidemic here, but I wanted to talk about the competitive nature of sort of the non-poultry business that you're seeing out there, what we should expect going forward, and how do you think that's going to play with margins as we move throughout 2025 and maybe even into 2026, given the longer-term nature of those contracts?

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

Yeah. Hey, Jason. This is Paul. How are you doing?

Jason Seidl
Jason Seidl
Managing Director at TD Cowen

Good, Paul.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

Here's what I would say splitting out the non-poultry. It's really competitive out there. I would say I'll break dedicated into two worlds: specialized and non-specialized. Some of what we have is specialized that is not poultry. In that business where you've got a specialized truck, a specialized trailer, or a specialized driver, I would say there's not as much pressure there. The business that is more 53-foot dry van dedicated, it's tough right now, and there's a lot of competition. I think the longer this one-way market has stayed down, the more competition and more folks are moving freight to the one-way market, and more one-way people are running to dedicated, and it has hurt.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

That said, I think, like you've seen in cycles past, 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 that loosen up from a customer perspective a little bit. It is definitely a pretty competitive environment out there. As it relates to just margins in total, I think we'll see dedicated margins improve for a couple of things. I think the weather, just like expedited, the weather significantly affected dedicated in the first quarter. Just with better weather and whatnot, it'll help dedicated.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

As we continue to lap the bird flu, the worst of the bird flu was probably over in January, early February, but little chickens do not eat as much as big chickens, and it takes a little while to kind of get the train back on track and get the pump primed again. The combination of those two margins and dedicated in total should improve. In the non-commoditized space, in the commoditized dedicated stuff, it is a tough market right now.

Jason Seidl
Jason Seidl
Managing Director at TD Cowen

How should we view your presence in the space? Are you going to look to continue to move away from the commoditized market and trying to get more into specialty?

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

Yeah. I would say every time we can find a specialty deal, that's what we're looking for. I think most of our we've purged through most of the commoditized stuff that's true commodity. I think a lot of that stuff has left and gone to the one-way market or kind of reset over the last 12 to 18 months.

David Parker
David Parker
Founder and CEO at Covenant Logistics Group

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

Jason Seidl
Jason Seidl
Managing Director at TD Cowen

Interesting. Given all the macro uncertainty that's out there, 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 impacting the world.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

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

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

I think there's one or two a quarter that's interesting that we evaluate. Then there's 15 a quarter. Nope, nope, nope, nope. You can just see people wanting out.

David Parker
David Parker
Founder and CEO at Covenant Logistics Group

A lot of those are on the smaller scale or the OTR market.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

Yep. I agree.

Jason Seidl
Jason Seidl
Managing Director at TD Cowen

Gotcha. Gentlemen, appreciate the time as always.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

Thank you, Jason.

Operator

Our next question comes from Daniel Imbro from Stephens Inc. Please go ahead, Daniel.

Daniel Imbro
Daniel Imbro
Managing Director and Equity Research Analyst at Stephens Inc

Hey, hey. Good morning, guys. Thanks for taking the question.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

Hey, Daniel.

Daniel Imbro
Daniel Imbro
Managing Director and Equity Research Analyst at Stephens Inc

Maybe you want to start on the expedited business a little bit. Obviously, you have LTL linehaul within that. I'm curious any commentary from your standpoint on how that end market's shaping up. Are we seeing any signs of improvement kind of with your LTL customers there? How's the AAT or the government business trending as we move here through the first part of the year?

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

I would say this, David. I would say on the LTL side, it's really a smorgasbord. I mean, I see some of our LTLs that are doing better than others. I see that our national LTLs are probably being hurt more so than the regional LTL guys. We had a discussion on that just in the last few days. I see a lot of the industrial side that the LTL guys are involved in that is hurting some of those guys. What I mean by that is down 2-3% kind of numbers. Yeah, I'm seeing some stress on the LTL side on probably half of our business. That is something that we're just having to work through and see what happens.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

As well as when I say LTL, I'm also including in there freight forwarders and air freight industry that we haul for and all that segment of substitute service.

Daniel Imbro
Daniel Imbro
Managing Director and Equity Research Analyst at Stephens Inc

How about AAT, David?

David Parker
David Parker
Founder and CEO at Covenant Logistics Group

Yeah. Yeah, AAT, Daniel, they've had a good first quarter and are looking good going into the second quarter. 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 we get more at bats. That's been a really good strategic move, and we're going to continue to do that, have some more things in the hopper so we can continue to get more. The more at bats, the more times you're going to hit. Continue to be really happy with that business and its performance.

Daniel Imbro
Daniel Imbro
Managing Director and Equity Research Analyst at Stephens Inc

Got it. That's helpful. Maybe Tripp, David just talked about how many deals are out there in the M&A market, but how is your appetite for M&A in this environment given the uncertainties? I think you did introduce a new $50 million repurchase program. Should we take that as an indication that you view the buyback as a higher risk-adjusted return than M&A? How should we think about your appetite for deploying capital?

Tripp Grant
Tripp Grant
EVP and CFO at Covenant Logistics Group

No, 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. We continue to look at M&A deals as they come up. I think the key that we always talk about is being disciplined on what we need and what fits our strategy, what fits our culture, what fits our segments, and what we can execute on well. We are going to continue to look at M&A deals, and I think what you'll see is deploy capital in that manner. If the right one does not come along, we may not do one. 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.

David Parker
David Parker
Founder and CEO at Covenant Logistics Group

Daniel, I'll add to what Tripp 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 in love. We're just doing a deal just to do a deal. I would say we're going to keep looking and keep doing the share repurchase. Over time, I think it'll work out.

David Parker
David Parker
Founder and CEO at Covenant Logistics Group

I would just input, and we noted this in the release, that our CapEx this year is going to be much less than what it was last year. I think we'll probably have more EBITDA this year just with the year-over-year growth and some of the truckload business, the poultry business. I anticipate we don't have a stated goal on leverage, but I'm not concerned about getting over two times. I think somewhere between one and two times is where we want to operate EBITDA leverage. 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.

Daniel Imbro
Daniel Imbro
Managing Director and Equity Research Analyst at Stephens Inc

Maybe I'll clarify out there on the CapEx outlook. I guess what part of the CapEx budget are you reducing? Is it just fewer new truckers?

Tripp Grant
Tripp Grant
EVP and CFO at Covenant Logistics Group

No, 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. We had a lot of growth CapEx in our 2024 number. In 2025, while there is some growth, and we do anticipate some growth in our asset-based businesses, it will not be nearly as much as we saw last year. I am thinking that this year is a more normalized maintenance CapEx year. Just think about it in the $75 million-$80 million total, of which we did almost $20 million of net CapEx in the first quarter. We are on pace. I think we will generate a lot more free cash this year than we did last year.

Daniel Imbro
Daniel Imbro
Managing Director and Equity Research Analyst at Stephens Inc

Great. Appreciate it. Thanks a lot.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

Daniel, one other thing on that LTL. One of the statements that our LTL guys were making in the last week is that they just haven't seen the seasonal trend that's normal. They haven't seen it pick up. That is another side note.

Operator

Our next question comes from Jeff Kauffman from Vertical Research Partners. Please go ahead, Jeff.

Jeff Kauffman
Partner, Transportation and Logistics Equity Research at Vertical Research Partners

Thank you very much. Hi, everybody.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

Hey, Jeff.

Jeff Kauffman
Partner, Transportation and Logistics Equity Research at Vertical Research Partners

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 we've only had this for about two years, so it's still kind of new to us. When this happens, I guess fleets get slaughtered, and then they get repopulated, and then we eventually grow back. Kind of where are we in that process, and when should we see this? I know you mentioned little chickens eat less than big chickens. But when should we see this start to normalize?

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

Here's what I'd tell you, Jeff, is that let's go back to the beginning of what you said. You're right. There's some amount of bird flu every year. I would say just in talking to some industry folks, this year is probably as bad as any year it has been. I'd say in the top two in the last 15 years. The timing of it is generally the same kind of flu season that us as humans have, kind of early to mid-fall to mid-winter, so kind of an October to February kind of thing. It has to do with the migratory birds. That's what carries the bird flu. Actually, that's how the poultry fleets or flocks get it. It's from migratory birds that are migrating from up in Canada to either the southern U.S. or Central America. They get it. They're migratory patterns.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

You said it exactly right. I mean, when these flocks get infested with this, the Department of Ag regulations in those states, they go in and they'll terminate those flocks. What that does, it kind of hurts you on two sides. It hurts you on the live haul side. There's no birds to take to the processing plant. The other part, as you quoted me, they repopulate it with little birds, and the little birds eat less than the big birds, so your feed volumes are down. It just takes some time to get the pump kind of primed back up when all that happens. I would say we felt it in the fourth quarter. I'd say we felt it January, February, March. We're feeling it a little bit in April.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

I would say by June, we should be back at 100%. We're probably at 85% today. We'll be at 90-something percent in May and back at 100% in June as far as capacity. There should be some, again, improvements in the results once we get that back on plane.

Jeff Kauffman
Partner, Transportation and Logistics Equity Research at Vertical Research Partners

When you came into this business, you ever thought you'd be talking about migratory bird patterns on another call?

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

No.

Jeff Kauffman
Partner, Transportation and Logistics Equity Research at Vertical Research Partners

All right. Two months ago.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

We learned something this year, Jeff, this winter, I tell you that.

Jeff Kauffman
Partner, Transportation and Logistics Equity Research at Vertical Research Partners

I think I kind of understand what's happening in Dedicated and Expedited. Can you give me, oh, you were the tuck-in acquisition you did in Dedicated. Could you talk a little bit about that? 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?

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

Yeah. The whole tuck-in acquisition, it was a caller earlier asked about M&A. We had the opportunity to do a tuck-in on kind of a specialty dedicated fleet. When we talk about specialty trucks, specialty drivers, specialty trailers, that business met one of those criteria. It's a business that David and I had a little bit of history with the owner. It was a good business. It was on the smaller side, but the owner was in a place he wanted to exit. It was a business we thought we could fold in and then actually grow. I mean, it's a 60-70 truck kind of deal. We think long term, we can turn it into a 125-130 truck kind of deal at solid revenue per truck per week, solid margins.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

It is in a pretty defensible space that not everybody is in because of some of the specialty nature. Just another example of how some deals are big and some deals are little. It was a little deal. We have seen basically none of the earnings from it. We will start seeing a little bit of that in the second quarter. As it relates to warehousing and managed freight, the warehousing business, I would say revenue is relatively consistent. The margins were down a little bit in Q1, but I think some of that was, I mean, the weather affected them with storms and ice, and warehouses shut down. You cannot bill for the services if none of the employees can show up. I think you will see warehouse do a little better in Q2 and continue to get better throughout the year.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

We had a good startup in Q1 on the warehousing side that we had not seen the full benefit of and have got another pretty large startup coming later in the year. A small startup in Q2. 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 on invested capital is great. We will just keep going down the path on that business. Managed freight, I would say we are doing some things differently. We hired about a year ago, you guys know we hired Dustin Koehl, our new Chief Operating Officer. He has brought some new wrinkles to the game plan. I think we are starting to see better overflow freight between some of our asset businesses and our non-asset businesses.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

We have had some customer growth in managed freight as well. I think you will see revenue in that business up in Q2 and Q3 and margins compared to what you saw last year. I am really happy with managed freight and warehousing, not only where they are at, but where they are going.

Jeff Kauffman
Partner, Transportation and Logistics Equity Research at Vertical Research Partners

All right. Thank you very much.

Operator

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.

David Parker
David Parker
Founder and CEO at Covenant Logistics Group

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.

Operator

This concludes today's conference call. Thank you for attending.

Operator

The host has ended this call. Goodbye.

Executives
    • Paul Bunn
      Paul Bunn
      President
    • David Parker
      David Parker
      Founder and CEO
    • Tripp Grant
      Tripp Grant
      EVP and CFO
Analysts
    • Jeff Kauffman
      Partner, Transportation and Logistics Equity Research at Vertical Research Partners
    • Jason Seidl
      Managing Director at TD Cowen
    • Daniel Imbro
      Managing Director and Equity Research Analyst at Stephens Inc
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