Covenant Logistics Group Q3 2026 Earnings Call Transcript

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Provided by Quartr
October 30, 2026

Key Takeaways

  • Positive Sentiment: Consolidated freight revenue rose 17.2% to $315.1 million, while adjusted operating income increased 5.7% to $15.8 million and adjusted net income grew 14.6% year over year.
  • Positive Sentiment: Managed Freight was the quarter’s strongest contributor, with revenue up 68.4% and adjusted operating income up approximately 133.3%, supported by the Star Logistics Solutions acquisition, customer rate increases, and improved third-party capacity.
  • Negative Sentiment: Truckload margins were pressured by the transition to committed and dedicated contracts, driver recruitment and onboarding costs, unseated tractors, and higher equipment and compensation expenses. Expedited posted a 94.1% adjusted operating ratio and Dedicated posted 96.1%, both worse year over year.
  • Positive Sentiment: Management expects modest sequential improvement in fourth-quarter adjusted EPS as truckload margins recover, with Expedited profitability expected to improve beginning in the fourth quarter. Longer term, the company believes multi-year contracts, higher utilization, and industry capacity tightening can drive material margin expansion.
  • Neutral Sentiment: Net debt declined $12.4 million to $283.9 million, or roughly 2.1 times adjusted leverage, and management expects debt to decline further through improved cash flow. However, TEL’s contribution is expected to fall to $3.7 million–$4.0 million in the fourth quarter from $5.7 million in the third quarter because of seasonally softer used-equipment volumes and an anticipated bad-debt adjustment.
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Earnings Conference Call
Covenant Logistics Group Q3 2026
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Operator

Good day, everyone, and welcome to the Covenant Logistics Group third quarter earnings release and investor conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Now, I will turn the call over to your host, Tripp Grant. Please go ahead.

Tripp Grant
Tripp Grant
CFO at Covenant Logistics Group

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.

Tripp Grant
Tripp Grant
CFO at Covenant Logistics Group

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.

Tripp Grant
Tripp Grant
CFO at Covenant Logistics Group

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.

Tripp Grant
Tripp Grant
CFO at Covenant Logistics Group

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 2.1x and debt-to-capital ratio of 40.2%.

Tripp Grant
Tripp Grant
CFO at Covenant Logistics Group

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.

Tripp Grant
Tripp Grant
CFO at Covenant Logistics Group

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.

Tripp Grant
Tripp Grant
CFO at Covenant Logistics Group

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.

Tripp Grant
Tripp Grant
CFO at Covenant Logistics Group

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.

Tripp Grant
Tripp Grant
CFO at Covenant Logistics Group

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.

Tripp Grant
Tripp Grant
CFO at Covenant Logistics Group

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.

Operator

If you'd like to ask a question, please press star one on your phone now, and you'll be queued in order. Again, star one for a question, and we'll pause briefly to form our queue. First question today comes from Bascome Majors of Stephens Inc.

Bascome Majors
Bascome Majors
Analyst at Stephens Inc

Thanks for taking my questions. Can we talk more about the growth businesses you are seeing in Expedited? What are the structure of these contracts in duration? How do they protect you on, say, empty miles or fuel or some other downside risk, and what economic levers are in those agreements that have to come true to give you the most upside? Thank you.

David Parker
David Parker
CEO at Covenant Logistics Group

Hey. Yeah, this is David. Hey. Yeah, thank you. There's no doubt that the Expedited side, and we went into this year with about, what, 25% of our trucks running in the Dedicated from an Expedited standpoint. And our goal this year would probably be up around 75% or 80% as the year comes to a close. And it's a mixture of everything. I mean, there is anywhere from regular customers that you wouldn't think are wanting long-term contracts in Expedited, but they are because of inventory levels, to high-security loads. And we were talking this morning internally, a lot has changed in the Expedited side of our business in the last year, last couple of years, as the market has changed. I remember when I first started Covenant, it was this, high service levels with high utilization.

David Parker
David Parker
CEO at Covenant Logistics Group

Our number one lane was running from the South to the West Coast and back, and running 5,000 and 6,000 mi on a truck. And that has been transformed in the last couple of years to the customers only looking at service as never leaving, but at security. And because as we've seen, the computer age and systems and data centers. But high-value loads. Anyway, you know what I'm saying. The technology loads has just been exploding, and it's not just the data centers, but it's across the board there. And we have really grown into that as well as what our customers are requiring us of. And these are long-term contracts, multi-year contracts. I'd say the lease is two years and upward, but there's a lot of four-year contracts that are there as well. They all got minimums.

David Parker
David Parker
CEO at Covenant Logistics Group

As long as our truck is available, we're going to be able to get minimums. And utilization is not high because they're paying, again, for security. But to give an example, we will pick up freight at airports, waiting on airplanes to get there, so our truck is sitting, waiting, and then we go to destination. And so there's a lot of dwell time that is there, and we're literally having to back into what these drivers are getting paid, because utilization is running a lot lower, probably 25% lower on utilization because of dwell time and because of security. And some of you have. There is no doubt in my mind that we have the best security department of any trucker in the U.S. We've had it for 25 years. I had a load of Philip Morris stolen in the year 2000.

David Parker
David Parker
CEO at Covenant Logistics Group

It cost me $1.6 million, and I thought I better do something, and we started a security department that has morphed into what it is today, which is the best. We have now, and thank God for this, we have gone, we're approaching 600,000 loads without a theft. I don't care to say that because my whole goal in life is for the robber to go pick on somebody else and not pick on me because of the systems that we've got in place, and hopefully that continues. But that in itself brings a lot of high-security type opportunities to us, and this year has really. What's exploded it in a good way is because, guys, I'm going to tell you, what has been hit the hardest because of the driver situation, what FMCSA has done, and where they are continuing to go, has been the team aspect.

David Parker
David Parker
CEO at Covenant Logistics Group

There's no teams, and it's very difficult to get the teams. Their secret sauce is to why we have as many teams as we got, and one of them is because we've been doing it for 40 years. It'd be very difficult to start a company today and say, "I'm going to get in the team business." It's hard. It's tough. It's difficult. But we have got the infrastructure to be able to do that. That, as well as FMCSA is only a first base on this. We all know this. Everybody on this phone knows this. The biggest cheating out there is the ELDs, by far, that we have learned in the last year. I would tell you that 30% or 40% of the trucks running up and down the road today are cheating on ELDs.

David Parker
David Parker
CEO at Covenant Logistics Group

Those trucks used to run as solos because they never ran out of hours, and because they always cheated. They would compete against us if they didn't have a team with a solo driver. That also has played into our availability of our team side. But there's a lot of. This year, as we've grown that, let's say from 25%, we end at 75%, there's a lot of cost. There's a lot of cost when somebody says, "I want 10 trucks, 20 trucks, 50 trucks." Just thinking about it, getting it ready, getting trailers in place, getting the drivers, recruiting the drivers, because they got to be at certain origins and certain destinations. But getting the trailers at origin and destination, there is a lot of money, and that's what you're seeing in this.

David Parker
David Parker
CEO at Covenant Logistics Group

Once we get to, say, 75%, I'd say right now we're at 60%.

Bascome Majors
Bascome Majors
Analyst at Stephens Inc

That's right.

David Parker
David Parker
CEO at Covenant Logistics Group

Probably 60% today, and we'll get the fourth quarter up to 75%. Then you'll start seeing that smooth out from the extra cost there. Anyway, long-term minimum contracts is what we've got, and they cannot get out of them. If service gets pitiful, they can get out of it, documented, of which we have, I think, 90 days to correct the service. To give you an idea, it's a period of time to correct the service, and if we don't, then they can get out of it. To be honest with you, if we can't give the service, we ought to be fired. That's really the only out that is there over the next few years. It's better than I got in my OTR, what I got.

David Parker
David Parker
CEO at Covenant Logistics Group

I got a contract, and they said, "I'm going to give you 20 loads a week," and I may get it and I may not. It's much more tighter than that. I hope that helps you.

Bascome Majors
Bascome Majors
Analyst at Stephens Inc

No, that's helpful. David, with that, comments on dwell and lower utilization and all this downside protection, are these deals, once you get them up and running and the network kind of stable, are they going to run at full profitability quickly and not have a lot of variability, or is there some upside to volume as well in the way these deals are structured?

David Parker
David Parker
CEO at Covenant Logistics Group

Yeah, some of them have got upside. For instance, if you got some that a customer, a shipper, not just somebody you're thinking about, but from a high security, but again, we got regular shippers. But some of them that may be running 3,000 mi a week, keep in mind, I'm used to running 4,000 and 5,000 and 6,000 mi a week, and some of them are running 3,000 mi a week. As they get their system up and running better and tighter, then they'll take that up to 4,000 mi a week. So, there is going to be some increased utilization. What you're seeing today is the low side of utilization on these, and there'll be opportunities there. So therefore, when they run extra miles, we'll get paid extra money, but we got the minimums. Predominantly, it's what you are seeing today.

David Parker
David Parker
CEO at Covenant Logistics Group

But I'm here to tell you also that you're only seeing probably, Paul Bunn, 40% or 50% of the minimums as we speak.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

Yeah. Think of it like this, just let's go. It's a big Dedicated startup right now, because this really didn't pick up a lot of legs until-

David Parker
David Parker
CEO at Covenant Logistics Group

May, June.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

May, June.

David Parker
David Parker
CEO at Covenant Logistics Group

Yep.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

We have been in a major team dedicated startup May, June through Thanksgiving. As David said, there is a lot of inefficiencies in dedicated startups. You can study any of the solo dedicated guys on an account-by-account level, and we are just experiencing that with kind of a whole business unit right now. So, there is upside in the margin, both in how these contracts are structured and as we work with our customers to get these started up and optimize how they are running.

Dustin Koehl
Dustin Koehl
COO at Covenant Logistics Group

Yeah, there is definitely, Bascome, just adding on to what they have said, some learning curves. I think there is a lot of operational efficiencies to be had to capture more minimums. I think there has been some learning curves on what the drivers like and what the drivers do not like. David mentioned additional dwell time, and we know drivers like to drive. So we are having to create different pay packages for that dwell so that the driver is still getting compensated for having to sit there. So, this is really complicated stuff that we are working through. The good news is, in tandem with our customers, hand-in-hand, our drivers and our operators, and I think it is coming together. I think the fourth quarter will be a transition point, I think, for Expedited, and we will continue to see improvement after that.

Bascome Majors
Bascome Majors
Analyst at Stephens Inc

Just last one to maybe put a period on this thing, because it does sound like a very exciting opportunity, especially as we get into next year. Do you have any of these new deals that you think are representative, where you can share the kind of mature margin this business operates at compared to what it is replacing in Expedited?

David Parker
David Parker
CEO at Covenant Logistics Group

Yeah, I tell you, this Dedicated, it's going to operate in the 80s. To me, internally, I don't care to tell you, because I'll tell my customers, it's going to be at 85 or better kind of ORs, or you don't need to be in the team side. It's one or the other. You can't pay for what I'm paying for trucks and trailers and all this stuff on the cost standpoint. Yeah, it's going to operate in those kind of numbers.

Bascome Majors
Bascome Majors
Analyst at Stephens Inc

That 80, 85 or better, are you talking about this can take the entire segment to that level, or this point of the segment should operate at?

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

Probably not the whole segment to that, but there'll be portfolio pieces of business that operate there. Remember, you're still going to have some OTR business that probably won't operate that good. The blend of the totals probably won't be that low, but either way you look at it'll be better than it's running today.

Bascome Majors
Bascome Majors
Analyst at Stephens Inc

That's great news. Thank you all for the time.

Operator

From TD Cowen, we have Jason Seidl.

Elliot Alper
Elliot Alper
Analyst at TD Cowen

Hey, good morning. This is Elliot Alper for Jason Seidl. Can you talk about some of the dedicated contracts you signed earlier this year, and if you guys honor those contracts or are going back to customers to renegotiate? We have heard some carriers talk about that through earnings, given how significantly the cost picture has changed through the year. Then maybe looking forward on that same vein, I guess, I assume the big step back in rev per tractor in the quarter was due to that poultry headwind you talked about. Just want to make sure that is all that was, and that should kind of rebound back in the fourth quarter.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

Elliot, you are on top of it. Dedicated, as we know, most, especially solo dedicated, has got very similar annual escalators. We did sign on some new business earlier in the year, and just like a lot of our peers have reported, the costs have gone up more than the escalators, and a good bit more than the annual escalators. So, I would say we are working customer by customer through that. We went through this in the COVID deal back in 2021, and folks can go study us and our peer group and look at what dedicated. The dedicated performance, most of it was better in 2022 and 2023 than it was in 2021 when things got really tight, because it took a little. The cost came first, and the rates came second. I think that is what you are going to see in this.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

The costs have come first, and now we have just got to work customer by customer to get the rates to justify the cost increases. The customers are asking the questions, "Are these costs permanently increased or temporarily?" I think what we are all believing today is. Truck prices, David, I do not think. Or truck prices, insurance prices, or drivers going down?

David Parker
David Parker
CEO at Covenant Logistics Group

No.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

Well, he just answered the question. You are not going to upset long-term dedicated deals and long-term customer agreements over three or six months. But over the long term, you got to get revenues, got to be more than the costs. We are working on it.

Elliot Alper
Elliot Alper
Analyst at TD Cowen

Okay, great. Really nice growth in the Managed Freight business. Can you talk about maybe what is driving that strength? Do you expect that to continue going forward? I think in the release, you talked about the insurance and claims becoming a bigger risk. I assume that is related to Montgomery. Can you talk about the insurance front? We have seen a few companies through earnings this quarter take charges specifically to Montgomery. Just curious thoughts around Managed Freight growth and the cost side going forward.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

Well, here is what I would say, a couple things. Sequential growth, every broker in the world got killed in Q2. The sequential growth is just a function of going from really bad to pretty good out there. The year-over-year growth, it has to do. We did a tuck-in acquisition in the fourth quarter of last year, and those guys that really came on in the third quarter. What I would say is brokerage margins were really good for the third quarter. We do not expect them to stay that good forever. I mean, these things bounce around. It has always been a little volatile. It may not be as good as it was in Q3, but it is not going to be as bad as it was in Q2. Take a blended average of those. That is about what these brokerages will probably run long term.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

You are right, related to Montgomery, it is a riskier world out there. We have always done a lot of things from a compliance standpoint. We continue to double down on those and refine what we are doing. But we will just kind of keep going down that same path.

Dustin Koehl
Dustin Koehl
COO at Covenant Logistics Group

Yeah, we hit on it a little bit, and I look at it as a kind of a three-legged stool. It's rates captured in the first half of the year with all the tightness for the last previous three quarters. You've got basically carrier capacity loosening up in the quarter that kind of helped us procure capacity at a little bit of a cheaper rate. Then, you've got kind of just your, quite honestly, your overflow stuff that's come over with projects and different asset-based overflow freight that's come up that's helped grow this segment from a top-line perspective, in addition to the acquisition that Paul mentioned.

David Parker
David Parker
CEO at Covenant Logistics Group

I'll tell you another way to look at it, is that, as you think about it, is that second quarter, as it relates to the Managed Freight, the brokerage side, second quarter, we saw an explosion in market rates, not contract, but spot rates. It exploded, as we all know, and it came on in about a three-month period of time. That's the reason why it was hard to make a margin, because the spot rates were going so much higher than you could go to the customer and get your rates changed. One of the things that I think we ended in June, and I think on our second quarter call, I said that the freight environment in the second quarter was basically two loads for every truck. I mean, it was unbelievably good. Now, what happened in the third quarter?

David Parker
David Parker
CEO at Covenant Logistics Group

I would tell you that freight is 1.3 loads for every truck. It's still good. We're loading all our trucks, and we're getting broker freight, and the customer is still needing service and is needing capacity. It's not two loads, it's 1.3 loads for every truck. But then there's been 5%, 6%, 7%, 8% of freight has gone to intermodal, and you have seen the spot rates that have came down a little bit since the second quarter, which is healthy, because the freight is now moving. There's freight that's not sitting at docks for days and days and days, and the freight is being able to move, and there's still a lack of capacity, but because the spot rates have came down because of the lack of the freight going to intermodal, it's allowed the brokers to start making a margin again. That, in the third quarter.

David Parker
David Parker
CEO at Covenant Logistics Group

That's the way I see it.

Dustin Koehl
Dustin Koehl
COO at Covenant Logistics Group

Elliot, to your last question on insurance, it is definitely something we are keeping an eye on. There is no doubt in this post-Montgomery era, the risk. There is just a lot of eyes on risk and insurance, and when we go through our renewal process, I am sure we will learn a little bit more. But I saw a couple of notifications earlier this week where people got hit in this segment with some development of some past period claims, and it kind of deteriorated margins pretty materially.

Dustin Koehl
Dustin Koehl
COO at Covenant Logistics Group

So, we have been living with that on the truckload side for a while, and now it seems to be creeping over, and everybody It is an industry thing, not just us, and into the brokerage world, and we are just kind of keeping an eye on it and trying to control what we can control and do the best that we can.

Elliot Alper
Elliot Alper
Analyst at TD Cowen

Very helpful. Thank you, guys.

Operator

Next, we have Jeff Kauffman of Citizens Bank.

Jeff Kauffman
Analyst at Citizens Bank

Thank you very much. Congratulations, everybody.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

Thanks, Jeff.

Jeff Kauffman
Analyst at Citizens Bank

I wanted to go back to one of the answers that you gave Bascome, and just make sure that I understand what you were talking about. When you were saying, "We're at 60%, we're going to be at 75%," are you talking about the percent of Expedited trucks on long-term contracts?

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

Yes.

Jeff Kauffman
Analyst at Citizens Bank

Okay.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

Yeah, but-

Jeff Kauffman
Analyst at Citizens Bank

Thank you.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

-Jeff, that will be the percent of Expedited trucks that are under dedicated arrangements.

Jeff Kauffman
Analyst at Citizens Bank

Okay. How many trucks have been displaced over the course of this adoption of strategy, and how many of those trucks will still be not yet placed in the right area as of the end of this year?

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

I think we are still trying to figure out that mix. I mean, we have probably grown. The Dedicated fleet has probably grown, Dustin, 250, has grown 200. The Dedicated teams has grown 250, and OTR teams has probably shrunk 300. That is kind of what has happened since the beginning. I mean, you can see our team counts down from where we started the year. So, I would say you have grown Dedicated 250, shrunk kind of the OTR one-way teams 300, is what has happened here to date. To David's point, probably, there is some growth. There is still growth in the Dedicated teams, and I think we are going to kind of figure out what OTR teams.

Jeff Kauffman
Analyst at Citizens Bank

Sorry.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

Team count will be flat-ish, probably, Jeff. You can probably see growth in some Dedicated teams and either flat to reduction in the OTR teams as we try to We got to make sure we're servicing the OTR accounts because there is some overlap between the OTR accounts and the Dedicated accounts.

Dustin Koehl
Dustin Koehl
COO at Covenant Logistics Group

Take care of them.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

You got to take care of what the customer's needs are. You can't just have the ones we would probably prefer. You got to have a mix of the two. We're having to work through that on a customer-by-customer basis. Plus, as you know, we're going into peak, so a lot of people need capacity here.

Dustin Koehl
Dustin Koehl
COO at Covenant Logistics Group

Yeah. The other thing I'd say, Jeff, is why it's hard to answer that question is, I feel like that the demand out there, it's there, it's strong. The big question is just how much we can execute and how well we can execute. Anything we take on, we want to make sure we can execute it at a high level. We talked about a little bit earlier on the call, the ability to not just any driver, but get qualified team drivers to run this type of freight in this specialized environment is really, really difficult at a time like this. That can take some time, then bring them in and get them up to speed, and then get them on the road and get them available. It is a little bit of a process, so it's really and that's what we're focused on.

Dustin Koehl
Dustin Koehl
COO at Covenant Logistics Group

It's not as simple as just going out and getting rate increases. This is kind of some transformative stuff we're doing.

Jeff Kauffman
Analyst at Citizens Bank

All right. Then just one follow-up for David. David, I'm going to hit a topic that's near and dear to your heart. We've spent so much time talking about the impact on the driver supply from some of the administration's policies to improve driver quality and what have you. Can we talk a little bit about what's still out there to happen? I'm thinking more about ELDs, and as you mentioned earlier, some of the cheating that goes on in that space. What is happening with the administration right now in terms of kind of going after this problem with the ELDs where fleets are running two of them, one legal, one illegal, or not tracked? Is the administration going to take the lead in trying to get that under control, and does that keep the market tighter a little longer than a lot of us are thinking?

David Parker
David Parker
CEO at Covenant Logistics Group

Yes. The answer is yes and yes to both of those. There's no doubt, speaking with the FMCSA yesterday, and they are still It hasn't changed. Their attitude has not changed in the 12 months that they've been attacking these issues. I think the next thing you're going to be seeing is that they will be appointing a third party, what, certification?

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

Yeah.

David Parker
David Parker
CEO at Covenant Logistics Group

A third-party certification of the ELD companies. They're continuing to wash through them, probably going slower than what I would like to see happen, but they also have got companies that These are companies that they're trying to make sure that they do the right thing for companies. I can understand that as well. It's going to be a process that they've started, they're continuing to start. There was a big article. I got a new magazine, or somebody sent an article to me yesterday about where a driver up in Illinois said, "Here, let me show you how I'm going to change my hours," and had the police, and FMCSA was there.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

Standing there watching while he did it.

David Parker
David Parker
CEO at Covenant Logistics Group

Standing there watching while he did it. "Let me show you what happens." FMCSA was there when that happened. They are on this. Where do I think it is at? I think that 3% of capacity has been taken out, probably a little bit more of drivers. Guys, as I think about the team side, in particular on the Indian side, because California, the West Coast is where there was a lot of teams. California, Chicago, there was a lot of teams. Eastern European and India. They are having a difficult time. There is a lot of capacity that has been taken out. 3% trucks, 4% drivers. The rest of them are open trucks, including ours, looking for drivers. That has created I think that there is another 3%-4% that will be coming out.

David Parker
David Parker
CEO at Covenant Logistics Group

There will be 3% come out just when they get ELDs legalized. They are starting. I wish this was all done by Christmas, but maybe it is all done by next Christmas. They are committed. The thing I am looking at, without a shadow of a doubt, FMCSA is committed to have safe drivers on the road, period. It is going to continue to happen.

Jeff Kauffman
Analyst at Citizens Bank

Thank you very much, and congratulations.

David Parker
David Parker
CEO at Covenant Logistics Group

Thank you.

Operator

Our next question comes from Dan Moore of Baird.

Dan Moore
Dan Moore
Analyst at Baird

Gentlemen.

David Parker
David Parker
CEO at Covenant Logistics Group

Hey, Dan.

Dan Moore
Dan Moore
Analyst at Baird

Bringing up the rear here. A lot of questions have been asked. A lot of questions have been answered. I wanted to just take a moment and maybe frame out from the quarterly and what are you doing now sort of questions, and really talk about strategy long term, where the business is going to be in one to two years. As Expedited really begins to find some traction as truck rates, which are way too low to generate appropriate returns for you and your peers, especially your peers, as they march higher in 2027, presuming that occurs, free cash flow is going to accelerate. Talk to us a little bit about 2027, 2028, how you're thinking about the next couple of moves on the board.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

Hey, Dan. It's Paul.

Dan Moore
Dan Moore
Analyst at Baird

That sort of thing.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

I would say-

Dan Moore
Dan Moore
Analyst at Baird

Yep

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

probably a lot more of the same of what you have seen since kind of 2021. I don't think the playbook has changed. Number one, we're going to be focused on safety and execution, not chasing stuff. Dedicated and specialized in the team environment, specialized and dedicated in the solo environment, leaning in to Managed Freight, growing warehousing organically. TEL's going to grow. We're going to focus on safety and execution, then look at capital allocation alternatives based on what's out in the market, not try to chase commoditized stuff, only go after stuff where we can get a return. At times, probably look at M&A, at times focus on ourself, at times looking on deploying capital, like we've done before, share repurchases.

Paul Bunn
Paul Bunn
President at Covenant Logistics Group

I would think it is just going to be more of the same of what you have seen since the early 2021 kind of timeframe.

Dan Moore
Dan Moore
Analyst at Baird

What do you think about that, [inaudible]?

Dustin Koehl
Dustin Koehl
COO at Covenant Logistics Group

Yeah. Dan, I would echo Paul's. I think what we have been doing for the last five, six years is really, really working for us. I think coming out of a four-year down cycle and moving into a stronger freight cycle, the types of opportunities that we have in front of us today are plentiful and also complex to execute. The team is entirely focused on executing on those opportunities and have done a great job. A lot of those opportunities are in the truckload space, which ironically went backwards from a margin perspective sequentially in the quarter. Regardless, I think what we are doing there is, I said it before, is transformational and a lot of organic and in-house opportunities to execute on.

Dustin Koehl
Dustin Koehl
COO at Covenant Logistics Group

When the time is right or if the right acquisition or the right company comes our way, we have the flexibility to do it and the track record to acquire a company and do it well. There is a lot of focus internally on the execution that it is going to take and on the opportunities that we have in front of us over the next 12-18 months, however long this cycle lasts.

Dan Moore
Dan Moore
Analyst at Baird

Last question, capital structure. How are you thinking about debt? Do you expect to-

Dustin Koehl
Dustin Koehl
COO at Covenant Logistics Group

Yeah

Dan Moore
Dan Moore
Analyst at Baird

-ramp that higher, take that lower? Are you going to be patient pursuing deals?

Dustin Koehl
Dustin Koehl
COO at Covenant Logistics Group

No, I think where it is right now at two times, yeah, where we are at two times, I expect to improve over the next few quarters. We haven't finalized our capital plan for next year yet, but I expect to see the benefits of improved operational cash flow come through in the first quarter. We may see it a little bit in the fourth quarter. It wasn't as good as what I had hoped in the third, but sometimes it can be a little clunky. But, I think that we will naturally just keep our maintenance CapEx in place, and with our maintenance CapEx in place, we'll have the opportunity to burn down some of that debt. And we're comfortable. We don't have a target in mind, but we're comfortable between one and two times.

Dustin Koehl
Dustin Koehl
COO at Covenant Logistics Group

You're probably not going to see us go debt-free, but you probably won't see us go to 2.5 or three times either. I think over the next few quarters, that's probably where we're leaning. Not to say that that's the absolute answer. If the perfect opportunity came along, we would probably pull the trigger on it. But right now, based on what we know today, that's where we're leaning.

Dan Moore
Dan Moore
Analyst at Baird

Thanks, guys.

David Parker
David Parker
CEO at Covenant Logistics Group

Thanks, Dan.

Operator

Once again, everyone, press star one for a question. We will hear from Cole Couzens of Wolfe Research.

Cole Couzens
Cole Couzens
Analyst at Wolfe Research

Hey, guys. Sorry, I am hopping on late, so apologies if you guys already hit on this. Can you guys give an update on D.C. and the regulatory environment, and maybe what is the next shoe to drop, whether it is ELD enforcement, ELP, CDL enforcement? Is there any signs that the administration is less focused here because of inflation?

David Parker
David Parker
CEO at Covenant Logistics Group

Yeah. We don't see that. We have been working closely with FMCSA, and we think they're doing a great job. We think that their commitment is just as strong today as it was 12 months ago when you and I and everybody else started learning about what FMCSA was going after. We continue to see them do testing at schools. We continue to see them shut down schools. We continue to see them making sure that they agree with the grading process that schools have. I think there's pressure there. We see that they are at first base on the ELD requirements. They're very well aware of it.

David Parker
David Parker
CEO at Covenant Logistics Group

I was telling somebody else just a little while ago, one of the analysts, that I believe about 30% of the drivers running with ELDs, 30% of the trucks running up and down the road today, their ELDs are cheating. I think it's a gigantic number. I think that FMCSA is absolutely committed to bringing that down to zero. I think that you'll see them go to a third-party administrator, third-party certification, and that will be the start of what they're going to be doing. I think the FMCSA is very committed and very much so going to Their whole desire, as they told me, "I don't care how much money a trucking company makes. I don't care how much money a shipper makes.

David Parker
David Parker
CEO at Covenant Logistics Group

The only thing I care about is that when the motoring public goes up and down the interstate and they pass a truck, that they got confidence that there's a safe driver in it." That's their only goal in life. No, I don't see anything of them backing up at all. I just see them continue to do what they're doing.

Cole Couzens
Cole Couzens
Analyst at Wolfe Research

Okay. That's helpful. Maybe last question on 2027. Can you guys just give early expectations across truckload for what you expect contract rate increases to be? I'm sure you've already had some early conversations with shippers. Thanks.

David Parker
David Parker
CEO at Covenant Logistics Group

Yeah. I would just say this, that the way we answered a couple of questions ago was that, all of us and our peers, we are going to continue to raise rates. We have to because of the cost. The costs are, they may get a little bit better in 2027, but they are still numbers that four or five years ago, all of us would say, "Boy, that is high." They are continuing to increase, whether it is trucks, whether it is driver pay, trucks, trailers, insurance. We all are going to have to continue to go to our customers and get more money. We sit here and look at double-digit rate increases this year, and most of our ORs have improved by one or 1.5, two points. That is not enough. You cannot increase rates 15% and get two points better in margin. That is not the answer.

David Parker
David Parker
CEO at Covenant Logistics Group

I think that you are going to continue to see all of us go back to the customer and say, "We got to have more." I think 2027 will continue down the same path.

Cole Couzens
Cole Couzens
Analyst at Wolfe Research

So, another year of double-digit increases is kind of what we are shooting for?

David Parker
David Parker
CEO at Covenant Logistics Group

That is my expectations. I hope that it does, but that is my expectations.

Cole Couzens
Cole Couzens
Analyst at Wolfe Research

Okay. Thanks. I'll turn it back, guys.

David Parker
David Parker
CEO at Covenant Logistics Group

Yep.

Operator

No further questions at this time. Tripp, back over to you for any additional or closing comments.

Tripp Grant
Tripp Grant
CFO at Covenant Logistics Group

Yeah. We'd like to thank everybody for joining our call today and your interest in Covenant Logistics, and we look forward to talking to you in January at our Q4 earnings call. Thank you very much.

Operator

That concludes our meeting today. You may now disconnect. The host has ended this call. Goodbye.

Executives
    • Tripp Grant
      Tripp Grant
      CFO
    • David Parker
      David Parker
      CEO
    • Paul Bunn
      Paul Bunn
      President
    • Dustin Koehl
      Dustin Koehl
      COO
Analysts
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