Q1 2025 Covenant Logistics Group Inc Earnings Call
Welcome to today's Covenant Logistics Group Q1, 2025 earnings release at Investor Conference call our hosts for todays call with trip Grant.
At this time, all participants will be in a listen only mode. Later, we will conduct a question and answer session.
Speaker Change: I would now like to turn the call over to your host Mr. Graff you may begin.
Speaker Change: Good morning, everyone and welcome to the Covenant Logistics group first quarter 2025 conference call.
Speaker Change: 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.
Speaker Change: Please review, our SEC filings and most recent risk factors, we undertake no obligation to publicly update or revise any forward looking statements.
Speaker Change: Our prepared comments and additional financial information are available on our website at www Dot Covenant logistics Dot com slash investors.
Speaker Change: Joining me on the call today.
David Parker: Our CEO, David Parker President pulp on.
Destin Kale: And CFO Destin Kale.
Speaker Change: Before diving into the details I'd like to give an overview of changes in our business mix and impact our revenue and expense comparisons year over year.
Speaker Change: We continue to increase assets and people invested in our dedicated protein business and reduced assets and people allocated to lower return business.
Speaker Change: 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. At this specialized business grows revenue per mile driver and other employee cost per mile and fixed cost per mile.
Speaker Change: Now all increase.
Speaker Change: The year over year changes are more indicative of business mix than apples to apples rate and cost increases.
Speaker Change: 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.
Speaker Change: We had lower fixed cost coverage higher labor costs and worse equipment damage than a normal first quarter.
Speaker Change: Lower miles enhance the impact of business mix on our statistics.
Speaker Change: While our margins did not meet our standards, we navigated a difficult general freight market absorbed inefficiencies from startups overhead from lower base business and dedicated.
Speaker Change: And weather better than most first quarters in our history and many companies in our industry.
Speaker Change: Overall, our strategy is on track and covenant is well positioned to grow revenue and earnings over time.
Speaker Change: Recognizing that a variety of external factors are creating both uncertainty and opportunity in our business.
Speaker Change: Year over year highlights for the quarter include.
Speaker Change: Consolidated freight revenue declined by one 8% or approximately $4 5 million.
Speaker Change: To $243 2 million.
Speaker Change: Primarily as a result of our managed freight segment, which generated $6 million less freight revenue that exceeded our profit expectations by improving adjusted operating income by <unk>.
Speaker Change: $8 million.
Speaker Change: Holidayed adjusted operating income shrank by 26, 6% to $10 $9 million, primarily as a result of adverse operating conditions in the quarter that reduced utilization of our revenue producing equipment.
Speaker Change: Salaries wages and related expenses increased with business mix as well as poor workers compensation experience.
Speaker Change: Combined cost of depreciation interest rents and gain loss on sale increased due to lower fixed cost absorption from lower miles per unit.
Speaker Change: Our net indebtedness as of March 31 increased by $5 8 million to $225 4 million.
Speaker Change: Yielding an adjusted leverage ratio of approximately 155 times and debt to capital ratio of 33, 7%.
Speaker Change: The average age of our tractors at December 31, slightly decreased to 20 months compared to 21 months a year ago.
Speaker Change: On an adjusted basis return on average invested capital was seven 6% versus eight 3% in the prior year.
Speaker Change: Now, providing a little more color on the performance of the individual business segments.
Speaker Change: Our expedited segment yielded a 94 point to 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.
Speaker Change: Compared to the prior year expedited as average fleet size shrunk by 48 units or five 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 increase.
Speaker Change: <unk> exiting less profitable, but profitable business and adding more profitable business.
Speaker Change: Dedicated experienced average fleet growth in the first quarter of 212 units or approximately 16, 7% and grew freight revenue by $9 $5 million or 13, 1% compared with 2024 quarter.
Speaker Change: Revenue per tractor fell by three 1% principally as a result of the impact of inclement weather and reduced volumes associated with avian influenza.
Speaker Change: The result was an operating ratio of 91 far short of our expectations for this segment.
Going forward.
Speaker Change: We remain focused on our strategy of growing our dedicated fleet specifically in areas that provide value added services for customers.
Speaker Change: We believe that if we are successful in providing best in class service and controlling our cost growth and improved profitability will result.
Speaker Change: <unk> freight exceeded profitability expectations for the quarter by focused execution on profitable Fray assisting our expedited fleet with overflow capacity and reducing insurance related claims expense as a result of improvements to our cargo control procedures.
Speaker Change: Going forward, we seek to grow managed freight with profitable revenue from new customers worked closely with our asset base segments to capitalize on over flow opportunities when available and optimized cost to yield longer term margin goals in the mid single digits, which will generate an acceptable return on capital given the asset light nature of it.
Speaker Change: This business.
Speaker Change: Our warehouse segment saw a 6% decrease in freight revenue and a 42% decrease of adjusted operating profit compared to the prior year the.
Speaker Change: 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 new business.
Speaker Change: For the remainder of the year, we anticipate improvement in revenue and adjusted margin for this segment.
Speaker Change: Our minority investment until contributed contributed pretax net income of $3 8 million for the quarter compared to $3 7 million in the prior year period.
Speaker Change: Sales revenue in the quarter increased by 25% compared to the prior year by increasing its fleet by 431 trucks to 2513 and increasing its trailer fleet by 1000 to 7824.
Speaker Change: Regarding our outlook for the future although.
Speaker Change: Our first quarter's operational results fell short of our expectations. We were pleased with the improvement we witness late in that period.
Speaker Change: Momentum, we have taken into the second quarter.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Growing our dedicated fleet and improving our cost profile.
Speaker Change: Thank you for your time, and we will now open the call for any questions.
Speaker Change: If you would like to ask a question. Please press star one on your phone telephone telephone keypad now you'll be placed into the queue in the order of feet.
Speaker Change: Please be prepared to ask your question when prompted.
Speaker Change: Once again, if you would like to ask a question. Please press star one on your phone now.
Speaker Change: And our first question comes from Jason Seidl from TD Cowen. Please go ahead Jason.
Jason Seidl: Thank you operator, good morning, gentlemen.
Jason Seidl: Could you talk a little bit about the dedicated side you know obviously you had some issues with the with the bird flu epidemic here, but.
Jason Seidl: I wanted to talk about the competitive nature of sort of the non poultry business that youre seeing out there what.
Jason Seidl: What we should expect going forward and how do you think that's going to play with margins as we move throughout 'twenty, five and maybe even into 26, given the longer term nature of those contracts.
Paul: Yeah, Hey, Jason It's Paul how are you doing good Bob.
Here's what I would say splitting out the non poultry, it's really competitive out there.
Paul: I would say I'll break dedicated into two worlds specialized in non specialized and so.
Paul: Because some of what we have is specialized that it's not poultry and that business, where you've got a specialized trucks are specialized trailer or a specialized driver.
Paul: I would say, it's still theres not as much pressure there.
Paul: The business that is.
Paul: <unk> 53 foot dry van dedicated is it's tough right now and there is 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 into dedicated and so it is a it.
Paul: As hurt that said I think you know like you've seen in cycles past whenever the one way market goes the other way in the premium for dedicated is not as high as it is today, you'll probably see us.
Paul: 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 <unk>.
Paul: Margins in total.
Paul: I think on the.
Paul: I think we will see dedicated margins improved for a couple of things I think the weather just like.
Paul: Expedited the weather significantly affected dedicated in the first quarter, so just with better weather and and whatnot it'll help it'll help dedicated and then as we continue to lap the bird flu.
Paul: The worst of the bird flu was probably over in January early February, but little chickens don't need as much as big chickens and it takes a little while to kind of get the to get to try them back on track.
Paul: Get the pump primed again, and so the combination of those two.
Paul: Margins in dedicated in total should improve.
Paul: But but in the non commoditized space.
Paul: And the Commoditized dedicated stuff, it's a it is a tough market right now.
Paul: And how should we view.
Speaker Change: Your presence in this space are you going to look to continue to move away from the commoditized market and trying to get more into specialty.
Speaker Change: Yeah, I would tell you every time, we can find especially deal that's what we're looking for and I think most of our you know we parse through most of our <unk>.
Speaker Change: Most of the Commoditized stuff, that's true commodity I think a lot of that stuff is left and gone to the one way market are kind of reset over the last 12 to 18 months.
Speaker Change: Yeah, I would say, Jason that's been our strategy probably for the last couple of years in <unk>.
Speaker Change: <unk> Thompson the acquisition of Blue Thompson was probably.
Speaker Change: The biggest indicator of of you know.
Speaker Change: That being our strategy and our biggest investment in that but.
Speaker Change: One I would say it's difficult to move the needle right now in two I think that over time, you will see us continue to move our percentages are more specialized dedicated.
To a larger percentage of our fleet because theres no doubt about it we're going to have to constantly you know redefine what we consider a specialized or what we consider is defensible or niche.
Speaker Change: Because it is becoming increasingly competitive and I think it's going to even become more so after the cycle ends.
Speaker Change: Interesting.
Speaker Change: Given all the macro uncertainty that's out there you know, what's what's that doing to the deal market. Because I know you guys are constantly in the market to do.
Speaker Change: Probably on the smaller type deals, but talk to me a little bit about how that's been impacting world.
Speaker Change: Here's what I'd say there are a lot of what I'll call a little bitty deals out there right now.
Speaker Change: And I think that's a signal of capacity exits and folks that are struggling for capital.
Speaker Change: You know I would say, we continue to kind of sort through the the intermediate size deals as they come through and but I would say the volume of those is about the same as it's been in the last couple of years, I mean, theres, one or two things a quarter that are interesting and that we evaluate.
Speaker Change: Hum.
Speaker Change: There's one or two a quarter that's interesting that we evaluate and then there's 15 a quarter nope Nope Nope Nope you can just see people warning and a lot of those are on the smaller scale or the MTR Mark Yes, I agree.
Speaker Change: Got you gentlemen, I appreciate the time as always.
Speaker Change: Thank you Joseph.
Speaker Change: Okay.
Speaker Change: And our next question comes from Daniel Umbro from Stephens, Inc. Please go ahead Daniel.
Daniel Umbro: Hey, good morning, guys. Thanks for taking the questions.
Speaker Change: Hey, Dan maybe want to start on the dedicated on the exited business a little bit. It's obviously a L. T O line all within that I'm I'm curious any commentary from your standpoint on how that end market shaping up we're seeing any signs of improvement kind of with your with your LTE all customers. There and then how does the a T or the government business trending as move here through the first part of the year.
David Parker: I would say this David I would say on the L. T O side, it's really a smorgasbord I mean, I see some of our L. T cells that are doing better than others and.
David Parker: And I see that our national L. T cells are probably being hurt more so than the original <unk>.
David Parker: But we had a discussion on that just in the last few days.
David Parker: You know I see a lot of the industrial side that the L. T O guys are involved in that.
David Parker: 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 L. T L side would probably half of our business.
David Parker: So that is that is something that we're just having to work through and see what happens in as well when I say L. T. I'm I'm also included in there freight borders in airfreight and airfreight industry. You know that we have board Oh that segment of substitute service.
Speaker Change: And how about Hey, David Yeah, Yeah, Hey, Jay Daniel.
Speaker Change: They've had a good first quarter and are looking good going into the second quarter. So that that businesses continue to perform nicely wave.
Speaker Change: We've done some things strategically to continue to expand equipment types that we offer.
Speaker Change: In that space and so we get more at bats, and that's been a really good strategic move in and we're going to continue to do that have had more some more things in the hopper. So we can continue to get more the more at bats, or more times youre going to hit and so.
Speaker Change: Continue to be really happy with that business and its performance.
Speaker Change: Got it that's helpful. And then maybe trip you know David just talk 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 of the higher risk adjusted return and M&A.
Speaker Change: How should we think about your appetite for deploying capital.
Speaker Change: 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.
Speaker Change: We continue to look at M&A deals as they come up but I think the the key that we always talk about us being disciplined on what we need and what we 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.
Speaker Change: You'll see us deploy capital in that manner, but if the right one doesn't come along we may not do one so that that's.
Speaker Change: That's the biggest trap I think we could fall into is trying to do one just to do one and and not being right for the long term Daniel I'll I'll I'll add to what <unk> said, having the share repurchase is not going to preclude us from doing the rockdale. If the right deal comes across that said, we're not we're not in love with just doing a deal just to do a deal.
Speaker Change: So I would say you could you know we're going to keep looking and keep doing the share repurchase over time I think it will work out and I would just.
Speaker Change: We noted this in the release it.
Speaker Change: Our capex this year is going to be much less than what it was last year and I think on a 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.
Speaker Change: You know, we don't have a stated goal on leverage but I'm not concerned about getting over two times I think.
Speaker Change: You know somewhere between one and two times is where we want to operate EBITDA leverage and with the reduced capex. This year at kind of a affords us the opportunity to do these things without getting too extended in a situation like this.
Speaker Change: And then maybe last clarifier there on the Capex outlook, it's what part of the Capex, but reducing as just fewer.
Speaker Change: New truck now that's rolling stock, it's not what I would say is last year from a capex perspective, we had a ton of growth in poultry.
Speaker Change: 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 in 2025 is while there is some growth and we do anticipate some growth in our asset based businesses.
Speaker Change: It won't be nearly as much as we saw last year and so.
Speaker Change: I'm thinking that this year is a more normalized cat like maintenance Capex here. So just think about it in the 75 million to $80 million total of which we did almost <unk> 20 of net capex in the first quarter. So we're on pace and you know if I I think will generate a good.
Speaker Change: Sufficient a lot more free cash this year than we did last year.
Speaker Change: Great I appreciate all the color best of luck.
Speaker Change: And then one other thing on that L. T. Ao one of the statements that are L. P. O 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.
Speaker Change: And our next question comes from Jeff Kauffman from vertical Research partners. Please go ahead Jeff.
Jeff Kauffman: Thank you very much everybody.
Jeff Kauffman: I was I was just kind of curious could you dive a little deeper into this protein business how avian flu.
Jeff Kauffman: Impacted I know it happens every year, but you've only had this for about two years. So it's still kind of new to us when this happens I guess.
Jeff Kauffman: Let's get slaughtered and then they get repopulate as and when we eventually grow Bob kind of where are we in that process and when should we see this I know you mentioned little chickens eat lots of big chickens.
Jeff Kauffman: But when should we see this start to normalize.
Jeff Kauffman: Yeah, Here's what I would tell you Jeff is that.
Speaker Change: Let's go back to the beginning of what you said Youre right. There is some amount of of bird flu every year I would say just in talking to some industry folks.
Speaker Change: This year, it's probably the as bad as in a year. It has been I'd say in the in the top two in the last 15 years.
Speaker Change: The timing of it is generally the same kind of flu season.
Speaker Change: US as humans have kind of.
Speaker Change: Early to mid fall to mid winter, so kind of in October to February kind of thing and it has to do with the migratory birds. That's the that's what carries the bird flu.
Speaker Change: And actually.
Speaker Change: That's how the poultry fleets are Fox get it is from Margaret Tory Burch that are migrating from up in Canada, the either the southern U S or for Central America and so.
Speaker Change: They get it they are not migratory patterns and so.
Speaker Change: You said it.
Speaker Change: Exactly right I mean, they when these Fox get <unk>.
Speaker Change: Infested with this the the regulations of the Department of Agri Relations are no state. So they go in and they'll terminate those fox so what that does it kind of it kind of hurt shown two sides. It hurts you from on the long haul side, well Theres no barge to take to take to the processing plant and then and then the other.
Speaker Change: Other part as you quoted me.
Speaker Change: <unk> populate it with a little birds in the little birds eat less and the big Bird. So you feed volumes are down and so it just takes some time to get the pump kind of prompt back up when all that happens and I would say.
Speaker Change: We are we felt that you know in the fourth quarter I'd say, we felt that January February March were filling out a little bit in April I would say by June we should be back at 100%, we're probably at.
Speaker Change: We're probably 85% they will be at 90 something percent in my back at 100% in June.
Speaker Change: As far as capacity and so there there should be some are again improvements in the results are once we get that back on a plane.
Speaker Change: When you came into this business you've ever thought you'd be talking about migratory bird patterns on it.
Speaker Change: No.
Speaker Change: [laughter] alright so.
Speaker Change: We learned this year gaol. This winter I would tell you that.
Speaker Change: So I I think I kind of understand what's happening in dedicated and expedited can you give me Oh I guess 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 and warehouse are managed transportation and.
Speaker Change: And how we should think of that moving forward.
Speaker Change: Yeah, Let me touch.
Speaker Change: Tuck in acquisition.
Speaker Change: You know.
Speaker Change: Caller earlier asked about M&A and so we had the opportunity to do a tuck in on kind of a specialty.
Speaker Change: Our specialty dedicated fleet.
Speaker Change: And you know when we talk about specialty trucks specialty driver, especially trailer that business met one of those criteria. It's a business that they have not had a little bit of history with the owner.
Speaker Change: It was a good business and.
Speaker Change: 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 was.
Speaker Change: 60, 70 truck kind of deal and we think long term, we can turn into a 120 530 truck kind of deal at solid revenue per truck per week solid margins and it's been a pretty defensible spice that not everybody's in because of some of the specialty nature. So again just.
Speaker Change: Just another example of how you some deals or big some deals are little it was a little deal.
Speaker Change: We've seen basically none of the earnings from it we will start seeing a little bit of that in the second quarter.
Speaker Change: As it relates to warehousing and managed freight.
Speaker Change: The warehousing business I would say.
Speaker Change: Revenue is relatively consistent the the margins were down a little bit in Q1, but I think some of that was.
Speaker Change: And 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 youll see a warehouse to a little better in Q2 and continuing to get better throughout the year, we had a had a startup a good startup.
Speaker Change: Q1 on the warehousing side that we haven't seen the full benefit of and I've got a.
Speaker Change: Another pretty large startup 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 looked good the return on invested capital is great and so we'll just keep going down the path on that business Manny.
Speaker Change: Freight I would say.
Speaker Change: We're doing some things differently, we hired about a year ago, you guys know, we hired Dustin <unk>, our new Chief operating officer, and so he's brought some some.
Speaker Change: 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.
Speaker Change: And then we've had some customer growth and managed freight as well and I think youll 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.
Speaker Change: Not only where they're at but where they're going.
Speaker Change: Alright, Thank you very much.
Speaker Change: And as a reminder, if you'd like to ask a question. Please press star one on your phone now.
Speaker Change: And gentlemen at this time there appears to be no further questions.
Speaker Change: Okay.
Speaker Change: 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.
Speaker Change: This concludes today's conference call. Thank you for attending.
Speaker Change: The host has ended this call goodbye.