Covenant Logistics Group Q2 Earnings Call Highlights

Key Points

• Revenue grew, but profitability declined: Second-quarter freight revenue rose 6.6% year over year to $294.7 million, while adjusted operating income fell 19% to $12.2 million. Higher insurance, maintenance and brokerage-capacity costs outweighed improved rates and revenue quality.
• Management is emphasizing contracted revenue and margin recovery: Covenant aims to renew expiring contracts, shift uncommitted capacity into long-term commitments and improve Managed Freight margins as customer rates catch up with capacity costs. Dedicated and Expedited operations are also targeting stronger margins through specialized, higher-value services.
• Sequential earnings improvement is expected: Management anticipates earnings will rise in the third quarter and again in the fourth, supported by a potentially tightening freight market. Net debt declined to $289.7 million, though the company expects $50 million to $60 million in second-half net capital equipment investment.

Covenant Logistics Group NYSE: CVLG reported higher second-quarter freight revenue but lower adjusted operating income, as elevated insurance, maintenance and brokerage-capacity costs outweighed improving rates and revenue quality.

Consolidated freight revenue increased 6.6% year over year, or about $18.2 million, to $294.7 million. The increase was primarily driven by brokerage assets acquired in the fourth quarter of 2025 that are now operated within the company’s Managed Freight segment. That growth was partly offset by an approximately 3% decline in freight revenue from the combined truckload operations following fleet reductions.

Adjusted operating income fell 19% to $12.2 million. CFO Tripp Grant said lower gross margin in Managed Freight was the largest contributor to the decline, while Dedicated Truckload improved and the company’s other operations declined modestly. Adjusted net income decreased 9.8%, though higher pre-tax income from Covenant’s minority investment in TEL and a favorable tax rate partly offset the operating-income decline.

Strategy Focuses on More Contracted Revenue

Grant said Covenant has spent the past decade shifting away from a primarily irregular-route trucking model toward specialized, value-added services including Dedicated and warehousing, where the company seeks multiyear customer commitments. The strategy is intended to reduce exposure to freight-market swings and create more stable margins through the cycle.

“Over the next few quarters, we are focused on three execution priorities,” Grant said. Those priorities include transitioning expiring contracts into new long-term commitments, moving additional uncommitted capacity into committed revenue, and improving Managed Freight gross margins as contract rates catch up with capacity costs.

Grant said the company does not expect its margins to rise as quickly as those of truckload peers with more uncommitted capacity during an upcycle. However, he said the contracted model should provide greater resilience when freight conditions weaken.

The company characterized the second quarter as a positive inflection point for the freight economy after a prolonged downturn and described 2026 as a transition year for the industry. Covenant expects revenue, operating margin and earnings to improve over time, though management emphasized that progress is likely to be steady rather than abrupt.

Segment Results Pressured by Costs

The Expedited segment reported an adjusted operating ratio of 94.6, about 70 basis points above the prior-year quarter, though profitability improved 450 basis points sequentially from the first quarter. Over the past 12 months, Covenant reduced the fleet in the segment by 17%, while freight revenue per average tractor increased 6.8%.

Grant said the company is pursuing more high-value cargo under multiyear committed-capacity agreements in Expedited. Revenue per total mile improved, although fewer miles per average tractor and elevated insurance-related claims costs affected the segment’s quarterly results. Covenant’s longer-term objective is to generate an average double-digit adjusted operating margin in Expedited across the freight cycle.

Dedicated Truckload posted an adjusted operating ratio of 95, in line with the prior-year period. Freight revenue per average tractor rose 8.6%, but maintenance costs and insurance-related claims offset the benefit from improved revenue. Management said it aims to restore Dedicated margins to double digits, grow specialized high-service operations, improve returns from certain legacy accounts as contracts renew, and reduce fleet capacity that does not meet return expectations.

Managed Freight revenue rose 28.4%, largely because of the acquired brokerage operations. Its margin, however, lagged the company’s long-term expectations as the cost of securing brokerage capacity increased faster than Covenant could obtain contractual rate increases from customers. Grant described this compression as typical in an early freight-market upcycle.

The warehousing business met Covenant’s revenue expectations but did not improve margins sequentially because of continuing labor inefficiencies associated with a new customer. The company is targeting a high-single-digit adjusted operating margin for the segment.

Insurance and Maintenance Costs Were Elevated

President Paul Bunn said excess insurance expense affected both Dedicated and Expedited by approximately 1.5 to 2 operating-ratio points compared with the company’s normalized run rate over the past 24 months. He attributed the increase partly to a higher-than-usual number of claim mediations during the quarter.

Bunn said the claims were not individually “monster claims,” but that even moderate claims can reach seven-figure amounts in the current litigation environment. The effect was magnified as truck counts declined, he said.

Maintenance expense also rose in Dedicated, including costs to prepare equipment for sale and costs related to protein-based operations. Bunn estimated those expenses represented at least one operating-ratio point of increased Dedicated costs. He said management does not expect the elevated insurance and maintenance costs to be fully recurring.

Grant cautioned that insurance costs can be volatile because of Covenant’s level of self-insurance. He said the quarter represented the company’s highest historical level of claims activity of this type, driven by a large volume of smaller and moderate claims rather than a single major event.

Outlook, Capital Spending and TEL

Management expects sequential earnings improvement in the second half, with Bunn saying Covenant expects to earn more in the third quarter than in the second quarter and more in the fourth quarter than in the third. The extent of improvement will depend in part on fuel prices, brokerage margins, insurance costs and maintenance trends.

CEO David Parker said he believes industry capacity constraints, including driver availability and regulatory developments, could support a multiyear freight-market recovery. He said Covenant’s Dedicated pipeline is the strongest it has been and that demand for committed capacity is also extending into parts of the Expedited operation.

Covenant’s net indebtedness declined by approximately $6.6 million from year-end 2025 to $289.7 million as of June 30. Its adjusted leverage ratio was about 2.2 times, and its debt-to-capital ratio was 41.2%. The company expects net capital equipment investment of $50 million to $60 million in the second half, depending on delivery timing and used-equipment prices, while anticipating improved operational cash flow and modest additional debt reduction.

TEL contributed $5.3 million in pre-tax net income during the quarter, compared with $4.3 million a year earlier. Management said a substantial portion of the improvement came from higher equipment-sale gains and is not expected to recur in the third quarter. Still, Bunn said Covenant sees potential for gradual improvement at TEL over the next several years as its customer base emerges from the freight downturn.

About Covenant Logistics Group (NYSE:CVLG)

Covenant Logistics Group provides a comprehensive suite of transportation and logistics services across North America. The company's core offerings include less‐than‐truckload (LTL) and full truckload hauling, temperature‐controlled freight, intermodal transportation and freight brokerage. Covenant also delivers specialized solutions such as expedited “hot‐shot” deliveries, cross‐border shipping to Canada and Mexico, and dedicated contract carriage for time‐sensitive or high‐value shipments.

With a network of service centers, terminals and partner carriers strategically located throughout the United States, Covenant supports diverse industries including food and beverage, automotive, retail, energy and manufacturing.

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