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.

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.

And our first question comes from Jason Seidl from TD Cowen. Please go ahead, Jason.

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.

Yeah. Hey, Jason. It's Paul. I'm doing well, thanks. To discuss the non-poultry segment, the market is quite competitive. I see two categories within dedicated: specialized and non-specialized. The specialized segment, which includes specific trucks, trailers, or drivers, is facing less pressure. However, the 53-foot drive-in dedicated business is currently challenging due to intense competition. The prolonged downturn of the one-way market has led to increased competition, with more freight shifting to that market and more one-way operators moving to dedicated. This has had an impact on us. Historically, when the one-way market improves and the premium for dedicated decreases, we can expect some loosening from customers. So yes, it’s a highly competitive landscape. Regarding margins, I anticipate that dedicated margins will improve for a couple of reasons. First, like expedited services, the inclement weather significantly impacted dedicated in the first quarter, so improved weather should help. Additionally, as we move past the bird flu challenges, which peaked around January and early February, we’ll see benefits. Smaller chickens don’t consume as much as larger ones, so it will take time to stabilize and revitalize that segment. Therefore, the combination of these factors should lead to an improvement in dedicated margins overall. However, the commoditized dedicated area remains quite tough at the moment.

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?

Every time we discover a specialty deal, that's our focus. I believe we have largely moved past most of the true commodity items. A significant portion of that has transitioned to the one-way market or has undergone a reset in the past 12 to 18 months.

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.

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.

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 of 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.

I agree. Gentlemen, appreciate the time as always.

Thank you, Jason.

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

Hey, good morning, guys. Thanks for taking the questions.

Hey, Dan.

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?

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.

And how about AAT, David?

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.

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?

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.

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.

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.

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?

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.

Great. Appreciate all the color. Best of luck.

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.

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

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?

What I can tell you is that there is a certain level of bird flu every year, and this year seems to be one of the worst we have seen, likely among the top two in the last 15 years. The timing aligns with the typical flu season, which runs from early to mid-fall through mid-winter, approximately from October to February. The spread is largely attributed to migratory birds, which transfer the flu to poultry flocks as they migrate from Canada to the Southern U.S. and Central America. When these flocks become infected, regulations dictate that they must be culled. This situation impacts us in two significant ways. First, we have no birds available for transport to processing plants. Second, since they repopulate using younger birds, which consume less feed than mature birds, our feed volumes decrease. It takes some time to restore operations to normal. We felt the effects in the fourth quarter, and we're still experiencing some impact in January, February, and March, with a bit of an effect in April as well. By June, we expect to return to full capacity; currently, we're operating at about 85%. We anticipate reaching around 90% capacity in May and being back at 100% in June, which should lead to improved results once we stabilize operations.

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

No, sir. No.

All right.

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

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?

We made a small tuck-in acquisition related to a specialized dedicated fleet, which was something David and I had some prior experience with. The business had potential and, although it was on the smaller side, the owner was looking to exit. We believe we can integrate it and eventually scale it. It consists of about 60 to 70 trucks, and we see the possibility of expanding that to around 125 or 130 trucks with solid revenue and margins for each. This segment operates in a niche area that not everyone provides services in, showcasing our strategic approach with both large and small deals. We haven't recognized much of the earnings from this acquisition yet, but we expect to see some starting in the second quarter. In terms of our warehousing and managed freight, the warehousing revenue has remained relatively stable. Margins dipped slightly in Q1 due to factors like weather-related disruptions, which affected operational capacity at warehouses. However, we anticipate improvement in Q2, boosted by a promising start-up in Q1 we haven't fully leveraged yet, and another significant start-up planned for later this year. Overall, this sector is steady, with a positive outlook regarding the pipeline, team performance, and returns on invested capital. For managed freight, we’ve initiated some changes since hiring our new Chief Operating Officer, Dustin Koehl, about a year ago. His strategies have improved the flow of freight between our asset and non-asset sectors, and we've also experienced customer growth in managed freight. Consequently, we expect an increase in revenue and margins in Q2 and Q3 compared to last year. We are optimistic about the future of both managed freight and warehousing.

All right. Thank you very much.

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.

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