COVENANT LOGISTICS GROUP, INC. Q3 FY2024 earnings call

Key highlights include: Asset-based truckload operations (Expedited and Dedicated) grew average tractor count by 169 units (7.9%), freight revenue by $11.4 million (7.2%), and adjusted operating income by $1.6 million (12.6%). Asset-light operations (Managed Freight and Warehousing) saw freight revenue down $6.2 million (6.5%) but total adjusted operating income only down $0.2 million (3.0%). Net capital investment for revenue producing equipment was ~$18 million. Fleet average age improved to 20 months from 23 months. Net indebtedness declined to $236.7 million, with an adjusted leverage ratio of 1.6 times and debt-to-capital ratio of 35.4%. Return on invested capital was 8.1% for the quarter versus 10% in the prior year.

Expedited: Freight revenue was $87.4 million with adjusted operating income of $7 million, resulting in an adjusted operating ratio of 92. The segment was impacted by softer volumes and imbalanced network. Dedicated: Freight revenue grew by $15.7 million (23.5%) and adjusted operating income grew by $3.2 million (73.9%), with an adjusted operating ratio of 91. Managed Freight: Freight revenue decreased by 9.1% and adjusted operating profit by 29.5%, with an adjusted operating ratio of 95.7, due to lower profitable volumes and cargo claims. Warehousing: Freight revenue increased by 0.5% and adjusted operating profit by 85.1%, with an adjusted operating ratio of 91.5, showing improved profitability after prior challenges. TEL: Pre-tax net income was $4 million for the quarter compared to $5.3 million in the prior year, with revenue up 6% but pre-tax net income down ~24% due to a soft equipment market and higher interest expense.

The general freight market is expected to remain challenging despite improving fundamentals, with uncertainty about demand improvement pace. The fourth quarter is expected to have momentum to improve operations and execute opportunities regardless of the freight market. CapEx is expected to be lower in 2025, around $50-60 million, mostly for maintenance CapEx with some growth CapEx early in the year.

Soft freight volumes affecting the Expedited segment. Proliferation of brokers and small carriers negatively impacting market rebound. Higher interest rates affecting TEL's performance.

Q: About demand environment and Q4 post-storms A: Paul Bunn stated softness carried over from September to October in the Expedited network, with some uptick around hurricanes but fading quickly. David Parker added the freight market is still at the bottom waiting for a catalyst.

Q: Pricing in coming cycle A: David Parker expects 2%-3% rate increases, with potential for more in the second half of the year, noting customers are not expecting no rate increases for three years.

Q: CapEx in 2025 A: Tripp Grant said CapEx is expected to be lower in 2025, around $50-60 million, mostly for maintenance CapEx, with some growth CapEx already bought and paid for early in the year.

Q: Longer-term market changes A: Paul Bunn mentioned specialized businesses continue to perform well, while proliferation of brokers and small carriers hinder market rebound. David Parker added domestic industrial production and election impact could affect the market.

Q: Cash flow and acquisitions A: Paul Bunn and Tripp Grant discussed being patient with acquisitions, looking for niche, stable businesses, and CapEx reduction is building cash for potential acquisitions.