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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 would now like to turn the call over to your host, Mr. Grant. You may begin.

Tripp Grant : 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. 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, and 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. 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 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 mix, as well as poor workers’ compensation experience. Combined cost of depreciation, interest, rents, 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 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. 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 dollars or 13.1% compared with 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. 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 to the mid-single digits, which will generate an acceptable return on capital given the asset-light nature of this business. Our Warehouse segment saw a 6% decrease in freight revenue and a 42% decrease of 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. 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. Thank you for your time and we will now open the call for any questions.

Operator: [Operator Instructions] And our first question comes from Jason Seidl from TD Cowen. Please go ahead, Jason.

Jason Seidl: Hey, thank you, operator. Good morning, gentlemen. I wanted to talk a little bit about the dedicated side. Obviously, you had some issues with the bird flu 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 ‘25 and maybe even into ‘26 given the longer-term nature of those contracts.

Paul Bunn : Yeah. Hey, Jason. It’s Paul. How are you doing?

Jason Seidl: Good, Paul.

Paul Bunn : 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. And so because some of what we have is specialized that is not poultry. And that business where you’ve got a specialized truck, a specialized trailer, or a specialized driver, I would say it’s still there’s not as much pressure there. The business that is more 53-foot drive-in dedicated, it’s tough right now. And there’s a lot of competition. And so, 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 so it has hurt.

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 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 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 expedited, the weather significantly affected dedicated in the first quarter. So just with better weather and whatnot, it’ll help dedicated. And then as we continue to lap, the bird flu, the worst of the bird flu was probably over 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 the train back on track and get the pump primed again. And so the combination of those two margins and dedicated in total should improve. But in the non-commoditized space, in the commoditized type dedicated stuff, it’s a tough market right now.

Jason Seidl: And 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 : Yeah. I will tell you, every time we can find a specialty deal, that’s what we’re looking for. And 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 : Yeah. I would say, Jason, that’s been our strategy probably for the last couple of years. And Lou Thompson, the acquisition of Lou Thompson was probably the biggest indicator of 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 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. And I think it’s going to even become more so after this cycle ends.

Jason Seidl: 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 : 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 sized deals as they come through. But I would say the volume of those is about the same as it’s been the last couple years. I mean, there’s one or two things a quarter that are interesting and that we evaluate. I think there’s one or two a quarter that’s interesting that we evaluate. And then there’s 15 a quarter. No, no. You can just see people wanting out. And a lot of those are on the smaller scale or the OTR market.

Jason Seidl: I agree. Gentlemen, appreciate the time as always.

Paul Bunn : Thank you, Jason.

Operator: And our next question comes from Daniel Imbro from Stephen Sink. Please go ahead, Daniel.

Daniel Imbro : Hey, good morning, guys. Thanks for taking the questions.

Paul Bunn : Hey, Dan.

Daniel Imbro : Maybe I want to start on the dedicated, on the exited business a little bit. So obviously you have LTO Linehaul within that. I’m curious any commentary from your standpoint on how that end market is shaping up. We’re seeing any signs of improvement kind of with your LTL customers there. And then how is the AAT or the government business trending as we move here through the first part of the year?

David Parker : I would say, this is 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. 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. I see a lot of the industrial side that the LTL guys are involved in that it’s hurting some of those guys. And what I mean by that is down 2% to 3% 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. As well as when I say LT, I’m also included in their freight forwarders and air freight industry, that we haul forward, all that segment of substitute service.

Daniel Imbro : And how about AAT, David?

David Parker : Yeah, AAT, 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 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. And so continue to be really happy with that business and its performance.

Daniel Imbro : Got it. That’s helpful. And then 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. So should we take that as an indication that you view the buyback as a higher risk-adjusted return than M&A? Or even higher, how should we think about your appetite for deploying capital?

Tripp Grant : 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. And we continue to look at M&A deals as they come up. But 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. 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 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 : 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 with just doing a deal just to do a deal. So I would say we’re going to keep looking and keep doing the share repurchase. And over time, I think it’ll work out.

Tripp Grant : And I would just, and 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 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, 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. 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.

Daniel Imbro : And then maybe a last clarifier there on the CapEx outlook. It’s what part of the CapEx budget are you reducing? Is it just fewer new trucks? Is it fewer rolling stock?

Tripp Grant : 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, like a maintenance CapEx year. So just think about it in the $75 million to $80 million total, of which we did almost 20 of net CapEx in the first quarter. So we’re on pace, and I think we’ll generate a good sufficient a lot more free cash this year than we did last year.

Daniel Imbro : Great. Appreciate all the color. Best of luck.

David Parker : And, 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. So that’s another side note.

Operator: And our next question comes from Jeff Kauffman from Vertical Research Partners. Please go ahead, Jeff.

Jeff Kauffman: Thank you very much. Hi, everybody. 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 this happens, I guess, fleets get slaughtered, populated, and then we eventually grow back. 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 : Here’s what I would tell you, Jeff, is that the — let’s go back to the beginning in which 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. And it has to do with the migratory birds. 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 migrating from up in Canada either to Southern U.S. or Central America. And so, they get it.

They’re not migratory patterns. And so, you said it exactly right. I mean, when these flocks get 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 hurts you on two sides. It hurts you from on the live haul side, where there’s no birds to take to the processing plant. And then 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. And so it just takes some time to get the pump kind of primed back up when all that happens. And 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.

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. And so, there should be some, again, improvements in the results once we get that back on plane.

Jeff Kauffman: When you came into this business, you ever thought you’d be talking about migratory bird patterns on an annual call?

Paul Bunn : No, sir. No.

Jeff Kauffman: All right.

Paul Bunn : We learned something this year, this winter, I tell you that.

Jeff Kauffman: So, I think I kind of understand what’s happening in dedicated and expedited. Can you give me, there was a tuck-in acquisition you did in dedicated. Could you talk a little bit about that? 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?

Paul Bunn : Yeah. The little tuck-in acquisition, it was a caller earlier asked about M&A, and so we had the opportunity to do a tuck-in on kind of a specialty dedicated fleet. And when we talk about specialty truck, specialty driver, specialty trailer, 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, 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’s a 60, 70 truck kind of deal. And we think long term we can turn into 125, 130 truck kind of deal at solid revenue per truck per week, 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 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. We’ll start seeing a little bit of that in the second quarter. As 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, again, the weather affected them with 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 do a little better in Q2 and continue to get better throughout the year. We had a start-up, a good start-up in Q1 on the warehousing side that we hadn’t seen the full benefit of, and have got another pretty large start-up coming later in the year.

And so a small start-up 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 on invested capital is great, and so we’ll just keep going down the path on that business. Managed freight, I would say we’re doing some things differently. We hired about a year ago, you guys know we hired Dustin Koehl, our new Chief Operating Officer. And so he’s brought 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, not only where they’re at, but where they’re going.

Jeff Kauffman: All right. Thank you very much.

Operator: [Operator Instructions] Gentlemen, at this time, there appears to be no further questions.

Tripp Grant : 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.