Covenant Logistics Group, Inc. (NYSE:CVLG) Q4 2024 Earnings Conference Call January 24, 2025 10:00 AM ET

Company Participants

Tripp Grant - EVP, CFO
David Parker - CEO
Paul Bunn - President
Dustin Koehl - COO

Conference Call Participants

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

Operator

Welcome to today's Covenant Logistics Group Fourth 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 fourth 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. Our prepared comments and additional financial information are available on our Web site at www.covenantlogistics.com/investors. Joining me on the call today are CEO, David Parker; President, Paul Bunn; and COO, Dustin Koehl.

Before addressing the quarter's results, I would like to take a moment to comment on the year as a whole. For the second consecutive year, our business model demonstrated durability in a weak general freight environment, which would not have been possible without the commitment of our talented team executing on a common strategic goal. In 2025, we will continue to focus on factors within our control that make Covenant a more profitable and consistent company over the long term. We made great strides in 2024 and will continue to work on improving our model and financial results in the year ahead.

Focusing now on the quarter. The positives and negatives for the quarter roughly offset to deliver consolidated operating results consistent with our expectations. On a segment basis, in general, dedicated performed below expectations and expedited was on target, while managed freight and warehousing exceeded our profitability expectations.

Year-over-year highlights for the quarter include consolidated freight revenue grew by 4.6% as a result of the execution of new multiyear customer agreements within our dedicated segment. Consolidated adjusted operating income grew 4.7% primarily as a result of margin improvements in our asset light segments, which includes managed freight and warehousing. Our net indebtedness as of December 31st declined by $28.7% million to $219.6% million yielding an adjusted leverage ratio of approximately 1.5% times and debt to capital ratio of 33.4%.

The average age of our tractors at December 31st slightly increased to 20 months compared to 19 months a year ago. On an adjusted basis, return on an average invested capital was 8.1% versus 8.9% 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 providing a little more color on the performance of the individual business segments. Expedited finished the quarter strong and yielded a 92 adjusted operating ratio. The impact of network disruptions early in the quarter from Hurricane Helene were largely offset by higher freight rates and volumes within our specialized government services fleet, AAT.

Compared to the prior year, expedited's average fleet size shrunk by 40 units or 4.4% to 875 average tractors in the period. We expect the size of this fleet to flex up and down modestly based on various market factors. While we are pleased with the durability of our operating margin in the segment over the past two years, as general market conditions improve in 2025, our focus will be on improving margins through rate increases, exiting less profitable business and adding more profitable business.

Dedicated experienced average fleet growth in the fourth quarter of 198 units or approximately 16.2% and grew freight revenue by $14.8% million or 22.4% compared with the 2023 quarter, an accomplishment that aligns with our strategic plan of allocating capital to operations with high service requirements, resulting in more consistent above market returns over the long term. While we are pleased with the growth in this segment, profitability for the quarter fell short of our expectations. In the quarter, we experienced both year-over-year and sequential margin erosion as a result of prolonged customer shutdowns and volume reductions due to internal operating issues, Hurricane Helene in the Southeast and the impact of midweek holidays.

Costs were also headwinds for the quarter with higher-than-normal driver wages and salaries, claims expense and operations and maintenance expense. Going forward, we remain focused on our strategy of growing our dedicated fleet, specifically in areas that provide value added services for customers. We believe that if we are successful in providing best-in-class service and controlling our costs, growth and improved profitability will result.

Managed Freight exceeded profitability expectations for the quarter by capitalizing on overflow freight from our asset based segments as well as seizing on peak opportunities is available. We believe the margin achieved in the fourth quarter is not likely to carry into 2025. Going forward, we seek to grow managed freight with profitable revenue from new customers, work closely with our asset based segment to capitalize on overflow opportunities when available and optimize cost to yield longer term margin goals in the mid single digits, which will generate an acceptable return on capital given the asset light nature of this business.

Warehousing improved its adjusted operating profit compared to the prior year by 56% reporting an adjusted operating ratio of 90.7%. We are pleased with the improvement in profitability within this segment, which struggled to produce adequate returns over the prior two years when the business was rapidly growing and labor inflation outpaced our ability to obtain rate increases from customers. In the future, we plan to continue to grow revenue and operating income in this segment through a robust organic growth pipeline and cost management.

Longer term profitability goals are in the high single digits. Our minority investment in TEL contributed pretax net income of $3 million for the quarter compared to $4.7% million in the prior year period. The decrease was largely due to the cost of operating a larger fleet of newer more costly equipment, bad debt expense with a small number of customers and higher interest expense associated with more debt at a higher weighted average rate.

Revenue in the quarter increased by 13% and pretax net income decreased by approximately 36% versus the fourth quarter of 2023. TEL increased its truck fleet in the quarter versus a year ago by 342 trucks to 2,473 and increased its trailer fleet by 1042 trailers to 7,852. Regarding our outlook for the future, we expect consolidated earnings to improve for 2025 compared with 2024 based on the following assumptions.

The fundamentals of the general freight industry have improved to a level that is now allowing us to negotiate pricing from a better posture than the last two years. Assuming the trend continues, we expect to achieve improved pricing year-over-year under certain expedited, non-specialized dedicated and managed freight contracts. The level of increase is expected to build throughout the year as contracts renew. The specialized dedicated business is expected to yield new contracts and revenue growth as we are evaluating several expansion opportunities.

However, start up costs associated with new contracts and a lackluster poultry production forecast for 2025 may weigh on margins in this segment during the near term. We will continue to make incremental progress on safety and claims management. There are no major fluctuations in the market for new and used equipment.

Based on these assumptions, we believe 2025 will be a year of recovery for the industry and Covenant. Our goal is to steadily improve our customer and freight mix and our margins while continuing to review growth opportunities in niche businesses. Our primary objective remains to improve long term returns to our investors by filling network needs, developing our team and aligning with customers who truly need value added services.

Additionally, with modest leverage and significant liquidity, we have the full range of capital allocation alternatives available to us. Thank you for your time. And we will now open the call for any questions.

Operator

[Operator Instructions] And our first question will come from Daniel Imbro with Stephens.

Daniel Imbro

David, maybe I want to start on a little bit of a higher level. Another quarter here of sequential rate per mile increases. It feels like we're seeing some positive indicators in the cycle.

I guess, can you talk about how early bid season is going, how you feel about rate momentum through the year. Tripp, you just mentioned, you expect it to improve. And then on the 1Q weather comment, can you help us size up how you're thinking about either revenue or profit impact.

And how does that compare to last January when we also saw some winter weather.

David Parker

Daniel, I'll tell you, I would say that -- yes, the weather the first two weeks, in particular, the South, but -- from Houston to Florida, as we all know in Atlanta and here in Chattanooga, we've got five inches of snow and paralyzed us for two or three days, but it's been tough the last two weeks. If you can separate for what the weather has done so far in January, which I do in my mind, because it isn't -- it does affect with the Christmas, Wednesday, New Year's effects and then weather. Aside from that, I would tell you that this is the best that I have felt in two and half years.

And what I am -- something that's happening in the market that we've all been waiting on for a long time, something is happening. And I would tell you what -- as I know what I'm telling all of our teammates within our company for the last month or two, a couple of months. And that is I really believe that come March that we're going to say freight's pretty good. And by June, July, somewhere in the mid-summer, we're going to say there's a lot of freight.

And I really believe that that's where it's at. And if I separate the weather out of my mind and just look at what is happening from a freight environment and a customer environment in both bid activity and what the accomplishment that we're so far having on rates -- I'm very pleased, very happy, ecstatic, whatever word you want to use from that standpoint. I really think that 2025 is going to be a very good year for transportation.

We have taken so far -- our goal this back three months ago is that we wanted to go to the market and we believe we could but we weren't sure we could, but we were going to go anyway and have talks with our customers on September and October for January effect, and our goal was to get somewhere between 2% and 3% rate increases out of the customer. And again, this is in October when we were just saying, maybe we can, maybe we can't, but we're going to go try it. Freight's not bad, freight's okay, it's not what I want in October but I think that we can try it.

And so we have and I'm very pleased with what's happened, it’s we're probably around 2.5% rate increase on, Paul, 55% of the business.

Paul Bunn

Yes, 50%, 55%.

David Parker

50%, 55% of the business, about 2.5% because our goal is this. And of which we told all of our customers that have been gracious enough to give us the increases in January then here's what our goal is. Our goal is to get 2% to 3% in the month of January and then expect us in June to come back, and I believe that there's no doubt.

If the market goes into depression, you're not going to be able to go back in June but I don't think that's going to happen because of what I'm seeing in the month of January. So that and then as I look at bids. I'm going to tell you, I was looking to this just in the last couple of days getting caught up on exactly where all the bids, we have won more bid numbers this year, in the first three weeks this year than we won in six months last year, I'm very pleased with that.

And then I would tell you that 70% of it is with brand new customers, stuff that's happening, it's all I know. Something is happening that we're being successful. And the bids are at higher rates than what I was hauling three weeks ago and two months ago, excluding peak.

So Daniel, I hope I answered your questions but I'm very pleased with what's happening.

Daniel Imbro

And then maybe if I could focus a little bit on the dedicated business, that's been stable, maybe there's some customer shutdowns, those feel temporary, that's continuing into the first quarter. I guess, can you shed any light -- is there any more competition happening there, is that just kind of transitory with some of these outside issues. And how should we think about that playing through the year, is there a catch-up once these transitory pass, is that revenue just lost.

Like how does that look through the year.

David Parker

I will tell you and these -- what I'm saying here is exactly what we're talking internally to give you FYI. Yes, dedicated -- in my opinion, dedicated to market is where it's at, from a standpoint that the customers that want it, they used to run 50 trucks in the last two years, and now they're running 30 trucks, and they -- the last two years, I don't have the freight. I don't want to get rid of my dedicated, but I can't run 20 trucks, I need to run 15, I can't run 30, I need to -- that has happened, that's happened in the last two years.

To me, that's already built into where we are at as well as the other dedicated providers. I think that's where the market is at is that we have flatlined -- it has flatlined where it's at. And the customers that are in dedicated today are customers that want to be in dedicated today.

And the ones that wanted to get out because of the one way market, they've already done all that. And the ones that wanted to rightsize their fleet they've already done all that. And so I think that we're going into this year flatlined.

Now that said, as I continue to learn, as we know, in the year and half of been in the poultry business and AI is not good and we all know that but we don't know what that means. Then it hurts and it will continue to hurt for about another 60 days. I would tell you tidbits that I have learned is that when AI hit, in particular and as we all know, it could be any region, any farm, any state, it's not like it and Lord help that -- AI -- the goal is that it doesn't -- it never spreads all over the country.

And so far, it has not and it's been stationary in just a couple of regions of the country is what we have seen so far of what we hear anyway. Now we're not in all states with our poultry. So that's not -- may not be a true statement.

But for us, it's been a couple of farms here and a couple of farms there. And it takes the farms because it doesn't -- it hits certain farms. It don't -- let's just say that in the City of Modesto or the City of [Indiscernible], Arkansas. It's not that the whole city is quarantined as farms within those cities.

So it might be two farms that get hit and the other farms are doing well. And so what transpires then that time is that the states go in to determine if the chicken's good or the chicken's bad and they destroy the chickens. And that takes two to three weeks for that to process.

And then the new chickens arrived at the farms and depending upon the chicken itself, whether it's chicken or turkeys, it can take eight weeks for new growth of chickens or it can take 20 weeks for growth of turkeys to give you an idea. So it's two or three weeks, then it's eight weeks. Turkey is two or three weeks and 20 weeks before you get back into production.

Now that said, what I understand is that when that happens and we're, say, 10, 11 weeks down the road and we're on the turkeys, you're 23 weeks down the road, what ends up happening is that there's a tremendous amount of six day a week work because they've got to catch up on their supplies to their customers because now they're sitting there trying to make sure they don't lose their account. Just like we do on events that happened within the trucking is you just go to protect your customers. Well, they're protecting their customers and they got to supply them with the poultry as soon as they possibly can.

And so that's what we have heard and that's what we have seen. And it doesn't -- it's not like when two or three farms go down that affects all 600 trucks running poultry. No, it affects maybe one third of them.

So we've got a couple of hundred trucks that started in November, December so far now that we've had to be working with and that's what you're seeing in the numbers there. And I think it's probably about a March event, I think we've got another four or five weeks and then things will be back to normal, hoping to pray that AI stays normal. So I think -- I personally think on what I understand is that it's really through all the tough time is over with and deciding what they do with the chicken is over with and the chickens being disposed of is over with, and now it's the growing of the chickens to get back.

So that's what's happened to us and there's something that I think come March will heal itself and that part of our business will be extremely good, because I expect it to go to six day work weeks instead of five day work weeks.

Operator

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

Jason Seidl

Sticking on bird flu for a second, the last time this hit, how did the recovery look for Lew Thompson.

Paul Bunn

Jason, one thing I would say is bird flu hits every year, and so we had some this time last year. We didn't own the business the year before that but we've talked to them. And so I would say there's some element of it every year in, call it, the flu season, call it, the winter weather months.

And kind of like David just said, some years are worse than others. Last year wasn't too bad of a year but we had some. This year, we've had a little more.

And so I think the first thing, as David pointed out, is that it's seasonal, it's generally not a full year thing. And then the other piece I would point out is there are -- it's short term in nature and then there's some amount of catch-up that generally happens after that just depending on kind of supply and demand with the various -- in the various industry vertical. Does that help any.

Jason Seidl

Tripp, I wanted to go back to something I think you said you mentioned your expectations for I think the used equipment market to remain flat. Is that what you're seeing in the marketplace right now or did I mishear you.

Tripp Grant

No, I think we've seen some stabilization in the used equipment market. I think that actually from what we've seen in Q4, the volumes were down a little bit in terms of sales but we're starting to move equipment. There's interest in drive-ins, there's interest in used tractors.

And we were looking at it before earlier in the year and we just weren't getting the volumes of equipment moved and we were having to take some losses on it. So I think that there's some stabilization, if you will, in the used equipment market, which is a really good sign because especially in Q4, it was a bit of a headwind. We had a lot of costs not just on the fixed side but also on the variable side of equipment that hit us.

And it was like one of those things where we had a Q4 that was just kind of -- I always say this and I don't joke but it's true when you have low volumes, low revenue numbers and high cost, it's just not the recipe for a good operating ratio and really good solid earnings. But we think that will continue to improve with the market. We're seeing signs that will come off that stabilization and the used equipment market will start to improve starting in the first quarter maybe with some spring weather [Multiple Speakers]….

David Parker

It's not going to get any worse, I can tell you that.

Tripp Grant

That's right. And the stuff that we're pulling out on the maintenance side is going to be in really good shape. We got behind with COVID for quite a bit and some of the stuff we were selling last year and even the previous year was pretty beat up stuff.

So we've got some quality stuff coming out and expect to maintain our fleet and we're looking forward to what we're seeing in 2025.

Jason Seidl

Let me switch over to dedicated a little bit. When you're looking in sort of the regular dedicated marketplace, how is the level of competition out there and what are sort of customer accounts existing fleets look like. Are they maintaining them, are they trying to grow them this year with some enthusiasms, are they shrinking.

Paul Bunn

Jason, it's Paul. What I would say is and I'll go to what David said, I don't think you really see a lot of people shrinking. I think most of that happened in the last two years.

I also think there is a lot of competition out there and a lot of folks are -- have been and continue to really lean on incumbency. And so getting new badges, especially in what I call the more commoditized type dedicated where it's a lot of 53 foot dry van type stuff and heavy trailer truck ratios, it's still pretty competitive out there. I would tell you, we continue to focus on maybe the more specialized dedicated, so specialized driver, specialized trucks, specialized trailer.

And so we continue to lean in that a little harder. And there's -- that's -- the fruits higher up on the tree, it's harder to pick but there's some of it out there and we'll keep going on that path, because I think that's better margin business, it's stickier for the long term.

Jason Seidl

I want to flip back to the weather a little bit. I mean it feels like this weather is a lot worse than last year, even though last year, we had some. I mean, you're getting storms in areas that you just haven't had them before.

I think you made specific comments at that -- their CFO said for the first time, I have to talk about snow removal costs for New Orleans. How should we think about this from a dollar amount into 1Q, knowing full well that there could be more after this, right. Just sort of what you're seeing [Multiple Speakers]….

Tripp Grant

As I was about to say, Jason, we're just here at the end of January and a lot of times February can have some severe weather well. But what I would say is, first, I mean, our safety department has done a fantastic job in helping to navigate us through these weather challenges, probably more so than any time in the last 15 to 20 years, this has been kind of a headwind for us in terms of the volume of and quantity of roads that have been shut down and things that we're shutting down even before the roads are shut down just for pure safety purposes. So they've done a fantastic job there.

It's difficult to say. And here's what I would say also that kind of -- maybe I'm just reminding myself to help us feel better but this is not just a Covenant problem, this is an industry problem because it's widespread weather. So I mean it's not going to help, let me put it that way, it's going to hurt whether it hurts $0.02% or $0.03% from an earnings perspective, it's hard to say but I don't want it to overshadow, it's part of the business.

We're doing a good job managing it and focusing on the things that we can control by operating safely. But other than that like David was saying, we've got so much good momentum. I don't want just a temporary weather to overshadow some of the really good things we've got going in '25….

Paul Bunn

Jason, David and I were talking yesterday and maybe this will help you to Tripp's point, weather is incrementally worse this year versus last year. But if you look at this like the weather forecast, it's -- we see a lot of sunny skies ahead because when we're not dealing with the weather, things feel pretty good right now. So you kind of look at the forecast of the picture and say, all right, maybe it's cloudy, it's going to be partly sunny tomorrow but there's some good beach weather coming for the truckers.

Jason Seidl

And last but certainly not least, obviously, a great job on the warehousing side of things. How much can you tell is from customers just getting worried about tariffs and maybe trying to push some things in the warehouse ahead of time. Is there any of that or is it just real sort of -- not real but like a different type of growth.

Paul Bunn

I would say, Jason, we don't do a lot. Our warehouses really aren't heavily affected by port volumes. And so I think there are some folks that are probably set out with their warehousing business.

Ours is just a function of a lot of production from the customer's domestic production and a lot of volume. And I think what I would say is when you go back and look at third quarter too, you're starting to kind of see warehouse settle into a spot that where we hope it can run, as Tripp said in his prepared remarks, that hopefully warehouse is kind of in a different run rate than it was 12, 18 months ago.

Tripp Grant

Just to add on to that, and I always want to frame this up in the context of the larger picture. You go back to 2021, our warehouse division was about $60 million of top line revenue. So we've grown at 70% over the course of a couple of years when labor inflation was going up every month.

And growing it with new badges, new businesses trying to optimize it and make efficient is one thing but growing in an environment with rapid inflation and trying to adjust customer contracts for rate increases. My point is between '21 and '23, there was a lot of noise going on in terms of growth and cost that we finally got kind of straightened out through 2024. And so what you've seen is some pretty consistent margins.

Q4 was probably the best margin for the warehousing division in the year but they've all been high single digits and we've been really, really proud about that group. And they've also got a really good organic pipeline for 2025, too, to continue growing it. And so doing this organically and spinning off the cash that they've done has been fabulous and they've done a great job.

Operator

Our next question will come from Scott Group with Wolfe Research.

Scott Group

So I just want to make sure I'm getting the message right. When you started the call, talking about weather and poultry and start-up costs and then David starts talking it and he's ecstatic and something is happening. And so I guess, ultimately, what's the right way to think about the model here.

I don't know if there's a -- maybe the answer is there's a difference in how you should think about Q1 and the year. But what's the -- how should we think about margins, earnings near term for the year, any way to help us sort of think about that.

Paul Bunn

So Scott, I'll start and I'll flip it to David. I think what you're hearing us say is that we believe we're going to grow earnings of '25 over '24 because we think the fundamentals are setting up for some acceleration within the truckload industry. I do think, to your point, there could be some near term headwinds because of weather.

Just if you think about the cadence of earnings, Q2 and Q3 are always going to be our best quarter. Q4 will be the next best. And just like every transportation company, Q1 is probably going to be the worst.

And so I think what you're hearing us say is a little bit of short term headwinds but a lot of long term opportunity.

Scott Group

And then, David, your comments about, hey, March we're going to feel it and by June, we're going to really, really feel it. What's the actual visibility to that. Is that a feel or is there something based on customer discussions that we can really….

David Parker

I would tell you the last two years, I thank you, all of it, the analysts and not me, every CEO there is, it's all been feel and wondering when it's going to get better, we're all hoping. But now we're starting to sense that, we're starting to see a sense of the feel, but we're starting to see it, as I said, about bid awards that we have just won in the last two to three weeks. And we hadn't done that in two years on that type of volume.

I'm seeing a more concrete freight that is coming to us. And so that tells me that if that is happening in January which, as we all know, January, February is last -- worst two months of the year, et cetera, et cetera, it's going to get better. When [Indiscernible] -- unless somehow Trump puts us into a depression.

I don't see that, I see the opposite. I think the economy will get better going forward. So I definitely take what I'm seeing as we speak.

And then I believe what I think that the economy is going to do. I believe that capacity has [lead] -- capacity will continue to lead, it's been slower as any of us wanted it to leave, but it will continue to lead. And capacity will be less out there and there's going to be more freight and it's going to help us, the whole industry.

So that's what I'm attempting to say, Scott.

Scott Group

And maybe just lastly, I mean you guys have found a couple of really nice niche acquisitions last few years that have helped keep up the earnings in this downturn. Are we any closer to finding another smaller but nicely profitable deal.

Tripp Grant

I'd say we're going to operate under the same playbook that we've operated under the last few years, and which includes a number of things, dividend, share repurchases and acquisitions. And I think we've said this before, we're always looking but we're always going to be disciplined in what we look for and what we sign up for and there's a lot of boxes that need to be checked. And so we're on the lookout but I can't really comment or say that we got one ready to go or not but it is part of the playbook.

Operator

And we'll move next to Jeff Kauffman with Vertical Research Partners.

Jeff Kauffman

David, I want to follow up on the comments you're making about [visible] change and kind of what the feel is versus what you're actually seeing. Do you believe that it's more the business decisions and the business confidence that's changing out there, or do you believe it's more the market for truck capacity that's changing out there.

David Parker

Jeff, I think it's both of those. I think that the environment is getting better. I think optimism is getting better.

I think that when people are optimistic, they start buying stuff even more. I think that, that is in the process of happening or starting to happen or whatever word you want to use there. But I think it is definitely part of it, optimism.

I think that people are banking on what happens with the taxes, whether it's personal or corporate, it's going to generate more activity in the United States. I was thrilled to see what automotive and Jeep is doing, and I think that's the beginning what we're getting ready to see from a economic environment, which produces freight for us. So I do, I think, optimism is one part but I think the other side of that is capacity.

I can tell you that some of these bids that we have done, we've done these bids in the last two or three years. And then like we just did it, we've done it in two, three years and didn't win any of business. And we won business that I'm happy with for the last three weeks we're running business at higher rates than they were last year or the year before when I didn't win anything on the bids and so I'm winning on the bid.

So that's telling me something about capacity. And again, I believe if we could get even in January, I really believe we could get seven consecutive days of nice weather that we would -- we'll be seeing in January that underneath this freight is in a pretty good place. So that said, that may not happen until March.

And having them by the thing I'd say or what I'm telling our teammates is I really believe March, because we may have two more snow storms in the south, I'd agree with the railroad guy, [Indiscernible] [CSX] or whoever was in New Orleans that when it hits the south, it hits Chicago, it hits Indiana, it's a 10-hour blip usually. They usually get the roads back going and we're down for 10 or 12 hours then we're back. When it happens in the south, it's two or three days.

I mean I only know if they started schools back here yet, those kind of things that -- so that's what happens in the south that hurts everybody. But I think underneath, Jeff, freight's good, for the month of January and I think it's going to keep getting better because of optimism and people are going to start spending and companies are going to start reinvesting. And I think people are going to go -- anyway, I'll shut up, you got -- you know what I'm saying.

Jeff Kauffman

You're on a roll, this is awesome. Question for Tripp, if I can. Tripp, what are you seeing going on with cost inflation in the business. What areas are you seeing cost inflation moderating and what areas are you seeing cost inflation still being stubborn right now.

Tripp Grant

I think we're seeing some moderation in ops and maintenance costs. I think, what I would say -- and it's hard to define moderation because what we've seen in '22 and '23 were just unprecedented. And considering the capital spend, the refreshment and the fleet there's no doubt about it, our equipment costs, selling used equipment and fire sale prices and we have taken some shots in profitability in 2024 with equipment.

And I feel like we're just now starting to get our legs underneath us on the maintenance side of things, around the variable side of things by running a younger fleet, if you will. The other thing that really kind of shocked us, I would say, in 2024 was just the cost of insurance throughout the year and certainly a headwind in Q4. But I am feeling better about where we're at in 2025.

So all of that to say there's a couple of wildcards that I'm looking at in 2025, one being fuel, that's something that's a little bit outside of our control but there's a little bit of volatility there and then the other thing is just driver pay. I think that if you go for a longer period of time and we see a turn in the market and the market begins to strengthen, you could see some increases to driver pay. But I also think that we've absorbed and maybe even be able to see some cost improvement in certain areas in 2025 to help offset some of those increases.

So I'd be hesitant to say that we're going to be cost neutral. I think we'll see a little bit of inflation next year. But I think that if we can get some of these rates and throughout the year, not just the rates that we've gotten but continue to get rate increases, I think we can show a lot of operational leverage in the business by just the rates dropping down to the bottom line alone.

Operator

Our next question will come from Michael Vermut with Newland Capital.

Michael Vermut

A question for you. So we're -- it seems like we're entering what you guys look at as a much better environment, right. It can't get much worse than it's been.

We're kind of -- the balance sheet, no one's really touched on the balance sheet here but that's getting into pretty good shape. And I'd like to talk about that as to what the targets are for -- from a leverage standpoint. And then we look at -- we're trading here at 11, 12 times earnings, everybody else is closer to 30 times.

There's a huge disconnect. We've performed so much better through this downturn. Is there a point where we say, all right, we've got the balance sheet, we're in great shape.

The future looks as bright as it's been for the past three or four years, it's time to maybe go start a buyback here. How are you guys thinking about that versus the opportunities out there. It's the largest spread we've had versus the group.

Tripp Grant

Without a doubt, Mike and here's what I would say. Over the longer term, I do believe that we're moving the needle and building the model. And I think time will continue to kind of bridge that gap.

But here we are, to your point, we're still at a very, very significant discount for perhaps a number of reasons. But just focusing on the things within our control that we're thinking about is we are completely comfortable with where we are from a leverage standpoint today, 1.5% times or approximately 1.5% times EBITDA leverage. We don't have a stated target out there but we're completely comfortable between 1 times and 2 times levered, but we're going to be opportunistic.

I mean, we saw the benefits of some of the acquisitions that we've had in the past and -- which may mean that it flexes down to 1 times if we can't find the right thing or it may be that we get up at 2 times or slightly above 2 times if we find the thing that we think is going to be a perfect fit for us and is strongly built for growth and margin. And like I said earlier, I think you can't talk about capital allocation or M&A activities without also thinking about share repurchases and we've done it before pretty successfully. I was just looking at what we've done in the past and in '22 and '23, we bought, I'd say, close to $110 million of stock repurchases.

This is post split at like a $13 average. So I think that there's opportunities there to do that as well. So we're going to continue to use our playbook the way we've used it in the past and I think that there's a ton of continued upside in the stock as we move forward.

Paul Bunn

Mike, one thing I'd say. Tripp talks about the playbook, we talk about that all the time. We're going to -- I think we're going to be operating from a position of offense not defense, be it whatever of those capital allocation alternatives makes the most sense for the long term value creation for Covenant shareholders.

And so I think just hearing -- it's not just sitting back passively what comes our way from a playbook, we're kind of actively on the offense looking at those and nothing to announce but we're going to keep pushing to figure out what creates the most value long term.

Michael Vermut

No, it just seems that with how we've performed through this downturn and the outlook we've got, it's probably a decent idea here. But yes, maybe there's better acquisitions out there as well. So it's all good choices.

Operator

And it appears there are no further questions at this time. So I'd like to turn the conference back to our moderator for any additional or closing remarks.

Tripp Grant

Yes. Thank you, everyone, for joining us today and your interest in Covenant. And we look forward to speaking with you next quarter.

Stay safe. Thank you.

Operator

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