Covenant Logistics Group, Inc. (NYSE:CVLG) Q3 2024 Earnings Conference Call October 24, 2024 10:00 AM ET

Company Participants

Tripp Grant - Chief Financial Officer
Paul Bunn - President
David Parker - Chief Executive Officer

Conference Call Participants

Scott Group - Wolfe Research
Jason Seidl - TD Cowen
Daniel Imbro - Stephens
Jeff Kauffman - Vertical Research Partners
Michael Vermut - Newland Capital
Dan Moore - Scopus

Operator

Welcome to today's Covenant Logistics Group Third 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. Mr. Grant, you may begin.

Tripp Grant

Good morning, everyone, and welcome to the Covenant Logistics Group third 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 our 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 third quarter, overcoming softer-than-anticipated volumes in our Expedited division as a result of lingering weakness in our overall freight environment. Compared to a year ago, consolidated freight revenue increased by approximately $5.2 million, or 2.1%, to $258.6 million and adjusted operating income increased by $1.5 million, or 8.3%, to $19.3 million.

The year-over-year increase in freight revenue was primarily derived from new business growth within our Dedicated segment, partially offset by reductions from Expedited segment and Managed Freight segment. The growth in adjusted operating income was principally derived from both Dedicated and Warehousing segments, offset by reductions from Expedited and Managed Freight.

Adjusted net income of $15.2 million for the current quarter was essentially flat with the third quarter of 2023 primarily because higher adjusted operating income was offset by a $0.6 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 asset-based truckload operations, consisting of Expedited and Dedicated, grew its average tractor count by 169 units, or 7.9%, grew freight revenue by $11.4 million, or 7.2%, and improved its adjusted operating income by $1.6 million, or 12.6%.

Our asset-light operations, consisting of Managed Freight and Warehousing, experienced a $6.2 million reduction in freight revenue, or 6.5%, but was able to improve margin in a manner so that total adjusted operating income was only reduced by $0.2 million, or 3.0%.

Our net capital investment for revenue producing equipment was approximately $18 million for the quarter, consisting of both specialized equipment CapEx for growth and maintenance CapEx.

The average age of our fleet at September 30th improved to 20 months compared to 23 months a year ago.

The sale of revenue equipment resulted in a $0.2 million loss in the quarter, compared to $0.6 million gain in the prior year.

TEL produced $0.22 per diluted share, compared to $0.29 per diluted share versus a year ago period.

Our net indebtedness as of September 30th declined sequentially by $36.6 million to $236.7 million, yielding an adjusted leverage ratio of approximately 1.6 times and debt-to-capital ratio of 35.4%.

On an adjusted basis, return on invested capital was 8.1% for the current quarter versus 10% in the prior year. The decline is primarily attributable to the increase in the average invested capital base associated with acquisitions, growth CapEx and reducing the average age of our fleet.

Now, I'd like to turn it over to Paul for some more color on the items affecting the individual business segments.

Paul Bunn

Thanks, Tripp.

Our Expedited segment fell slightly short of our operating expectations this period, with freight revenue of $87.4 million and adjusted operating income of $7 million, resulting in an adjusted operating ratio of 92. The miss was primarily a result of declines in utilization that resulted from softer-than-anticipated volumes and an imbalanced network, particularly in the last month of the quarter. This softness has extended into the fourth quarter and we are currently working hard to mitigate its impact through new business awards and repositioning equipment to optimize our network.

Dedicated was successful in growing both freight revenue and operating income, while yielding an adjusted operating ratio of 91. Compared to the prior year, freight revenue grew $15.7 million, or 23.5%, and adjusted operating income grew $3.2 million, or 73.9%, and margin improved 260 basis points compared to the prior year.

Managed Freight experienced a 9.1% reduction in freight revenue and a 29.5% decrease in adjusted operating profit compared to the prior year, reporting an adjusted operating ratio of 95.7. The reductions in freight revenue and adjusted operating income are attributable to the combination of lower volumes of profitable freight and cargo related claim expenses incurred in the current period compared to the prior year.

Our Warehouse segment saw a 0.5% increase in freight revenue and an 85.1% increase in adjusted operating profit compared to the prior year, reporting an adjusted operating ratio of 91.5. We are pleased with the improvement in profitability within this segment, which struggled to produce adequate returns during the prior two years when the business was rapidly growing, and labor inflation outpaced our ability to obtain rate increases from our customers.

Our minority investment in TEL contributed pre-tax net income of $4 million for the quarter, compared to $5.3 million in the prior-year period. The decrease was largely due to the continued softness in the equipment market, surpassing -- suppressing gains on sale of used equipment, and increased interest expense.

TEL's revenue in the quarter increased 6% and pre-tax net income decreased by approximately 24% versus the third quarter of '23. TEL increased its truck fleet in the quarter versus year ago by 133 trucks to 2,328 and increased its trailer fleet by 477 to 7,490.

Regarding our outlook for the future, for the remainder of the year, we believe the general freight market will remain challenging despite overall fundamentals slowly improving with excess carrier capacity exiting an environment that has been had unsustainable conditions. Absent an outside catalyst to facilitate improved demand, we remain uncertain about the pace at which general freight conditions will meaningfully improve, allowing us to improve our margins with customers who are not providing an adequate return on capital. Despite these challenges, we remain optimistic about our business model as evidenced by the durability and growth of our core operations over the last 24 months. In the fourth quarter, we believe we have both the momentum and team to continue to improve the efficiency of our operations and execute on opportunities that present themselves regardless of that status of the freight market.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Scott Group from Wolfe Research. Please go ahead, Scott.

Scott Group

Hey, thanks. Good morning, guys. Maybe just start on the demand environment and what you've seen -- how it played out through the quarter? What have you seen so far in Q4 post these storms? Is this sort of regional tightness? Is it potentially spilling over to become more broader than that? Just any sort of high level color?

Paul Bunn

Yeah. Hi, Scott. This is Paul. I'll give you a little bit of color. July felt pretty good, the first 15, 20 days and then softened up a little. August is a month that doesn't have any holidays in it. So, we felt pretty good about revenue in the month of August. And then, we started sensing a little bit of softness in the month of September. And I would say, in general, that's carried over to the month of October, and that's primarily within the Expedited network. And as you know, there's a lot of PT-type accounts in there and you guys have seen what the LTL industry has done and so that's some of it. But, yeah, there was a little bit of uptick in tightness we saw right around the hurricane and, I would say both hurricanes and it faded pretty fast. It didn't last that long, and especially with just the nature of our customer base.

David, you want to add anything to that?

David Parker

Yeah, I agree. I think -- Scott, I think it's the same thing that we have felt for the last two years, it is still there. I mean, I know that I read all of you all's writings and I do believe that we're at the bottom and I think that we're just kind of going along the bottom or waiting on a catalyst to move the thing forward. So, that's where I think that the freight market is at.

Scott Group

Can you just remind us like what percentage of the Expedited business now is the LTL line haul? Like, is that ultimately what feels like it's gotten worse in the last, I don't know, couple of months...

David Parker

Yeah, our LTL air freight, I mean...

Paul Bunn

Freight forwarding.

David Parker

...freight forwarding, it's all -- we lump it all into transportation businesses and it runs about 55% to 60% of the total of Expedited. So, I mean, it's a big portion that is there. And when Apple came out with their release, it was game busters for about two or three weeks and then that got done. So -- and it's not that it's horrible, it's not horrible. I mean, last month, I think our utilization on our Expedited was over 15,000 miles a truck. So, I mean, it's extremely -- it's not it's not horrible, but it's not the way it was six months ago. So, it's okay. I don't want to act like the world's come to the end. It may just add a little bit of softness there. And I think it's similar to what I see you all writing on the LTLs. I think that it has slowed down a little bit for them. And I think it's mostly the industrial base.

Scott Group

Makes sense. And just lastly, David, I know last quarter, you talked about starting to get a couple of customers with some pricing increases. As we get to -- start to approach bid season and start dealing with more customers, how are you thinking about pricing this coming cycle in terms of -- can rates go up? Can they go up a little, a lot? Just any thoughts?

David Parker

I would tell you that -- good memory, last quarter, I think I said two, and now I'm up to five or six. So, we've done three or four since the last phone call. But we've been -- those that we've done, we've been successful. What do I think? Number one, I think that we will be successful in obtaining rate increases. It's not going to be from a lack of asking our customers. I don't think that our customers are expecting us and this industry to go three years without a rate increase. I don't believe that. And I think that we will be successful.

Now, what do I think that number is? I think that number could be 2% to 3%. I think the number then in the second half of the year could be 2% or 3%. And I don't know that you go to a customer right this moment and say here's 5%, even though we've gotten a couple of 5%-ers. But can I go overall and say, here's 5%? I'm not sure that you can, but I do believe that we can get 2% to 3% now and say, let's look at it in the summer. That's exactly what we're telling our sales department, what I just said to you, and that's what we're hitting the road hoping to obtain. And again, it won't be from a lack of asking, and I think that we've got relationships enough with our customers that we can be successful in getting some.

Scott Group

Thank you, guys. Appreciate the time.

Tripp Grant

Thanks, Scott.

Operator

Our next question comes from Jason Seidl from TD Cowen. Please go ahead, Jason.

Jason Seidl

Hey, thanks, operator. Good morning, gentlemen. Piggybacking on that question a little bit, David, would you define success as 2% to 3% in this market, given where costs have gone?

David Parker

Yes. Yeah. If somebody said, here's January 1, here's 2.5%, we'll just use that number. Here's 2.5%, I would say that's successful, seeing if the market gets better and then say we got to come again.

Jason Seidl

Okay. Well, then let's take that and extrapolate it out for '25. As I look this year, you guys are going to earn probably about $4, give or take, right? So, what type of earnings growth can we expect, knowing that you guys have a little bit of a different business mix than your stereotypical truckload player in a 2% to 3% up-pricing scenario?

Tripp Grant

Jason, so I think that we can absolutely -- I've gotten some comments on the release about operating leverage and rate increases, and here's what I know. I know that in 2024 year-to-date, we've absorbed a lot of costs, and a lot of those were absorbed in 2023 and they've just escalated. We're doing everything in our power to manage costs to the extent possible, and I feel like we're about out of bullets on what we can manage.

With that being said, absorbing the costs into the P&L, the costs are in there today, and like you said, we may wash out at $4. I'm not saying that that's where it's going to land, but I'm just repeating your words, but with that -- so you take that and extrapolate it, and you think about the number of miles that we run each year based on where we are today, it's a little under $300 million. 1%, 2% goes a long way in terms of operating leverage. So, if you think most of that goes straight down to the bottom line on rate, you could see a pretty big lift in operating income and certainly EPS with a low share count.

But we're going to try to go to the market and get what we can get, and it may require kind of a two-phased effort like David had said, but I absolutely think that we can grow operating income. I like the momentum we've got in Dedicated with the growth that we have. We've got the youngest fleet of equipment that we've operated in some time, and I think we're poised for this upswing whenever it happens. We're ready to be successful in it. And a lot of that's predicated on what the market is going to give us. So, whatever it is, we're ready, and we're going to take advantage of it to the most -- to the extent -- greatest extent possible.

Jason Seidl

That's great color. And you sort of are leading me into my next question. You talked about the youngest fleet. How should we think about CapEx as we look at '25?

Tripp Grant

I think you'll see a reduced number in CapEx. If we just give you some round numbers, and it gets a little bit fuzzy because we've had a little bit of growth -- quite a bit of growth. This year, we've had -- we'll probably land the year, and this is in the release, at about $90 million of CapEx, I would say. A big portion of that, not the majority, maybe $40 million of that has been related to growth CapEx.

I think next year, what you'll see is continued investment in capital expenditures, mostly on the maintenance side. We've got some extra equipment ready, set aside for some growth CapEx early in the year already, so that's bought and paid for, so to speak. So, you'll see a little bit of a lighter CapEx, much lighter than $90 million, probably somewhere in the neighborhood of $50 million to $60 million is what I'm thinking right now. Our CapEx plans have not been finalized yet, but we are going to continue to invest.

Jason Seidl

And so, if it's $50 million to $60 million, so what would maintenance CapEx be for you guys? About $40 million-ish?

Tripp Grant

Yeah, that would probably be right. I mean, $50 million to $60 million -- I would say, $50 million to $60 million next year would be our maintenance CapEx number. We've got some CapEx ready for growth this year. If we do start to see business materialize, we've got some levers within in-house capacity to kind of absorb that for a short period of time. And so you may -- if we grow and dedicate it more than kind of what we're expecting or get some big wins, which is completely possible because we've gotten some big wins this year that we weren't anticipating. And I think we can move quickly, and you may see that number go up a little bit.

Jason Seidl

Okay. That's fair enough. And just to follow up a little bit on the LTL line haul stuff, has there been a recent drop in the LTL line haul, or was that more consistent through the quarter?

Paul Bunn

I would say, Jason, it's probably more in the second and third month of the quarter. We start sensing it a little bit post 4th of July, and then it kind of materialized over the balance of the quarter.

Jason Seidl

Okay.

Paul Bunn

June was really good in that space, as it always is, and coming back from the holiday, it felt pretty good, and then it softened up in the latter eight to 10 weeks of the quarter.

Jason Seidl

Got you. Gentlemen, I appreciate it, as always.

Tripp Grant

Thank you, Jason.

Operator

And our next question comes from Daniel Imbro from Stephens. Please go ahead, Daniel.

Daniel Imbro

Hey, good morning, guys. Maybe to follow up on that Expedited piece, so maybe the LTL demand stays softer in the near term, and it sounds like that's your expectation. Just curious, with the network being out of whack, I guess, what can you do to drive up utilization as you look to improve that in the fourth quarter and kind of start levering those costs?

And then related, maybe to follow up on the last one, just how are you thinking about Expedited tractor counts? Should we see that fleet go down if demand stays challenged for a while, or how are you thinking about investing there?

Paul Bunn

So, a couple things, Daniel, I would say is, I think the fleet counts stay about the same because I feel like we're already making progress on getting some of those imbalances rectified. So, we're out really trying to fill some holes to balance the network. I would say, we've made some progress in the last couple of weeks, still got some progress to go. Peak is right around the corner, and that's a word that we don't use around here near as much as we used to. But there's no doubt that we've got a little bit of peak business starting to kick off now, and November and early December will have a little more.

And so, I think the combination of our team really, really trying to hulk and hunt for freight to fill some of these gaps to make the trucks move more efficiently than maybe they did in the last 10 weeks, I think that's in process, and I think we're -- I would say, we're probably gone a little old school on three or four meetings a week, everybody accountability to fill these gaps, because it's our networks -- it's a pretty tight network. And so, it doesn't take a lot of -- we're not talking thousands of loads, we're talking a couple of hundred loads -- a couple of hundred loads in the right spot on the right days, and they get this thing where it needs to be. So anyway, I think it's just blocking and tackling on that part. And then I would say, followed up by a little bit of peak and -- is what we're doing.

Daniel Imbro

That's helpful. And then maybe shift over to Dedicated side of the business. I think if I remember right, [live bird] (ph) should be strengthening here in the fourth quarter, that should be OR accretive just from a mixed standpoint. So, how do you think about maybe Dedicated OR here in the near term in the fourth quarter? Are there any offsets we should be aware of that would offset that benefit from the strength in live bird?

Paul Bunn

Yeah, I do think the poultry business will be will be strong in the fourth quarter. We're seeing that, that's really starting to roll this week. And between now and Christmas, it will just continue to get stronger. I would say, we had a few rate adjustments with some customers to keep some business in the third quarter that'll -- you'll have the full quarter effect of. And so, I'd say, the puts and the takes, I'd say, Dedicated is probably evenish third quarter versus fourth quarter. I don't think it will get better, but I don't think it will get materially worse.

Daniel Imbro

Great. Appreciate it. And last one for me, just on the cash flow side, you mentioned CapEx being down next year. Maybe margins are getting better if we get the rate. I guess I should spit out more free cash. How are you thinking about M&A opportunities out there? You've seen anything else getting shaken loose given the prolonged downturn?

Paul Bunn

I would tell you, I think everybody knows what we're looking for. And it's niche, stable, good margin business that's not competing with the OTR environment, not competing with all the general freight environment. And we continue to have a number of things come across our desk. And so, I think we will continue to look at those, and -- but we're not going to let any cash burn a hole in our pocket. If we do something, it's going to have to be the right deal at the right time with the right business model. And so, we're just going to continue to evaluate and see what happens over the next year or so.

Tripp Grant

Yeah, Daniel, I would say I would just echo Paul's comment on that. I mean, you probably saw the reduction in net debt during the sequential net reduction, which is basically a building of cash. And that's not saying that we've got any sort of imminent acquisition targeted out there, but I do like to have a little bit of a cushion of cash. It was just a really good quarter, but I would say, our playbook has not changed, I mean. And the key for us is just being patient, finding the right acquisition, the right fit for us, the right culture, the right leadership team. And we've been successful for that -- or with that over the last couple acquisitions, last three acquisitions -- four acquisitions, I would say. And we're going to continue that playbook. So we like our playbook, and I think you'll see us continue following it.

Daniel Imbro

Makes sense. Thanks so much.

Operator

And our next question comes from Jeff Kauffman from Vertical Research Partners. Please go ahead, Jeff.

Jeff Kauffman

Thank you very much, and congratulations in a very difficult environment. I want to look beyond the fourth quarter and kind of pick your brain on kind of the longer term that you're seeing in the market. We all know the market is dislocated. I think people are talking about how long this downturn has been, although arguably we're coming off a sugar high when we started. But kind of what changes do you think you've seen in the market structurally versus what kind of weakness we're seeing as more just the short-term normal ebb and flow of the market?

Paul Bunn

I'll throw a couple things out there, and some of these will tie into some of the things Daniel talked about on. Specialized businesses continue to do really good. I mean, even ones we get decks on that we may or may not be interested in, I would say, specialized businesses continue to perform really well. I think the proliferation of brokers continues to negatively affect the ability for this market to rebound, along with the small carriers that just made so much money, just crazy margins during the second half of '21 and '22, and had cash reserves going into this thing and have basically taken a lot of freight that -- at well below their cost structure.

And so, I would say, the proliferation of especially small brokerages that blew up during COVID and of the small transportation companies that blew up, and some of the, I'll call it, decisions they've made in the last 24 months that kind of defy economics, that's something that's just lasted a really long time. People that -- if you get businesses that are outside that space, not bidding on a bunch of commoditized businesses, they still run like a business should, and that is you got to get a return on your capital, and those businesses are still operating with, I'd say, pretty good economic fundamentals.

David Parker

I agree 100%, yeah.

Jeff Kauffman

So, I want to go back then to your comment on, we feel like we're almost out of bullets here. I mean, I love the niche strategy, if you will, to your point on the specialized businesses. But at this point, is it really just we batten down the hatches and we're waiting patiently for the turn, or are there niches that you aren't as heavily exposed in today that make sense more than they used to in this kind of market?

David Parker

I think it's both of those. I think that you need to be prepared to do both, and that is batten down the hatches, and when is this thing going to turn. Now, I will also say that I can paint a picture that, with the Fed, what they did, 50 basis points, and are they going to do another 25 basis points in '25? I personally don't know that they've got inflation straightened out yet or not, but that's a side note. But if they reduced interest rates, we're going to feel that. It's going to be felt, and there's a lot of freight in housing, there's a lot of freight in automotive that will start coming forth in the next few months if the Fed continues to lower interest rates.

And I think the election is going to be a very important election. I think if it goes one way, I think it's going to be some more freight out there. If it goes the other way, I think that we may have kind of where we're at today, but aside, whichever President wins the election, I think what the Fed is doing on interest rates is going to help transportation in the next few months.

The other side of that, so you batten your hatches down, at the same time, I think you're going to get some help, and then, as Paul said, we continue to look at acquisitions that make sense, and the niche ones make sense. And so, it's just a matter if you find the one that has the interest or find the one that you can agree upon, because that's the way in which we're building our company in the future.

Paul Bunn

Does that help, Jeff?

Jeff Kauffman

No, that was tremendously helpful. Thank you. Just kind of following along that path, I think we all agree capacity isn't going to be our savior here, because it's just coming out too slowly, but outside of housing, is there anything out there that would make a material difference, positive or negative, to your '25 outlook in terms of parts of the economy?

David Parker

Great question.

Paul Bunn

I think domestic industrial production going up would definitely help. And I'll be honest with you, I've talked to a few folks just from my prior life in public accounting and some stuff, I think a piece of this industrial production slowdown, it's the old election year thing. And I think you might see a pickup in industrial production post-election, no matter who wins. There's a lot of people just sitting on the sidelines right now between interest rates in the election. And so, CapEx spending, fueled by industrial production, I think that, I think housing, I think auto, I think all those things would be really beneficial to us.

Jeff Kauffman

No, I agree, decision paralysis. Break that up would be very helpful. Well, all things considered, congratulations and thank you.

Tripp Grant

Thanks, Jeff.

Paul Bunn

Thanks, Jeff.

Operator

And our next question comes from Michael Vermut from Newland Capital. Please go ahead, Michael.

Michael Vermut

Hey, gentlemen, how are you doing? Fantastic operating through all this. You certainly separated yourselves from everybody else out there.

David Parker

Thank you.

Michael Vermut

So, just getting back to the cash flow situation, we've got the youngest fleet already, I assume, CapEx, it'll be coming down. If you just do the math here, with the free cash flow we'll have over the next two to three years, you could -- if no large acquisitions come by, we're pretty much debt free, maybe, two to three years, something like that, we're close. Where do you look at this? We're trading at 12 times now, the group's trading 20 times to 40 times, massive discount here. Is there a point, if we don't find these acquisitions, you start buying back stock? Is there an optimal leverage spot we'll get to, and then you think about that, but the amount of free cash flow generated over the next two to three years is going to be significant? So, how do you look at that?

David Parker

I would say that nothing has changed than it was two years ago when we started down this track that -- internally that I said somebody's going to love us, Wall Street love us, or we're going to love ourselves, and we've loved ourselves to the tune of buying back a bunch of stock and doing acquisitions. So, whichever avenue opens up for us is the way we're going to go.

Paul Bunn

The math's going to be what the math's going to be.

David Parker

The math's going to be -- whatever it's going to be, and I'm happy with either one of those, and we can continue to do acquisitions, and a great acquisition comes, we're going to do it, but if it doesn't, then you can expect us to do something with our cash, and we all know what we've done in the past. So, whichever way opens up is the way, Michael, that I want us to go.

Tripp Grant

Yeah, Mike, I would echo David's thoughts. I mean, I'm pretty happy with our capital allocation, the playbook, again, like I told Jeff, is working. We've had three acquisitions. We significantly restructured our business in 2020. A lot of significant changes. And I still don't think investors maybe have gotten that message yet. The longer part of our history would suggest that we're a very, very volatile company, and I get kind of frustrated when people try to look at 10-year, 15-year averages of how we've performed. I'm like, don't pay attention to that, because it's a very, very different structural company, much more efficient, much more resilient, much more insulated, poised for growth.

And I think that we're going to just keep focusing on the things that we can control and try to be the best that we can be at those things, execute at a high level, continue with our capital allocation playbook. And I think you're going to see more of the same of what you've seen over the last three or four years. We're in a great position. I mean, we mentioned some headwinds in the release, but I would say that we've had headwinds throughout the last two-and-a-half years that we've overcome, and this one just kind of came at the tail end of what we thought was going to be a fantastic quarter. And it is a good quarter, but they come and go, and I think there's more blue sky ahead of us than there are clouds.

Michael Vermut

Excellent. One of the last things, in a lot of your releases you discuss, the model now is much more consistent, and you may not have as much upside leverage as others. You'll have still dramatic upside leverage. That's on an operating income level, I assume, because when you look at the capital structure, I think you took down 2 million, 3 million shares over the last four years, something like that. So, the bottom line, there will be dramatic leverage, right? Now, you've changed that capital structure forever, so it's really the leverage on the top income line, not the bottom line.

Tripp Grant

That's right. And so, I'm absolutely excited about it. I think that, one of the things we have to remind investors, again, going back, it's a different company. We were so volatile in the past, and I've read some releases before where they're still being mentioned. And there's still not a full conviction that we are, in fact, a different company, and we are more contractual, we are more profitable, we're more stable, but we've pulled the share count down, our OR has materially improved in a trough market. I mean, the fundamentals of our business, the team is solid, all pulling the rope in the same directions, we're going to continue down the path that we've been on. There's no reason for us to deviate. And so, I think that there's, like I said, every indicator gives me the confidence that makes me believe that we're going to continue to be successful over the longer term.

Michael Vermut

Excellent. All right. Congrats, guys. Eventually, it'll be recognized. So, congrats.

David Parker

Thanks, Mike.

Tripp Grant

Thanks, Mike.

Operator

Our next question comes from Dan Moore from Scopus. Please go ahead, Dan.

Dan Moore

Hey, guys. Congratulations again on a great quarter to echo everybody else's comments.

David Parker

Thank you, Dan.

Dan Moore

Yeah, my pleasure. Had a couple of questions I wanted to run by you and kind of the spirit of some questions that have already been asked, dovetailing in on kind of a longer-term framework. This is about as long and as nasty a downturn as I've ever seen. And I've been doing this a while. It seems to me like we have a pretty good idea of where trough earnings reside. So, what I'd like to do is just spend a minute or two on what the next cycle -- up cycle can look like for you.

And to add some context, maybe, Tripp, you mentioned a few percentage points of rate can go a long way in terms of earnings growth and leverage. It seems to me that this next cycle, it's not unreasonable to assume that we could see margins improve by 500 basis points, but that we're not going to see because of the stability of the model, the type of volatility, i.e., a 300 basis point -- 300% improvement in profits like we used to see 10 and 15 years ago. With that kind of opportunity, free cash flow improves, you're going to have a lot of opportunity to redeploy capital both in terms of the business as well as share repurchases. Can you speak to, just for a few minutes, the glide path that exists to take rates higher in an up market, improved margins, and what you think the earnings power of the business is today relative to what it's been in the past? Thank you.

Tripp Grant

Yeah, I'd be happy to talk through that. I mean, if you look at our adjusted earnings last period or last year, I think we came at $4.16. And I think if you look at how we've performed this year without -- I'll use the number that somebody else -- maybe it was Jeff or Jason, mentioned, if we come in somewhere around $4, not predicting anything, I'm just using his number, this year, I think we've hung in there very, very well from an earnings perspective.

And when I think about the cost, I think, David and I were just walking through this, if you factor in a 2% rate increase to our earnings, it winds up being on 280 million miles, I mean, it's $6 million of operating income. We've taken on a lot of costs, much of that is going to fall down to the bottom line. And so it's -- that $6 million translated is over $0.30, I think, of EPS.

And I also think in an up freight market, you're going to see TEL get a little bit stronger. They've kind of felt like they've bottomed out right now, they've got a lot of debt and some good equipment to deploy, and not doing as strong because of the higher interest rates. But if you look at the longer-term trajectory on TEL, they've done an outstanding job of growing their business. They have gone down over this downturn, but I have every expectation that you'll see them continue to make progress over the long-term and grow in their business.

So, I really don't want to put any numbers from an earnings perspective out there. But we have goals to -- the biggest wildcard in our segment, in all four of our segments is our Managed Freight business, because you can look back in '21 and '22 and see what it did, and I don't think a sub-90 OR is realistic for a Managed Freight segment, certainly not long-term. So, our focus is going to be growing the things that we control, focusing on profitable business and customers that we can add value to, and I think you'll see profitability grow or improve in our Dedicated and our Expedited segments, and we do.

We have a very good mix of customers today and that we're happy with and partner with, and I think that as we grow, we're going to look to grow with customers that we continue to add value to, and they provide a sufficient return to us as well. So, there's a lot of things in there and moving pieces, but I think there's significant upside. You may not see what we earned in '21 or, I guess '22 was kind of our cap year, but there's definitely upside to the earnings, I would say.

Does that answer your question, Dan?

Dan Moore

Yeah. No, I just -- it strikes me that the whole industry is suffering from significantly depressed rates and that we could see rates move 5% to 10% higher over the course of the next couple of years. And it's the kind of leverage that you would realize from something like that wouldn't -- candidly would result in close to a doubling of earnings at a 10% type of improvement. So, yeah, I'd like to maybe talk with you some more about that offline and just get a better sense of how I should be thinking about some of these businesses. But that being said, congratulations again on a great quarter. A lot of heavy lifting over the last couple of years certainly paid off, and look forward to following up again here after the December quarter. Thank you.

Tripp Grant

Thank, Dan.

Operator

And at this time, there are no further questions. I'd like to turn the call back over to Tripp for closing remarks.

Tripp Grant

All right, everyone. Thank you for joining us today, and thank you for your interest in Covenant Logistics. We look forward to speaking with you in the fourth quarter or in July -- or January for our fourth quarter results. Have a good day.

Operator

This concludes today's conference call. Thank you for attending.