Earnings call transcript: Covenant Logistics beats Q2 2025 earnings expectations

Covenant Logistics Group (CVLG) reported its Q2 2025 earnings, surpassing expectations with an earnings per share (EPS) of $0.45 against a forecast of $0.419, marking a 7.4% surprise. Revenue reached $302.85 million, exceeding the anticipated $287.25 million. Following the announcement, Covenant Logistics’ stock rose by 3.38% to $25.85, indicating positive investor sentiment. With a market capitalization of $665.5 million and an EV/EBITDA ratio of 5.9x, InvestingPro analysis suggests the stock is trading slightly above its Fair Value, though analysts see further upside with price targets ranging from $30 to $34.

Key Takeaways

• Covenant Logistics exceeded both EPS and revenue forecasts for Q2 2025.
• The company’s stock price increased by 3.38% in post-earnings trading.
• Freight revenue increased by 7.8% year-over-year.
• The trucking industry shows signs of recovery, with Covenant outperforming its peers.
• The company is expanding its dedicated fleet and implementing new safety measures.

Company Performance

Covenant Logistics demonstrated strong performance in Q2 2025, with a notable increase in consolidated freight revenue by 7.8% to $276.5 million. Despite a challenging environment in the trucking industry, marked by a prolonged downturn, the company has managed to outperform its peers by focusing on specialized and high-margin services. The expansion of its dedicated fleet and strategic diversification across expedited, managed freight, and warehousing segments have contributed to its robust performance.

Financial Highlights

• Revenue: $302.85 million, surpassing the forecast of $287.25 million.
• Earnings per share: $0.45, exceeding the forecast of $0.419.
• Consolidated adjusted operating income: $15 million, a decrease of 19.6%.
• Net indebtedness: Increased to $268.7 million.
• Share repurchase: 1.6 million shares at $22.69 per share, totaling $35.2 million.

Earnings vs. Forecast

Covenant Logistics delivered an EPS of $0.45, beating the forecast of $0.419 by 7.4%. The revenue of $302.85 million also exceeded expectations by 5.43%. This marks a significant performance, as the company has consistently managed to deliver earnings surprises in recent quarters, reinforcing investor confidence.

Market Reaction

Following the earnings announcement, Covenant Logistics’ stock rose by 3.38% to $25.85. This increase reflects positive investor sentiment and confidence in the company’s ability to navigate a challenging market environment. The stock’s performance is notable, considering its position within a 52-week range of $17.46 to $30.77.

Outlook & Guidance

Looking ahead, Covenant Logistics anticipates a modest peak season in Q4 and potential market improvement in October. The company is targeting an operating ratio of 83-93 for its expedited segment and aims to enhance margins in the dedicated segment. Covenant’s strategic focus on high-margin services and market recovery signs positions it well for future growth.

Executive Commentary

CEO David Parker highlighted the company’s resilience, stating, "We’ve excelled much better than virtually any peer that we got out there in the most difficult environment in trucking history." He emphasized the potential for growth, saying, "The better the economy, the more freight that’s gonna be available for all of us." Parker also noted the company’s transformation, "We’re on a seven-year journey now of taking our company and transforming our company tremendously."

Risks and Challenges

• Economic Uncertainty: Potential fluctuations in GDP growth could impact freight demand.
• Industry Downturn: Prolonged downturns in the trucking industry may affect profitability.
• Regulatory Changes: New regulations could increase operational costs.
• Competitive Pressure: Intense competition could impact market share.
• Supply Chain Disruptions: Continued disruptions could affect service delivery.

Q&A

During the earnings call, analysts inquired about the potential impact of the infrastructure bill and market recovery expectations. Discussions also centered on segment-specific performance and strategies, as well as driver recruitment and language proficiency requirements. Covenant Logistics addressed these questions, highlighting its strategic initiatives and market positioning.

Full transcript - Covenant Logistics Group Inc (CVLG) Q2 2025:

Conference Operator: Welcome to today’s Covenant Logistics Group Q2 twenty twenty five Earnings Release and Investor Conference Call. Our host for today’s call is Tripp Grant. At this time, all participants will be in a listen only mode. Later, we will conduct a question and answer session. I would now like to turn the call over to your host.

Mr. Grant, you may begin.

Tripp Grant, Financial Representative, Covenant Logistics Group: Good morning, everyone, and welcome to the Covenant Logistics Group’s second quarter twenty twenty five 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 www.covenantlogistics.com/investors.

Joining me today are CEO, David Parker president, Paul Bunn and COO, Dustin Kale. Revenue rebounded during the second quarter to a new record high, thanks to growing our dedicated fleet, strong new business awards in managed freight, a small acquisition and receding impact of weather and avian influenza. However, margins remain compressed, particularly in our asset based truckload segments due to an inflationary cost environment, persistently high claims expense, a quarter end jump in fuel prices, and continued pressure on volume and yields in our expedited and legacy dedicated segments. During the quarter, we repurchased approximately 1,600,000.0 shares or 5.7% of the average diluted shares outstanding for a total cost of $35,200,000. The average price per share repurchased was $22.69.

Approximately $13,800,000 remains available under our $50,000,000 share repurchase authorization. We retain the full range of capital allocation alternatives based on our current financial profile. Year over year highlights for the quarter include consolidated freight revenue increased by 7.8% or approximately $20,000,000 to $276,500,000. Consolidated adjusted operating income shrank by 19.6% to $15,000,000, primarily as a result of year over year cost increases within our truckload segment. Our net indebtedness as of June 30 increased by $49,000,000 to $268,700,000 compared to 12/31/2024, yielding an adjusted leverage ratio of approximately two times and debt to capital ratio of 39.2% as a result of executing our share repurchase program and acquisition related earn out payments.

The average age of our tractors at June 30 increased slightly to twenty two months compared to twenty one months a year ago. On an adjusted basis, return on average invested capital was 7% versus 8% in the prior year. Now providing a little more color on the performance of the individual business segments. Our expedited segment yielded a 93.9 adjusted operating ratio, a result only slightly better than the year ago quarter. While this result falls short of our expectations for this segment, we were pleased with the year over year consistency.

Compared to the prior year, Expedited’s average fleet size shrunk by 50 units or 5.5% to eight sixty average tractors in the period. We expect the size of the 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 95 adjusted operating ratio improved sequentially, but fell short of both the prior year and our long term expectations for this segment. On a positive note, we were successful in growing the dedicated fleet by a 162 tractors or approximately 11.7% compared to the prior year and grew freight revenue by $8,300,000 or 10.2% compared with the twenty twenty four quarter.

We continue to win new business in specialized and high service niches within our dedicated segment and reduce exposure to more commoditized end markets where returns have not justified continued investment. Going forward, we remain focused on our strategy of growing our dedicated fleet, specifically in areas that provide value added services for customers. Managed freight exceeded both revenue and profitability expectations for the quarter. We were pleased by the team’s ability to bring on new freight, handle overflow freight from expedited and reduce costs. The quarter benefited from nonrecurring business that is expected to roll off during the third quarter, and we point out that this segment generally is susceptible to volatility of revenue gains and losses and to margin expansion and compression related to the cost of sourcing capacity during market cycles.

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 in capital given the asset light nature of this segment. Our warehouse segment experienced great revenue that was effectively flat to the prior year quarter, but adjusted operating profit fell by approximately 45%. 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 start up related costs and inefficiencies related to new business. We anticipate improvements to adjusted margin during the remainder of the year. Our minority investment in Tel contributed pretax net income of $4,300,000 for the quarter compared to $4,100,000 in the prior year period.

Sales revenue in the quarter increased by 34% compared to the prior year, primarily by increasing its truck fleet by four twenty nine trucks to two thousand six and thirty five and increasing its trailer fleet by 866 to 7,880. The revenue increase was largely offset by lower margins on lease revenue and equipment sales due to a soft market. Regarding our outlook for the future, our team is performing well while keeping the pedal down on growth and shifting next toward more contracted, specialized and high service niches. Pebble Logistics is one of the few companies in our industry to grow revenue and fleet count year over year, while the combination of tepid general freight market and start up costs and new dedicated accounts along with inflationary costs has pressured margins more than we’d like. We see a path to improving fundamentals as the year develops.

Our baseline expectations for the second half of the year includes additional start ups in our dedicated segment, a slowly improving general freight market and modest peak season that will benefit expedited and dedicated, and a wide range of outcomes in managed freight. If the general freight market fails to improve, we still expect mix change and seasonality to generate better results in the second half of the year. And the general freight market improves and the typical peak season takes place, we believe leverage exists in our models that capitalize and expedite certain dedicated accounts and manage freight. Regardless of what the remainder of 2025 has in store for us, our team is aligned and focused on continuing to execute on our strategy and plan, which includes a disciplined approach to capital allocation, executing with a high sense of urgency, improving operational leverage as conditions improve, growing our dedicated fleet, and improving our cost profile. Thank you for your time, and we will now open up the call for any questions.

Conference Operator: Thank you. If you would like to ask a question, please press star one on your telephone keypad now. You’ll be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, if you have a question, please press star one on your phone now.

And our first question will come from Scott Group with Wolfe Research.

David Parker, CEO, Covenant Logistics Group: Hey. Thanks. Morning. 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 broad views about how how the market’s developing. Hey. Hey, Scott. This is David. Yeah.

You know, we are definitely seeing, I believe, some green shoots that are starting to show forth. And we I think we all been looking for it for three years. And the thing is in three years, I think we all will say there’s been two or three times we felt like that something was happening that never did quite, you know, have any longevity to it. But I do believe there’s some opportunities out there in the marketplace today. As I look at bids, as I look at midyear bids that, you know, people that did bid six months ago that all of sudden are having some issues on capacity that are starting to come back and want to ask questions, I’m looking at in not inability, but pricing that is not going down, may not be going up as much as I want or those kind of things.

I don’t see it’s a pressure on rate decreases across the the book of business. So I do think that some things are happening. I think some things are happening in the capacity side as well as I as I look about as we know some of the things that are going on from English and, you know, English language and those kind of things that none of us consider to say that that it really has taken effect, but we’re sensing some of that. On the solutions side, the business has been kind of ups and downs at the very beginning of it. They really did sit and had to say goodbye to some carriers that could not guarantee that they’re gonna have some English speaking people.

But that said, overall, I feel pretty good about what I’m starting to see in the market. But I could get really excited if it had not gone down a couple of times in the last three years, Scott. Under understand. You’ve got a a lot of LTL exposure on the expedited side. Maybe just talk about how how that business is developing.

Any signs any signs of green shoots there, or is that still more challenging? Yeah. It is. It is. It has been challenging.

And that’s one of the to be honest with you, one of surprises that I would I would say to me in the last few months, the last five months anyway, as as we’ve seen our LTL customers get softer in the marketplace, trying to figure out exactly what that is to what is happening there. You know, we kinda did a study in the last couple of days of all our LTL companies, I’m talking about verbalizing with them. And out of all of them, we’ve only found a couple of them that would say, our business is up. The rest of them are saying, we’re feeling pressure on volume. And so the LTL side of it is concerning of what’s going on there.

I would tell you also, though, that surprising good from a good standpoint is that the air freight side of our business, the consolidation of air freight, I’m seeing some good things happen there that is exciting me. And I mean, I think we all see the focus of the government that Trump and administration has got on a one you know, AI, and and we’re sensing that. I mean, we’re hauling a lot of servers right now. I’m starting to see transportation wise what I’ve been hearing from people verbally about AI. I’m starting to see some of that taking place in some of these data centers that are building out The United States and the service that that we’re starting to haul just in the last thirty, forty five days that we’re really starting to see some opportunity there.

So the LTL’s down, but the air freight side of our business is really I don’t wanna say really starting to pick up, but it’s starting to pick up. So that’s encouraging. Yeah. That’s interesting about the AI stuff and data center maybe finally starting to drop in in trade a little bit. Just last one, if I if I can.

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

Tripp Grant, Financial Representative, Covenant Logistics Group: Yeah. I don’t know that it changes our plan, Scott, but it sure does help help our cash tax obligations for the remainder of this year and, quite honestly, next year. And you gotta think, I mean, just in a broader sense of of kind of the economy, there are a lot of industries, particularly kind of heavy CapEx. I think it could spur some additional freight. I think it could be a catalyst for some additional demand.

I look at it as kind of a stimulus

Paul Bunn, President, Covenant Logistics Group: that can kind of help with some

Tripp Grant, Financial Representative, Covenant Logistics Group: of that industrial lightness that David was talking to. But we talk about our CapEx for the year was planned a little bit lighter than what we had announced in the release. And I

Paul Bunn, President, Covenant Logistics Group: think what we’ve

Tripp Grant, Financial Representative, Covenant Logistics Group: seen fortunately is the ability to grow continue to grow our dedicated and I think we’ve got some additional dedicated growth opportunities for the tail end of the year. And so there’s some growth CapEx in our numbers as well for the rest of the year. But generally, we try to stay pretty disciplined to our CapEx plan and adjust it for growth opportunities.

David Parker, CEO, Covenant Logistics Group: Thank you, guys. Appreciate the time.

Paul Bunn, President, Covenant Logistics Group: Thanks, Scott.

Conference Operator: Next question will come from Daniel Imbro with Stephens.

Paul Bunn, President, Covenant Logistics Group: Yes. Hey, good morning, guys. Thanks for taking our questions. Maybe David or Dave, if I you one. But maybe on Dedicated side, starting there, we saw some stronger actual growth in truck count this quarter.

It’s good to see that. I guess, 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?

Or is I know the back half is important for that poultry business. Would love an update there on that as well. Hey, Daniel. It’s Paul. Yeah.

The the Asian influenza is it’s it’s all about gone. You know, that that season is generally more, you know, mid mid fall to to mid winter, you know, and so that’s that’s gone. Fingers crossed, we don’t experience anything like we did last year on that front. Yeah. The the the growth in the dedicated count was a function of really two things, a small kind of tuck in acquisition, really small, you know, sixty, seventy truck kind of deal on some specialized business and as well as growth in poultry.

Yeah. And then I would say the the legacy dedicated business was was flattish. You know, we saw a little bit of decline in that in q one, and and that business was flattish for q two, hence, the the truck growth in the quarter. Got it. That’s helpful.

As far as maybe You asked some yeah. You asked about balance of the year. I I would say I’d probably say flat to incrementally up. You know, I I think there but we do have some start ups that are that are signed and planned. Also know of, you know, a few, you know, small reductions.

And and so on the balance, I think it’ll be flat to slightly up for the balance of the year. That’s helpful. Appreciate that, Paul. And maybe, Tripp, a financial kind of follow-up question. Just looking at the model, revenue per mile step down a little bit 1Q to 2Q.

But if I marry that with David’s comment earlier, it sounds like things are actually getting better and pricing is still okay. Can you maybe just walk through kind of what happened in the quarter there optically? And then how we should think about that trajectory into the back half of the year?

Tripp Grant, Financial Representative, Covenant Logistics Group: Yes. I think what you’re seeing in revenue per mile, whether you’re looking at it or sequentially or whether you’re looking at it on a year over year basis, we I mean, if it’s going from a year over year basis, we have had some rate increases, particularly on our expedited segment. But I think what you’re seeing is a significant change in business mix. And if you’re looking at our total truckload operations and you’re reducing 50 trucks out of our expedited fleet, and I’ll just use round numbers that are putting 200,000 miles on a truck per year and inherently have a lower rate per total mile, if you will, and then you’re adding in these low short haul mileage trucks in our dedicated and significantly growing that, you’re going to see some distortion on the rate per mile. And not to add chaos to confusion, but the dedicated business isn’t just pure line haul stuff.

It has fixed and variable costs. It’s billed per load, and there’s some weight pieces to it. And so you just can’t really look at the number of miles they ran and and look when you have a a changing mix in the fleet, I would say. The other thing I would say, if you’re looking at it sequentially, all of the shutdowns and the it created and the weather created a little bit of a bump in deadhead, and it created some just noise in the first quarter. So it’s hard to follow from a 1q to When we were out here talking about some rate increases, particularly in expedited, there was some out of route miles, it kind of creates some issues where you’re kind of it it makes the rate per total mile look a little wonky.

But I think for the rest of the year, we’re probably gonna be looking at flat absent some sort of, like, short term catalyst, which I think this thing is turning. I just don’t know how quick it’s turning. I’d be hesitant to make a call. But does turn toward us. Yeah.

We’ve got some leverage when it does turn. We just we’re just waiting on that that day to happen.

Paul Bunn, President, Covenant Logistics Group: Oh, all makes sense. Hey. Last one, if I could squeeze it in. You mentioned you did a small tuck in this quarter in Dedicated side. Just curious how the M and A backdrop is evolving as we navigate this prolonged downturn, but we’re coming off the bottom.

Like, are you seeing the frequency of deals coming across your desk picking up at all through?

Tripp Grant, Financial Representative, Covenant Logistics Group: I think well, first of all, the tuck in acquisition was done on the really back end of last quarter. We mentioned it in the release last quarter. But again, it was a small one. It fit well and it was a tuck in and really interesting type of business and interesting type of nonpoultry related freight or nonag related freight. Yes, I think it’s interesting.

The deal market ebbs and flows, and I think we’re in kind of a situation over the last couple of months where a couple of interesting things have crossed our desk or crossed our path that have made it to a level where we’re talking about them that fit what we do. I think the key to us is sticking to what we’ve done historically and just being disciplined in our working our plan and being disciplined with our capital and making sure that we’re allocating it appropriately. But it definitely has. It feels like it has picked up with some interesting opportunities. There’s always things floating out there, but the last two or three months, I’ve noticed some things that have been particularly interesting, I’d say.

Paul Bunn, President, Covenant Logistics Group: Great. Appreciate all the color and best of luck guys.

Tripp Grant, Financial Representative, Covenant Logistics Group: Thanks. Thanks, Daniel.

Conference Operator: We’ll move next to Jeff Kaufman with Vertical Research Partners.

Paul Bunn, President, Covenant Logistics Group: Hey. Good morning, everybody. How are you? Hey, Jeff. Hey.

Well, there’s a lot of questions to ask about here. So I’ll I I got one detailed question and one big picture question here. Question for Trip. You bought back 1,500,000.0 shares. The shares sequentially changed by only $05,000,000.

What’s a good number to think of in terms of third quarter shares outstanding?

Tripp Grant, Financial Representative, Covenant Logistics Group: Well, we we purchased I mean, remember, our average here’s what I would say. The shares that are presented in our financial information are an average.

Paul Bunn, President, Covenant Logistics Group: So

Tripp Grant, Financial Representative, Covenant Logistics Group: I think you can the 1,500,000.0 or $1,600,000 that we repurchased over the course of the quarter, you’ll see them be completely out Q3 of results. So you could basically take where we landed in Q1 or at the end of Q1, reduce it by $1,000,000 or $1.6 and then that’s probably going to be a close run rate. There’s not a lot of best things or anything like that or diluted share issuances that are going to kind of materially impact that number or that math, if you will,

Paul Bunn, President, Covenant Logistics Group: on your reconciliation. Okay. So an overly simple way to think about it is you had 27,200,000.0 shares average for the second quarter with something in the 26 to 26.2 range be kind of a fair target in terms of where that third quarter average is likely to be. And and that’s barring any other activity.

Tripp Grant, Financial Representative, Covenant Logistics Group: Yeah. I think that’s pretty spot on. It may move up and down up and down a little bit, but not twenty six two is is probably a a good number.

Conference Operator: Mhmm. Okay. Thanks.

Paul Bunn, President, Covenant Logistics Group: And then question for for David and Paul. If I take a couple steps back and and look at the bigger picture of the freight environment and where we think we’re probably going over the next year or two, You know, 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 market’s stabilized? And and when I think about the dedicated business, you mentioned the avian flu is gone, but that that impact to the franchise still kind of lingers around kind of, you know, as these businesses heal and the markets normalize, where where should those margins go?

David Parker, CEO, Covenant Logistics Group: Yeah. This is David, Jeff. Great, great questions. I I would I would sum up a couple of things on this. One, that particular question is in the overall summary that from a big picture standpoint.

I really think that expedited is a depend upon the market. It’s a 83 to 93 operation. It’s 83 to 93 depending upon the market. I think it’s a when when it is thinking like it has been the last couple of years now keep in mind, some of us on this call will remember that that 10 points that I’m saying there, that used to be 93 to a 103. It used to be a 92 to a 102 kind of number back in twenty fifteen, fourteen, those kind of days.

So we we have probably dropped it by a a strong five, six point, but I do believe that expedited is 83 to 93 depending upon the market. I believe that our dedicated is going to have the first goal that we’ve got there is to get back down into the low nineties. And I think that that is very, very possible. I’d say as I as I think about dedicated, as as we all know, I mean, our our poultry division is is in the eighties, to give you an idea. We all know that.

It’s in the eighties. A the the flu hurt it into the low nineties, but it’s a it’s a solid it’s a solid mid to high eighties kind of number. We wanna we want to improve that, and it will improve. We have grown that segment so fast and so rapidly, and I still see continued growth in that, that it cost money to to go out here and and grow these things even for the repositioning equipment all over the country in order to do that. So, you know, internally, I would tell you that give me give me 84 to 86 on on poultry, and I’m a happy guy.

And I think that that’s where it’s going be as long as we’re going to be growing that. I mean, we have tripled that business. So we are so it’s a big it’s a big operation that we’ve got there. And we continue to make good headway on the legacy dedicated side of our business. No doubt it’s operating to equal 95.

It’s operating the high nineties in order to to to operate there. But what has happened on that, and it’s getting closer, I believe, to maybe it gets to 94 kind of numbers that lot of two things happened. A lot of commoditized business has left. I still think out out of on that legacy out of eight eight, 900 trucks in there. I think we still got a couple of 100 trucks that are commoditized that have to be dealt with eventually.

But I also think that that the business that we lost in that bit in in that over the last couple of years in the in the legacy dedicated, as we all know, two things happen. Commoditized ruins your rate, and that’s not what any of us want to be in. It’s a commoditized any kind of any kind of commoditized business. It’s what we’ve ran from for so long. But another one is that the ones that are operating extremely well in the last couple of years, the pressure when that contract’s up, that pressure gets there.

Let’s just say those those businesses are operating in the low eighties, and they were and they are, those kind of things, an acceptable return, all of sudden, the contract expires, and you either lose it or it or 95. It goes to a 95. What you know? So so you got legacy commoditized as well as the good ones. And so that’s the thing on the legacy side that we’ve been dealing with for the last three years.

I think it starts healing itself as we go forward, especially when the market gets a little bit tighter. So that’s what’s going on with the expedited. I think expedited is we we still believe it’s high eighties to low nineties together, everything together. And I think that that’s where we will end up at. We just may need some help from a strengthening of economy or less capacity.

So, hopefully, that gave you a big picture of those two, JL.

Paul Bunn, President, Covenant Logistics Group: No. That was that was really, really helpful. And then Scott Group kinda hinted at this, but let me come back to it. You know, look. They’re the ones right, I think, this industry had for two to three years is where’s the volume.

Right? We’ve been waiting for that volume catalyst to tighten up the market, you know, because capacity is just not coming out as fast as it needs to. Did do you believe that between the consumer benefits to disposable income and some of the industrial incentives that are out there on on capital investment and and manufacturing. Could the could the one big beautiful bill be that volume catalyst the industry is waited for, or or do you think it’s something else?

David Parker, CEO, Covenant Logistics Group: Well, I think there’s a couple of things. I think, first of all, big, beautiful bill there. I would say Donald Trump is going to get this economy going nicely. I do believe that. I mean, I think he will die before he doesn’t get there.

And so I think the entire government’s focus is there. And I do believe I think that we’re gonna start seeing three to 4% GDP kind of numbers. I was with housing folks yesterday, you know, in, you know, in the in the the floor covering business. And, you know, they’re they’re just basically waiting for housing for interest rates to drop on the housing. They think the backlog is gigantic as soon as people can afford the payments.

And we we see the battle going on in Washington with the Federal Reserve on the interest rate, and I think there’s a lot of catalyst because he will win. Whether that’s Trump. Whether that’s in November, October, or next March, he’s gonna win that battle, and those interest rates are gonna go down, and housing is going to improve. So I think that those are some some of the catalysts that they as well as capacity is leaving. It has not left as fast as what all of us would like to see capacity leaving for it’s been very stubborn and those kind of things.

But capacity is leaving. You can see it in the class eight truck orders. Nobody is buying a bunch of trucks. And so it’s just a matter of time. I think that whatever number you wanna use, three to three and a half percent GDP with classic truck orders being down and and exit being up, even though maybe not the number I want, that is going to show up in practice of business.

And, you know, whether that’s three months from now, I believe my my guess is good as anybody here is as good as mine. I think it’s the October kind of time frame that we will start seeing capacity really starting to tap because we’re starting to sense it as we speak right now.

Paul Bunn, President, Covenant Logistics Group: That was a terrific broad answer. Thank you very much. Those are my questions.

Conference Operator: And our next question will come from Elliot Alper with Covenant Logistics.

Paul Bunn, President, Covenant Logistics Group: 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.

Yeah. Let me break it down for you a little bit, Elliot. I think that dedicated margin got better from q one to q two, and I think dedicated margin could get slightly better from q two to q three. And then wherever it gets in q three, it that’ll probably be where it’ll be because q four with the holidays, you know, Thanksgiving and Christmas, it actually always pressures dedicated margins. And so I think you’ll see dedicated get a little better q two to q three, and then and then, you know, it could be flat to back a little bit in q four.

And then on the expedited side, you know, you’re talking about the the peak season. If if some of the things David talks about come to pass and and, you know, October things start tightening, you know, we did see a little bit of peak last year. You could see an uptick in in, you know, our rates and and tightness in that kind of in that fourth quarter on the expedited side. If we experience that and and with nothing tells us that it’s gonna be looser than it was last year, especially with the tax policy and and maybe what GDP might do, you think it’d be better than it was last year, then I think you could see expedited, you actually get a little better in the fourth quarter. Okay.

Very helpful. And then maybe just following up on that within Dedicated, you spoke to value added services for customers. Curious to get your thoughts on maybe what that could look like. Yeah. I mean, I think we’re we’re just con we’re we’re continuing to try to diversify on the dedicated side, you know, out of those commoditized end markets.

And so, you know, that takes time. And but, you know, here’s here’s what you know is that every time specialty businesses that are harder generally have better margins than than stuff that’s not specialized. And so over time, I think you’ll you’ll continue to see that margin improve as we work that plan, but that’s gonna kinda be a slow, steady plan, not a not a flip of the switch kinda deal.

David Parker, CEO, Covenant Logistics Group: You, guys. Elliot, just to add

Tripp Grant, Financial Representative, Covenant Logistics Group: to that, I mean, you know, all of this is prolonged, you know, down cycle, if you will, has if it’s done one thing, it’s created a lot of competition within traditional dedicated, dry van dedicated. And there is a lot of capacity flooding into that. Adding to Paul’s comments and part of our strategy is to figure out how figure out ways, basically, how to differentiate ourselves, whether it’s hauling different things like live haul or feed or using different equipment or doing different things that require driver credentials or that are just difficult, high service requirement things. Those are the type of areas that we’re trying to penetrate. And the more commoditized stuff is the stuff that we’re gonna as we think about capital allocation long term, those are the types of things that are gonna be.

We’re gonna have to leave those behind because they may have been considered niche or or kind of dedicated and and high margin at one time. But I I do think it’s becoming more and more competitive, and I don’t know if it’ll ever come back to to where it was. We’re having to adjust our plan and adjust our sights on some of that more specialized stuff to help us stay ahead of the game.

Conference Operator: Our next question will come from David Floyd with Chattanooga Times.

David Parker, CEO, Covenant Logistics Group: I

Paul Bunn, President, Covenant Logistics Group: was hoping you could elaborate on the factors that led to the record revenues you guys saw in the second quarter this year.

David Parker, CEO, Covenant Logistics Group: Yes.

Tripp Grant, Financial Representative, Covenant Logistics Group: We’ve been really blessed. I mean, David, this freight economy has been terrible for three years, and we’ve had the benefit of being able to grow our dedicated fleet and our total trucks. And unlike any time in company history, we’ve been able to kind of sustain our margin and sustain our expedited business. Our managed freight, which is an asset light business has continued to grow organically. We did have some surge freight in the quarter that helped, whether you’re looking at it on a year over year or sequential basis.

But that happens in that segment. And I think it’ll be up again year over year in the third quarter. And who knows, it can be impacted by peak in the fourth quarter and additional business adds. We’re seeing a lot of opportunities there. And then organic growth in warehousing has helped.

And the combination of the two big drivers of the growth year over year are going to be the dedicated segment. And that growth, I would say, of 162 units net in that segment. And then basically your managed freight, which grew almost $18,000,000 year over year. So we’re excited about it and we like the direction of the company, especially of where we’re going, especially in an environment that is really, really tough to grow.

Paul Bunn, President, Covenant Logistics Group: Gotcha. And 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 that’s covenant.

David Parker, CEO, Covenant Logistics Group: That’s not been a problem, Dave, because they had to pass it. We’ve never been there where we would not allow it them to come to work. So we’ve always had to have English speaking abilities and so drivers. So that’s not a problem with us. And so really, from from our standpoint and for the carriers that do not have that issue or do not employ those drivers that can’t speak English, anything that comes out is something that we’ve been talking about on reduction of capacity that will help industry.

Paul Bunn, President, Covenant Logistics Group: Gotcha. Last thing I had was, Justin, you were talking about how the other thing is based on the interest rates will come down, which will, I guess, encourage more people to start, you know, buying homes, and that could be good for the industry. I was hoping you could kind of elaborate on just, like, the outlook for the freight market going forward under under Trump’s economy.

David Parker, CEO, Covenant Logistics Group: Well, here’s what I know. The higher GDP is, the more freight there’s gonna be. The lower interest rates are, the more it’s gonna help housing. And there’s probably 20 truckloads of freight for every house that gets built. To give you an idea, if you get into flatbeds and those kind of things, it’s probably more than that.

But it’s just a big nucleus of freight for the housing industry. So the better the economy, the more freight that’s gonna be available for all of us. So that that’s really the two things that we look at.

Paul Bunn, President, Covenant Logistics Group: Gotcha. Thank you. Appreciate it. Thank you.

Conference Operator: And once again, if you would like to ask a question, please signal by pressing star one at this time. And we’ll pause for just a moment to allow everyone an opportunity to signal. And it appears there are no further questions at this time. Mr. Graham, I’ll turn the conference back to you.

David Parker, CEO, Covenant Logistics Group: Yeah. I wanna I wanna say add on a little bit about the big picture that that we were talking about a little while ago. And I wanna make sure that I look at our company and what we’ve done. This team I am so thrilled and so proud of what this team has done. They’ve done an excellent job, especially when you look at the last three years environment that the whole trucking industry has been in.

We’ve excelled much better than virtually any peer that we got out there. They’re in the most difficult environment in trucking history that this team has done great. And I look at that, and I look at things that I believe are going to get better. And the thing that I love about this because this has been since 2018. We’re on a seven year journey now of taking our company and transforming our company tremendously since 2018.

And the model that we’re sitting here talking about and raising all the various questions around expedited and dedicated and freight management and warehousing, etcetera. That’s exactly what we wanted. And what we are seeing is is taking place. It’s what we’ve been working on for the last since 2018, so the last eight years. And it’s exciting to me because I look and I say, you know, when when something is up, one of the other ones are coming stronger.

When one is when one is down, the other ones are pulling us up, and that is something that’s happening in our model tremendously. Expedited I I take the freight manager. We’re all happy about the second quarter of freight management. They did a great job. Well, let me tell you, a lot of that some of that or a percentage of that is because of the overflow from expedited.

I look at expedited. We had discussed about it. 93 OR and expedited, I think that 33 to 93 is where expedited can go at. But because of something that 93, the high end of a number that I want, but managed freight did extremely well. They had to give them a lot.

I mean, it was it was a lot of freight because of the network, because expedited is working in a network in this economy that could be up, it could be down. The the the network, it could be sluggish in one area, strong in another area, and they may not have the trucks available when that when the in those areas that it’s strong in. And so they give it over to the managed freight, and that has helped managed freight tremendously in the second quarter. So what ends up happening is that expedited as they as freight continues to get stronger, we talked about LTL. The way as LTL gets stronger, the network for expedited will get better.

It will get stricter and rates on there, then it will go down, rates will go up, utilization will go up. Now and expedite will perform better. Now the worst part of that is that they won’t be throwing over as much freight over to to managed freight. And so therefore, managed freight will go down a little bit. And so that’s what I love about what I’m seeing in our model.

And I just wanna make sure that everybody sees, recognizes that because that’s powerful. And it’s this team that has done this throughout our company. Another thing, I’ll tell you, that does drive me crazy, and, you know, our industry’s gotta get help on this, but it’s it’s the insurance. As I look for the last four year this is our fourth year that we’re trying to set a record on safety. Fourth year.

The last three years the previous three years have been record. We beat we beat it every year for the last three years, and we’re working on trying to beat it again this year for the fourth fourth year in a row. And we’re also putting inward facing cameras. As we speak, we got in about 700 trucks today. So we’re continuously looking and working, and the results are there on safety.

But I look at our cost on insurance. It has almost doubled since COVID. It’s telling you that something’s not right. We’ve gotta we’ve gotta get tort reform. We got a couple of accidents I’m concerned about.

I don’t know where it’s gonna go. We’ll figure out where it’s gonna go. But tort reform has got to happen. The American Trucking Association is working extremely hard on tort reform, but it’s gotta happen in our industry. And so I don’t know.

As I as I look at the big picture, I think that we have done a great job. I will question whether we’ve been rewarded for that great job from Wall Street or not, but that’s that’s your questions and your answers. But I’m proud of the team. So, anyway, I hope that we gave you all a big overall big picture of how I feel. So I think that’s it.

Tripp Grant, Financial Representative, Covenant Logistics Group: All right. Well, thanks everyone for joining us today, and we look forward to speaking with you again in

Paul Bunn, President, Covenant Logistics Group: the third quarter. Thank you.

Conference Operator: And this concludes today’s conference call. Thank you for

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