Earnings call transcript: Covenant Logistics Q1 2025 misses earnings forecast

Covenant Logistics Group Inc. (CVLG) reported its first-quarter 2025 earnings, revealing a miss on both earnings per share (EPS) and revenue forecasts. The company posted an EPS of $0.32, falling short of the expected $0.4135, while revenue came in at $269.36 million against a forecast of $291.5 million. According to InvestingPro data, four analysts have recently revised their earnings estimates downward for the upcoming period. Despite the earnings miss, Covenant Logistics’ stock price rose by 7.37% to close at $20.19, reflecting investor optimism about the company’s strategic focus and future prospects. The stock currently trades at a P/E ratio of 14.75, with analysts setting price targets between $31 and $34.

Key Takeaways

• Covenant Logistics missed its EPS and revenue forecasts for Q1 2025.
• Despite the earnings miss, the stock price increased by 7.37%.
• The company is focusing on expanding its specialized dedicated business.
• Reduced capital expenditures are expected to generate more free cash flow.
• The freight market remains challenging with economic uncertainties.

Company Performance

Covenant Logistics Group faced a challenging first quarter of 2025, with consolidated freight revenue declining by 1.8% to $243.2 million. The company’s adjusted operating income also fell by 26.6% to $10.9 million. With an EBITDA of $149.41 million over the last twelve months and a market capitalization of $535.79 million, the company maintains a solid financial foundation despite recent headwinds. According to InvestingPro’s comprehensive analysis, which includes over 30 key financial metrics and exclusive insights, Covenant Logistics maintains a "FAIR" overall financial health score. The company is strategically positioning itself by focusing on specialized dedicated services and expanding its equipment types within its government business.

Financial Highlights

• Revenue: $269.36 million, down from the forecast of $291.5 million.
• Earnings per share: $0.32, below the forecast of $0.4135.
• Consolidated freight revenue: $243.2 million, a 1.8% decrease.
• Adjusted operating income: $10.9 million, a 26.6% decrease.

Earnings vs. Forecast

Covenant Logistics reported an EPS of $0.32, missing the forecasted $0.4135 by approximately 22.6%. The revenue of $269.36 million was also below the expected $291.5 million, marking a significant miss in financial expectations for the quarter.

Market Reaction

Despite missing its earnings forecast, Covenant Logistics’ stock rose by 7.37%, closing at $20.19. This increase suggests that investors are optimistic about the company’s strategic initiatives and its potential for future growth, particularly in specialized transportation segments.

Outlook & Guidance

Looking ahead, Covenant Logistics anticipates a recovery in the freight economy throughout 2025. The company expects improvements in dedicated segment margins and a normalization of its protein business by June. Reduced capital expenditures are projected to enhance free cash flow, supporting further strategic investments. With a beta of 1.37 and revenue growth forecast of 2% for FY2025, the company shows moderate market sensitivity and growth potential. For deeper insights into Covenant Logistics’ growth prospects and detailed financial analysis, investors can access the comprehensive Pro Research Report available exclusively on InvestingPro, which covers over 1,400 top US stocks with expert analysis and actionable intelligence.

Executive Commentary

Trip Grant, CFO, emphasized the company’s focus on disciplined capital allocation and strategic execution, stating, "We remain positive about our team and strategy, which is focused on disciplined capital allocation, executing with a high sense of urgency." Paul Bunn, President, highlighted the importance of finding specialty deals, while CEO David Parker reiterated a cautious approach to mergers and acquisitions.

Risks and Challenges

• Economic uncertainties continue to challenge the freight market.
• The avian flu has significantly impacted the protein transportation business.
• The competitive environment in dedicated trucking remains intense.
• The LTL market is under stress, with the industrial segment down by 2-3%.

Q&A

During the earnings call, analysts queried the impact of the avian flu on the protein transportation business and explored Covenant Logistics’ competitive landscape in dedicated trucking. The company’s M&A and share repurchase strategy also drew attention, providing insights into its long-term growth plans.

Full transcript - Covenant Logistics Group Inc (CVLG) Q1 2025:

Conference Operator: Welcome to today’s Covenant Logistics Group Q1 twenty twenty five Earnings Release and Investor Conference Call. Our host for today’s call is Trip 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.

Trip Grant, CFO, Covenant Logistics Group: Good morning, everyone, and welcome to the Covenant Logistics Group first 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 at www.covenantlogistics.com/investors.

Joining me on the call today are CEO, David Parker, President, Paul Bunn, and COO, Justin Cale. Before diving into the details, I’d like to give an overview of changes in our business mix that impact our revenue and expense comparisons year over year. We continue to increase assets and people invested in our dedicated protein business and reduce assets and people allocated to lower return business. 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. As this specialized business grows, revenue per mile, driver, and other employee cost per mile, and fixed cost per mile all increase.

The year over year changes are more indicative of business mix than apples to apples rate and cost increases. 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. We had lower fixed cost coverage, higher layover costs, and worse equipment damage than a normal first quarter. Lower miles enhanced the impact of business mix on our statistics.

While our margins did not meet our standards, we navigated a difficult general freight market, absorbed inefficiencies from start ups, overhead from lower base business and dedicated, and weather better than most first quarters in our history and many companies in our industry. Overall, our strategy is on track and Covenant is well positioned to grow revenue and earnings over time, recognizing that a variety of external factors are creating both uncertainty and opportunity in our business. Year over year highlights for the quarter include, consolidated freight revenue declined by 1.8% or approximately $4,500,000 to $243,200,000, primarily as a result of our managed freight segment, which generated $6,000,000 less freight revenue, but exceeded our profit expectations by improving adjusted operating income by $800,000. Consolidated adjusted operating income shrank by 26.6 to $10,900,000 primarily as a result of adverse operating conditions in the quarter that reduced utilization of our revenue producing equipment. Salaries, wages, and related expenses increased with business mix as well as poor workers’ compensation experience.

Combined cost of depreciation, interest, rent, and gainloss on sale increased due to lower fixed cost absorption from lower miles per unit. Our net indebtedness as of March 31 increased by $5,800,000 to $225,400,000, yielding an adjusted leverage ratio of approximately 1.55 times and debt to capital ratio of 33.7%. The average age of our tractors at December 31 slightly decreased to twenty months compared to twenty one months a year ago. On an adjusted basis, return on average invested capital was 7.6% versus 8.3% in the prior year. Now providing a little more color on the performance of the individual business segments.

Our expedited segment yielded a 94.2 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. Compared to the prior year, expedited average fleet size shrunk by 48 units or 5.3% 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 increases, exiting less profitable profitable business, and adding more profitable business.

Dedicated experienced average fleet growth in the first quarter of 212 units or approximately 16.7% and grew freight revenue by $9,500,000 or 13.1% compared with the twenty twenty four quarter. Revenue per tractor fell by 3.1%, principally as a result of the impact of inclement weather and reduced volumes associated with AVN Influenza. The result was an operating ratio of 90.1, far short of our expectations for this segment. Going forward, we remain focused on our strategy of growing our dedicated fleet, specifically in areas that provide value added services for customers. We believe that if we are successful in providing best in class service and controlling our costs, growth and improved profitability will result.

Managed freight exceeded profitability expectations for the quarter by focused execution on profitable freight, assisting our expedited fleet with overflow capacity and reducing insurance related claims, expense as a result of improvements to our cargo control procedures. Going forward, we seek to grow managed freight with profitable revenue from new customers, work closely with our asset based segments to capitalize on overflow opportunities when available, and optimize 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 this business. Our warehouse segment saw a 6% decrease in freight revenue and a 42% decrease of adjusted operating profit compared to the prior year. 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 the new business. For the remainder of the year, we anticipate improvement in revenue and adjusted margin for this segment.

Our minority investment in Tel contributed pretax net income of $3,800,000 for the quarter compared to $3,700,000 in the prior year period. Tel’s revenue in the quarter increased by 25% compared to the prior year by increasing its truck fleet by 431 trucks to 2,513 and increasing its trailer fleet by a thousand to 7,824. Regarding our outlook for the future, although our first quarter’s operational results fell short of our expectations, we were pleased with the improvement we witnessed late in the period, momentum we have taken into the second quarter. 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 pork volumes are reduced with fewer imports. 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.

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, growing our dedicated fleet, and improving our cost profile. Thank you for your time, and we will now open the call for any questions.

Conference Operator: If you would like to ask a question, please press star one on your phone telephone keypad now. You will be placed into the queue in your order

Trip Grant, CFO, Covenant Logistics Group: to receive. Please be prepared to

Conference Operator: ask your question when prompted. And our first question comes from Jason Seidl from TD Cowen. Please go ahead, Jason.

Trip Grant, CFO, Covenant Logistics Group: Hey, thanks, operator. Good morning, gentlemen. Wanted to talk a little bit about the dedicated side. Obviously, you had some issues with the bird flu epidemic here. But

Conference Operator: I wanted to talk about

Trip Grant, CFO, Covenant Logistics Group: the competitive nature of sort of the non poultry business that you’re seeing out there. What we should expect going forward? And how do you think that’s going to play with margins as we move throughout 2025 and maybe even in the ’26 given the longer term nature of those contracts?

Conference Operator: Hey, Jason. It’s Paul. How are you doing? Good, Paul. Here’s what I would say, splitting out the nonpoultry.

It’s really competitive out there. And I would say, I’ll break dedicated into two worlds, specialized and nonspecialized. And so because some of what we have is specialized that that is not poultry. In that business where you’ve got a specialized truck, a specialized trailer or a specialized driver, I would say it’s still there’s not as much pressure there. The business that is more 53 foot dry van dedicated is it’s tough right now.

And there’s a lot of competition. And so I think the longer this one way market has stayed down, the the more competition and and more folks are moving freight to the one way market and more one way people are running the dedicated and so it is it is hurt. That said, I think, you know, like you’ve seen in cycles past, whenever the one way market goes the other way and the premium for dedicated is not as high as it is today, you’ll probably see, you know, 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, you know, just margins in total, not I think on the I think we’ll see dedicated margins improve for a couple of things.

I think the weather just like expedited, the the weather significantly affected dedicated in the first quarter. So just with better weather and and and whatnot, it’ll help it’ll help dedicated. And then as we continue to lap the the bird flu, you know, the the worst of the bird flu was probably over in in January, early February, but little chickens don’t eat as much as big chickens, and and it takes a little while to to kinda get the to get the train back on track and, you know, get the the pump primed again. And so the combination of those two margins in dedicated in total should improve. But but in the noncommoditized space, in the commoditized dedicated stuff, it’s a it is a it’s a tough market right now.

And

Trip Grant, CFO, Covenant Logistics Group: and and how should we view your presence in the space? Are you gonna look to to continue to move away from the the commoditized market and and trying to get more in the specialty?

Conference Operator: Yeah. I would say every time we can find a specialty deal, that’s what we’re looking for. And I think most of our you know, we purge through most of the most of the commoditized stuff is true commodity. I think a lot of that stuff is left and gone to the one way market or kinda reset over the last, you know, twelve to eighteen months.

Trip Grant, CFO, Covenant Logistics Group: Yeah. I would say, Jason, that’s been our strategy probably for the last couple of years. And Lou Thompson, the acquisition of Lou Thompson was probably the the biggest indicator of of, you know, that being our strategy and our biggest investment in that. But one, I would say it’s difficult to move the needle right now. And two, I think that over time, you will see us continue to move our percentage of more specialized dedicated to a larger percentage of our fleet because there’s no doubt about it.

We’re going to have to constantly redefine what we consider as specialized or what we consider as defensible or niche because it is becoming increasingly competitive. And I think it’s going to even become more so after this cycle ends. Interesting. Given all the macro uncertainty that’s out there, what’s that doing to the deal market? Because I know you guys are constantly in the market to do probably on the smaller type deals, but talk to me a little bit about how that’s been impacting the world.

Conference Operator: Yeah. You know, here’s what I’d say. There are a lot of what I call little bitty deals out there right now. Oh, I mean and I think that’s a signal of capacity exits and and folks that are struggling for capital. You know, I I would say we we continue to to kind of sort through the the intermediate sized deals as as they come through.

And but but I I would say the volume of those is is about the same as it’s been the last couple years. I mean, you know, there’s one or two things a quarter that are interesting and that that we evaluate. I I think there’s one or two a quarter that’s interested that we evaluate, and then there’s 15 a quarter. Nope. Nope.

Nope. Nope. You can just see people wanting out. And and a lot of those are on the smaller scale or or the OTR market. Yep.

I agree.

Trip Grant, CFO, Covenant Logistics Group: Gotcha. Gentlemen, appreciate the time as always.

Conference Operator: Thank you, Jason. And our next question comes from Daniel Imbro from Stephens Inc. Hey, Dave. Maybe I want to start on the dedicated on the expedited business a little bit. It’s obviously you have LTL line haul within that.

I’m curious any company commentary from your standpoint on how that end market shaping up. We’re seeing any signs of improvement kind of with your LTL customers there? And and then how is the AAT or the government business trending as we move here through the

Trip Grant, CFO, Covenant Logistics Group: first part of the year?

Conference Operator: I I would say this, David. I would say on the LTL side, it’s really a smorgasbord. I mean, I see some of our LTL that are doing better than others. And and and and I and I see that our national LTLs are probably being hurt more so than the regional LTL guys, but we had a discussion on that just in the last few days. You know, I I see a lot of the industrial side that the LTL guys are involved in that is hurting some of those guys.

And what I mean by that is down two to 3% kind of numbers. But, yeah, I’m seeing some stress on the LTL side on probably half of our business. Mhmm. So that is that is something that we’re just having to work through and and see what happens. As well as when I say LT, I’m I’m also included in their freight forwarders and air freight air freight industry, you know, that we haul forward, all that segment of substitute service.

And how about AAT, David? Yeah. Yeah. AAT, Daniel, it’s they’ve had a good first quarter and and are looking good going into the second quarter. So that that business has continued to perform nicely.

We’ve we’ve done some things strategically to continue to expand equipment types that we offer in that space. And so we get more at match. And that’s been a really good strategic move, and and we’re going to continue to do that, have have more some more things in the hopper so we can continue to get more. You know, the more at bats, the more times you’re going to hit and so continue to be really happy with that business and its performance. Okay.

That’s helpful. And then maybe, Trip, David just talked about how many deals are out there in the M and A market. But how is your appetite for M and A in this environment given the uncertainties? I think you did introduce a new $50,000,000 repurchase program. So should we take that as an indication that you view the buyback as a higher risk adjusted return than m and a?

Or how how should we think about your appetite for deploying capital?

Trip Grant, CFO, Covenant Logistics Group: No. I I think it’s the same. Our our playbook has basically remained unchanged. We think we’ve got a good deal now with share repurchases, and we continue to look at M and A deals as they come up. But I think the key that we always talk 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 and A deals, and I think where 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 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

Conference Operator: the long term. Daniel, I’ll I’ll I’ll add to what Tripp said. Having the share repurchase is not going to preclude us from doing the right deal if the right deal comes across. That said, we’re not we’re not in love. We’re just doing a deal just to do a deal.

So I would say you could you know, we’re going to keep looking and keep doing the share repurchase. And over time, I think it

Trip Grant, CFO, Covenant Logistics Group: will work out. And I would just input and we noted this in the release that 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 for the growth year over year growth in some

Conference Operator: of the truckload business, the poultry business.

Trip Grant, CFO, Covenant Logistics Group: And so I anticipate we don’t have a stated goal on leverage, but I’m not concerned about getting over 2x. I think somewhere between 1x and 2x is where we want to operate EBITDA leverage. And with the reduced CapEx this year, it kind of affords us the opportunity to do these things without getting too extended in a situation like this.

Conference Operator: And then maybe last clarifier there on the CapEx outlook. I guess, what part of the CapEx budget are you reducing? Is it just fewer new trucks or

Trip Grant, CFO, Covenant Logistics Group: What I would say is last year from a CapEx perspective, we had a ton of growth in poultry, 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. And 2025 is while there is some growth and we do anticipate some growth in our asset based businesses, it won’t be nearly as much as we saw last year. And so I’m thinking that this year is a more normalized cap, like a maintenance CapEx year. So just think about it in the $75,000,000 to $80,000,000 total, of which we did almost $20,000,000 of net CapEx in the first quarter.

So we’re on pace. And I think we’ll generate a good sufficient a lot more free cash this year than we did last year.

Conference Operator: Great. Appreciate all the color. Best of luck. And Daniel, one other thing about LTL, one of the statements that our LTL 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. And our next question comes from Jeff Kaufman from Vertical Research Partners. Please go ahead, Jeff. You very much. Hi, everybody.

Hey, Jeff. Hey, I was just kinda curious. Could you dive a little deeper into this protein business and how avian flu impacted? I I know it happens every year, but you’ve only had this for about, what, two years, so it’s still kinda new to us. When it happens, I guess, fleets get slaughtered, and then they get repopulated, and then we eventually grow back.

Kinda where are we in that process, and and when should we see this? I know you mentioned little chicken eat less than big chickens. But but when should we see this start to normalize? You know, here’s what I’d tell you, Jeff, is that the let’s go back to the beginning of what you said. You’re right.

There there’s some amount of of of bird flu every year. I would say just in talking to the instant industry folks, this year is probably the as bad as any year it has been, you know, I’d say in the in the top two in in the last fifteen years. The timing of it is generally the same kind of flu season that, you know, us as humans have kind of early to mid fall to to mid winter, so kind of an October to February kind of thing. And it has to do with the migratory birds. That’s that’s what carries the bird flu.

And actually, that’s that’s how the poultry fleets or flocks get it is is from migratory birds that are migrating from, you know, up in Canada to either the Southern US or or Central America. And so but they they get it. They’re not migratory patterns. And so you said it exactly right. I mean, they when when these flocks get infested with this, the the regulations, the Department of Ag regulations in those states, they go in and they’ll terminate those blocks.

So what that does, it kinda it kinda hurts you on two sides. It hurts you from on the the live haul side where there’s there’s no birds to to take take to the processing plant. And then and then the other part is as you quoted me, you they repopulate it with the little birds the little birds eat less than the big birds, so your feed volumes are down. And so it just takes some time to get the pump kind of primed back up when all that happens. I would say we we felt it, you know, in the fourth quarter.

I’d say we felt it January, February, March. We’re filling it a little bit in April. I would say by June, we should be back at a %. We’re we’re probably we’re probably at 85% today. We’ll be at, you know, 90 something percent in May and back at a % in June as far as capacity.

And and and so there there should be some, again, improvements in the results once we get that back on plane. When you came into this business, you ever thought you’d be talking about migratory bird patterns on an initial? No. No. Alright.

So to to this year, Dale. It’s the winner. I’ll tell you that. So I I think I kinda understand what’s happening in Dedicated and Expedited. Can you give me oh, you’ve been with 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 of what’s hitting revenue in warehouse and managed transportation and and how we should think of that moving forward? Yes. Let me the little tuck in acquisition, it was caller earlier asked about M and A. And so we had the opportunity to do a tuck in on kind of specialty dedicated fleet.

And when we talk about specialty trucks, specialty drivers, specialty trailer, that business met one of those criteria. It’s a business that David and I had a little bit of history with the owner. It it was a good business, and it 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 it’s a, you know, sixty, seventy truck kind of deal, and we think long term, we can turn into a 25, hundred and 30 truck kind of deal at at solid revenue per truck per week, solid margins, and it’s in a pretty defensible space that not everybody’s in because of some of the specialty nature. So again, just another example of how some deals are big, some deals are little.

It was a little deal. We’ve seen basically none of the earnings from it. We’ll start seeing a little bit of that in the second quarter. As it relates to warehousing and managed freight, the warehousing business, I would say, revenue is relatively consistent. The margins were down a little bit in Q1, but I think some of that was I mean, again, the weather affected them with storms and ice and warehouses shut down and can’t bill for the services if none of the employees can show up.

And so I think you’ll see warehouse feel a little better in in q two and and and continue to get better throughout the year. We had a had a start up, a good start up in q q one on the warehousing side that we hadn’t seen the full benefit of and have got a another pretty large start up coming later in the year. And and so we you know, a small start up in q two. So, again, I would say that business is kind of steady as she goes. The pipeline looks good.

The team looks good. The margins look good. The return on invested capital is great. And so we’ll just keep going down the path on that business. Managed freight, I would say we’re doing some things differently.

You know, we hired about a year ago. You guys know we hired Dustin Cales, our new chief operating officer. And so he brought some 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 then we’ve had some customer growth in managed freight as well.

And I think you’ll 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. And we’re not only where they’re at, but where they’re going. Alright. Thank you very much.

Gentlemen, at this time, there appears to be no further questions.

Trip Grant, CFO, Covenant Logistics Group: 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.

Conference Operator: This concludes today’s conference call. Thank you for attending. The host has ended this call. Goodbye.

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