Covenant Logistics Group Q3 Earnings Call Highlights

Key Points

• Third-quarter results improved: Freight revenue rose 17.2% year over year to $315.1 million, adjusted operating income increased 5.7% to $15.8 million, and adjusted net income climbed 14.6%. Managed Freight, boosted by acquired brokerage assets, was the primary growth driver.
• Truckload restructuring weighed on margins: Covenant reduced its fleet and shifted more capacity toward committed and multi-year dedicated contracts, creating near-term inefficiencies. Expedited and Dedicated operating ratios deteriorated as driver, maintenance, depreciation and other costs increased, though management expects sequential improvement.
• Balance sheet and outlook remain constructive: Net debt fell to $283.9 million, or approximately 2.1 times adjusted leverage, while TEL contributed $5.7 million of pre-tax income. The company expects modest fourth-quarter adjusted EPS growth, partly offset by a seasonal decline in TEL’s contribution, and plans to pursue further customer rate increases as costs remain elevated.

Covenant Logistics Group NYSE: CVLG said third-quarter freight revenue rose 17.2% year over year to $315.1 million, driven primarily by brokerage assets acquired in the fourth quarter of 2025 and now operated as Star Logistics Solutions within its Managed Freight segment.

Adjusted operating income increased 5.7% to $15.8 million, while adjusted net income rose 14.6%. Chief Financial Officer Tripp Grant said Managed Freight’s revenue and margin growth was the largest contributor to the improvement, while higher pre-tax earnings from the company’s minority investment in TEL also helped offset higher interest expense.

The company said it continued to reshape its truckload operations during the quarter by shifting assets toward committed customer freight, exiting less-profitable business and expanding multi-year contracts. Those changes created near-term operating inefficiencies, particularly in truckload, although Managed Freight margin gains more than offset the impact, Grant said.

Truckload transition pressured margins

Combined truckload freight revenue declined about 3.4% from the prior-year quarter as a result of fleet reductions. At the same time, freight revenue per total mile increased about 19.8%, and freight revenue per average tractor per week rose 6.1%.

The Expedited segment posted an adjusted operating ratio of 94.1, 50 basis points worse than a year earlier. The fleet was reduced 21.4% over the past 12 months, while freight revenue per average tractor increased 12%.

Grant said driver recruiting, onboarding and seating costs increased as Covenant expanded committed-capacity operations. He said the company expects sequential improvement in Expedited profitability during the fourth quarter and continues to target a double-digit adjusted operating margin across the freight cycle over time.

Chief Executive Officer David Parker said the company entered the year with about 25% of its Expedited trucks operating in dedicated arrangements and expects that percentage to reach roughly 75% to 80% by year-end. At the time of the call, he said the figure was approximately 60%.

Many of the new arrangements are multi-year contracts, generally extending for at least two years and in some cases four years, Parker said. The contracts include minimums when trucks are available, and customers generally may exit only if Covenant fails to correct documented service issues within a specified period.

Parker said the business mix is increasingly focused on high-security and high-value freight, including technology-related loads. These contracts can involve lower utilization and more dwell time than traditional long-haul operations because customers are paying for security and service rather than solely mileage.

President Paul Bunn said the transition has resembled a large dedicated startup, with higher initial costs and operational inefficiencies. He said Covenant’s dedicated team fleet has grown by roughly 250 trucks since the beginning of the year, while its one-way over-the-road team fleet has declined by about 300 trucks.

Management said portions of the dedicated team business could ultimately operate at adjusted operating ratios in the mid-80s, though the entire Expedited segment is not expected to reach that level because it will retain some over-the-road business.

Dedicated faced cost and agricultural headwinds

Covenant’s Dedicated segment reported an adjusted operating ratio of 96.1, 140 basis points worse than the prior-year period and below management’s expectations. Freight revenue per average tractor increased 6.2%, but the benefit was offset by higher driver compensation, depreciation and maintenance costs.

The company also cited an increase in unseated tractors and reduced agricultural-fleet volumes caused by severe heat during the quarter. Grant said the weather-related volume declines limited the company’s ability to absorb fixed costs.

Bunn said Covenant is working with customers to address cost increases that have exceeded customary annual contract escalators. He said the company does not intend to disrupt long-term customer relationships over short-term cost changes, but it will seek revenue levels that support higher costs over time.

Management said its objectives for Dedicated include restoring double-digit margins, expanding high-service niche operations, improving profitability with legacy customers as contracts renew and reducing fleet operations that do not generate adequate returns.

Managed Freight growth offsets truckload pressure

Managed Freight revenue increased 68.4% from a year earlier, largely reflecting the acquired brokerage assets, as well as increased efficiency in handling overflow asset-based freight. Adjusted operating income in the segment rose approximately 133.3% year over year.

Chief Operating Officer Dustin Koehl said the segment benefited from customer rate increases captured earlier in the year, improved third-party carrier capacity and higher volumes of overflow freight from Covenant’s asset-based operations.

Bunn cautioned that brokerage margins can be volatile. He said the third quarter benefited from an improvement after a difficult second quarter for brokers, and that management does not expect third-quarter margin levels to persist indefinitely. Covenant’s longer-term objective is to grow Managed Freight organically while maintaining mid-single-digit margins.

The warehouse segment met Covenant’s revenue expectations but did not achieve sequential margin improvement because of labor inefficiencies associated with a new customer. The company said it remains focused on organic warehouse growth and eventually reaching high-single-digit adjusted operating margins.

Balance sheet, TEL contribution and outlook

Net indebtedness declined by about $12.4 million from the end of 2025 to $283.9 million as of Sept. 30. Covenant reported an adjusted leverage ratio of approximately 2.1 times and a debt-to-capital ratio of 40.2%.

Koehl said the company expects leverage to improve over the next several quarters as operating cash flow improves. Management said it is comfortable operating with leverage between one and two times, while retaining flexibility for acquisitions or other capital-allocation opportunities.

TEL contributed $5.7 million of pre-tax net income during the quarter, up from $3.6 million a year earlier. Covenant expects TEL’s fourth-quarter pre-tax contribution to decline to between $3.7 million and $4 million because of seasonally softer used-equipment volumes and an anticipated bad-debt adjustment.

Grant said third-quarter adjusted diluted earnings per share increased both sequentially and year over year for the first time since 2022. For the fourth quarter, Covenant expects modest sequential adjusted EPS improvement from stronger combined truckload margins, partly offset by a lower contribution from TEL.

Parker said management expects trucking costs—including equipment, insurance and driver compensation—to remain elevated. He said the company expects to continue seeking rate increases from customers in 2027, potentially including another year of double-digit increases.

About Covenant Logistics Group (NYSE:CVLG)

Covenant Logistics Group, Inc is a transportation and logistics company headquartered in Chattanooga, Tennessee. Founded in 1986, the company provides freight transportation, supply chain management and related logistics services to customers across North America.

Its operations include expedited and dedicated truckload transportation, refrigerated and temperature-controlled freight, freight brokerage, managed transportation and warehousing. Covenant also provides final-mile delivery, cross-docking, fulfillment and other distribution services designed to support customers' supply chains.

The company serves a range of industries, including retail, consumer goods, food and beverage, automotive and manufacturing.

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