Good afternoon, everyone. Our next presentation is Covenant Logistics. Covenant's a provider of Transportation and Logistics services operating through four segments: Expedited, Dedicated, Managed Freight, and Warehousing. Stock trades in New York under the symbol CVLG. With us from management are the company President, Paul Bunn, and Chief Financial Officer, Tripp Grant. Paul?
Yeah, thank you. Yeah, we appreciate y'all's time. Just give you a brief overview of the company. You know, over the last five years, we've really had an operational turnaround transformation. When you really think about Covenant, if folks may have followed the company 10 or 15 years ago, it was just a Singular Trucking company. We've reshaped it into kind of a Full-board Logistics company. You know, a piece of our revenue comes from the team business: two drivers in a truck. Another piece of our business, and we'll get into the pieces here in a minute, comes from dedicated transportation, generally solo, specialized type operations. A piece is an Asset-light Brokerage managed trans. A piece is a Contract Warehousing business. The last piece is an equipment Leasing company owned through a Joint Venture Equity Method Investment.
What you're really getting is a Diversified Logistics company. I think that's part of what's helped us hold up over the last few years. Really, what's been the key? You know, the stock's taken a pretty good dip in the last six or eight months. Before that, I would say we probably held up better than anybody in the Transportation Subsector since Post-COVID. It's really been focused on shareholder return, return on invested capital, and doing things like accretive M&A, share repurchases, and dividends. We've got a young, strong management team: Tripp, myself, our Chief Operating Officer, and our Chief People Officer are all 50 or under. Our Founder and Chairman, David Parker, is still involved in the business. They've owned about 50% of the votes, about 40% of the equity. He's still actively involved day to day.
As we're talking about here, the company will be 40 years old January 1. We don't shy away. We're a faith-based, publicly traded company based in Chattanooga, Tennessee. Our mission and our vision really tie back to some of our founder and founders' families' beliefs and how we treat people with empathy, servanthood, and virtue. You know, doing the right thing in all situations, treating other folks the way you want to be treated. We just talked about it really quick, David, myself, Tripp, and then our Chief Operating Officer and our Chief People Officer. Just a little bit, it's a national footprint. You can see that probably 70-80% east of the Mississippi, running generally between 2,300 and 2,400 tractors, over 5,000 trailers. The slide's a little dated. We're probably right at close to 6 million sq ft of warehousing.
You can see those with the Red Pinpricks. We'll talk about the warehousing in a minute. We run that on kind of an Asset-light. And then about 50,000 carriers we use in our brokerage. And then you're seeing about 5,000 team members. And then a little bit about the segments. We talked about you can kind of see the team business, you know, about $350 million. I would say that's probably closer to $300 million Run Rate now. The dedicated is probably $300-$325 million, managed freight's $200-$250 million. Warehousing's probably $100-$115 million. Still about a billion-dollar revenue company. Again, we were tripping or talking to some folks in here before that had followed the company in 2012, 2013, 2014. That is what I was talking about at the beginning, kind of who we were. We were 100% asset-based.
I mean, you want to buy a Trucking company, you got a Trucking company Stock, primarily the expedited and then some Commoditized Refrigerated. You know, we really, again, talked about we changed out the management team, except for David. I would say no member of management's the same as it was five, six years ago, except for David. To diversify our service offerings into more niche, where I come from in Georgia, nichy. I've got a trademark on that word, but you know, that's North Georgia Redneck for specialized and value-added. And through strategic acquisitions and then some Non-core Asset Divestitures. And so what has that gotten us? Today, you know, we are a lot less exposed to the Freight Cycle. Here's what I'll tell you. We've got our board meeting tomorrow. And we just released Q3 earnings a few weeks ago.
We're not making, I mean, we made $0.44 a share in Q3. And we weren't happy with it. But there are a lot of the Blue Chip staple companies in our industry that were breaking even to losing money on an Earnings Per Share basis. So for us to be in the trough of troughs and still generating cash and good EPS is great. You know, we're about a 65% asset base now where we're 100. I think over the long haul, we hope to get that closer to 50-50, about a 50% asset base, 50% asset light business. And then a leadership team that is, as you can see, young and really driven to deliver growth in the business, make sure we provide a good experience for all of our teammates. And you know, we're all here for the long haul.
The logos down there are just some of the name brands that we operate under. This is a little bit about the strategic transformation. The one thing Tripp and I like to tell folks about this slide is we're making a lot more with a lot less. I mean, you kind of look at that. You know, in 2006, the company had almost 10,000 trailers and almost 4,000 tractors. It was probably a break-even kind of company. Now we're running, you know, by 2021, we're running 2,150 tractors and 6,000 trailers and making money every month. You can kind of see the shift we're talking about from heavy expedited to diversifying out into the dedicated, managed freight, and the warehousing. That does not even include the equipment leasing business.
That kind of got, you know, that was 1996 up when we went public up until kind of the COVID time period. I would say that that 1st shift into, you know, deeper into the supply chain, trying to start getting stuff in the right buckets has just really been exacerbated in the last four or five years where we've really started digging into these niche opportunities. I mean, two of them are this Poultry business in the dedicated space. We acquired a business in Arkansas 30 months ago. It hauls Live chickens, Live turkeys, and chicken and turkey feed. It's about the most non-sexy but stinky business you can have. There were 724 trucks in that business this morning. It's a Cash Machine. And it's a Blue Chip customer base of protein producers, you know, the Tysons and the Simmons Foods and Foster Farms.
I could go on and on. The business, we've almost tripled the business in 30 months. That has been a great business, and that's in our dedicated space. The other business is a business that's buried within the expedited space that hauls Ammunition and Explosives for the Department of Defense. Really good business. A lot of barriers to entry around security requirements of the drivers, security requirements of the people operating the business. I mean, it's got a moat around it. It was doing really good until the government shut down. I would say October was the worst month we've had since we bought it in 2022. That said, the last few days, that thing is screaming again. Those are two really good acquisitions. We've done two or three other small tuck-in acquisitions since then as well.
Tripp, you want to kind of walk through the segment?
Yeah. Yeah. First of all, any questions on Paul's kind of overview of the strategy or?
If I'm Freight Cycle, why isn't it relatively constant year-round?
There are two cycles. There is the cyclical nature of just supply and demand, and then there is the annual cycle during the year. I'll kind of tell you where we are on the general. We are kind of in the trough of troughs. I mean, you can think COVID was the peak of peaks. It was about a 24- 30-month up cycle. Truckers made more money than truckers have ever made, but so did most businesses, you know, in America. Your Average Freight Down Cycle, if you go all the way back to the early 1980s, is about 18 months. This one, we are in month 40 of the down cycle. Hence why there is just a lot of stress on our competitors and peers.
If you look back over time, and there's a lot of different charts, you could just Google or ChatGPT or whatever on Freight Cycles. We're definitely in the, probably the, our founder's been doing this 50 years. He said it's by far the hardest and longest freight cycle he's ever been through, coming off what was a really, really high for 24 months.
I would add a little bit to that and just kind of talk about the macro because the Freight Cycles, the strong ones and the weak ones, have been going on since, you know, deregulation. What I would say is you can tell probably by mine and Paul's physique, truckers don't have a lot of discipline. Whether it's food or whether it's like Capital Allocation, when times get good in transportation, generally people go out and buy trucks and think that it's going to remain good. By the time they get those trucks ordered, delivered, seated, and on the road, usually it's a Supply and Demand Model. You have so much supply flooding in. You have low barriers to entry in transportation on the asset side. All of this capacity comes flooding into the market. Demand really doesn't change.
It can kind of, or sometimes it does, sometimes it does not. Usually the supply is a catalyst. When there is so much supply, people are bidding against each other and rates come down. That is really what we saw with COVID. It was a super, super strong cycle post-COVID. All of a sudden, the strength of that draws everybody in. You have all this PPP money. You have all of these basically notes out there and loans for, you know, basically free money. People were able to make a lot of money on the Spot Chart Market and build this War Chest. They are sticking around, right? They are staying. Even though times are bad, they are not leaving like they normally would because they have built up a War Chest. It is a very fragmented market. It is a very tough market.
In fact, just a little bit, I've been with the company six years. Before my six-year start date, I swore I would never be in transportation because I knew how difficult it was. You know, things worked out. Fortunately, I wound up at Covenant. I was right about how hard the business was. It is a lot of fun because it is a business where you can make money if you're smart and allocate capital correctly. I think that's one of the things we've done well. I'm not saying we've learned a lot of tough lessons, I would say, over the last, you know, six years since the strategic kind of capital allocation plan has come into place. It's been a lot of fun just building a model that's more defensible.
People talk about, well, you're going to see automatic trucks driving down the road. You won't need truck drivers. I mean, we've had that technology in airplanes for years, and you still have two pilots. Nobody's going to get on a plane without pilots. You may have that technology today with truckers. I think you're still going to have truck drivers in there, but they may use the safety technology, and it may help us be safer on the road. It is an evolving, it is an evolving, I still, there's a lot of, you'll hear about consolidation, but I still always think it's going to be a lot very fragmented.
Our focus from a strategy perspective is pick what we're going to do and do it extremely well and allocate capital to the big winners, to allocate capital to the things that are going to, you know, have a good steady flow of Free Cash Flow or Return on Capital. The stuff that isn't returning and isn't performing, let's pull it away. Both John and Paul mentioned the four business units that we have chosen and that we operate in today. There is no real secret sauce other than I can say this has proven kind of over the last three years to really have saved us in a lot of ways. I can talk a little bit about why, but the diversity of our business model today is its strength.
I don't think that there's a public carrier out there today that has this type of mix that we do. I can kind of briefly talk through each one of these. Let me just start with these two segments on the left-hand side, expedited and dedicated. These are our asset-intensive segments. When we hear talk about truckload or combined truckload, that's expedited and dedicated. The segments on the far right, the two segments, managed freight and warehousing, we call those our asset-light businesses. Not a lot of capital. People, technology is kind of what that uses or what those segments use to kind of generate funds. It's been good. We've got customers that we serve multiple segments in, single customers that we do warehousing and dedicated and managed freight for, customers we do expedited and managed freight.
I mean, that's kind of the secret sauce, if you will. Our expedited group is what you'll hear us call expedited, our teams group. That's two people in a truck. That includes the Ammunitions business. If it needs to be moved across the country fast or securely, that's what people are using. We haul, just as an example, the data towers that are going in these AI stations, the Nintendos, the Sony PlayStations, bombs, bullets, ammunitions, and all the way over to produce. Produce needs to get from, you know, the West Coast over to the East Coast really, really fast. We'll put it in a reefer, put two drivers in that truck and get across the country pretty fast. The fleet size in this business can flex from 850-950. And it's really just based on a factor of kind of where the market is.
We feel like this, based on our footprint today and our customer geographies and customer profiles, 900 is about the right size for this business, give or take 50 units. You know, on a capital-intensive scale, I would say this is kind of in the red. We put anywhere from about 180,000 mi on average per truck per year. When people look at our fleet and they're like, "Y'all have a really, really young fleet," it's because we're putting, you know, almost 400,000 mi on a tractor in two years. You churn through capital. Naturally, this needs to have a little bit of a better Operating Ratio or better margin for it to return itself in capital, which is why we're really, really picky about how and when we grow this segment.
We want to grow with customers that are consistent and will return their fair share of capital. Dedicated, as Paul said, it's about 30% of our total consolidated revenue. This is where the Poultry business is, and it's roughly now probably half. I know this number is 30%. We've grown that very, very quickly. Probably 45%-50% of our dedicated is in the Poultry Space, whether it's renderings, live haul, or feed. Again, people talk about autonomous vehicles. We're driving these trucks on dirt roads, on farms, across routes, backing up to poultry plants, loading cages. I mean, you're not going to have an autonomous vehicle do that. I kind of chuckle about that. You're not going to have a lot of competitors in this space because it is incredibly difficult.
You know, one of the things that I'm most proud of about our business was the Lew Thompson Acquisition and not only being able to keep his business and his current customers or the customers he had when we bought them happy, but we were able to grow it. I think I'm confident that you could ask any one of those new customers or customers that we've expanded with, and they would be very, very speak highly of our level of service. We've won a lot of business from there's only one or two really competitors out there that aren't private fleets. They've told us we're better than the competitor. Really, really happy with that, considering the service standard. When you have a service-sensitive business such as a Poultry business, margin is going to follow, and it does follow.
That's kind of the big chunk in there. The other chunk of the business we call legacy dedicated or non-poultry. It's a mix of a variety of things from industrials, John Deere, Eastman and chemicals to paper products. That's an area we're watching. We've got a good pipeline in right now, but it's getting more and more competitive. We've got to, to use Paul's word, nichy, we've got to increase our kind of nichiness in the non-poultry side of this business. I think we're on the road to do that. Moving over to the asset-light side, one of the other segments is managed freight. It's about 25% of our business. It's going to have margins in the mid-single digits. It is asset-light and technology-focused.
When you hear brokerage, that's what that primarily is, as well as some managed trans solutions, which is a contractual way of when customers want to outsource their transportation and logistics department, they outsource it to us, and we call it managed transportation. We manage their Inbound and Outbound freight on kind of a cost-plus model. The smallest segment, but maybe one of my favorite segments because we're not, there haven't been any fatalities in warehousing like there have been in the transportation space or bad accidents. Warehousing is a very, very steady stream of revenue and margin for us. It's asset-light because we go find the customer and then we'll lease it, lease the warehouse co-terminus with the customer contract. These contracts are three to five years in duration. We have kind of a Blue Chip base of customers within this business.
Today, it's on a run rate of about $110 million of revenue. It runs, truckers use the term OR, Operating Ratio, but Operating Margin, it's 10% or from an Operating Ratio, it runs around a 90 or 91. Customers include Colgate, Hill's, Delta, Mars. Some Blue Chip customers that we've been expanding. We've got another, we've got a good pipeline in this business too. This is one of those businesses that isn't as cyclical as other businesses in our portfolio and helps steady the ship, if you will. It's been a big, it's done very well for us in an environment that's been tough on the truckload side. We're happy with that business.
Any questions on the segments?
Sure. Warehouse and Off-load storage?
No, no, it's not. A small piece of it is, but it's primarily ambient. There's one operation is a Freezer Facility.
Each one of them are customized to the, no one is the same. Sometimes we use our Warehouse Management System Technology. Sometimes we use theirs. Just depends on the customer. Always has to, you know, they're generally big customers, just has to integrate with their ERP system.
Last but not least is our Equity Method Investment. We own 49% of an equipment Leasing company called Tell. You won't see their revenue in our income statement. You'll see them at the bottom kind of as an Equity Method Investment, a single line item where their share of their, or 49% of their earnings get added to our income statement. Tell, their fleet, quite honestly, is as big as Covenant's, both on the tractor side and the trailer side. They help us with scale.
We go in, we buy, even though we're legally a separate, you know, organization from them, we buy and together. It helps the pricing of new equipment. They also help us sell and liquidate our used equipment. In addition to them having just a Phenomenal Business Model, you know, they're leasing equipment, tractors and trailers, and sometimes both to Small Mom-and-pop companies. If you look at the longer term, I'd say run rate for Tell, you'd see a tremendous amount of growth. If you looked at the last two years, you'd see some reductions, which is quite natural if you think of who they're leasing their companies or their equipment to, Small Mom-and-pop fleets that quite honestly are having the most trouble. We're really proud about how they've hung in there.
We really like the, you know, $8-$11 million of dividends that they give us every year. It is a highly levered model. The margins they produce are a lot better than probably transportation and trucking will ever be. Good business to own 49% of. The last thing I'll just talk about, and Paul hit on a little bit, is whether you talk about opportunities or you talk about strategy. Today, our Balance Sheet sits at about two times EBITDA leverage. We're right at $300 million in net debt. A lot of that net debt has grown as a result of some CapEx growth for specialized equipment in our Poultry Space. It's grown because of some share repurchases we've done over the last couple of years.
It's done, it's also grown because of some acquisitions that we've done, some smaller acquisitions that we think we can maximize and optimize and have a better run rate. We're not, we don't have a stated goal of a debt target or a net debt target. We're comfortable between one, two, to up to maybe 2.5 times if we find the right opportunity. We don't want to get anywhere beyond that. We want to continue to give ourselves shots at the plate, swings at the plate. One thing about this business, and partly because of the cyclical nature of it, is opportunities present themselves at the oddest times. Always maintaining that opportunity to execute on those is important to us. That's kind of how our strategy is. We've done it all. We've done the dividends.
We've done share repurchases, accretive acquisitions that are niche in some way or defensible in some way. That's what we're in a nutshell just trying to do, trying to separate ourselves from other carriers that are just running napkins, paper plates, general commoditized freight that don't have any urgency or don't have any sensitivity. At the end of the day, we want to hang our hats on service. We feel like if we can be above board on service in all of our segments, then price is going to follow. That's really all I had. Any questions?
Just a quick one, who are your main competitors?
Oh, yeah, I mean, there's, I wouldn't say that there is a public company out there that has the same profile that we do in terms of a Leasing company, a Warehousing company.
There are a lot of companies that compete with us that do dedicated. Just about like all of the, you know, you got J.B. Hunt. They're a big dedicated carrier, but they also, they're a bigger intermodal, you know, player, if you will. We don't do anything in intermodal. I had dinner last night with the Chief Operating Officer at Ruan. Ruan is non-public, but their model is probably, probably more closely related to ours. They don't own 49% of a Leasing company, but they have a really, really big dedicated fleet of about 4,000 tractors. They do managed freight. They do brokerage, and they do warehousing in a very similar format, but they don't have the teams. Werner has grown their teams lately, and they also have dedicated, but they don't really have the warehousing.
They've got like these, you know, so there's, we compete with several different companies, but I wouldn't say that there's like another, you know, Covenant that's out there that has our same footprint and service offerings or size. I think that's an important part. As you think about consolidation, we're kind of a smaller cap public company, public transport. A lot of the people are, or a lot of the competitors our size have been gobbled up. U.S. Xpress, gosh, Daseke, USA Truck, yeah. Over the last five or six years, there have been several acquisitions of companies our size or even slightly bigger from the big. The big are getting bigger for sure. They're trying to win with scale. We're trying to win with nichiness.
I think of our, Paul told me about this book that I have yet to read. It's a Strategy Book, and it uses the David and Goliath story. You're either going to embrace being David or you're either going to embrace being Goliath. We kind of embrace being David because we feel like our size allows us a lot more flexibility and opportunities to move fast. If there's one thing that you got to do in this business, you've got to make decisions fast, and you've got to get out there quick or pull back quick. Because by the time, if you're late, you're pretty much off the bus.
Why did the 40-month cycle? I used to run account with client and now I'm in the shipping, so I don't remember those kind of issues.
No, the down cycle, the way that I think about it, this is a long answer, but I'm going to make it real short for you. 2020, COVID happened. We didn't know if it would be terrible for years or six months. It was terrible for like two months. It hit us, I remember feeling the April, I remember seeing revenue drop like a rock. July, I remember seeing it shoot up. I'm like, man, this could be good. Everybody started talking about it. From July of 2020 up through really the end of 2022, we had the strongest freight. Think about all the stimulus that got pumped into the economy, all the disruption with COVID, people working remotely, the ports were in disarray. I mean, Drayage Operations were going crazy just trying to find containers and move them. There were space limitations.
Not only was there a lot of freight to move with all the stimulus and people staying at home and not buying food or traveling, they were buying Amazon stuff. They were buying all kinds of goods. My wife was one of those. Yeah, and there are boxes on top of boxes when I'd get home and everything. It created this super, this, you know, just super upcycle, if you will, just because of the volumes and the inefficiencies. Everybody and their brother got into trucking and transportation. We couldn't buy any equipment for those two years. What happened was, we were also moving and getting more contractual. You had all of these companies working in the spot and making fortunes. Naturally, you got to think of it like a pendulum.
If it swings one way really, really hard, it's going to swing the other way really, really hard as well. We had the world's or the industry's best Super Cycle. I also think what we're seeing today is the industry's kind of worst, you know, bad cycle. The other thing that Paul had mentioned is there have been a tremendous amount of growth of, without getting political or anything, there is a lot of fleets like us have to run with a standard. There's a safety. We've got all kinds of mechanisms on top of mechanisms to make sure that we're doing things by the rules, by the logbooks. The fragmentation of our industry allows, and probably some lax rules, lack of enforcement allows some drivers to be able to run two sets of logbooks.
We've done some research in it and we're getting some of the associations involved. The only way they're making money and what's keeping them around is them putting 140,000 mi on a tractor a year in a solo tractor. If you went by the logs, that's technically impossible. Like you cannot do that. There is only one explanation on why one solo driver could run 140,000 mi a year, 150,000 mi by himself on a tractor is that his logs aren't accurate. There has not been a lot, if any, enforcement on that up until the last probably few weeks. I would love to be able to compete in a level playing field. I think that's probably what's going to help get us right size this next year.
I see opportunities, but I think a lot of the smaller guys getting out of the space. Is that correct?
Yeah, I'd say it's two things. It's the less capitalized businesses, this 40-month down cycle is choking them out, for lack of a better word. I mean, they did really good at Tripp said in 2021 and 2022, but then they had a War Chest and they made it through 2023 and started building some stress in 2024. You know, by now the War Chest is gone and the banks, they're not prime credits. You know, the banks don't really want to renew those leases or refinance the next truck, especially with the economic, you know, with what the rates are, that the stuff just doesn't pencil out. That's a piece of what you're seeing. Our equipment leasing business, I'll give you some data.
Their bad debt 2021, 2022, 2023 was almost non-existent. 3rd, 4th quarter of 2024, it really, really ramped up. It just ramped up a lot this year. That tells you the small guys that are leasing from them aren't, you know, they're not renewing their leases and they're a lot of times not even have the ability to finish off the lease payments. They go out of business before. That is one piece of what you're seeing. The other piece of what you're seeing is what Tripp was talking about. If you see it in the news, it's called non-domiciled CDL drivers. It's basically folks who are A, not full U.S. citizens, B, who don't live in the U.S., but C, have a Commercial Driver's License.
There have been several pretty high-profile accidents in various states, two or three states from the East Coast to the West Coast. We've been seeing this, you know, for a little while. The Department of Transportation is now really starting to see that there's a problem with what's going on. I mean, these folks, Tripp said, they're running 50% more mi than is legal. How do they do that? It's because they're using kind of a fringe set of logbooks. There are all kinds of ways they're doing that. Anyway, some of it is people are just going broke and they don't have any undercapitalized folks who aren't able to make it in this 40-month down cycle. The other is some of the folks, the only way they're making it is cheating. These fringe operators, which is a high percentage of the market.
I mean, your top 50 trucking companies in the United States only make up about 7% or 8% of the capacity.
Is that an opportunity for acquisitions or where we?
Hopefully what, you know, I'd say those aren't the kind of folks we're probably acquiring. What is the opportunity for is, you know, folks that are just beaten down by unsustainable rates come out of the market. The prediction is if over history, these up and down cycles are 18 to 20 months and this one's 40, you got to be closer to the end than you are the beginning. Hopefully it'll go into a, you know, a cycle where rates, you know, rates get to more of a normalized position.
Thanks, everyone.