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    CVLG
    Earnings call· Jun 2026(Q2 FY26)

    COVENANT LOGISTICS GROUP Q2 FY26 earnings call CVLG

    Jul 30, 2026 Source

    Executive summary

    Covenant Logistics Group Q2 FY26 — Strategic Shift to Committed Contracts Drives Resilience Amidst Cost Headwinds

    Covenant Logistics' strategic shift towards specialized, multi-year committed contracts has enhanced business stability, demonstrating margin resilience during the recent downturn. While Q2 FY26 saw revenue growth and a positive freight market inflection, elevated insurance and maintenance costs pressured operating margins. Management anticipates steady sequential improvement and aims to expand operating margins over a multi-year "super cycle" by leveraging its contractual capacity and strong dedicated pipeline.

    Highlights

    4

    • Consolidated freight revenue increased by 6.6% or approximately $18.2 million to $294.7 million.

    • Net indebtedness decreased by approximately $6.6 million to $289.7 million compared to December 31, 2025.

    • Dedicated Truckload segment improved its results.

    • Minority investment in TEL contributed $5.3 million in pretax net income, up from $4.3 million in the prior year period.

    Concerns

    5

    • Consolidated adjusted operating income shrank by 19% to $12.2 million.

    • Managed Freight segment experienced lower gross margin.

    • Expedited segment reported an adjusted operating ratio of 94.6%, approximately 70 basis points above the prior year quarter.

    • Elevated insurance-related claims costs impacted Expedited and Dedicated segments unfavorably.

    • Warehouse segment failed to improve margins sequentially due to labor inefficiencies with a new customer.

    Guidance & targets

    10
    CategoryTargetConfidence
    Net capital equipment investment
    $50 million to $60 million
    medium materiality
    High
    Operational cash flow
    improve
    medium materiality
    High
    Net indebtedness
    reduce modestly
    medium materiality
    High
    Expedited segment profitability
    steady sequential improvement
    medium materiality
    High
    Expedited segment adjusted operating margin
    average a double-digit
    high materiality
    High
    Dedicated segment adjusted operating margin
    steadily restore to double digits
    high materiality
    High
    Warehouse segment adjusted operating margin
    reaching high single digits
    medium materiality
    High
    TEL pretax net income contribution
    not anticipate benefiting from in the third quarter
    low materiality
    Medium
    Overall operating margin and earnings
    improved over time
    high materiality
    High
    Net CapEx
    a little bit more net CapEx, mostly just replacement CapEx, but there may be a little bit of growth in there
    medium materiality
    Medium

    Segment performance

    5
    SegmentRevenueYoYQoQMargin
    Consolidated
    Consolidated freight revenue increased primarily due to the acquisition of brokerage assets in Q4 2025, partially offset by 3% less freight revenue from combined truckload operations due to fleet reductions. Adjusted operating income shrank by 19%.
    		$294.7M6.6%—$12.2M adjusted operating income
    Expedited
    Adjusted operating ratio was 70 basis points above the prior year quarter, but improved sequentially by 450 basis points from Q1. Elevated insurance-related claims costs impacted the segment unfavorably. Goal is to average a double-digit adjusted operating margin across the freight cycle.
    Fleet reduction: 17%Freight revenue per average tractor improvement: 6.8%Miles per average tractor: reduced
    		———94.6% adjusted operating ratio
    Dedicated
    Adjusted operating ratio was in line with the prior year quarter. Cost headwinds, including maintenance and insurance-related claims, offset improved freight revenue. Goal is to steadily restore adjusted operating margin to double digits.
    Freight revenue per average tractor improvement: 8.6%
    		———95% adjusted operating ratio
    Managed Freight
    Freight revenue growth compared to the prior year was primarily due to the brokerage assets acquired in Q4 2025. Operating margin lagged longer-term expectations due to rising costs to secure quality brokerage capacity outpacing contractual rate increases.
    		28.4% growth28.4%——
    Warehouse
    Performed in line with revenue expectations but margins disappointed due to a continuation of labor inefficiencies with a new customer. Focused on enhancing adjusted operating margin with a target of reaching high single digits.
    		in line with expectations———

    Operational metrics

    13
    Net indebtedness
    $289.7Mdecreased by $6.6M from Dec 31, 2025
    June 30, 2026

    Reduction in net indebtedness in the first half of the year was in line with expectations.

    Adjusted leverage ratio
    2.2x
    June 30, 2026

    Calculated based on net indebtedness.

    Debt-to-capital ratio
    41.2%
    June 30, 2026

    Calculated based on net indebtedness.

    Cash proceeds from operations
    —
    Q2 FY26

    Impacted by acquisition-related earn-out payments, insurance policy renewals, and large claim settlement payments.

    Average age of tractors
    26 monthsup from 22 months a year ago
    June 30, 2026

    This growth is in line with the life cycle management plan for the asset-based fleet and consistent with year-over-year reductions to the high-mileage expedited fleet.

    Adjusted return on invested capital
    5.2%vs 7% for the same period in the prior year
    trailing 4 quarters

    Performance for the trailing four quarters compared to the prior year.

    TEL pretax net income
    $5.3Mvs $4.3M in the prior year period
    Q2 FY26

    Improved results, though much is attributable to higher equipment sale gains not anticipated in Q3.

    Insurance costs impact
    1.5 to 2 OR pointsabove run rate
    Q2 FY26

    Excess insurance costs over the last 24 months' run rate, due to a heightened number of mediations and 7-figure claims.

    Maintenance costs impact
    at least 1 OR point
    Q2 FY26

    Increased expenses due to getting equipment ready for sales and protein-based businesses; some could have been deferred.

    Insurance/claims costs spike impact
    $0.05 to $0.08
    Q2 FY26

    Estimated impact from an unusual spike in insurance and claims costs in Q2, which is not expected to be recurring.

    Rate increases
    3.4%
    Jan/Feb

    Initial rate increases secured in the market.

    Rate increases
    7% or 8%
    April

    Market rate increases observed by April.

    Rate increases
    10%, 11%, 12%
    June/July

    Market rate increases observed by June and July, reaching double digits.

    Industry KPIs

    2
    MetricValueDetails
    Operating ratio94.6%%
    Fuel surcharge diesel pricehelper

    Deals & partnerships

    1
    STAR Logistics SolutionsAcquisition of brokerage assets

    Brokerage assets acquired in the fourth quarter of 2025, now being operated as STAR Logistics Solutions within the Managed Freight segment.

    Capital programs

    1
    Net Capital Equipment Investmentunderway
    Period spend: $50M-$60M
    Start: July 2026

    Anticipated range for the second half of the year, depending on timing of deliveries and used equipment prices. This year's total CapEx is expected to be below the normal capital replacement cycle.

    Risks & headwinds

    6
    Elevated insurance-related claims costsQ2 FY26, ongoing industry issue

    1.5 to 2 OR points above run rate for Expedited and Dedicated; estimated $0.05 to $0.08 per share impact from Q2 spike.

    Mitigation: Strategic shift to committed contracts to stabilize margins; management notes the Q2 spike was unusual but the general trend is upward. Seeking contractual rate increases to offset costs.

    Elevated maintenance costsQ2 FY26

    At least 1 OR point of increased expenses in Dedicated segment.

    Mitigation: Costs related to preparing equipment for sales and protein-based businesses; some could have been deferred, implying non-recurring nature.

    Lower gross margin in Managed FreightQ2 FY26, early up cycle

    Operating margin lagged longer-term expectations.

    Mitigation: Rising costs to secure quality brokerage capacity outpacing contractual rate increases. Management expects improvement as the cycle progresses and rates catch up.

    Labor inefficiencies with new customerQ2 FY26

    Warehouse segment failed to improve margins sequentially.

    Mitigation: Focused on enhancing adjusted operating margin in the Warehouse segment with a target of reaching high single digits.

    Industry driver capacity constraintsExtended cycle

    Not directly quantified, but described as keeping a 'lid on capacity' and making it 'harder for drivers'.

    Mitigation: Expectation of increased driver pay (offset by rates); focus on profitability over fleet growth; DOT regulations also constraining capacity.

    Montgomery decision impact on insurance and claimsOngoing

    Higher insurance and claims expense has become a greater risk.

    Mitigation: Implies need for higher rates to cover increased risk, but no explicit mitigation strategy stated beyond general cost management.

    What to watch in Q3 FY26

    5

    Expedited segment profitability

    Throughout the year
    Current94.6% adjusted OR
    TargetSteady sequential improvement

    Why it matters

    This segment is undergoing transition, and its profitability improvement is key to overall margin expansion and achieving long-term double-digit OR goals.

    Going forward⏳, we have line of sight to steady sequential improvement in this segment's profitability throughout the year.

    Q&A highlights

    8

    Can you provide more color on the maintenance and insurance costs, specifically how much was in Expedited versus Dedicated, and the reasons behind the increase, especially for maintenance?

    Paul Bunn explained that both Dedicated and Expedited experienced 1.5 to 2 OR points of excess insurance costs due to a heightened number of mediations and 7-figure claims. Dedicated also had at least 1 OR point of increased maintenance costs from preparing equipment for sales and protein-based businesses. These costs are not expected to be fully recurring.

    “A couple of things are 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.”

    asked by Reed Sah · answered by M. Bunn

    2 min read6 chapters

    Detailed Narrative

    01

    Strategic Business Transformation

    Covenant Logistics has undergone a decade-long strategic shift, moving from a volatile irregular route carrier to a model deeply embedded in customer supply chains through specialized, multi-year committed contracts in dedicated and warehousing. This transformation has significantly lowered business volatility, with margins holding up better than peers during the 2023-2025 market bottom. The company aims to raise both its earnings floor and ceiling in the current cycle.

    02

    Q2 Financial Performance Overview

    In Q2 FY26, consolidated freight revenue increased by 6.6% to $294.7 million, primarily due to the acquisition of brokerage assets in Q4 2025. However, consolidated adjusted operating income shrank by 19% to $12.2 million. This decline was mainly attributed to lower gross margin in Managed Freight and elevated costs, despite improved results in Dedicated Truckload.

    03

    Cost Headwinds and Insurance Volatility

    The quarter was significantly impacted by elevated insurance-related claims and maintenance costs. Insurance costs were 1.5 to 2 operating ratio points above the run rate for both Expedited and Dedicated segments, driven by a higher volume of mediations and 7-figure claims. Dedicated also saw at least 1 OR point of increased maintenance expenses. Management views these as largely non-recurring📎 spikes, but acknowledges the industry-wide trend of rising insurance costs.

    04

    Freight Market Outlook and "Super Cycle"

    Management believes the freight economy has reached a positive inflection point and is entering a multi-year "super cycle" (3-4 years). This outlook is driven by persistent capacity constraints, including driver shortages and new DOT/FMCSA regulations. Rate increases have accelerated, moving from 3.4% in January/February to 7-8% by April, and reaching double digits (10-12%) by June/July. The company prioritizes profitability and earnings recapture over fleet growth.

    05

    Dedicated and Expedited Segment Strategy

    The company is focused on converting expiring contracts into new long-term commitments and moving uncommitted capacity into committed revenue. For Expedited, the goal is steady sequential profitability improvement throughout the year, aiming for a double-digit adjusted operating margin across the freight cycle. Dedicated aims to steadily restore its adjusted operating margin to double digits by growing the fleet in high-service niches and improving profitability through contract renewals.

    06

    Managed Freight and Warehouse Performance

    Managed Freight's revenue grew 28.4% YoY due to the Q4 2025 brokerage acquisition, but its operating margin lagged expectations. This was due to rising costs to secure quality brokerage capacity outpacing contractual rate increases, a typical early-up-cycle dynamic. The Warehouse segment met revenue expectations but disappointed on margins due to continued labor inefficiencies with a new customer, with a target of reaching high single-digit adjusted operating margins.

    AI-generated summary of the company’s earnings call. Not investment advice.