Covenant Logistics : 3rd Quarter 2023 Script

• Our net indebtedness as of September 30th was $183.4 million, yielding a leverage ratio of approximately 1.7x and debt to equity ratio of 31.8%,
• On an adjusted basis, return on invested capital was 10.6% for the current quarter versus 17.5% in the prior year.

Now Paul will provide a little more color on the items affecting the individual business segments:

Thanks Tripp,

• The performance of Expedited during the third quarter - approximately 90.7% adjusted OR in the midst of a historically weak freight market - says volumes about the work we have done to deploy assets with the right customers, lower our cost per mile, and focus on what we can control. In the context of an 8% decline in revenue per mile, we thought a 12% improvement to utilization and lower cost per mile were significant accomplishments. The improvement in utilization was principally attributable to newer equipment in the fleet and reduced down time, which we will look to continue as year over year freight revenue per total mile comparisons are expected to continue to be challenging for the remainder of 2023 and into 2024.
• Dedicated reflected another success story centered on our disciplined approach to capital allocation. Dedicated improved its adjusted operating ratio to approximately 93.6% by effectively weeding and feeding. We reduced the overall fleet size by 170 trucks while nearly doubling adjusted operating income. Trading out approximately 400 legacy contract units for Lew Thompson and Son aligns with our strategy of exiting unprofitable or underperforming business and replacing it when opportunities arise that meet our profitability and return requirements. We were pleased with the year over year improvement to adjusted margin and expect to continue to improve upon both this segment's size and profitability over the long term.
• Managed Freight experienced a 11% reduction of total freight revenue and 57% reduction of consolidated adjusted operating profit. The significant reduction in revenue and operating profit was primarily the product of little to no high-margin overflow freight from our asset-based Truckload segments. The brokerage environment remains highly competitive with numerous brokers aggressively competing for volumes at the expense of margin. We anticipate continued margin pressure in this environment.
• Our Warehouse segment saw a 15% increase in freight revenue and 82% increase of adjusted operating profit compared to the prior year. The top line growth is a result of new customer startups over the last 12 months and the operating profit improvement was a result of the combination of new customer business and improved rates for existing customers. Although we were pleased with the improved profitability within this segment, we will continue to focus on improving profitability through improved labor utilization and rate increases with existing customers.
• Our minority investment in TEL contributed pre-tax net income of $5.3 million for the quarter, compared to $7.4 million in the prior year period. The decline was largely a result of reduced gains on sale of used equipment compared to a year ago. TEL's revenue in the quarter declined 8% and pre-tax net income decreased by 28% versus the third quarter of 2022. TEL increased its truck fleet in the quarter versus year ago by 42 trucks to 2,195 and grew its trailer fleet by 153 to 7,013.
  Due to the business model, gains and losses on sale of equipment is a normal part of the business and can cause earnings to fluctuate from quarter to quarter. Our investment in TEL, included in Other Assets on our consolidated balance sheet, has grown to $61.6 million as of September 30, 2023, from our original

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investment of $4.9 million. In 2022, we received $14.7 million in cash dividends from TEL, and we received $9.8 million year to date in the third quarter of 2023.

Regarding our outlook for the future:

For the fourth quarter, we expect our revenue and earnings to experience a modest decline sequentially due to a cyber-attack on a major customer and the ongoing United Auto Worker strike, which has temporarily depressed load volumes and revenue per truck in our Expedited and Dedicated divisions. More broadly, however, we are optimistic that the trough of the freight cycle is behind us but remain cautious about the rate at which we will see improvements. For 2024, we believe that the first half of the year may continue to be challenging and expect capacity to continue exiting the market. Although we are all eager for the freight environment to improve, our primary focus remains on the long term, by continuing to invest in areas that provide opportunities for us to make forward progress on our strategic plan- by exiting underperforming capital tied to underperforming customers, investing capital to business units and customers that provides for adequate returns, improving our safety culture and investing in our people.

Thank you for your time and we will now open the call for any questions.

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