Covenant Logistics (CVLG) Q3 2026 Earnings Call Transcript

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DATE

Oct. 30, 2026

CALL PARTICIPANTS

• Chairman and Chief Executive Officer - David Parker
• President - Paul Bunn
• Chief Financial Officer - Tripp Grant
• Chief Operating Officer - Dustin Koehl

TAKEAWAYS

• Freight Revenue -- $315.1 million, representing a 17.2% increase driven by the acquisition of brokerage assets in the fourth quarter of 2025.
• Adjusted Net Income -- $13.2 million, a 14.6% improvement due to growth in managed freight and higher earnings from the minority investment in Transport Enterprise Leasing.
• Adjusted EPS -- $0.50, representing the first year-over-year and sequential increase for this metric since the second quarter of 2022.
• Net Indebtedness -- $283.9 million, representing a $12.4 million decrease compared to Dec. 31, 2025.
• Debt-to-Capital Ratio -- 40.2%, an improvement from 42.3% at the end of 2025.
• Adjusted Leverage Ratio -- 2.1x, which the company expects to improve over the next several quarters through operational cash flow.
• Combined Truckload Freight Revenue -- $166.0 million, a 3.4% decrease as a result of a 8.9% reduction in the weighted average tractor fleet.
• Truckload Revenue per Total Mile -- $3.03, representing a 19.8% improvement due to a shift toward lower mileage committed contracts.
• Truckload Revenue per Tractor per Week -- $5,778, growing 6.1% over the prior year quarter.
• Expedited Adjusted Operating Ratio -- 94.1%, a 50-basis point increase from the prior year reflecting costs to recruit and onboard drivers for new committed capacity business.
• Expedited Fleet Size -- 677 tractors, representing a 21.4% reduction from 861 units in the prior year quarter as management exited unprofitable freight.
• Expedited Committed Contract Percentage -- 58% of the fleet, an increase from 40% three months prior as management transitions one-way over-the-road contracts to multiyear agreements.
• Dedicated Adjusted Operating Ratio -- 96.1%, a 140-basis point increase driven by escalating driver pay, equipment-related costs, and agricultural volume headwinds.
• Dedicated Fleet Size -- 1,509 tractors, representing a 1.9% decrease from the prior year weighted average.
• Managed Freight Revenue -- $121.6 million, an increase of 68.4% year over year primarily from the integration of brokerage assets acquired in late 2025.
• Managed Freight Adjusted Operating Income -- $7.1 million, growing 133.3% due to rate increases implemented during the first half of the year and easing third-party capacity costs.
• Warehousing Freight Revenue -- $26.7 million, increasing 7.8% primarily from a new customer onboarded in the fourth quarter of 2025.
• TEL Pretax Net Income -- $5.7 million, exceeding expectations due to growth in equipment leasing and higher equipment sale gains.
• Average Tractor Age -- 26 months, up from 23 months a year ago, in line with life cycle management for a lower mileage dedicated fleet.
• Fourth Quarter TEL Guidance -- $3.7 million to 4 million in pretax net income, reflecting seasonally softer used equipment volumes.
• Net Capital Expenditures Guidance -- $35.0 million to $40.0 million for the balance of 2026.
• Return on Average Invested Capital -- 5.2% for the trailing four quarters, a decrease from 6.9% in the prior year period.
• Expedited Average Freight Revenue per Tractor per Week -- $7,934, representing a 12.0% increase over the previous year.

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RISKS

• Grant stated, "several of our operations within our agricultural-based fleets experienced significant volume headwinds as a result of the severe heat in the quarter," which diminished the ability to absorb fixed costs.
• Bunn noted that brokerage margins in Managed Freight are volatile and warned that "we don't expect them to stay that good forever," following a strong third quarter.
• Management reported that the Warehousing segment failed to improve margins sequentially as a result of "labor inefficiencies with a new customer" and general labor inflation.
• Grant warned that "higher insurance and claims expense has become a greater risk in Managed Freight," noting that industry-wide developments in past period claims have deteriorated margins for peers.

SUMMARY

Covenant Logistics Group, Inc. (NYSE:CVLG) reported that its reallocation of assets toward multiyear committed capacity contracts and the integration of acquired brokerage operations contributed to its first sequential and year-over-year increase in adjusted earnings per share since 2022. Management stated that approximately 80% of fleet assets were under long-term contracts by the end of the quarter, as the company reduced its exposure to one-way over-the-road freight. The managed freight segment provided overflow capacity for the expedited division and grew its top-line revenue, which helped offset inflationary pressure on driver wages and equipment maintenance costs. Management reported that the ongoing transition to committed agreements is expected to reduce repositioning expenses and support margin expansion in the fourth quarter.

• CEO Parker projected that the Expedited fleet will reach 75% to 80% dedicated arrangements by the end of the year, up from 25% at the beginning of 2026.
• Management highlighted the company's security department, with Parker noting that Covenant is "approaching 600,000 loads without a theft," a standard that drives demand for high-value technology and data center freight.
• Bunn indicated that the company is renegotiating contracts with Dedicated customers to align rates with recent cost inflation in driver pay and equipment prices.
• CFO Grant noted that the fourth quarter will be a "transition point" for the Expedited segment, with operational efficiencies expected to improve after working through initial learning curves on new pay packages and dwell times.
• Parker estimated that 30% to 40% of trucks currently operating on U.S. roads are noncompliant with Electronic Logging Device (ELD) regulations, creating a capacity-tightening catalyst as federal enforcement increases.
• The company remains committed to organic growth in the Warehouse and Managed Freight segments, targeting high single-digit and mid-single-digit margins, respectively.

INDUSTRY GLOSSARY

• Adjusted Operating Ratio: A measure of operating efficiency (operating expenses divided by revenue), excluding fuel surcharges and specific non-GAAP adjustments like amortization and transaction costs.
• Dedicated: A segment where truckload capacity is committed to a specific customer for a multiyear period, typically providing more stable revenue.
• ELD: Electronic Logging Device, hardware that records a driver's hours of service to ensure compliance with federal safety regulations.
• Expedited: A truckload segment focused on high-service, time-sensitive freight, often utilizing two-person driver teams for 24-hour operation.
• FMCSA: Federal Motor Carrier Safety Administration, the lead federal government agency responsible for regulating and providing safety oversight of commercial motor vehicles.
• Managed Freight: A non-asset-based segment providing freight brokerage and logistics management by outsourcing carriage to third-party providers.
• Net Indebtedness: A financial metric calculated as total debt and finance lease obligations minus cash and cash equivalents.
• TEL: Transport Enterprise Leasing, a minority-owned affiliate that provides revenue equipment sales and leasing services to the trucking industry.

Full Conference Call Transcript

Operator: Good day, everyone, and welcome to the Covenant Logistics Group Third Quarter Earnings Release and Investor Conference Call. [Operator Instructions] Now I'll turn the call over to your host, Tripp Grant. Please go ahead.

James Grant: 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 multiyear committed capacity business with new and existing customers. Dedicated, expanded our pipeline of multiyear dedicated truckload business, exited historically unprofitable or marginally profitable business and executed start-ups 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 pretax earnings from our minority investment in TEL, partially offset by higher interest expense. Our net indebtedness as of September 30 decreased by approximately $12.4 million to $283.9 million compared to December 31, 2025, yielding an adjusted leverage ratio of approximately 2.1x and debt-to-capital ratio of 40.2%. The average age of our tractors at September 30 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 asset-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 multiyear 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-based 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 the 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 pretax 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 pretax net income will fall within a range of $3.7 million to $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 multiyear customer relationships with well-planned and executed start-ups 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: [Operator Instructions] First question today comes from Bascome Majors of Stephens Inc.

Bascome Majors: Can we talk more about the growth businesses you're 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 through to give you the most upside?

David Parker: This is David. Thank you. There's no doubt that the Expedited side, and we went into this year with, what, about 25% of our trucks running in the dedicated from an Expedited standpoint. And our goal this year is 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. Our #1 lane was running from the South to the West Coast and back and running 5,000 and 6,000 miles 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 and -- but high-value loads from -- 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, multiyear contracts. I'd say the lease is two years and upward, but there's a lot of 4-year contracts that are there as well. They all got minimums. 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 you 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 United States. We've had it for 25 years. I had a load of Philip Morris stolen in the year 2000. It cost me $1.6 million, and I thought I'd better do something and we started a security department that is morphed into what it is today, which is the best.

We have now -- and thank God for this, 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 -- and 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.

There's no teams. And it's very difficult to get the teams. And 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. But 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. Those trucks used to run as solos because they never ran out of hours, and because they always cheated. And so they would compete against us if they didn't have a team with a solo driver. So 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 costs.

There's a lot of costs, 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 in 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. And once we get to, say, 75%, I'd say right now, we're at 60%. 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. But anyway, long-term minimum contracts. It's 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. And to be honest with you, if we can't give the service, we ought to be fired. So that's really the only out that is there over the next few years. So it's better than I got in my OTR. What I got, I got a contract and they said, I'll give you 20 loads a week, and I may get it and I may not.

So it's much more tighter than that. I hope that helps you.

Bascome Majors: No, that's helpful. And 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 is 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: Yes. 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 miles a week. Keep in mind, I'm used to run 4,000 and 5,000 and 6,000 miles a week and some of them are running 3,000 miles a week. And as they get their system up and running better and tighter, then they'll take that up to 4,000 miles a week. And 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. But I'm going to tell you also that you're only seeing probably, Paul, 40% or 50% of the minimum as we speak.

M. Bunn: Think of it like this, Bascome. It's a big Dedicated start-up right now because this really didn't pick up a lot of legs until...

David Parker: May, June.

M. Bunn: May, June. And so we've been in a major team dedicated start-up, May, June through Thanksgiving. And as David said, there's a lot of inefficiencies in dedicated start-ups. You can study any of the solo dedicated guys on an account-by-account level, and we're just experiencing that with kind of the 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're running.

James Grant: Yes. There's definitely, Bascome, just adding on to what they've said, some learning curves. Just I think there's a lot of operational efficiencies to be had to capture more minimums. I think there's been some learning curves on what the drivers like and what the drivers don't like. David mentioned additional dwell time, and we know drivers like to drive. And so we're having to create different pay packages for that dwell so that the driver is still getting compensated for having to sit there. And so this is a very a complicated stuff that we're working through. And the good news is in tandem with our customers hand-in-hand, our drivers and our operators, and I think it's coming together.

And I think the fourth quarter will be a transition point, I think, for Expedited, and we'll continue to see improvement after that.

Bascome Majors: 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's replacing in Expedited?

David Parker: Yes. I'd tell you, this Dedicated, it's going to operate in the 80s. And to me, I mean, 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. I mean 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. So yes, it's going to operate in those kind of numbers.

Bascome Majors: And that 80%, 85% or better, are you talking about this can take the entire segment to that level? Or are you just at this point in the segment should operate at?

M. Bunn: 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. And so the blend of the totals probably won't be that low. But either way you look at it, it will be better than it's running today.

Operator: From TD Cowen, we have Jason Seidl.

Elliot Alper: This is Elliot Alper on 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 going back to customers to renegotiate. We've heard some carriers talk about that through earnings, given how significantly the cost picture has changed through the year. And then maybe looking forward on that same vein, I guess, like I assume the big step back in rev per tractor in the quarter was due to that poultry headwind you've talked about. Just want to make sure that's all that was, and that should kind of rebound back in the fourth quarter?

M. Bunn: I mean, Elliot, you're on top of it. I mean, Dedicated, as we know, most, especially Solo Dedicated has got very similar annual escalators. And 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. And so I would say we are working customer by customer through that. And that's going to take -- we went through this in the COVID deal back in '21.

And folks can go study us and our peer group and look at what Dedicated -- the Dedicated performance, most of it was better in '22 and '23 than it was in '21 when things got really tight because it took a little. The cost came first and the rates came second. And I think that's what you're going to see in this. The costs have come first. And now we've just got to work customer by customer to get the rates to justify the cost increases. And the customers are asking the questions, are these costs permanently increased or temporarily? And I think what we're all believing today is.

Truck prices, David, I don't think -- or truck prices, insurance prices or drivers going down?

David Parker: No.

M. Bunn: Well, he just answered the question. You're 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 to than cost. So we're working on it.

Elliot Alper: Okay. Great. So yes, really, really nice growth in the managed freight business. Can you talk about maybe what's driving that strength? Do you expect that to continue going forward? And then I think in the release, you talked about the insurance and claims becoming a bigger risk. I assume that's related to Montgomery. Can you talk about the insurance front? We've seen a few companies through earnings this quarter take charges specifically to Montgomery. So just curious thoughts around managed freight growth and the cost side going forward.

M. Bunn: Well, here's what I'd say a couple of things. Sequential growth, every broker in the world got killed in Q2. And so 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. And what I'd say is brokerage margins were really good for the third quarter. We don't expect them to stay that good forever. I mean these things bounce around. It's always been a little volatile.

And so it may not be as good as it was in Q3, but it isn't going to be as bad as it was in Q2. Take the blended average of those. That's not what these brokerages will probably run long term. You're right, the related to Montgomery, it is a riskier world out there. We've always done a lot of things from a compliance standpoint. We continue to double down on those and refine what we're doing. But we'll just kind of keep going down that same path.

James Grant: Yes. 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. And then you've got kind of, 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: And I'd say another way to look at it, is that, as you think about it is that second quarter as it relates to the Managed Freight and 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 3-month period of time. And that's the reason why it's 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.

And one of the things 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. So I mean, it was unbelievable, good. Now what happened in the third quarter? I would tell you that freight is 1.3 loads for every truck. It's still good. 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. And so in the third quarter. So that's the way I see it.

James Grant: And Elliot, to your last question on insurance, it's definitely something we're keeping an eye on. There's no doubt in this post-Montgomery era, there's just a lot of eyes on risk in insurance. And when we go through our renewal process, I'm sure we'll 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.

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

Operator: Next, we have Jeff Kauffman of Citizens Bank.

Jeffrey Kauffman: Congratulations, everybody. So 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?

David Parker: Yes.

M. Bunn: Yes. But jeff, that will be the percent of Expedited trucks that are under dedicated arrangements.

Jeffrey Kauffman: Okay. And then 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?

M. Bunn: I think we're still trying to figure out that mix. I mean we've 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. And so that's kind of what's happened since the beginning. You can see our team count is down from where we started the year. So I would say you've grown Dedicated 250, shrunk kind of the OTR one-way teams 300, is what's happened here to date. To David's point, probably there's still growth in the Dedicated teams. And I think we're going to try to figure out what OTR team. So team count will be flattish probably, Jeff.

You could 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. And so you also got to think of it as -- you got to take care of what the customers' needs are. And so you can't just have the ones we would probably prefer. You got to have a mix of the two. And so 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.

James Grant: 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 is, 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. And 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.

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

Jeffrey Kauffman: And 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? And I'm thinking more about ELDs. And 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, legal, illegal or not tracking?

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: Yes. The answer is yes and yes to both of those. There's no doubt I was 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. And I think the next thing you're going to be seeing is that they will be appointing a certification, a third-party certification of the ELD companies. And they're continuing to wash through them, probably going slower than what I would like to see happen, but they also have got companies, these are companies that are trying to make sure that they do the right thing for companies. And so I can understand that as well.

But it's going to be a process that they've started. They're continuing to start, there was a big article. I got a 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.

M. Bunn: Standing there watching while he did it.

David Parker: Standing there watching while he did it. Let me show you what happens. And that was very interesting and 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, and particularly on the Indian side, because California and the West Coast is where there was a lot of teams. California and Chicago, there was a lot of teams, Eastern European and India. They are having a difficult time. And so there's 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. And so that's created, I think that there's another 3% to 4% that will be coming out. There'll be 3% come out just when they get ELDs legalized. But they're starting. I wish this was all done by Christmas, but maybe it's all done by next Christmas, but they are committed. The thing I'm looking at without a shadow of a doubt FMCSA is committed to have safe drivers on the road, period. And so it's going to continue to happen.

Operator: Our next question comes from Dan Moore of Baird.

Daniel Moore: Gentlemen, 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 '27, presuming that occurs, free cash flow is going to accelerate.

Talk to us a little bit about '27, '28, how you're thinking about the next couple of moves on the board? That sort of thing.

M. Bunn: Dan, it's Paul. I would say probably a lot more of the same of what you have seen since kind of '21, since '21. I don't think the playbook has changed. I mean number one, we're going to be focused on safety and execution and not chasing stuff. Dedicated and specialized in the team environment, specialized and Dedicated in the solo environment, leaning into Managed Freight, growing Warehousing organically, TEL's going to grow. And so we're going to focus on safety and execution and then look at capital allocation alternatives based on what's out in the market and not try to chase commoditized stuff, only go after stuff where we can get a return.

And at times, probably look at M&A and at times, focus on ourselves and at times looking on deploying look at deploying capital like we've done before share repurchases. And so I would think it's just going to be more of the same what you've seen since the early 2021 kind of timeframe.

James Grant: Yes, 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 4-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. And a lot of those opportunities are in the truckload space, which ironically went backwards from a margin perspective sequentially in the quarter.

But regardless, I think what we're doing there is, I said it before, it's transformational and a lot of organic and in-house opportunities to execute on. And 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. But there's a lot of focus internally on the execution that is going to take and on the opportunities that we have in front of us over the next 12 to 18 months, however long this cycle lasts.

Daniel Moore: And last question, capital structure. How are you thinking about debt? Do you expect to ramp that higher, take that lower? Are you going to be patient pursuing deals?

James Grant: No, I think where it is right now at 2x, yes, I think where it is right now at 2x 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 1x and 2x. You're probably not going to see us go debt free, but you probably won't see us go to 2.5x or 3x either. And so 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.

Operator: [Operator Instructions] And we'll hear from Cole Couzens of Wolfe Research.

Cole Couzens: Sorry, I'm hopping on late, so apologies if you guys already hit on this. But can you guys give an update on D.C. and the regulatory environment? And maybe like what's the next shoe to drop, whether it's ELD enforcement, Dalilah, CDL enforcement? And is there any signs that the administration is less focused here because of inflation?

David Parker: We don't see that. We have been working closely with FMCSA, and we think they're doing a great job, and 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. And 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. So 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.

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. And I think that FMCSA is absolutely committed to bringing that down to zero. And 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. But I think the FMCSA is very committed and very much so. 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. 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. And so no, I don't see anything of them backing up at all, and I see them continue to do what they're doing.

Cole Couzens: Okay. That's helpful. And 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.

David Parker: Yes. Yes. I would just say this that the way we answered it a couple of questions ago was that all of us and our peers we're going to continue to raise rates. We have to, because of the cost. And the costs are, they may get a little bit better in '27, but they're still numbers that four or five years ago, all of us to say, boy, that's high. And they're continuing to increase, whether it's trucks, whether it's driver pay, trucks, trailers, insurance. And we all are going to have to continue to go to our customers and get more money.

I mean 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. I mean that's not enough. You can't increase rates 15% and get two points better in margin. That's not the answer. And so I think that you're going to continue to see all of us go back to the customer and say, we got to have more. And so I think '27 will continue down the same path.

Cole Couzens: So another year of like double-digit increases is kind of what we are shooting for?

David Parker: That's my expectations. I hope that it does, but that's my expectations.

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

James Grant: Yes. 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.

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