Covenant Logistics Group, Inc. Q2 FY2025 earnings call

• Revenue rebounded during the second quarter to a new record high, but margins remain compressed, particularly in Asset-Based Truckload segments. - Repurchased approximately 1.6 million shares or 5.7% of the average diluted shares outstanding for a total cost of $35.2 million. - 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. - Net indebtedness as of June 30 increased by $49 million to $268.7 million. - Average age of tractors at June 30 increased slightly to 22 months. - Return on average invested capital was 7% versus 8% in the prior year. - Expedited segment had 93.9% adjusted operating ratio, slightly better than year ago but fell short of expectations. - Dedicated segment's 95% adjusted operating ratio improved sequentially but fell short of prior year and long-term expectations. - Managed Freight exceeded revenue and profitability expectations, benefited from nonrecurring business. - Warehouse segment had flat freight revenue but reduced adjusted operating profit.

Expedited segment: Yielded a 93.9% adjusted operating ratio, average fleet size shrank by 50 units (5.5%) to 860 average tractors. Dedicated segment: 95% adjusted operating ratio, grew dedicated fleet by 162 tractors (approximately 11.7%) and freight revenue by $8.3 million (10.2%). Managed Freight segment: Exceeded both revenue and profitability expectations for the quarter. Warehouse segment: Freight revenue effectively flat to prior year quarter, but adjusted operating profit fell by approximately 45%. Minority investment in TEL: Contributed pretax net income of $4.3 million for the quarter, revenue increased by 34% compared to the prior year, but margins on leased revenue and equipment sales were lower due to a soft market.

• Baseline expectations for the second half of the year include additional start-ups in Dedicated, slowly improving general freight market, and modest peak season benefiting Expedited and Dedicated, with wide range of outcomes in Managed Freight. - If the general freight market fails to improve, still expect mix change and seasonality to generate better results in the second half. - If the general freight market improves and typical peak season takes place, believe leverage exists in the model to capitalize in Expedited, certain Dedicated accounts, and Managed Freight.

• Insurance costs almost doubled since COVID, need for tort reform. - Avian influenza impact in past. - Commoditized business in Dedicated segment that may pressure margins.

Q: 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.

A: David Ray Parker: We are seeing some green shoots. Seeing bids, midyear bids with capacity issues, not sensing pressure on rate decreases across the book of business. Sensing some capacity side changes and some impacts from English language.

Q: 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.

A: David Ray Parker: LTL side is challenging, most LTL companies reporting pressure on volumes. Airfreight side, consolidation of airfreight, seeing good things with servers and AI-related freight.

Q: How does the big bill impact your thinking about CapEx and spending on trucks? Does it -- are you more likely to be buying trucks or sign more trucks now, anything like that?

A: James S. Grant: Big bill helps cash tax obligations, could spur additional freight, but CapEx plan is generally disciplined, with some growth CapEx for Dedicated growth opportunities.

Q: On the Dedicated side, starting there. We saw some stronger actual growth in truck count this quarter. It's good to see that. I guess, can you talk about what drove that? Maybe 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 kind of out there that you're hearing from the field?

A: M. Paul Bunn: Avian influenza is mostly gone. Dedicated truck count growth due to small tuck-in acquisition and growth in poultry, legacy Dedicated business was flattish. Poultry for back half of year expected to be flat to incrementally up.

Q: 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?

A: James S. Grant: Repurchased shares will be out of Q3 results, can take Q2 average and reduce by repurchased amount, likely around 26.2% range.

Q: If I take a couple of steps back and look at the bigger picture of the freight environment and where we think we're probably going over the next year or 2. Right now, we're looking at kind of a 95-ish OR in Expedited. We're kind of around the 96-ish OR in Dedicated. Where do you think these should be in the longer run when the markets stabilized?

A: David Ray Parker: Expedited should be 83% to 93%, Dedicated's poultry side should be 84% to 86%, legacy Dedicated moving towards lower OR as commoditized business leaves.

Q: 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 at all? I guess trying to think about core Dedicated trends, maybe some of the expectations into what a modest peak season looks like, especially given some trade policy that might swing what a normalized peak might look like?

A: M. Paul Bunn: Dedicated margin got better from Q1 to Q2, could get slightly better Q2 to Q3, then flat to back a bit in Q4. Expedited could see uptick in rates and tightness in Q4 if market tightens.

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

A: James S. Grant: Revenue rebounded due to growing dedicated fleet, strong new business awards in Managed Freight, small acquisition, and receding impacts of weather and avian influenza.

Q: I was curious about just like what the effects of the English proficiency requirements are on just like recruitment of drivers. I mean, industry-wide, but also at Covenant?

A: David Ray Parker: Not a problem at Covenant as they've always required English-speaking drivers, and it helps reduce capacity in the industry.

Q: I was hoping you could just kind of elaborate on just like the outlook for the freight market going forward under Trump's economy?

A: David Ray Parker: Higher GDP and lower interest rates will lead to more freight, with housing improving and带动 related freight, and capacity leaving slowly leading to market tightness.