Welcome to the Covenant Logistics Group Q3 2025 Earnings Release and Investor Conference Call. Our host today is Tripp Grant. I will now hand the call over to Mr. Grant. You may begin, sir.

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

Our first question comes from Scott Group of Wolfe Research.

I want to begin by discussing the capacity situation you mentioned earlier and provide some insights on what we are observing in the market regarding capacity exits. How significant do you think this will be? Additionally, there seems to be increased discussion in the market about this. Can you explain why we are not seeing any impact on national spot rates? While there are indications of tighter conditions in local markets, why do you believe this is not reflected in the national spot rate data?

Scott, it's David. I mean, this is something that has been challenging to understand. To start, I'm really excited. After 53 years in this industry, I feel more optimistic now than ever about the next 2 to 3 years. We're seeing increased government concern about who is driving trucks and why, and I sense a significant change is coming. Recently, we've noticed margin compression in our brokerage operations over the past 3 weeks. This situation appears to be confined to several individual states. I met yesterday with our brokerage team, and states like California, Texas, Oklahoma, and cities like Chicago keep coming up. Third parties are hesitant to operate in these areas, and that's contributing to tightening in certain regions, resulting in rising rates where many truckers avoid these locations. For instance, reports from Oklahoma about authorities detaining trucks make drivers wary, and many are avoiding places like Laredo, Texas, due to language barriers and enforcement. We're at a point where if fatalities continue to occur involving illegal immigrants, the problem is likely to spread nationwide. Issues concerning non-domiciled CDL licenses, language capabilities, and ELD compliance are rampant. Many companies are cheating the system despite the expectation that ELDs would enforce stricter regulations. The government has already suspended a few companies, but hundreds more need scrutiny. I feel confident that in the coming years, we will see fewer drivers on the road, leading to safer operations. We'll see English-speaking drivers, a more streamlined ELD system, and fewer fraudulent activities related to MC numbers. The influx of new drivers is likely to diminish, which is encouraging because it indicates a supply constraint is finally developing. Regarding the Fed's approach to interest rates, I believe they will continue to lower them and stimulate the economy. The massive stimulus package will lead to substantial freight opportunities as new plants are established in America. While I see challenges like margin compression affecting brokerages now, I maintain a positive outlook. The used truck market is fluctuating, and uncertainty reigns, but I'm optimistic it will improve. The recent government shutdown impacted my Department of Defense business, but I expect things will eventually return to normal. I also want to highlight that rates in our industry have not increased in 4 years, which is frustrating. However, recently, we've secured rate increases of 2.5% to 4% from several accounts, which is encouraging and has not been seen in years. Bid rates are also rising significantly. This trend is partly due to our customers’ concerns about capacity, even as we all seek freight. So, as I look ahead to 2026, 2027, and 2028, I am more excited than ever. If someone wants to invest in trucking, now is the time; they shouldn't wait any longer. That's where I stand.

Thank you, Scott. I want to highlight a few points. David discussed regulation extensively, and we are definitely feeling its impact. We've shared insights about future demand in freight. Internally, we're focused on two key ideas: first, patience. We all need to exercise patience, and I will elaborate on that. Second, there will be some challenges before we see improvements, particularly with used truck prices and the bankruptcy of smaller companies flooding the market, along with compression in brokerage. Historically, our industry has experienced difficulties before achieving progress, and that's the situation we're currently facing. Regarding the spot market, following Secretary Duffy's announcement about non-domiciled CDLs, we saw an increase in spot rates, especially in the markets David mentioned. Many of those license holders chose to stay home, particularly because the distribution of these non-domiciled CDLs is limited to a few states, particularly on the West Coast. The main West Coast states involved are still determining their course of action for those with non-domiciled CDLs. California is expected to make a decision within the next five days on how to instruct carriers regarding these drivers. Initially, in the first few days, those with such licenses stayed home, but they have since returned to work. In the coming five to ten days, we anticipate California will announce procedures for carriers to follow. This is when we expect to see some capacity leave the market, and I believe it will happen soon. Additionally, as David pointed out, new entrants into the market are also being curtailed. This context might clarify why spot rates have not surged; while some individuals stayed home initially, they have now returned. In the next five to ten days, we expect states to implement policies, followed by a reduction in capacity around 30 days later.

Okay. Super helpful. David, I’d like to ask a follow-up if I can. How do you assess the number of drivers from your perspective on enforcement? It has generally been easier to enforce large fleets compared to smaller truck operators. How do you approach this? And do you believe that this will ultimately benefit large fleets significantly? Is there a risk to the brokerage model in general?

Yes, we have a $200 million brokerage, and I am concerned because I believe that under Duffy's leadership at DOT, there will be a stronger focus on targeting more illegal small carriers rather than the larger ones. Therefore, I do have concerns about margin compression in my brokerage. However, I think that after some time, which could be three to six months or so, we will begin to see asset rates rise significantly enough to counterbalance any brokerage compression.

Yes. I think, Scott, when I was referring to there's going to be some pain before there's gain. I think that that was probably more on the brokerage side because there will be some pain going through this with a lot of brokerages. And to your point, it should help asset companies more. Brokers make money when rates are rising hard, when rates are falling hard. And so, where they are getting troubles in the middle and if you got contract rates and hadn't reset...

And if the government was not doing nothing, if the government was just going to be on the sidelines, it all go back to the way it's always been for 40 years. But I don't believe that's happening. There's an unbelievable amount of pressure, that the government is putting on it, but I think constituents are putting back to the government now saying, am I going to wake up every day to a fatality accident.

Okay. And then just last one, if I can, just turning to your business. You talked about near-term pain in Q4. Any way to sort of size sort of what you're thinking about for Q4? And I know you've got a lot of like that linehaul LTL business. How is that performing right now?

Yes. The LTL is down, and it's interesting because forever, LTL would slow down in November, December, that was typical, to be honest with you, from COVID for 2, 3 years, say, '21, '22, '23, we really didn't see the LTLs really slow down a lot. But the LTL guys are slow. I mean, their business has been hit. And I think overall, the volumes are down, and I don't know when that is necessarily going to come back. It will, but I don't know when it's going to be. So yes, I look at that, that concerns me. I look at how long is the government shutdown going to be on my DoD business because it's only half of what it was. And so, we got to deal with that and then compression on the brokerage side of the business. So I think we got to go through that junk. In our TEL business, I'm happy about a couple of things. They've grown more business, more sales, more leases is what I'm trying to think of. The customers so far in the last 6 weeks, which is a good sign, but they also had to take back more trucks than they've had. So I'm seeing some sloppiness in the TEL business that concerns me. And so, I think all that adds up to fourth quarter that it isn't going to be third quarter. It's going to be less than third quarter, and I'll let...

I think it's too early to provide a specific number, but it's softer than seasonally expected for several reasons discussed earlier, particularly regarding truckload and our TEL business. Based on what we've observed so far this quarter and our outlook for the peak season, while there are some positive signs in freight, they don't outweigh the challenges we've encountered in the first few weeks of October. It does seem unusually softer, but I would hesitate to provide a definitive forecast.

That's interesting because I am somewhat optimistic about what I'm seeing about peak business. And some of our customers have already gotten back with us saying that carriers have given back freight to them, which is on the brokerage side. And so that's also interesting to me. So yes, peak is not going to take care of some of the reductions, but I am optimistic that peak seems like it might be a decent peak for us.

Guys, I don't know if you can still hear me, but just so we can hear you.

Okay. Thank you. We're going to put it on mute. Our operator has disappeared.

Yes, we're trying to see if there's any other questions.

Maybe you convince the operator who's busy buying trucking stocks.

He is busy. The market is open. We're trying to get the operator to see if they can facilitate any questions. So we'll see what happens.

Just to clarify, would you like me to ask more questions?

Yes, please.

Let's discuss pricing for a moment. I believe you mentioned that you're beginning to see some bidding activity. What are your initial thoughts on pricing and the upcoming bidding season for 2026?

Scott, it's early. As David said, we're going out to some customers. And I think low single digits is kind of the norm. I mean, we need a lot more than that. Inflation has been significant in '22, '23, '24, '25. And I'm betting the price of trucks is going to go up next year and health insurance and casualty insurance is going to go up. And so, we need a lot more. But I think low single digits, there are customers that are willing to have good active discussions around those numbers just from the recent experience we've had.

Okay. You mentioned that there isn't much demand for trucks at the moment. What are you planning to do regarding your fleet? What are your thoughts on capital expenditures?

There are a few points to discuss. I'll cover some details and then David can add his insights. First, typically by this time of year, large fleets have established their pricing. However, with the uncertainty surrounding tariffs—particularly discussions about potential new big truck tariffs announced in late September and early October—questions remain about whether these would apply to entire trucks, specific parts, or certain vendors. There's a lot of ambiguity right now. Hopefully, we'll have more clarity by next week as we meet with all the OEMs in San Diego. As a result of this uncertainty, there have been no orders placed, since pricing remains unclear, and the order boards at these OEMs are quite slow. Looking ahead to the fourth quarter and into next year, the order boards for truck and trailer equipment are very relaxed. Regarding our fleet size, I anticipate it will remain relatively stable, though we may streamline some operations if we can't achieve desired margins. Concerning next year's net CapEx, I will let you calculate that.

I believe there are still uncertainties about the situation. It's likely that our net figures will be in the range of $70 million to $80 million, but I would prefer to avoid making a firm commitment to that estimate as it may change. We have several new trucks that we've financed, which are ready to be put into service, but we currently have a significant amount of unproductive equipment, both new and used. We don't want to sell it off hastily, as we can afford to hold onto it for a while longer to take advantage of market fluctuations. While our fleet has aged by about 2 or 3 months compared to last year, it's worth noting that we have a lot of new equipment waiting to be deployed, indicating that our fleet remains in excellent condition. Our balance sheet is also robust, and we plan to acquire more equipment, though it's challenging to specify a number without knowing the prices. This situation actually provides us with an advantage over some competitors, as we have consistently replaced our fleets even during tough times, ensuring we maintain a fleet equipped with the latest safety features and optimal fuel efficiency. We will continue to follow this strategy and have a bit more flexibility than others in the market when it comes to delaying or reducing purchases next year. For now, we are maintaining a wait-and-hold approach regarding our absolute volumes.

Have you guys tracked on the operator yet?

No comment.

I appreciate you being here again. David, one of the things I admire about you is your calmness regarding the markets and your lack of enthusiasm. I wanted to elaborate on two different topics. Can you discuss the impact of the government shutdown on the DoD? You mentioned that business is down about half. How should we expect that to affect the P&L? Once the government reopens, whenever that may be, how quickly do you anticipate that freight will return? I also have a question regarding capacity.

Yes, this is Paul. On the DoD business, I would estimate that about half of it will be lost due to the way they handle freight. Some of it involves inventory movements while other parts are vendor-related freight. As a result, not everything will eventually create a backlog; some will simply be lost. We've shifted many trucks to expedited loads to keep operations running and ensure drivers are compensated. Therefore, we might see a slight increase once the government resumes operations, although it may not be a complete recovery. Regarding its impact on the profit and loss statement, if it lasts the entire quarter, it could significantly affect expedited results. However, if a resolution occurs in the first week of November, as is expected, the impact might be less pronounced. I'm frustrated that we lost October, which is crucial since many bases close around Thanksgiving and Christmas, and we typically see high activity from October 1 to November 15. The timing of the government shutdown is unfortunate and will certainly affect us. As David mentioned, it's a tough situation, but this business will eventually bounce back.

Turning back to capacity, as Scott mentioned, we're not seeing much of an impact in the spot market. However, I believe that eventually things will improve as we move through the months. My question is what could accelerate this process? We've heard that some insurance companies and customers are considering actions regarding exposure to carriers with non-domiciled drivers. How should we approach this situation, and what insights do you have from the marketplace?

I believe what you mentioned, Jason, is currently unfolding. It appears that insurance companies may soon refuse coverage for non-domiciled CDL licenses, and California is at the forefront of this change. We'll likely learn more about California's plans in the coming week. Insurance companies are assessing their current policies and realizing they may need to stop insuring certain risks, which will inevitably leave many without coverage. Additionally, government pressure on these issues is increasing. We haven't discussed cabotage, but the level of violations in that area is significant, with drivers from Mexico traveling to Canada and the U.S. instead of returning directly. This situation, which falls under government scrutiny, could eventually lead to more freight being redirected to U.S. carriers. Overall, whether this process unfolds in the near term or takes until April, I believe government intervention will result in a reduction of capacity in the market, with no new capacity being added. Recently, we've observed a weekly decline of 50 to 100 MC numbers, but last week the drop was over 400, which is a significant fluctuation. Moreover, while total freight volume has decreased by 17%, rejection rates have increased by nearly 2%, indicating something about market capacity. These are the trends we are monitoring as we move forward.

Well, David, let's say you're right and the recovery is in April with the start of spring shipping season because you finally get the volume back. Bid season, we're going to be well into that already and probably not at exceedingly favorable rates at this stage. What's your ability to go back to the customers and say, 'Hey, look, it's June, the market is different, right?

I am fully invested in my customers, more than anyone else. However, if I haven't managed to raise your rates in four years, and I can't make a case for an increase just three months into a low rate, then we don't have a relationship worth pursuing. If that's the case, I don't want you in my portfolio. This situation will affect not just me, but the entire industry. Looking at the rates we discussed, we are experiencing margin compression, and tough times lie ahead, but I am satisfied with our current position. Despite the challenges we face, there are many positive demand opportunities, foreign investments, and accelerated depreciation to consider. Additionally, with the Federal Reserve's rate cuts and the domestic investment that will bolster the economy as capacity decreases, I am optimistic about the future. It's a perfect storm.

I can certainly see it. While I don’t have 50 years in trucking, I have just over 30 years, and this is definitely one of the more interesting times I’ve experienced. I appreciate the time as always, and I want everyone to stay safe out there.

And our next question comes from Reed Seay from Stephens.

You've given a lot of good color, but I wanted to come back and touch on some of this government business. You mentioned like the volume will come back once the government comes back. But here in the fourth quarter, let's say maybe we get a shutdown here at the end of the month. Could we potentially see a catch-up of these volumes in 4Q? Or how would you expect maybe the cadence following a return of these volumes?

Yes, Reed, I would say that while there could be a partial catch-up, it won't be complete. One factor limiting the catch-up is that operations will halt around Thanksgiving and Christmas. Given the timing of the calendar, this will affect a full recovery, along with other factors related to the freight itself. It is still moving, and a partial catch-up could happen if the government reopens sooner rather than later.

And then it looks like during the quarter, costs were moving in the right direction. Can you talk about maybe some actions that you've taken on the cost side here in 3Q? And maybe is there any more to come in 4Q if we have demand continue to be weak in the LTL or in certain parts of the business?

We have worked to align our headcount with our freight volumes and have focused on avoiding unnecessary overhead expenses. We significantly curbed any growth in overhead earlier this year, or possibly at the end of last year, anticipating that the market would continue to be challenging. We are satisfied with our maintenance costs and the measures we have implemented to reduce them. Overall, we are concentrating on managing our resources effectively and ensuring we are prepared for ongoing market challenges, as we have been dealing with this situation for about 36 to 40 months. We need to be cautious and avoid overspending.

I agree with what Paul mentioned. There were several significant cost-cutting measures we undertook this quarter, which we've detailed in a table. These decisions were challenging, but we have remained very mindful of our expenses throughout the year. Earlier in the year, particularly in the first and second quarters, we faced increases in equipment-related costs. As we develop our dedicated fleets and expand into new regions, it takes time to optimize our cost structures in these areas. We are working to find the right balance and achieve the density necessary for efficient operations. This quarter, we also encountered some start-up costs related to new facilities and hires, including salaries, which we believe will lead to greater efficiency in the future. We are committed to investing in initiatives that will yield positive returns for our shareholders, even though the process may be somewhat cumbersome. However, I believe that as our business continues to expand, we will start to see improved efficiencies.

And our next question comes from Jeff Kauffman from Vertical Research Partners.

Just some quick kind of look ahead here. What are you expecting to hear from the other carriers at ATA that might be a little different than what you were thinking a couple of weeks ago?

I believe it will simply be an add-on to everything we've discussed today. There are motor carriers who are upset and others who are satisfied with the government's actions. I think this will set the tone at ATA. Additionally, we need to address the concerns regarding OEMs and trucks. I believe these will be the two main issues. Don't you agree, Paul?

Yes, truck. I think it's going to be government regulation. It's going to be how bad has inflation been over the last 36 to 42 months that you haven't been able to get in rates and regulation trucks and inflation that has been a recovery in rates. That will be the 3 big talking points.

And then just one follow-up question because I know a lot of questions were asked by Scott Group. The shares are about 9x earnings right now, give or take. I know it frustrates you. It just is what it is. I know the balance sheet is in good shape, but what are you thinking in terms of share repurchase here? I mean, you don't want to get over your skis in buying them in a tough environment. On the other hand, shares appear like a bit of a gift at these valuations for a buyback.

I agree with you. I believe our shares are significantly undervalued, presenting substantial potential. The balance sheet is solid, with our debt-to-EBITDA ratio just over 2x. We have repurchased a considerable amount of stock for various reasons, including making an earn-out payment in the first half of the year and preemptively addressing tariffs on most of our equipment. I expect our margins and cash flow from operations, including maintenance CapEx, will improve in the fourth quarter, providing us with opportunities. While I don’t want to commit to any specific share buyback plans, we do have room under our board-approved share repurchase program. We've explored various options in the past, such as M&A, share repurchases, and maintaining dividends. We believe our strategy is effective, and we intend to continue with it.

At this time, there are no further questions. I'll turn the call back over to Tripp for closing remarks.

All right. Well, thank you, everybody, for joining us for the third quarter earnings call for Covenant Logistics. We look forward to talking to you next quarter. Thank you very much.

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