COVENANT LOGISTICS GROUP, INC. Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Business mix changes: Increasing assets and people in dedicated protein business, reducing in lower return business. Specialized dedicated customers have higher revenue per mile but fewer miles per tractor.
• Impact of weather and avian influenza: Lower miles, lower fixed cost coverage, higher layover costs, and worse equipment damage in Q1. Margins didn't meet standards but navigated difficult market better than most.
• Segment focuses: Expedited on improving margins via rate increases and business exit; Dedicated on growing fleet and providing value-added services; Managed freight on profitable growth and cost optimization; Warehouse on anticipating improvement; TEL on continued growth.

Segment Performance

• Expedited: Yielded a 94.2 adjusted operating ratio. Average fleet size shrunk by 48 units (5.3%) to 852 average tractors in the period. Focus on improving margins through rate increases, exiting less profitable business, and adding more profitable business.
• Dedicated: Experienced average fleet growth of 212 units (approximately 16.7%) in Q1, grew freight revenue by $9.5 million (13.1%) compared to 2024. Revenue per tractor fell by 3.1% due to weather and avian influenza impact, resulting in an operating ratio of 90.1.
• Managed freight: Exceeded profitability expectations by focusing on profitable freight, assisting expedited fleet with overflow capacity, and reducing insurance claims. Focus on growing with profitable revenue from new customers and optimizing costs.
• Warehouse: Saw a 6% decrease in freight revenue and a 42% decrease in adjusted operating profit compared to prior year. Due to facility-related cost increases, startup costs, and inefficiencies. Anticipate improvement in revenue and adjusted margin for the rest of the year.
• Minority investment in TEL: Contributed pre-tax net income of $3.8 million for the quarter, with TEL's revenue increasing by 25% with fleet growth.

Guidance

• April expected to be a good operational month with better weather and poultry volumes, though volumes can shift negatively.
• Anticipate recovery from bird flu by June, with capacity expected to be back at 100% by then.
• Reduced CapEx this year compared to last year, with normalized CapEx expected. Focus on disciplined capital allocation, evaluating M&A deals, and share repurchasing while being selective.

Risks

• Weather impact on miles and operational costs.
• Continued impact of avian influenza on poultry-related business volumes.
• Competitive nature of non-poultry dedicated business, leading to margin pressure.
• Economic uncertainties affecting M&A activity and market conditions, requiring disciplined capital deployment.

Q: Jason Seidl from TD Cowen asked about the competitive nature of non-poultry dedicated business and margins going forward.

A: Paul Bunn responded that non-poultry dedicated has competitive pressures, with specialized non-poultry business less pressured than 53-foot drive-in dedicated. Weather and lapping bird flu impact will help margins.

Q: Daniel Imbro from Stephen Sink asked about LTL market, AAT business, and M&A appetite.

A: David Parker said LTL market is mixed with stress on some, AAT business is performing well. Tripp Grant stated disciplined approach to M&A and share repurchasing, with reduced CapEx this year.

Q: Jeff Kauffman from Vertical Research Partners asked about avian flu impact on dedicated and details on M&A, warehousing, and managed freight.

A: Paul Bunn explained avian flu timeline and recovery expectations. Discussed small M&A tuck-in, warehousing improvement with startups, and managed freight growth with new COO bringing changes.