Tripp Grant: Good morning, everyone, and welcome to the Covenant Logistics Group third quarter 2026 conference call. Joining me today are Chief Executive Officer David Parker, President Paul Bunn, and Chief Operating Officer 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 Q3. 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.
Tripp Grant: Key accomplishments included Expedited, transitioned expiring one-way OTR contracts to multi-year committed capacity business with new and existing customers. Dedicated, expanded our pipeline of multi-year dedicated truckload business, exited historically unprofitable or marginally profitable business, and executed startups 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.
Tripp Grant: 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 Q4 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.
Tripp Grant: 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.
Tripp Grant: Adjusted net income improved by 14.6% as a result of the growth in adjusted operating income and higher pre-tax earnings from our minority investment in TEL, partially offset by a higher interest expense. Our net indebtedness as of 30 September decreased by approximately $12.4 million to $283.9 million compared to 31 December 2025, yielding an adjusted leverage ratio of approximately 2.1 times and debt-to-capital ratio of 40.2%.
Tripp Grant: The average age of our tractors at 30 September was 26 months, up from 23 months compared to a year ago. This growth is in line with our lifecycle management plan for our assets-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.
Tripp Grant: 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.
Tripp Grant: 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 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 sequential improvement in this segment's profitability during Q4 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.
Tripp Grant: 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.
Tripp Grant: Managed Freight grew freight revenue 68.4% compared to the prior year, primarily as a result of the brokerage assets acquired in Q4 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 Warehousing 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.
Tripp Grant: 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 pre-tax 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 Q4 pre-tax 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 Q3 adjusted earnings per diluted share increased both sequentially and year-over-year for the first time since 2022.
Tripp Grant: 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 Q4, 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 multi-year customer relationships with well-planned and executed startups 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: If you would like to ask a question, please press star 1 on your phone now, and you will be queued in order. Again, star 1 for a question, and we will pause briefly to form our queue. First question today comes from Bascome Majors at Stephens Inc.
Bascome Majors: Thanks for taking my questions. Can we talk more about the growth businesses you are 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? What economic levers are in those agreements that have to come true to give you the most upside? Thank you.
David Parker: Hey. Yeah, this is David. Hey. Yeah, thank you. There is no doubt that the Expedited side, and we went into this year with about, what, 25% of our trucks running in the Dedicated from an Expedited standpoint. Our goal this year would probably be up around 75% or 80% as the year comes to a close. It is a mixture of everything. I mean, there is anywhere from regular customers that you would not think are wanting long-term contracts in Expedited, but they are because of inventory levels, to high-security loads. 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.
David Parker: Our number 1 lane was running from the South to the West Coast and back, and running 5 and 6,000 miles on a truck. That has been transformed in the last couple of years to the customers only looking at service as never leaving, but at security. Because as we have seen the computer age and systems and data centers, but high-value loads from Anyway, you know what I am saying.
David Parker: The technology loads has just been exploding, and it is not just the data centers, but it is across the board there. We have really grown into that as well as what our customers are requiring us of. These are long-term contracts, multi-year contracts. I would say the least is 2 years and upward. There are a lot of 4-year contracts that are there as well. They all got minimums.
David Parker: As long as our truck is available, we're going to be able to get minimums. Utilization is not high because they're paying, again, for security. To give 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. 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. 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.
David Parker: It cost me $1.6 million, and I thought I better do something, and we started a security department that has morphed into what it is today, which is the best. We have now, and thank God for this, we have gone, 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.
David Parker: That in itself brings a lot of high-security-type opportunities to us, and this year has really. 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. There's secret sauces 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've got the infrastructure to be able to do that.
David Parker: That as well as FMCSA is only at 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 hours, and because they always cheated. They would compete against us if they didn't have a team with a solo driver. That also has played into our availability of our team side.
David Parker: 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 cost. There's a lot of cost 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 and certain destinations. Getting the trailers at origin and destination, there is a lot of money, and that's what you're seeing in this. Once we get to, say, 75%, I'd say right now we're at 60%.
Dustin Koehl: That is right.
David Parker: Probably 60% today, and we will get the Q4 up to 75%. Then you will start seeing that smooth out from the extra cost there. Long-term minimum contracts is what we have 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 is a period of time to correct the service, and if we do not, then they can get out of it.
David Parker: To be honest with you, if we cannot give the service, we ought to be fired. That is really the only out that is there over the next few years. It is better than I got in my OTR. What I got, I got a contract, and they said, "I am going to give you 20 loads a week," and I may get it, and I may not. It is much more tighter than that. I hope that helps you.
Bascome Majors: No, that is helpful. 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 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: Yeah, some of them have got upside. For instance, if you got some that a customer, a shipper, not just somebody you are 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 am used to running 4,000 and 5,000 and 6,000 miles a week, and some of them are running 3,000 miles a week. As they get their system up and running better and tighter, then they will take that up to 4,000 miles a week. So, there is going to be some increased utilization.
David Parker: What you are seeing today is the low side of utilization on these, and there will be opportunities there. So, when they run extra miles, we will get paid extra money, but we got the minimums. Predominantly, it is what you are seeing today. But I am here to tell you also that you are only seeing probably, Paul, 40% or 50% of the minimums as we speak.
Paul Bunn: Think of it like this is Bascome. It is a big Dedicated startup right now, because this really did not pick up a lot of legs until
David Parker: May, June.
Paul Bunn: May, June.
David Parker: Yep.
Paul Bunn: We have been in a major team Dedicated startup May, June through Thanksgiving. As David said, there is a lot of inefficiencies in Dedicated startups. You can study any of the solo Dedicated guys on an account-by-account level, and we are just experiencing that with kind of a 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 are running.
Tripp Grant: Yeah, there is definitely, Bascome, just adding on to what they have said, some learning curves. I think there is a lot of operational efficiencies to be had to capture more minimums. I think there has been some learning curves on what the drivers like and what the drivers do not like. David mentioned additional dwell time, and we know drivers like to drive.
Tripp Grant: So, we are having to create different pay packages for that dwell so that the driver is still getting compensated for having to sit there. So, this is really complicated stuff that we are working through. The good news is, in tandem with our customers, hand in hand, our drivers and our operators, and I think it is coming together. I think the Q4 will be a transition point, I think, for Expedited, and we will 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 is replacing in Expedited?
David Parker: Yeah, I tell you, these are going, this Dedicated, it is going to operate in the 80s. To me, internally, I do not care to tell you, because I will tell my customers. It is going to be at 85 or better kind of ORs, or you do not need to be in the team side. It is one or the other. You cannot pay for what I am paying for trucks and trailers and all this stuff on the cost standpoint. So yeah, it is going to operate in those kind of numbers.
Bascome Majors: That 80, 85 or better, are you talking about this can take the entire segment to that level, or this part of the segment should operate?
Paul Bunn: Probably not the whole segment to that, but there will be portfolio pieces of business that operate there. Remember, you are still going to have some OTR business that probably will not operate that good. So, the blend of the totals probably will not be that low, but either way you look at it will be better than it is running today.
Bascome Majors: That is great news. Thank you all for the time.
Operator: From TD Cowen, we have Jason Seidl.
Elliot Alper: Hey, good morning. This is Elliot Alper 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 are going back to customers to renegotiate? We have heard some carriers talk about that through earnings, given how significantly the cost picture has changed through the year. Then maybe looking forward on that same vein, I guess, I assume the big step back in rev per tractor in the quarter was due to that poultry headwind you talked about. Just want to make sure that is all that was, and that should kind of rebound back in Q4.
Paul Bunn: Elliot, you are on top of it. Dedicated, as we know, most, especially solo Dedicated, has got very similar annual escalators. 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. So, I would say we are working customer by customer through that, and that is going to take We went through this in the COVID deal back in 2021, and folks can go study us and our peer group and look at what A lot of the Dedicated performance, most of it was better in 2022 and 2023 than it was in 2021 when things got really tight, because it took a little.
Paul Bunn: The costs came first and the rates came second. I think that is what you are going to see in this. The costs have come first, and now we have just got to work customer by customer to get the rates to justify the cost increases. The customers are asking the questions, "Are these costs permanently increased or temporarily?" I think what we are all believing today is truck prices, David, I do not think Or truck prices, insurance prices, or drivers going down?
David Parker: No.
Paul Bunn: Well, he just answered the question. You are not going to upset long-term Dedicated deals and long-term customer agreements over 3 or 6 months, but over the long term, you got to get revenues got to be more than the costs. We are working on it.
Elliot Alper: Okay, great. Really nice growth in the Managed Freight business. Can you talk about maybe what is driving that strength? Do you expect that to continue going forward? I think in the release you talked about the insurance and claims becoming a bigger risk. I assume that is related to Montgomery. Can you talk about the insurance front? We have seen a few companies through earnings this quarter take charges specifically to Montgomery. Just curious thoughts around Managed Freight growth and the cost side going forward.
Paul Bunn: Well, here is what I would say, a couple things. Sequential growth, every broker in the world got killed in Q2. 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 Q4 of last year, and those guys that really came on in Q3. What I would say is brokerage margins were really good for Q3. We do not expect them to stay that good forever. These things bounce around. It has always been a little volatile. It may not be as good as it was in Q3, but it is not going to be as bad as it was in Q2.
Paul Bunn: Take a blended average of those, that is about what these brokerages will probably run long term. You are right, related to Montgomery, it is a riskier world out there. We have always done a lot of things from a compliance standpoint. We continue to double down on those and refine what we are doing. We will just kind of keep going down that same path.
Tripp Grant: Yeah, we hit on it a little bit, and I look at it as a kind of a three-legged stool. It is rates captured in the H1 of the year with all the tightness for the last previous 3 quarters. You have basically carrier capacity loosening up in the quarter that kind of helped us procure capacity at a little bit of a cheaper rate. Then you have kind of just your, quite honestly, your overflow stuff that has come over with projects and different asset-based overflow freight that has come up that has helped grow this segment from a top line perspective, in addition to the acquisition that Paul mentioned.
David Parker: I tell you another way to look at it is that, as you think about it, is that Q2 as it relates to the Managed Freight, the broker side, Q2, 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 is the reason why it was 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. One of the things I think we ended in June, and I think on our Q2 call, I said that the freight environment in the Q2 was basically 2 loads for every truck. I mean, it was unbelievable good. What happened in the Q3?
David Parker: I would tell you that freight is 1.3 loads for every truck. It is still good. We are loading all our trucks and we are getting broker freight, and the customer is still needing service and is needing capacity. It is not 2 loads, it is 1.3 loads for every truck. There has been 5%, 6%, 7%, 8% of freight that has gone to intermodal, and you have seen the spot rates that have came down a little bit since the Q2, which is healthy because the freight is now moving.
David Parker: There is freight that is not sitting at docks for days and days and days, and the freight is being able to move, and there is still a lack of capacity, but because the spot rates have came down because of the lack, the freight going to intermodal, it has allowed the brokers to start making a margin again. That, in the Q3. That is the way I see it.
Tripp Grant: Elliot, to your last question on insurance, it is definitely something we are keeping an eye on. There is no doubt in this post-Montgomery era, there is just a lot of eyes on risk and insurance, and when we go through our renewal process, I am sure we will learn a little bit more. 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.
Tripp Grant: We have been living with that on the truckload side for a while, and now it seems to be creeping over and it is an industry thing, not just us, and into the brokerage world, and we are just kind of keeping an eye on it and trying to control what we can control and do the best that we can.
Elliot Alper: Very helpful. Thank you, guys.
Operator: Next we have Jeff Kauffman of Citizens Bank.
Jeff Kauffman: Thank you very much. Congratulations, everybody.
Paul Bunn: Thanks, Jeff.
Jeff Kauffman: 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-
Paul Bunn: Yes
Jeff Kauffman: contracts?
Paul Bunn: Yes.
Jeff Kauffman: Okay.
Paul Bunn: Yeah.
Jeff Kauffman: Thank you.
Paul Bunn: Jeff, that would be the percent of Expedited trucks that are under Dedicated arrangements.
Jeff Kauffman: Okay. 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?
Paul 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. That is kind of what has happened since the beginning. You can see our team counts down from where we started the year. So, I would say you have grown Dedicated 250, shrunk kind of the OTR one-way teams 300, is what has happened year to date. To David's point, probably, there is some growth. There is still growth in the Dedicated teams, and I think we are going to kind of figure out what OTR teams.
Jeff Kauffman: Sorry.
Paul Bunn: Team count will be flat-ish, 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 have to make sure we are servicing the OTR accounts because there is some overlap between the OTR accounts and the Dedicated accounts. You also have to think of it as.
Jeff Kauffman: Take care of them.
Paul Bunn: You got to take care of what the customer's needs are. You can't just have the ones we would probably prefer. You got to have a mix of the two. 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 here.
Tripp Grant: The other thing I'd say, Jeff, is why it's hard to answer that question. I feel like the demand out there, 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. 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.
Tripp Grant: 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. 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.
Jeff Kauffman: Then just one follow-up for David. David, I am going to hit a topic that is near and dear to your heart. We have 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 is still out there to happen? I am thinking more about ELDs, and as you mentioned earlier, some of the cheating that goes on in that space.
Jeff Kauffman: What is happening with the administration right now in terms of going after this problem with the ELDs where fleets are running two of them, one legal, one illegal, or not tracked? 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 is no doubt, I was speaking with the FMCSA yesterday, and they are still. It has not changed. Their attitude has not changed in the 12 months that they have been attacking these issues. I think the next thing you are going to be seeing is that they will be appointing a third-party certification.
Jeff Kauffman: Yeah
David Parker: A third-party certification of the ELD companies, and they are continuing to wash through them. Probably going slower than what I would like to see happen, but they also, we have got companies that these are companies that they are trying to make sure that they do the right thing for companies. I can understand that as well. It is going to be a process that they have started, they are continuing to start. There was a big article, I got a new magazine or somebody sent an article to me yesterday about where a driver up in Illinois said, "Here, let me show you how I am going to change my hours," and had the police and FMCSA was there.
Paul Bunn: Standing there watching why he did it.
David Parker: Standing there watching why he did it. Let me show you what happens. That was very interesting. 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, in particular on the Indian side, because California, the West Coast is where there was a lot of teams. California, Chicago, there was a lot of teams, Eastern European and India. They are having a difficult time. There is 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. That has created, I think that there is another 3% to 4% that will be coming out.
David Parker: There will be 3% come out just when they get ELDs legalized. They are starting. I wish it was all done by Christmas, but maybe it is all done by next Christmas. They are committed. The thing I am looking at, without a shadow of a doubt, FMCSA is committed to have safe drivers on the road, period. It is going to continue to happen.
Jeff Kauffman: Thank you very much and congratulations.
David Parker: Thank you.
Operator: Our next question comes from Dan Moore of Baird.
Dan Moore: Gentlemen.
David Parker: Hey, Dan.
Dan Moore: 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 2027, presuming that occurs, free cash flow is going to accelerate. Talk to us a little bit about 2027, 2028, how you are thinking about the next couple of moves on the board.
Paul Bunn: Hey, Dan, it's Paul.
Dan Moore: That sort of thing.
Paul Bunn: I would say
Dan Moore: Yeah
Paul Bunn: probably a lot more of the same of what you have seen since kind of 2021, since 2021. I mean, number one, we are 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 in to Managed Freight, growing Warehousing organically, TEL's going to grow. We are 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.
Paul Bunn: At times probably look at M&A, and at times focus on ourself, and at times looking on deploying capital, like we have done before, share repurchases. I would think it is just going to be more of the same of what you have seen since the early 2021 kind of timeframe.
Tripp Grant: Yeah, I would.
Dan Moore: What do you think about that, Dan?
Tripp Grant: 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 four-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. A lot of those opportunities are in the truckload space, which ironically went backwards from a margin perspective sequentially in the quarter. Regardless, I think what we are doing there is, I said it before, it is transformational and a lot of organic and in-house opportunities to execute on.
Tripp Grant: 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. There is a lot of focus internally on the execution that it 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.
Dan Moore: 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?
Tripp Grant: No, I think where it is right now at 2 times, yeah, where we are at 2 times, I expect to improve over the next few quarters. We have not finalized our capital plan for next year yet, but I expect to see the benefits of improved operational cash flow come through in the Q1. We may see it a little bit in the Q4. It was not as good as what I had hoped in the Q3, but sometimes it can be a little clunky. I think that we will naturally just keep our maintenance CapEx in place, and with our maintenance CapEx in place, we will have the opportunity to burn down some of that debt. We are comfortable. We do not have a target in mind, but we are comfortable between 1 and 2 times.
Tripp Grant: You are probably not going to see us go debt-free, but you probably will not see us go to 2.5 or 3 times either. I think over the next few quarters, that is probably where we are leaning. Not to say that that is 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 is where we are leaning.
Dan Moore: Thanks, guys.
Dustin Koehl: Thanks, Dan.
Operator: Once again, everyone, press star 1 for a question. We will hear from Cole Couzens of Wolfe Research.
Cole Couzens: Hey, guys. Sorry, I am hopping on late, so apologies if you guys already hit on this. Can you guys give an update on DC and the regulatory environment, and maybe what is the next shoe to drop, whether it is ELD enforcement, ELP, CDL enforcement? Is there any signs that the administration is less focused here because of inflation?
David Parker: Yeah. 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. 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.
David Parker: 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. I think that FMCSA is absolutely committed to bringing that down to zero. 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. I think the FMCSA is very committed and very much so going to. 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.
David Parker: 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. No, I don't see anything of them backing up at all. I just see them continue to do what they're doing.
Cole Couzens: Okay. That's helpful. 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. Thanks.
David Parker: Yeah. I would just say this, that the way we answered a couple of questions ago was that all of us and our peers, we are going to continue to raise rates. We have to because of the cost. The costs are, they may get a little bit better in 2027, but they are still numbers that four or five years ago, all of us would say, "Boy, that is high." They are continuing to increase, whether it is trucks, whether it is driver pay, trucks, trailers, insurance. We all are going to have to continue to go to our customers and get more money.
David Parker: We sit here and look at double-digit rate increases this year, and most of our ORs have improved by one or 1.5, 2 points. That is not enough. You cannot increase rates 15% and get 2 points better in margin. That is not the answer. I think that you are going to continue to see all of us go back to the customer and say, "We got to have more." I think 2027 will continue down the same path.
Cole Couzens: So, another year of double-digit increases is kind of what we are shooting for?
David Parker: That is my expectations. I hope that it does, but that is my expectations.
Cole Couzens: Okay. Thanks. I'll turn it back, guys.
David Parker: Yep.
Operator: No further questions at this time. Trip, back over to you for any additional or closing comments.
Tripp Grant: Yeah. 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.
Operator: The host has ended this call. Goodbye.
