Welcome to the Covenant Logistics Group Q2 2025 Earnings Release and Investor Conference Call. Our host for the call is Tripp Grant. I will now hand the call over to Mr. Grant to start.

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 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 today are CEO, David Parker; President, Paul Bunn; and COO, Dustin Koehl. Revenue rebounded during the second quarter to a new record high, thanks to growing our dedicated fleet, strong new business awards in Managed Freight, a small acquisition, and receding impacts of weather and avian influenza. However, margins remain compressed, particularly in our Asset-Based Truckload 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 5.7% of the average diluted shares outstanding for a total cost of $35.2 million. The average price per share repurchased 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. Year-over-year highlights for the quarter include: consolidated freight revenue increased by 7.8% or approximately $20 million to $276.5 million. Consolidated adjusted operating income shrank by 19.6% to $15 million, primarily as a result of year-over-year cost increases within our Truckload segment. Our net indebtedness as of June 30 increased by $49 million to $268.7 million compared to December 31, 2024, yielding an adjusted leverage ratio of approximately 2x and debt-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 tractors at June 30 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 year-over-year consistency. Compared to the prior year, Expedited's average fleet size shrunk by 50 units or 5.5% to 860 average tractors 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 tractors or approximately 11.7% compared to the prior year and grew freight revenue by $8.3 million or 10.2% 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 end 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 nonrecurring 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 acceptable return in capital given the asset-light nature of this segment. Our Warehouse segment experienced freight revenue that was effectively flat to the prior year 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 start-up 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 pretax 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 by 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 leased 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 growth and shifting mix toward more contracted, specialized, and high-service niches. Covenant Logistics is one of the few companies in our industry to grow revenue and fleet count year-over-year, while the combination of a tepid general freight market and start-up 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 start-ups in our Dedicated segment, a slowly improving general freight market, and a modest peak season that will benefit Expedited and Dedicated with a wide range of outcomes in Managed Freight. If the general freight market fails to improve, we still expect mix change and seasonality to generate better results in the second half of the year. Should the general freight market improve and the typical peak season take place, we believe leverage exists in our model to capitalize in Expedited, 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 you for your time, and we will now open up the call for any questions.

And our first question will come from Scott Group with Wolfe Research.

So you just talked about, I think, improving or optimism about improving fundamentals in the back half of the year. Maybe just give us some sense what you're seeing in the market? Any sort of customer conversations around peak, any impact from English proficiency enforcement, just broad views about how the market is developing.

Scott, this is David. Yes, we are definitely seeing, I believe, some green shoots that are starting to show forth. And I think we've all been looking for it for 3 years. And in 3 years, I think we all will say there's been 2 or 3 times we felt like something was happening that never did quite carry on with any longevity. But I do believe there are some opportunities out there in the marketplace today. As I look at bids, as I look at midyear bids from those who did bid 6 months ago and are having some issues on capacity, they are starting to come back and ask questions. I'm looking at pricing that is not going down; it may not be going up as much as I want. However, I don't sense the pressure on rate decreases across the book of business. So, I do think that some things are happening. I think we are seeing some changes on the capacity side as well. As I look at some of the things that are going on with the English language and those aspects that none of us can say have really taken effect, but we're sensing some of that. On the solutions side of the business, it has been ups and downs compared to the very beginning. They had to say goodbye to some carriers that could not guarantee they would have English-speaking drivers. But that said, overall, I feel pretty good about what I'm starting to see in the market. I would be really excited if it hadn't gone down a couple of times in the last 3 years, Scott.

Understand. You've got a lot of LTL exposure on the Expedited side. Maybe just talk about how that business is developing? Any signs of green shoots there? Or is that still more challenging?

It has been challenging. To be honest, it's one of the surprises I would say in the last few months, the last 5 months anyway, as we've seen our LTL customers get softer in the marketplace. We kind of did a study in the last couple of days with all our LTL companies, and out of all of them, we've only found a couple that say our business is up. The rest are reporting pressure on volumes. So, the LTL side is concerning. However, what I find surprising on the positive side is that the airfreight consolidation I've been seeing has shown some improvement that excites me. I think many of us can see the government's focus on AI, and we're sensing that. I mean, we're hauling a lot of servers right now. I'm starting to see transportation-wise what I've been hearing from people verbally about AI come to fruition in some of these data centers that are being built out in the United States, with the servers we are hauling in just the last 30 to 45 days. So while LTL is down, the airfreight side of our business is starting to pick up. I wouldn't say it's picking up significantly, but it shows some encouraging signs.

Yes. That's interesting about the AI stuff and data center maybe finally starting to drop freight a little bit. Just last one, if I can. How does the big bill impact your thinking about CapEx and spending on trucks? Are you more likely to be buying trucks or signing more trucks now, anything like that?

I don't know that it changes our plan, Scott, but it certainly helps our cash tax obligations for the remainder of this year and, quite honestly, next year. In a broader sense looking at the economy, there are several industries, particularly heavy CapEx that could spur some additional freight. It could be a catalyst for some additional demand. I view it as a stimulus that can help with some of the industrial lightness David mentioned. Our CapEx for the year was planned to be a bit lighter than what we had announced in the release. Fortunately, we have the ability to keep growing our Dedicated fleet. I think we have some additional dedicated growth opportunities for the tail end of the year. So there's some growth CapEx in our numbers for the rest of the year. However, we try to stay pretty disciplined with our CapEx plan and adjust it for growth opportunities.

Our next question will come from Daniel Imbro with Stephens.

David. But maybe on the Dedicated side, starting there. We saw some stronger actual growth in truck count this quarter. It's good to see that. Can you talk about what drove that? What part of Dedicated business you were able to grow here in the second quarter? And then just tied into that, how are you thinking about poultry for the back half of the year? Is there any avian influenza still out there that you're hearing from the field? I know the back half is important for that poultry business. Would love an update on that as well.

Daniel, it's Paul. Yes, the avian influenza is all but gone. That season typically runs more mid-fall to mid-winter. Fingers crossed, we don't experience anything like we did last year on that front. The growth in the Dedicated count was a function of two factors: a small tuck-in acquisition, a really minor 60 to 70 truck deal on some specialized business, and the growth in poultry. I would also mention that the legacy Dedicated business was flattish. We did see a little decline in that in Q1, but for Q2, it remained stable, hence the truck growth in the quarter.

Got it. That's helpful.

Regarding the balance of the year, I would say we're likely looking at flat to incrementally up. We have some start-ups that are signed and planned, but there are also a few small reductions anticipated. Overall, I think we can expect it to be flat to slightly up for the balance of the year.

That's helpful. Appreciate that, Paul. Maybe a financial follow-up question. Just looking at the model, revenue per mile is down a little bit from Q1 to Q2. But if I align that with David's comments earlier, it seems like things are actually getting better and pricing is still okay. Can you walk through what happened in the quarter there, in terms of optics, and how we should consider that trajectory into the back half of the year?

Yes. I think what you're observing in revenue per mile, whether looking at it sequentially or year-over-year, we have had some rate increases, particularly on our Expedited segment. However, I think you're seeing a significant change in business mix. For our total truckload operations, we reduced 50 trucks from our Expedited fleet, and those typically put on around 200,000 miles per truck per year, and therefore have a lower rate per total mile. Meanwhile, we are adding in short-haul mileage trucks in our dedicated segment at a significant rate, which is going to create a disparity in the rate per mile. The dedicated business isn’t only linehaul; it has fixed and variable costs that influence pricing. Additionally, all the shutdowns and weather conditions created a slight uptick in deadhead percentages, which resulted in some noise in the first quarter. It complicates comparisons with Q1 and Q2 as we previously discussed some rate increases in Expedited. Right now, I would project that for the rest of the year, we might see flat results unless there are short-term catalysts, which we believe are beginning to develop.

It does turn going up.

Yes, we've got some leverage when it does turn. We're just waiting for that day to happen.

All makes sense. Last one if I could squeeze it in. You mentioned a small tuck-in this quarter on the Dedicated side. Just curious how the M&A backdrop is evolving as we navigate this prolonged downturn, but we're coming off the bottom. Are you seeing the frequency of deals coming across your desk picking up at all, Tripp?

Well, first of all, the tuck-in acquisition was completed on the back end of last quarter. We mentioned it in the release last quarter. Again, it was small, it fit well, and it was a tuck-in of a unique business with non-poultry-related freight. Regarding the deal landscape, it ebbs and flows. Over the last couple of months, some interesting opportunities have crossed our paths to an extent that we are discussing them that align with our objectives. The key for us is to stay disciplined and continue with our strategic plan while effectively allocating our capital. There's been an uptick in interesting opportunities recently.

We'll move next to Jeff Kauffman with Vertical Research Partners.

There's a lot of questions have been asked already here. So I got one detailed question and one big picture question here. Question for Tripp. You bought back 1.5 million shares. The shares sequentially changed by only 0.5 million. What's a good number to think of in terms of third quarter shares outstanding?

We purchased a significant number of shares, and it's important to note that the figures reflected in our financial data are averages. The 1.5 or 1.6 million shares we repurchased during the quarter are not included in the third quarter results. If you take the total shares at the end of the first quarter and subtract 1.5 or 1.6 million, you'll likely get a good estimate of the current share count. There isn’t much vesting or dilution happening that would significantly impact this figure or your calculations.

Okay. So an overly simple way to think about it is you had 27.2 million shares average for the second quarter. Would something in the 26% to 26.2% range be kind of a fair target in terms of where that third quarter average is likely to be? That is barring any other activity?

I think that's pretty accurate. It may fluctuate slightly, but 26.2 million shares is quite likely.

Okay. And then a question for David and Paul. If I take a step back and consider the larger freight environment and what's coming over the next year or two. Right now, we're looking at kind of a 95-ish OR in Expedited and around 96-ish in Dedicated. Where do you think these should be in the longer run when the markets stabilize? When I consider the Dedicated business, you mentioned that the avian flu is gone, but the impact on the franchise still lingers as these businesses heal and the markets normalize. Where should those margins go?

Yes. This is David. Great questions. I'd articulate a couple of things overall. For Expedited, I believe it's an 83% to 93% operation depending on the market situation. While in recent years, we've likely dropped it by about 5 to 6 points from where it used to be in 2015 or 2014, I believe that Expedited can reach that range. Concerning Dedicated, we aim to return to the low 90s operationally, and I think that is very achievable. As we've all witnessed, our poultry division operates in the 80s, significantly impacted by the flu, but we aim for 84% to 86% on poultry, especially with our continued growth in that segment. We have seen substantial growth in that segment; it naturally costs money. Meanwhile, we've been working diligently towards improving our legacy Dedicated side of operations. Although it operates at 95%, we aim for closer to 94% as we recover from past challenges. I anticipate that as the market tightens, the legacy challenges will begin to stabilize and improve.

No, that was really, really helpful. And then Scott Group kind of hinted at this, but let me come back to it. Look, the one great I think this industry has had for 2 to 3 years is where is the volume? We've been waiting for that volume catalyst to tighten the market because capacity is just not coming out as fast as it needs to. Do you believe that between the consumer benefits to disposable income and some of the industrial incentives for capital investment and manufacturing, could the big bill be the volume catalyst the industry has waited for? Or do you think it's something else?

I think there are a few contributing factors. Firstly, regarding the big stimulus measures, I believe that Donald Trump is set on reviving the economy. I genuinely think he is committed to it. My belief is that the government's full focus is directed towards growth. I anticipate seeing a return to 3% to 4% GDP growth. I was recently with some housing peers who believe there is a substantial backlog waiting for housing demand to rise; they are just waiting for interest rates to drop. We see the ongoing battle with the Federal Reserve concerning interest rates. I believe there are many drivers to an increase in freight demand. Additionally, we see that capacity is leaving the market, albeit not as quickly as many might hope. However, orders for Class 8 trucks are down, and the outlook for exit rates is improving, even if not at the levels we hope for. In terms of timing, I foresee that by October, we could see capacity beginning to tighten.

And our next question will come from Elliot Alper with Covenant Logistics.

This is Elliot on for Jason Seidl. Maybe coming back to Dedicated margins improving in the back half of the year, you spoke about some additional start-ups. Is that margin drag quantifiable? I'm trying to think about core Dedicated trends, especially given some trade policy that could impact what a normalized peak might look like.

Yes. Let me break it down for you a little, Elliot. I think that Dedicated margin improved from Q1 to Q2. Then it could improve slightly Q2 to Q3, after which, I believe it will stabilize for Q4 due to seasonal holiday impacts including Thanksgiving and Christmas. So we can expect Dedicated margins to improve slightly from Q2 to Q3, but potentially be flat to decline a little bit into Q4. On the Expedited side, considering a potential peak season, if David’s perspective materializes in October, it may lead to better rates and tighter conditions effective in Q4. If we align with expectations and GDP supports the notion, Expedited could potentially witness a better performance this year than last.

Okay. Very helpful. And just following up on that within Dedicated, you spoke to some value-added services for customers. I'm curious to hear your thoughts on what that could look like.

Yes, we're continually working to diversify our Dedicated segment away from commoditized end markets. It takes time to implement, but generally speaking, specialty businesses have better margins than those that are not specialized. So, over time, we expect margins to improve as we execute our plan, but it will take steady efforts, not an overnight change.

Elliot, just to add on to that, this prolonged downturn has spurred considerable competition within traditional Dedicated and dry van markets, with a lot of capacity moving in that space. Our strategy focuses on differentiation—whether it’s hauling specific types of freight, like live feed, or deploying equipment that requires specialized credentials or higher service demands. The commoditized aspects are ones we will leave behind as we adjust our capital allocation strategy and set our sights on more specialized logistics.

Our next question will come from David Floyd with Chattanooga Times.

I was hoping you could elaborate on the factors that led to the record revenues you saw in the second quarter this year.

Yes. We've been quite fortunate. This freight economy has been challenging for 3 years, but we've managed to grow our Dedicated fleet and the overall truck count, maintaining our margins and sustaining our Expedited business. Our Managed Freight, which is asset-light, has continued to expand. We had surge freight in the quarter that contributed to year-over-year and sequential increases. Looking ahead to Q3, I believe it will continue to be favorable year-over-year, potentially impacted by peak business in Q4. We're witnessing numerous opportunities on that front. Additionally, organic growth in warehousing has also contributed to our revenue rise. The two main drivers of growth year-over-year are our Dedicated segment, with an increase of 162 units, and Managed Freight, which grew almost $18 million year-over-year. We're excited about the direction of the company, especially in such a challenging growth environment.

Got you. And I was curious about the effects of the English proficiency requirements on the recruitment of drivers, both industry-wide and at Covenant.

That's not been a problem for us, David, because we have implemented that requirement; we've always required English-speaking abilities for drivers. Therefore, it hasn't been a challenge. For carriers without those requirements, anything that arises in this regard will help with capacity reduction in the industry.

Got you. Last thing I had was, Jeff, you were discussing how there was anticipation for interest rates to drop, which I assume may encourage more people to buy homes, and that could be beneficial for the industry. Could you elaborate on the freight market outlook going forward under such an economy?

The higher GDP goes, the more freight will be generated. Lower interest rates will be beneficial for housing, and if you consider that for every house built, there are approximately 20 loads of freight needed. If we include flatbeds and additional categories, that number could rise. Hence, the stronger the economy, the more available freight there will be for everyone.

It appears there are no further questions at this time. Mr. Grant, I'll turn the conference back to you.

I want to add on a bit about the larger perspective we discussed earlier. I want to express how thrilled and proud I am of our team's accomplishments. They have done an exceptional job, especially considering the challenging state of the trucking industry over the past 3 years. We've excelled compared to virtually any peer during what has been one of the most difficult environments in trucking history. Our journey of transformation started in 2018, and it’s been a 7-year endeavor. The diverse model we discuss, encompassing Expedited, Dedicated, freight management, and warehousing—this is what we've been striving for. I see a trend of when one aspect strengthens, the other compensates, providing resilience to our business model. Expedited improved while freight management performed admirably in the second quarter. That success is a reflection of the synergies within our network as we adjusted to a fluctuating economy. Furthermore, I want to emphasize the rising costs of insurance in our industry and how they have almost doubled since COVID. We are striving for an unprecedented safety record over four years, and while we continuously make strides in safety, we face rising insurance costs. We need tort reform, and the American Trucking Association is diligently working on this matter.

Thank you for joining us today, and we look forward to speaking with you again in the third quarter. Thank you.

And this concludes today's conference call. Thank you for attending.