Covenant Logistics Group, Inc. (NYSE:CVLG) Q2 2024 Earnings Conference Call July 25, 2024 10:00 AM ET

Company Participants

Tripp Grant - Executive Vice President & Chief Financial Officer
Paul Bunn - President & Chief Operating Officer
David Parker - Founder & Chief Executive Officer

Conference Call Participants

Scott Group - Wolfe Research
Jason Seidl - TD Cowen
Daniel Imbro - Stephens
Jeff Kaufman - Vertical Research Partners
Michael Vermut - Newland Capital

Operator

Welcome to today's Covenant Logistics Group Second Quarter 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, Tripp Grant. You may begin.

Tripp Grant

Thank you. Good morning, everyone, and welcome to the Covenant Logistics Group second quarter 2024 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.

A copy of the prepared comments and additional financial information is available on our website at www.covenantlogistics.com\investors.

I am joined on the call today by David Parker and Paul Bunn.

Our core business performed well in the second quarter, overcoming lingering weakness in the overall freight environment. Compared to a year ago, consolidated freight revenue increased by approximately $12.8 million, or 5.3%, to $256.5 million, and adjusted operating income increased by $2.4 million, or 15%, to $18.7 million. The year-over-year increase in freight revenue was primarily derived from growth in average tractor counts within our asset-based truckload segments, consisting of Expedited and Dedicated. The growth in adjusted operating income was principally derived from our asset-based Dedicated segment and both of our asset-light segments, consisting of Managed Freight and Warehousing.

Adjusted net income of $14.5 million for the quarter was essentially flat with the second quarter of 2023 primarily because higher adjusted operating income was offset by a $1.7 million increase in pre-tax interest expense and a $1.3 million reduction in pre-tax earnings from our equipment leasing company investment, TEL.

Key highlights for the quarter include:

Our combined truckload segments grew the average total tractor count by 191 units, or 9.1%, and improved freight revenue per tractor by approximately 0.8% compared to a year ago.

Our Dedicated fleet achieved the lowest adjusted operating ratio in company history with a 90.9 and grew its average tractor count by 136 units or 10.9% compared to the prior year.

Within our combined truckload segments, compared to the prior year, operations and maintenance related expenses declined by $0.02 per total mile or 10%. Fixed equipment related costs, including leased revenue equipment expenses, depreciation, and net gain/loss on sale increased $0.03 per total mile, or 8%, as a result of operating newer, more costly equipment in a soft used equipment market.

Insurance and claims expense increased $0.08 per total mile, or 56%, compared to the prior year as a result of increases in new current period claims expense and the development and settlement of one large prior period claim.

Our net capital investment for revenue producing equipment was approximately $43 million for the quarter, consisting of both specialized equipment CapEx for growth and maintenance CapEx.

The average age of our fleet at June 30th improved to 21 months compared to 26 months a year ago.

The sale of revenue equipment resulted in a $0.9 million loss in the quarter, compared to $2 million gain in the prior year.

TEL produced $0.23 per diluted share, compared to $0.29 per diluted share versus the year ago period.

TEL's contribution to pretax net earnings declined primarily as a result of the year-over-year softening in the used equipment market, suppressing gains on sale and increased interest expense.

Our net indebtedness as of June 30th was $273.3 million, yielding an adjusted leverage ratio of approximately 2. Times and debt-to-capital ratio of 39.5%.

On an adjusted basis, return on average invested capital was 8 % for the current quarter versus 13% in the prior year. The decline is attributable to reduced year-over-year trailing 12-month operating income particularly from our asset-light Managed Freight segment and the increase in the average invested capital base associated with acquisitions, growth CapEx and reducing the average age of our fleet.

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

Paul Bunn

Thanks, Tripp.

Expedited was successful in growing freight revenue by approximately $3 million, or 3.4%, but experienced a 330-basis-point deterioration in profitability compared to the prior year with an adjusted operating ratio of 94. Although our average tractor count grew 6.4%, profitability fell short of our expectations primarily as a result of cost headwinds from significant casualty claims and year-over-year declines in both rate and utilization.

Dedicated was successful in growing both freight revenue and operating income, while yielding the best adjusted operating ratio in company history with a 90.9, representing a 170-basis-point improvement compared to the prior year. During the quarter, the team successfully executed a second large start up for the year, increasing the fleet's average tractor count by 10.9% year-over-year.

Managed Freight experienced a 4.6% reduction in freight revenue and a 73.6% increase in adjusted operating profit compared to the prior year, reporting an adjusted operating ratio of 94. The significant improvement to adjusted operating profit was primarily the result of the combination of improved purchased transportation costs, the year-over-year impact of the Sims Transport acquisition, and reduced cargo-related claims compared to the prior-year quarter.

Our Warehouse segment saw a 0.7% increase in freight revenue and a 104.7% increase of adjusted operating profit compared to the prior year, reporting an adjusted operating ratio of 91. We are pleased with the improvement in profitability within this segment, which struggled to produce adequate returns during the historical periods of rapid growth and significant labor inflation.

Our minority investment in TEL contributed pre-tax net income of $4.1 million for the quarter, compared to $5.4 million in the prior-year period. The decrease was largely due to continued deterioration in the equipment market, suppressing gains on sale of used equipment. TEL's revenue in the quarter declined by 4.1% and pre-tax income decreased by approximately 24% versus the second quarter of '23. TEL decreased its truck fleet in the quarter versus year ago by 77 trucks to 2,206 and reduced its trailer fleet by 17 to 7,014.

Regarding our outlook for the future, as we enter the third quarter of the year, we believe freight fundamentals are continuing to improve by excess carrier capacity slowly exiting a market with unsustainable conditions. Absent an outside catalyst to facilitate improved demand, we remain uncertain about the pace at which general freight conditions will meaningfully improve. Despite these challenges, we remain optimistic about our business model as evidenced by the durability and growth of our core operations over the last 12 months.

In the third quarter, we believe that we have the momentum necessary to produce sequential operating income growth throughout the year. Although much of this growth will be offset by higher interest costs and reduced earnings contributions from TEL, we are excited about the direction of our company.

Lastly, it is with sad news that we recognize the passing of Doug Carmichael, Founder and CEO of TEL. Doug was a true partner with Covenant and friend to all who worked with him. Known for his entrepreneurial spirit, quick wit and deep generosity, Doug will be missed dearly by all who were fortunate enough to know him. Although we will miss Doug, he leaves behind the most talented management team TEL has ever had. We look forward to working with them more closely to honor Doug's legacy and ensuring the continued success of the business.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Scott Group with Wolfe Research.

Scott Group

Hey, thanks. Good morning, guys. Appreciate the time. So just maybe start with, if we can, your perspectives of the market. Knight talked last night about their own spot rates starting to move above contract rates, increasingly confident that things at bottom sounds like you're seeing some of the same things, but just your broader perspective on where we are and how quickly things can recover from here?

David Parker

Hey, Scott. This is David. Yeah, I definitely think that we've hit bottom, and I think that we started seeing it the middle of May. We started -- things just started feeling a lot better and freight was more available to us about the middle of May. And then, all of June was the same way, pretty good month in the month of June, and that has held true for the first 20 or so days of July. So, it was really the middle of May where we started seeing.

So, I think things have bottomed out, and I do think that, and that's all because the capacity that has lay up that we've all been figuring out how long it's going to take in the last two years for capacity to leave. But I got a feeling that until capacity [Technical Difficulty] that's kind of my take on the environment.

But I'm pleased with that to give you an idea, which we're thrilled with, we've actually taken three rate increases in the last 45 days, and we haven't done that in two years. And so -- and we actually have got customers that are at least open and willing to have discussions about our costs and those kind of things. So, those are events that have not happened in the last two years that are starting to happen now. We don't have the momentum yet to go full-fledged and say roll out rate increases all over to every customer, but we're looking at that. And the ones that are not performing well are the ones that we're going to go have talks with.

Scott Group

That's helpful. Well, do you have like any perspective, you said like three rate increases. Like, is that three out of five? Three out of 100? I don't know.

David Parker

Three out of -- let's say three out of 75 or so that really mean anything to the business. I mean, it's literally -- and that's all in the last couple of weeks, Scott. So that is just the beginning. The question would be, as we get on our third quarter conference call, is that three going to become 23? And so, that's really worth that. Hey, but in two years, I'm thrilled with three.

Paul Bunn

That's three more than we've got in two.

David Parker

It's three more than I've had in two years.

Scott Group

And yeah, no, totally. And then, your margins have obviously held up just so much better than anybody else's. Does that preclude you and your thinking any way from seeing a lot of margin improvement whenever the cycle turns?

David Parker

I think the only thing that won't be there for us, and this is exactly as you know, Scott, going -- following us during this turnaround for the last four or five years, but the lows are not going to be as low, evident what you're seeing. And you could say the highs are not going to be as high from a standpoint that we -- spot market is about 2% or 3% of our business. We just do not participate much in the spot market. So, if it goes back up to $4 a mile and it's 20% of your business, we're not going to experience that big uplift like that, but we will have our uplift. If rates in the market go up 5%, 6%, 7%, we're going to get our 5% or 6%, but we won't get 20% of the spot rate if that's what somebody's at. You know what I'm saying?

Paul Bunn

Yeah. Scott, I want to add on. This is Paul. I might add on to what David said about that. Yeah, I mean, it's -- when spot rates go crazy and some of these carriers drop down and they're running in the 70 ORs, consolidated, our model doesn't have the ability to do that. On the other hand, I think what we haven't seen is, as you know, we purchased back a huge percentage of the shares kind of in the '21, '22 period.

And so, I do think we've got a lot of earnings leverage with just a little bit of rate. So, a little bit of rate can go a long way. As David said, when and if we get to that point, and we're not at that point now. And so I think it's kind of a balancer effect. I mean, yeah, we're not going to look up and have a 77 OR in one quarter. It just not the model. On the other hand, you ain't going to look up and get a 97 OR in one quarter either. And we should get some benefit of the rate given the low share count.

Scott Group

That all makes sense. If I could just ask one last one. You talked about sequential improvement in Q3. Any way to just put some color around sort of how you're thinking about margins, earnings, whatever, in the third quarter?

Paul Bunn

What I'd say is the third quarter has got a lot of work days. Weather's generally pretty good. And so, I think I'll let Tripp give any color he wants to give, but we're pretty confident on sequential improvement. I don't know that we want to put a number out there.

Tripp Grant

Yeah. Scott, this is Tripp. With our model change, I generally look at our Q3 absent something strange or unexpected happening. Our Q3 typically should be our best quarter of the year, because where a lot of our business is contractual, and we have a lot of shutdowns and Christmas holidays or Thanksgiving holidays that impact Q4 negatively. And we don't play in the peak market very much anymore. So, Q3 is a very good quarter from us operationally. The poultry business gets hot with the -- getting ready for Thanksgiving and the Holidays. And so there's a lot of volume improvement in the third quarter. To Paul's point, there's a lot of work days on the legacy side of the Dedicated business.

And I think you could see some similar trends of what you saw last year where a little bit of an improvement in Q3. I don't want to put any numbers on it, but compared to Q2, taken from increased volumes, I would say, and hopefully some better costs. We called out the insurance, and I'm hoping we get a little bit better there. But the depreciation headwinds are here to stay. We've absorbed a lot of costs that we're not seeing any reductions on, but I do -- insurance is one of those things we called out in the release, and I do think that we can get better on that. So, I think a little bit of margin may be coming from cost.

Scott Group

Thanks, guys. Appreciate the time.

David Parker

Thanks, Scott.

Operator

Our next question will come from Jason Seidl with TD Cowen.

Jason Seidl

Thank you, operator. David, Paul, Tripp, good morning here, and my condolences to Doug and the family. Wanted to drill down a little bit on how we should look at some of your segments. I think Dedicated sort of surprised us a little bit, was stronger than we expected, Expedited, maybe a little bit weaker. How should we think about the Dedicated tractor count as we move forward through this year, then maybe if you can give us a little insight into next year? And then, how should we look at sort of how the claims impacted Expedited and then maybe how the claims positively impacted the Managed Freight division as we move forward from 2Q to 3Q?

Paul Bunn

Yeah, I mean, I think I'll provide some color commentary. I think on Dedicated, I would say the truck count, I would say is flattish the rest of the year. I mean, we've got some new deals coming on and we got a few deals going off. And so, I don't see a significant -- I mean, it might be plus or minus 25, but the dedicated truck count kind of is what it is. But I would tell you we're budgeting for a little bit of truck count growth in 2025. I mean, that's our goal.

So, I'm seeing Dedicated shippers more willing to take calls in the last two months, more willing than they've been in the last two years. And so, the pipeline is out there, but the pipeline is probably more Q1-ish, Q2-ish of next year, not as much the balance of this year. As you know, we've already grown a lot in Dedicated.

I think you said it, Jason, and Tripp called it out, the insurance headwinds that affected Expedited, I think from a cost standpoint, that number will get better next quarter. And so, I think you'll see Expedited get back in Q3 and Q4 to a number that you're expecting to see this quarter.

Managed Freight and Warehousing, two of our smaller segments, but we're really proud of how they're operating. I mean, the claims were a benefit versus last year quarter, but we didn't make a lot of money last year. And so, I mean, I think that Managed Freight division is probably in that 95 to 97 kind of OR. We're not going to run a brokerage to run 103 OR, I mean, it just -- that's just not our model. And so, we'll take less revenue and less exposure to make sure things in the black every month. And so, I think you're going to keep seeing stuff in that range.

And the Warehousing business, similar, had some cost issues in '23 because -- we doubled the business in '24. And it took a little while to work out of that slump, but you've seen two quarters of back-to-back solid numbers, and I don't see anything changing in that going forward.

Jason Seidl

Well, that's great color. Let me shift gears a little bit. I mean, obviously, you guys have been very successful with your M&A strategy over the last few years, adding some really, I think, strong components to your network. How should we think about M&A going forward and how does the pipeline look for you guys?

David Parker

I would tell you that we're always looking, and I think that probably the best thing that's happened, Jason, is that every truckload carrying in the United States is for sale, is not coming across our desk anymore, like all that can be flooded upon you. And we're starting to -- as people have seen what we purchase and what our interest is, those kind of acquisition opportunities are really what are coming across to us. So that's number one.

And I would say that one out of five kind of piques our interest. And you may have discussions on one out of five. We're open to acquisitions when the timing and the opportunity presents itself. So, it's not something that's closed, but it's not something that we got ready to do something tomorrow on anybody or any company, but it is something that we like.

Tripp Grant

Yeah, and I'll add to David's comments on that, too, Jason. Thinking about our position and thinking about the M&A that we've done in the past, and we've been quite honestly blessed with some really good opportunities that we've executed on and be able to add some really great partners to the Covenant family.

And I think right now, if you look at our debt level, and if you look at the fact that we're actually growing as a business together in an environment like this, and hopefully, we are on the cusp of an upswing. Whether that happens next quarter or whether it happens in the third quarter of 2025, I don't know. I don't know if anybody really knows. But I do know that we're closer to the end of this thing than we are to the beginning.

And I just think -- and the other thing I was going to mention is, with the addition of Dustin, our new Chief Operating Officer, and some additional promotions and leadership opportunities that we've given to people within the company, we've got our hands full with a lot of good things going for us today. And while I agree that we are always looking, and if we had another perfect acquisition land into our laps and we would probably jump on it. But we're in a position now, I guess, is what I'm trying to say to -- we can be very disciplined about what we choose to do in terms of an M&A deal. And I think we're going to exercise that discipline for a period of time.

Jason Seidl

Sounds good, gentlemen. I appreciate the time, as always.

David Parker

Thanks, Jason.

Paul Bunn

Thanks, Jason.

Operator

Our next question will come from Daniel Imbro with Stephens.

Daniel Imbro

Hey. Good morning, guys. Thanks for taking our questions.

David Parker

Hey, Daniel.

Daniel Imbro

Maybe I'll start on the Dedicated side. I think you guys talked about some startups in the quarter. Can you talk about just what kind of businesses those are? Are those in the more specialized side, like live haul? And then broadly, can you expound as you've grown into that and continued to win more business if that is what it is, what are the competitive advantages you have? Why aren't others growing here? Can you just talk about maybe what's given you guys the advantage to keep winning this business?

Paul Bunn

So, a couple of things, Daniel. I mean, the larger startup in Q2 was on the more specialty side of the business. That said, we had startups in the legacy side as well. And so, we continue to tack both what I call our legacy-dedicated and poultry or specialized businesses. I think the team in that space has got a really good reputation, and I think there's some really good things we do operationally that the customers like. And so, we're going to keep trying to grow all kinds of Dedicated business, especially those that have specialized trailers, specialized drivers, time-sensitive requirements. I mean, that's our focus.

Daniel Imbro

And then, maybe because the data is harder to [indiscernible], when we think about seeing capacity to leave the market, this is a more specialized subsector. Have we seen capacity similarly exit this part of the market that gives you pricing power across that as well?

Paul Bunn

Well, I don't think in the specialized space. Yeah, I think most of the dedicated deals we're competing against -- we got a couple of deals out there right now, and it's a lot of pretty well capitalized carriers. And so most of the dedicated deals in that specialized space are not the mom and pops that are going out of business.

Daniel Imbro

That makes sense. And then maybe stepping back a little bit, David, you mentioned some more seasonally normal demand beginning in May, I guess, as you speak with your customers, are you getting a sense this is a pull forward? Is this inventory building ahead of peak season? Like, what do you think is driving this more seasonally normal shape of the curve?

David Parker

A great question. This is the same question that we're asking internally. That said, we do -- we don't do much retail, and so therefore, it's -- I can say, I mean, like, 1% is retail business, but I did, I've seen some analysts, some folks have written on, is there a prebuy -- pre-peak that is going on, which made me wonder and question, because you definitely see all the port business, the vast majority of the port business is up very nicely, which would make you think.

But, so I'm not sure. I'm just not sure, Daniel. I do believe, though, that non-retail is not -- I don't see any peak -- a pre-peak in the non-retail business that we're doing. And we don't do enough retail to wonder about it. I am seeing some of the -- getting ready for the Apple launch and that kind of freight that is out there, but we have that every year in a September kind of timeframe, and we're getting ready for that big little bit, but that's every year deal.

So, I'm just not sure, because really to us, the pre-peak would be our freight out of Los Angeles and our freight out of Savannah because those are the two main ports, and a little bit out of Houston. And both of those are definitely up, but I'm not ready to contribute that it's some pre-peak season. But we may be sensing some of that. I don't know. I just know what we're feeling -- every one of us truckers are liking what we're feeling. I just hope it lasts.

Daniel Imbro

I appreciate all the color. And best of luck you all.

David Parker

Thanks, Daniel.

Paul Bunn

Thank you.

Tripp Grant

Thank you.

Operator

[Operator Instructions] And our next question will come from Jeff Kaufman with Vertical Research Partners.

Jeff Kauffman

Just terrific results in a very tough environment this quarter. I'm kind of curious, I've heard the commentary about things that we hope are changing or behaviors that are changing that could lead to positive events, but in terms of what you're seeing within the industry itself, there's the things you can't control, and then there's the things you can button down and control yourselves. How has your view of both of those things changed over the last three months?

David Parker

Well, those are great questions. I think it's -- I think that we've -- for the last five or six years anyway, as we've been on our journey, I think that we've looked very strongly at the things that we can control and attempt to get involved in the things that we can't control. And it has been something that we work very diligently. But I will say, in the last two years, the trucking industry is not immune to 20% inflation. I mean, it's not immune to about tire people walking in and raising, and truck people and trailer people and all these segments that have walked into this door and reinsurance and, I mean, the P&L, you can go down, and payroll, and those kind of things. So, we -- some of the areas that we can't control, we try to just negate it as much as we possibly can. And we've been successful in a lot of that, of being able to put -- take some cost out, even though the line items are tremendously up in a lot of areas.

So, we continue, again -- I mean, to give an example, anything that says that we're buying for $0.10, can we buy it for $0.01? We are scrubbing the P&L to make sure that we do. Now suddenly we look up and we took out $1. And that's what we've been doing, Jeff, for the last two years is why our earnings have been good. Leading the effort is because of that, because it's not because of rate increases, very little of those things that have happened. And so, I am proud of this team. I really am, of controlling the things they can control and the things they can't control to try to make it as least hurt as they possibly can. And I think that's really been the philosophy for the last couple of years.

Tripp Grant

Yeah. And I would add to that, just expanding on what David had said, on talking about the income statement, but I think what this team has done really well, or done a good job with, too, is just looking at capital, looking at the balance sheet, and trying to make sure we're optimizing that as much as possible.

And I think a big part of our story over the last few years has been capital allocation, which is -- starting in 2020 with the downsizing of a lot of the freight that we were moving or a lot of the assets tied to the freight we were moving, disposal and sale of a lot of terminals, a factoring business went away and it provided us some opportunities and we started seeing the benefits of what it meant to be a more focused logistics provider. It allows us to be more nimble, a little more flexible, and -- but whatever it is we decide to do, we've got to be really good at. And I think that -- that approach to capital allocation has served us well and it's something that we continue to do.

David Parker

And I'd give you a couple more examples, Jeff. Let's take -- even though we're not showing it, two statements I've heard Tripp say, hey, I'm hoping that we'll get some -- we'll start seeing some good things on the insurance line item that going forward, we hope that's the case. I can tell you for the last two years, our accidents are in historical lows. When you look at DOT per million mile accidents and critical accidents, Tripp also made -- internally made the statement says -- told us that, I've also been expecting this for the last two years, and that's a correct statement, too. But if we could keep the accidents from happening, which we are, it's got to eventually flow through to us that something that we got on the books for $1 million, all of a sudden becomes $1.5 million and you got eight of those. Next thing you know, you report $0.25 a mile insurance cost because that stuff -- well, eventually you're running out of those accidents. And so, if we keep those accidents low, which we have, then we've got to start reaping the benefits. So, there's an example of something that we can't control the settlements or the court cases, we can control the accidents to the best of our ability and that will help us. Not in second quarter, we think though, down the line it's going to start showing up.

I look at the Expedited side even though utilization was down just a little bit in the second quarter, I would say this year, utilization year-to-date is up 12%, 13%. For the six months, are definitely double-digit kind of numbers for the six months. So in a horrible environment, we're making sure that we're going to the right places, the right destinations. And we may be saying no to freight during a time we need freight, but evident by the fact that our utilization is up double-digit numbers, we're making some great decisions on that. And once -- as you said earlier, somebody said once insurance helps us there, you'll start seeing the numbers on Expedited B and what we think that they will be.

So, those are a couple of examples of things that can control, but things that we can't control, but how are we getting better at it.

Jeff Kauffman

Well, thank you for those answers. And that kind of begets the next part of that question, which is every downturn changes things in some way, shape or form. And even though we're not finished with this one, I think your comments are -- we think we see the light at the end of the tunnel here. What do you think is going to be different about the market as a result of this downturn and how it's played out? And how is that an opportunity for you when the markets do eventually stabilize?

David Parker

Yeah. I think a couple of things that thrilled me through this last couple of years is that even -- as we have moved out of the OTR, even though you can say Expedited is the OTR, but it's also specialized. We got the largest team fleet in the United States, so everybody's brother does not run the amount of team drivers that we run. And so, it is OTR, but it's specialized OTR.

We're down to less than 100 trucks running solo OTR. And I'm worried about how am I going to load them out of Chicago or New Jersey today, that -- we're down to just very little. But the specialized -- and we have got long-term agreements that we entered, and probably one of the best things we did was we entered that in '22, a little bit of '23, when our customers could not find trucks, could not find trucks out there that we all on this phone realize. And we went to our customers and said, we want to make a partnership with you, and that is we will give you the trucks right now at a fair rate, a scale of 1 to 10, a rate on a 7 or 8 not a 12 on a scale of 1 to 10 during '22. And let me tell you, that's about 55% of Expedited's revenue is on long-term agreements of which most of them have been re-upped this year for two to three more years.

And those customers have treated us right. We treated them right. And it's been a great, great partnership, that's one of the things that has changed for us that we will be there during the good times, and we will be there when it comes out for our customers because they have proven to us that they're going to be there for us, even if it means taking freight away from our competitors and given to us. That's what they've done in the last 12 months. And so, we have shaped the market. Dedicated -- I would say, Jeff, that on the Dedicated side of our business, I want to say, Paul, that 70%, 80% of it is specialized, is that a true number?

Paul Bunn

Yeah, I'd say. Yeah, 50%, 60%, for sure. 50% to 70% specialized.

David Parker

And I would say that we -- that we are out. I would say that we're 95%...

Paul Bunn

Out of commoditized.

David Parker

...out of commoditized over the last two years. And so that's been a blessing that now on the Dedicated side, we're really guided with customers that need us and we want them. And it's not ones that we're worried about what did spot market do, and we're already got rid of all those. So that's on the Dedicated. I just told you about the Expedited.

I couldn't be more happier with our Warehouse. I mean, those guys have knocked it out of the park on operating it, growing it, doubling it, had to take a couple of steps back, the team did, reshaped it, and you can see what the Warehouse side has decided to do and then, so that they won't feel left out.

I am thrilled with our Managed Freight. I mean, I went back there about a month ago and gave them a hug. I mean, those guys are doing great. Yeah, they are. They're doing. The guys and gals back there. I mean, in this environment, to be in the black because as you see, most of them are in the red. We're not in the black and we're not going to be in the black. So -- anyway, I'll shut up.

Jeff Kauffman

No, that was awesome. Thank you very much.

Operator

And our next question will come from Michael Vermut with Newland Capital.

Michael Vermut

Hi, guys. How you doing? Congratulations on a great year so far and quarter. So obviously, we're all sitting here, or at least I am a shareholder for years and years, and we've come out of this downturn looking better than anyone else. There's no one that's compared to what you've done with this company, right? The way that we've transformed this company -- 15 years ago, we would have been losing money in these quarters, no question, right? So, it's a completely different company here. And I think we're still trading at a 10 multiple point discount, let's say, to the group on average.

And I do think it's now that we've come through this and probably one of the worst downturns we've had in years and doing so well with what we've been given and the way that we've built this company now that we don't see how it's going to transform as the market turns, right? And as the next downturn comes, is this something that the leverage in the model -- I know this question was asked before. I know it's changed, but that we're still there.

So, we're doing $4 roughly this year and it goes to $6 at the peak. And I think people don't understand that, that leverage is still there in this model and that on the contract side, we'll still see that. Is there anything that we're not understanding here? Because there's something that the Street doesn't understand with what has happened at Covenant so far.

Tripp Grant

No, and I can start on this, Mike. This is Tripp, and let Paul kind of finish it off. I think that there's plenty of opportunities for operating leverage. The timing of that may be a little bit different from the timing of some of the other public carriers out there because of the -- I mean, we're 99% contractual and almost all of our truckload stuff. You may start seeing it in the brokerage world a little bit quicker than some of the truckload customers.

But what I would say is we've got to be very intentional about how we go about this. And I think going back to '21 and '22, and one of the best things that we did, and David mentioned this, we really took the opportunity to improve our customer mix and be fair to the customers who were fair to us and downturns, and we were fair to them when things got tight, when we absolutely could have gone to them with 10%, 12% raises. And we ask for fairness and we provide a good-valued service for a good value return. And so, it is on a customer-by-customer basis, and we're in the process of going through and understanding who do we need to get in front of.

I think the key is for us is to be very fair to the customers who've been fair to us, and we're making adequate returns on and be urgent in front of the people and the customers that we need quick rate increases. But all that said and done, I think that there's a ton of opportunities for us to improve margins and get this thing up to kind of numbers that you had mentioned earlier. So...

Paul Bunn

Yeah, I think the only thing I'd add to what Tripp said, Mike, is, it's a -- I'm a pretty simple person, so I just try to keep it pretty simple sometimes. And it's -- to your point, we're going to do, should do $4 a share or better this year in a period with no rate increases and increasing cost. The leverage comes to whenever you can get some rate, and hopefully you've already absorbed a lot of those costs. The flow-through to the bottom-line should happen. And again, as we told one of the other callers, I think the other leverage is going into this with less share count than we've had historically should create that earnings leverage that you referred to give the ability to push those numbers high. People could model out what a 3% on rates or 5% on rates or whatever numbers over [indiscernible] I mean, people can model that out and I think they'll like the answer they get. I think they'll like the answer they get.

Michael Vermut

Excellent. Yeah. And can you look at it with the way we've performed in this downturn, you would think we'd be trading at a premium, not at a discount that we are, so...

David Parker

I agree 100%.

Michael Vermut

No one's done what you guys have done in this downturn, let me tell you. The second thing is on the M&A, just following up on what Jason is asking, are there more specialized carriers? Is that -- will that be the focus when we're looking, when we finally do it in more specialized areas?

Tripp Grant

Yeah, I'd say specialized something. I mean, it's...

David Parker

Something hard. Something that is a great niche, something that everybody's brother, something that's difficult, something that, all that, yes.

Michael Vermut

Excellent. Yeah. Right. Well, look, you guys, it's amazing to see what you've done to Covenant. So keep on going, and one day we'll be really rewarded.

David Parker

We will, I believe that. Thank you, Michael.

Tripp Grant

All right. Thank you, Michael.

Operator

[Operator Instructions] And it appears there are no further questions at this time. Mr. Grant, I'll turn the conference back to you.

Tripp Grant

Yeah. Thank you, Jen. I just want to thank everybody for participating in their interest in Covenant Logistics this quarter. And we just look forward to next quarter's conference call. Thank you.

Operator

And this concludes today's conference call. Thank you for attending.