Covenant Logistics Group, Inc. 2026 Q3 Earnings Call

Please go ahead. Good morning, everyone, and welcome to the Covenant Logistics Group Third Quarter 2026 Conference Call.

Joining me today are CEO David Parker, President Paul Bunn, and COO Dustin Koehl. Before we begin, please note, 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 website at www.covenantlogistics.com/investors. Now, shifting to the results of the third quarter. During the quarter, we capitalized on the strong freight market to advance our strategic priority, improving the long-term durability, consistency, and quality of our business model.

Key accomplishments included Expedited, transitioned expiring one-way over-the-road contracts to multi-year committed capacity business with new and existing customers. Dedicated, expanded our pipeline of multi-year dedicated truckload business, exited historically unprofitable or marginally profitable business, and executed startups with new customers. Managed Freight, grew top-line revenue and margin, and improved the operating efficiency of overflow capacity within the division. The continued refinement of our business model and allocation of assets where they are most productive are critical to our long-term success and align with our strategic plan. While we expect this process to be ongoing, the percentage of our fleet we reassigned during the quarter was more significant than normal. As a result, our truckload operating margin was negatively impacted, while our Managed Freight margin more than made up the difference. We are confident in our strategy.

The market is supportive of aligning more assets with committed customers, and we believe our structural revenue improvements will overcome transition inefficiencies and general operating cost inflation in the near term. With sustained tightness of industry driver capacity and strong execution, we believe we can significantly expand our operating margins through steady gains rather than a sharp increase. With that background, I will move on to the quarter's statistical review. Consolidated freight revenue increased by 17.2%, or approximately $46.2 million to $315.1 million, primarily as a result of the brokerage assets acquired in the fourth quarter of 2025 that are now being operated as Star Logistics Solutions within our Managed Freight segment, partially offset by approximately 3.4% less freight revenue from our combined truckload operations as a result of fleet reductions.

Freight revenue per total mile improved by approximately 19.8%, and freight revenue per average tractor per week improved 6.1% compared to the prior year quarter in our combined truckload operations. Given the year-over-year shift in operations to lower mileage committed contracts, year-over-year revenue statistic comparisons can be difficult to compare. Consolidated adjusted operating income improved by 5.7% to $15.8 million. The largest contributor was the growth of both revenue and margin on our Managed Freight division. Adjusted net income improved by 14.6% as a result of the growth in adjusted operating income and higher pre-tax earnings from our minority investment in TEL, partially offset by a higher interest expense. Our net indebtedness as of September 30th decreased by approximately $12.4 million to $283.9 million compared to December 31st, 2025, yielding an adjusted leverage ratio of approximately 2.1 times and debt-to-capital ratio of 40.2%.

The average age of our tractors at September 30th was 26 months, up from 23 months compared to a year ago. This growth is in line with our life cycle management plan for our assets-based fleet and consistent with year-over-year reductions to our high-mileage Expedited fleet. On an adjusted basis, return on average invested capital was 5.2% for the trailing four quarters versus 6.9% for the same period in the prior year. Now, providing a little more color on the performance of the individual business segments. The Expedited segment reported an adjusted operating ratio of 94.1, approximately 50 basis points above the prior year quarter. Over the past 12 months, this segment has undertaken a considerable amount of transition. While the fleet was reduced 21.4%, freight revenue per average tractor has improved by 12%. Driver compensation and related costs spiked in the quarter for our Expedited segment.

The cost to recruit, onboard, and seat new drivers for our growing committed capacity business has not come without cost. As we work to convert this segment to serving more freight under multi-year agreements, we are confident that profitability will improve to a level that meets our expectations. Going forward, we have line of sight to sequential improvement in this segment's profitability during the fourth quarter of the year. Over time, our goal is to average a double-digit adjusted operating margin across the freight cycle to generate an acceptable return on capital. Dedicated's adjusted operating ratio of 96.1 was 140 basis points above the prior year quarter and fell short of our expectations. During the quarter, we experienced growth in unseated tractors, escalating driver pay costs, and escalating equipment-related costs.

In addition, several of our operations within our agricultural base fleets experienced significant volume headwinds as a result of the severe heat in the quarter, diminishing our ability to absorb certain of our fixed costs. Freight revenue per average tractor for the period improved 6.2%. Cost headwinds in the quarter included depreciation, maintenance, and driver compensation-related costs, offset improved freight revenue in this segment. Going forward, our goal is to steadily restore adjusted operating margin to double digits, grow the fleet serving high-service niches, improve profitability with certain legacy customers as contracts renew, and if applicable, reduce any part of the fleet that is not adequately returning capital in line with our expectations.

Managed Freight grew freight revenue 68.4% compared to the prior year, primarily as a result of the brokerage assets acquired in the fourth quarter of 2025, but also as a result of the team's effort to improve balance and efficiency in overflow asset-based freight. In addition, due to the combination of rate increases received from customers during the year, increased overflow volumes from Expedited, and improved availability of third-party capacity, we were successful in growing our adjusted operating income by approximately 133.3% compared to the prior year. As we look ahead, our goal is to continue to grow top-line revenue organically within this segment and maintain mid-single-digit margins. The warehouse segment performed in line with our revenue expectations, but disappointed us by failing to improve margins sequentially as a result of a continuation of labor inefficiencies with a new customer.

Looking ahead, we remain committed to continued organic growth within this segment and are focused on enhancing our adjusted operating margin, with a target of reaching high single digits. Our minority investment in TEL exceeded our expectations for the quarter by contributing pre-tax net income of $5.7 million for the quarter, compared to $3.6 million in the prior year period. While pleased with these improved results, we anticipate that TEL's fourth quarter's pre-tax net income will fall within a range of $3.7 million-$4 million as a result of seasonally soft used equipment volumes and a bad debt adjustment expected in the near term. Regarding our outlook for the future, our third quarter adjusted earnings per diluted share increased both sequentially and year-over-year for the first time since 2022.

Through strong coordination and capitalizing on available freight and capacity, Managed Freight offset transition and inflationary costs in truckload, while TEL exceeded expectations. The good news is we believe there is significant runway to improve truckload margin from here. Starting with the fourth quarter, we expect modest sequential improvement to our adjusted earnings per diluted share through improvement in our combined truckload margins, partially offset by a reduced contribution from TEL. In the meantime, we continue to exit unprofitable freight and expand mutually beneficial multi-year customer relationships with well-planned and executed startups with exceptional service. With this approach, we are confident in our ability to continue to improve our margins and the durability of our business model over the longer term. Thank you for your time, and we will now open the call for any questions.