Full Transcript: Covenant Logistics Gr Q2 2026 Earnings Call

Covenant Logistics Gr (NYSE: CVLG ) held its second-quarter earnings conference call on Thursday. Below is the complete transcript from the call. APIs provide real-time access to earnings call transcripts and financial data. Visit to learn more.

7 million, driven by brokerage asset acquisitions, but faced a 19% decline in adjusted operating income due to elevated costs. The company's strategic shift towards long-term, committed customer contracts has stabilized margins, reducing market volatility impact and positioning them for steady margin improvements in the future. 7 million, and the company anticipates further modest reductions in debt by the end of the year. Key challenges included elevated maintenance and insurance costs, particularly impacting the expedited and dedicated segments, but management expects these to normalize in future quarters.

Future outlook is positive with expectations for revenue improvements and a focus on disciplined cost controls, although growth may be hampered by driver shortages and regulatory changes. Full Transcript OPERATOR Welcome to today's Covenant Logistics Gr second quarter earnings release and investor conference call. Our host for today's call is Tripp Grant. At this time all participants will be in a listen-only mode.

Later we will conduct a question-and-answer session. I will now like to turn the call over to your host, Mr. Grant. You may begin.

Tripp Grant, Investor Relations Good morning everyone and welcome to the Covenant Logistics Gr second quarter 2026 conference call. As a reminder, 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 Joining me today are CEO David Parker, President Paul Bunn, and COO Dustin A. Koehl. Before we dive into the quarterly numbers, I want to take a step back and connect a few dots regarding the freight recovery we are now seeing. Ten years ago, Covenant looked very different.

We were almost entirely an irregular route carrier without multiple-year committed customer contracts. That meant our financial results were significantly linked to the ups and downs of the volatile freight cycle, making it difficult for investors to understand the long-term value proposition of our business. To fix that, we launched a strategy to deeply embed ourselves in our customers' supply chains. We began moving away from highly volatile, commoditized business, intentionally invested in more specialized, value-added businesses such as dedicated and warehousing which require multi-year committed relationships.

These businesses have performed well and, crucially, lowered the volatility of our business. We aren't finished, but we are well on our way. Today we have much less exposure to the extreme swings of the market. We saw the proof of this from 2023 through 2025 when the market bottomed; our margins held up much better than our peer group average and our own historical results.

As a result, our stock outperformed. As we look ahead, we expect this strategy to keep delivering over the next few quarters. We are focused on three execution priorities. First, we are transitioning expiring contracts into new long-term commitments.

Second, we are moving more of our uncommitted capacity into committed revenue. And third, over time we expect managed freight gross margin to return to normal levels as contract rates catch up to capacity costs. Given our levels of contractual capacity, our operating margins won't spike as fast or as high as peers who have mostly uncommitted capacity. But the flip side is exactly why we built this model: when the market turns down again, our margins should be more stable.

Because we have proven our long-term value to customers during the last cycle, we proved we could raise the floor on our earnings. In this cycle, our goal is to raise the ceiling while establishing an even higher floor. Based on an extended cycle of tight industry driver capacity and strong execution, we believe we can significantly expand our operating margin. We expect steady improvements, not a hockey stick.

This is where we have been heading for a decade and we are confident in our path forward. With that background, I will move on to the quarter's statistical review. Highlights for the quarter include: While rates and revenue quality improved in the quarter, elevated costs more than offset any improvements to operating margin. 7 million, primarily as a result of the brokerage assets acquired in the fourth quarter of 2025 that are now being operated as store logistics solutions within our managed freight segment, partially offset by approximately 3% less freight revenue from our combined truckload operations.

2 million. The largest contributor was lower gross margin in managed freight. Dedicated truckload improved its results and all other declined slightly. 8% as a result of the combination of higher pre-tax earnings from our minority investment in TEL combined with a favorable tax rate as a result of infrequent discrete items impacting our income tax provision, partially overcoming lower operating income.

2%. The reduction in net indebtedness in the first half of the year was in line with our expectations. Cash proceeds from operations for the period was impacted by acquisition-related earnout payments, insurance policy renewals, and large claim settlement payments. For the second half of the year, we anticipate our net capital equipment investment to range between $50 million and $60 million depending on the timing of deliveries and the prices for used equipment, operational cash flow to improve, and net indebtedness to reduce modestly.

The average age of our tractors at June 30 was 26 months, up from 22 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. 2% for the trailing four quarters versus 7% for the same period in the prior year. Now providing a little more color on the performance of the individual business segments.

6, approximately 70 basis points above the prior-year quarter. The segment's profitability improved sequentially from the first quarter by 450 basis points but still fell short of our expectations for the quarter. Over the past 12 months this segment has undertaken a considerable amount of transition. 8%.

Our focus on growing our customer base with high-value cargo through multi-year committed capacity agreements has resulted in improved freight revenue per total mile, but has been partially offset with a reduction in miles per average tractor for the period. Elevated insurance-related claims costs also impacted this segment unfavorably in the quarter. As we work to convert this segment to serving more committed capacity 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 steady sequential improvement in this segment's profitability throughout 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 95 was in line with the prior-year quarter. 6%. Cost headwinds in the quarter, including maintenance and insurance-related claims, 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. 4% compared to the prior year, primarily as a result of the brokerage assets acquired in the fourth quarter of 2025. However, the segment's operating margin in the quarter lagged our longer-term expectations as a result of rising costs to secure quality brokerage capacity outpacing our ability to secure contractual rate increases from customers.

This type of margin compression is normal for an early upcycle. As we look ahead, our goal is to improve upon these results with the understanding that cost pressure may remain elevated as carrier capacity may be constrained for some time and higher insurance and claims expense has become a greater risk after the Supreme Court's recent Montgomery decision. The warehouse segment performed in line with our revenue expectations, but disappointed us by failing to improve margins sequentially as a result of a continuation of labor inefficiencies with a new customer.

Looking ahead, we remain committed to driving organic growth within this segment and are focused on enhancing our adjusted operating margin, with a target of reaching high single digits. 3 million in the prior-year period. While pleased with these improved results, much of it is attributable to higher equipment sale gains which we do not anticipate benefiting from in the third quarter. Regarding our outlook for the future, the second quarter marked a positive inflection point for the freight economy following a prolonged downturn, reinforcing our view that 2026 is a transition year for the industry.

While elevated costs pressured our profitability in the quarter, we were encouraged by the pace of revenue improvements this early into the upcycle. Through the remainder of the year, we intend to build on this progress by improving the quality and durability of our customer relationships and maintaining disciplined cost controls, resulting in improved operating margin and earnings over time. Although the pace of improvement may be more measured than that of certain peers, we believe the durability of our model and the continued execution of our strategy position us well for long-term performance that meets or exceeds our shareholder expectations.

Thank you for your time, and we will now open the call for any questions. OPERATOR If you would like to ask a question, please press star one on your telephone keypad now. You will be placed into the queue in the order received. Please be prepared to ask your question when prompted.

Once again, if you would like to ask a question, please press star one on your phone now. And our first question comes from Reed Seah from Stephens Inc. Please go ahead. Reed.

Reed Seah, Analyst at Stephens Inc. Hey guys, thanks for taking my question. I wanted to start by following up on some of the maintenance and insurance costs that you called out. It seems like mostly one-time in nature.

If you give us a little more color on kind of how much was in expedited versus how much was in dedicated. And the insurance does seem to be a pretty prolific problem in the industry. But I was wondering if you could give a little more color on what's behind some of the increased maintenance costs here in the second quarter. Paul Bunn, President and Chief Operating Officer Yeah, Ray, this is Paul.

Let me start with the insurance and I would tell you probably just from an OR point perspective, dedicated and expedited both, there's probably one and a half to two OR points of kind of excess insurance over our run rate for the last 24 months. A couple things is we just had a number of mediations pop up in the second quarter. And as you know, in this litigious environment, if you can get a mediation and get it settled and get it off the books, that's what you do. And we just had, we probably had more mediations in second quarter than we've had in a number of quarters and several mediations on some claims that were, you know, none of them were monster claims.

But, you know, it doesn't take much for a claim to be a seven-figure claim anymore. And so I would just say a heightened number of mediations that just happened to get scheduled in the second quarter. And we had the opportunity to close a lot of those out at numbers that we were comfortable closing them out with. And so it was kind of a volume game, you know.

The other is when you start taking those higher costs in a period when the truck counts come down a little bit, it just exacerbates it. And again it's about one and a half to two OR points on dedicated and expedited was kind of the negative impact over what we kind of view a normalized run rate. I would say on the dedicated side of things and, look, to a lesser degree expedited, we just had some maintenance costs in getting some equipment ready for sales, maintenance cost in some of the protein-based businesses that again were just higher than our normal run rate. And, you know, some of those could have been, you know, deferred and maybe were Q4/Q1 kind of things.

And so that's probably at least one OR point on the dedicated side of increased expenses. So if you kind of normalize for those, we feel, you know, a lot better about the results and we don't expect those to be fully recurring. Reed Seah, Analyst at Stephens Inc. Got it.

And it does feel like if those are one time in nature, which it seems like they are, looking to Q3 we should have some pretty solid improvement in margins. How should we think about that as we look at modeling Q3 and then y'all are, as you talked about in your prepared comments, relatively later cycle compared to some of your truckload peers, just based off your end markets and the type of business that you serve. How should we think about margin expansion next year when we see a lot of this benefit actually flow through your bottom line? Paul Bunn, President and Chief Operating Officer A couple things I'd say.

We feel really comfortable about sequentially and year over year improving earnings from Q2 to Q3 and from Q3 last year to Q3 this year. Some of what brokerage margins do, just like a lot of our peers, is going to really affect that number. And so, you know, I think there's two or three buckets. I mean, you know, fuel was a helper for the quarter for us and the whole peer group.

So what does fuel do? Brokerage margins, what do they do? Everybody, you know, across the whole peer group and with us, they were compressed for the second quarter. And then we do expect insurance and maintenance to normalize a little bit.

So you kind of take those three or four puts and takes. We feel like there's going to be more puts than takes in the short term. And I think we'll make more in Q3 than we did in Q2 and more in Q4 than we made in Q3. And, you know, if you keep doing that every quarter, the numbers keep stacking.

That's kind of what we'll get — the numbers everybody's excited about. Tripp Grant, Investor Relations Hey, and Reid, I'd add just a couple of points about insurance. With the amount of self-insurance that we carry, there's no doubt that it can be volatile from quarter to quarter, and having to forecast that is difficult. But I'll just paint some color around the number that we put up this quarter.

It's, you know, for not having a large claim go through that pierced or was above insurance, it was a bunch of, you know, I won't call smaller claims, but a high volume of claims. And then when that happens, we have a development factor — that incur but not reported or development on self-insurance — it also gets reported. So that increased pretty dramatically in the quarter as well. And so by far, this was the highest quarter historically looking back on it.

But going forward, I mean, again, it's an industry issue and there is a lot of volatility in it and the trend is not good when you're looking at it. But I would say Q3 is a little bit of an anomaly as you're looking at it based on past performance. The other thing I would paint, you know, just adding color to Paul's pace of improvement, is I think you'll see a little bit of a better pace of improvement in expedited — it's a little more fluid.

Dedicated, I think we're going to just kind of slowly get there and make sure that we're making right strategic decisions, not just with rate, but customer mix too — making sure we're working with customers that really need our teams or with our dedicated specialized business and that are going to be with us, you know, cycle in and cycle out. So these are strategic decisions that have multi-year sticky contracts and they take a little while. I think if you went back and looked and saw how our dedicated improved, we were still kind of on a path of improvement well after the cycle ended.

And part of that was acquisition, but part of that is certainly in line with our strategy with getting more specialized and working on things that don't fall into the typical freight cycle.