Covenant Transportation Group, Inc. Class A Stock

Welcome to today's Covenant Logistics Group Second Quarter Earnings Release and Investor Conference Call. Our host for today's call is Tripp Grant.

[Operator Instructions]

I would now like to turn the call over to your host. Mr. Grant, you may begin.

Good morning, everyone, and welcome to the Covenant Logistics Group 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 www.covenantlogistics.com/investors.

Joining me today are CEO, David Parker; President, Paul Bunn; and COO, Dustin 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. 10 years ago, Covenant looked very different.

We're 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 customer supply chains. We began moving away from a highly volatile, commoditized business, intentionally invested in more specialized value-added businesses, such as dedicated and warehousing, which require multiyear 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 3 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.

Consolidated freight revenue increased by 6.6% or approximately $18.2 million to $294.7 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% less freight revenue from our combined truckload operations as a result of fleet reductions.

Consolidated adjusted operating income shrank by 19% to $12.2 million. The largest contributor was lower gross margin in managed freight.

Dedicated Truckload improved its results, and all others declined slightly. Adjusted net income declined by 9.8% as a result of the combination of higher pretax 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.

Our net indebtedness as of June 30 decreased by approximately $6.6 million to $289.7 million compared to December 31, 2025, yielding an adjusted leverage ratio of approximately 2.2x and debt-to-capital ratio of 41.2%.

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 were impacted by acquisition-related earn-out 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 asset-based fleet and consistent with year-over-year reductions to our high-mileage expedited fleet.

On an adjusted basis, return on invested capital was 5.2% for the trailing 4 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. The Expedited segment reported an adjusted operating ratio of 94.6%, 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. While the fleet was reduced by 17%, freight revenue per average tractor has improved by 6.8%.

Our focus on growing our customer base with high-value cargo through multiyear committed capacity agreements has resulted in improved freight revenue per total mile but has been partially offset by 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 the segment to serving more committed capacity 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 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. Freight revenue per average tractor for the period improved by 8.6%.

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.

Managed Freight grew freight revenue 28.4% 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 up cycle. 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.

Our minority investment in TEL contributed pretax net income of $5.3 million for the quarter compared to $4.3 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 up cycle.

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 Instructions]

And our first question comes from Reed Sah from Stephens Inc.

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 could give us a little more color on 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.

Yes, Reed, 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 1.5 to 2 OR points of excess insurance over our run rate for the last 24 months.

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.

We probably had more mediations in the second quarter than we've had in a number of quarters, and several mediations on some claims that none of them were monster claims, but it didn't take much for a claim to be a 7-figure claim anymore.

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 a volume gain. 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.

Again, it's about 1.5 to 2 OR points on Dedicated and Expedited was the negative impact over what we view as a normalized run rate.

I would say on the dedicated side of things and to a lesser degree, expedited, we just had some maintenance costs in getting some equipment ready for sales, maintenance costs in some of the protein-based businesses that, again, were just higher than our normal run rate.

Some of those could have been deferred and maybe were Q4, Q1 things. And so that's probably at least 1 OR point on the dedicated side of increased expenses.

So if you normalize for those, we feel a lot better about the results, and we don't expect those to be fully recurring.

It does feel like those are one-time in nature, which seems like they are. Looking to 3Q, we should have some pretty solid improvement in margins. How should we think about that as we look at modeling 3Q?

And then you 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?

A couple of things I would say. We feel really comfortable about sequentially and year-over-year improving earnings from 2 to 3 and from 3 last year to 3 this year.

Some of what brokerage margins do, just like a lot of our peers, is going to really affect that number. And so I think there's 2 or 3 buckets. I mean, fuel was a helper for the quarter for the whole peer group and us. So what does fuel do?

Brokerage margins- what do they do? Everybody 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 take those 3 or 4 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 if you keep doing that every quarter, the numbers keep stacking; that's what we'll get the numbers everybody is excited about.

Reed, 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.

For not having a large claim go through that pier or be above insurance, it was a bunch of- I won't call them smaller claims, but a high volume of claims.

When that happens, we have a development factor that incurred but not reported or development on self-insurance that 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, 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 the 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 cycle in and cycle out.

So these are strategic decisions that have multiyear 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 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 of getting more specialized and working on things that don't fall into the typical freight cycle.

So we're focused on the longer term, and we're focused on slow, steady, intentional improvement to both of our segments in Expedited and Dedicated.

One quick one left for me, and then I'll pass it on. On the transition that you all talked about, it started late last year, carrying on into this year. How much do we have left to churn out of this business that you're trying to get rid of?

Or have we already gotten rid of it all, and we should return back to truck growth here soon?

On the dedicated side, I think for the most part, you're there. On the expedited side, I think the truck count probably is what it is.

What we're in the process of doing right now, Reed, is trying to convert as much of the expedited as makes sense to dedicated teams as opposed to more over-the-road teams. And so I would say that's in process, and we'll see how that shakes out.

But on the legacy dedicated side and the protein side, I think we're at the numbers. I could see those growing over time. I think the expedited, we're trying to convert as much of that as we can to dedicated team, and we'll see how that keeps going.

And our next question comes from Jason Seidl from TD Cowen.

This is Elliot Alper on for Jason. So in your release, you guys talked about having all your asset-based businesses under long-term dedicated contracts by the end of the cycle.

I would be curious to hear your thoughts on maybe the length of this cycle and maybe how pricing is trending and how the market continues to evolve from here. It's been a couple of years since you guys have been in the low 90s for OR.

I guess, is this going to be a slow and steady, like you suggested, trip? Is this like a multi-year effort? Or could this be something a bit sooner since you're rolling some of these contracts off to books quicker?

Elliot, this is David. I'd tell you, I would much rather be in the industry we are in, in a position that I think that the world is going to shake. I really do.

What I've read from some of you all about some of the analyst write-ups about this long term is this an industry -- what's the word I've been using- industry change, long-term cycle? I really believe it is.

I mean, as I look at the backdrop, I don't think the industry, including us, is at first base. And I see a lot of great things that are happening within DOT and FMCSA and everything that they are doing there that is just going to continue to allow this industry to get back to returns that we all want to be at.

And so I'm excited about where we are. We got challenges. The industry has got challenges that we've already talked about here, and that insurance being #1 as everybody's insurance expires, ours don't expire until next year.

So we're good for another 8 or 10 months before the market, but you still have high deductibles and quarters, and I mean it drives me crazy about how much you pay for insurance and about how much you really have, which would be less than what you think you got on every one of these insurance claims.

But the market, the rates got to go up. And the rates are, and the rates will continue to go up because capacity has left and capacity is going to continue to leave.

I would tell you that I have seen from first -- because keep in mind, as I'm thinking here, Elliot, guys, we did not -- here it is, November, December, 8 months ago, we all, including everybody on this phone, said, is it turning? Maybe I think it is, first time in 4 years. March was 4 years. Is it turning?

We were asking that question. I never forget sitting here in this company last December saying, I think we can go get rate increases. First time the industry has in 4 years. I think we can go get increases.

I'm here to tell you, we went out to the market in the middle of December. And for January and the 1st of February, we got 3.4%, and we were high 5.

We thought, man, we are doing a job because of the first time in 4 years. Well, by April, 2.5 months later, that 3.4% was that the market was at 7% or 8%, 7% or 8%.

Well, you can't go into your January and February customers that just gave you 3.4% and raise them 2 months later. So you've got to let some time go by- say, 6, 8, 10 months go by before you can go back to those customers.

But by current July, June and July, that's 7%, 8% was double digits, 10%, 11%, 12%, even higher on certain pieces of the business that are operating.

So how quickly the market has moved is a backdrop to where we're at. So that said, I'm happy with where our rate increases are at. If you look at the last 4 years, phenomenal, us in the industry, unbelievable, whatever word you want to use.

But I'm here to say that I think it's half of it. I think it's going to continue to climb because we got the costs that I look at those claims we had in the second quarter.

The tail on these things is crazy, but that hasn't changed. That's always been there. But every so often, backing the but it's good. In the second quarter. But with the background that the industry is at, I expect great things. I think now, because you asked the question, you read one about growth.

When growth, I don't know because a blessing is that it's getting harder for drivers. It's getting harder to get truck drivers. And that's a negative from a standpoint that I could grow some dedicated right now, and we're going to try to figure out how to grow dedicated and get some drivers.

It's going to increase driver pay. That's okay. We've got to get it out of the rates. But at the same time, you're not going to see crazy stuff happening because the driver situation is getting more difficult as we speak.

So it's going to keep a lid on capacity cause the drivers. It's going to keep a lid on capacity cause the DOT. They are at first base on the ELDs, I'm going to tell you, 30% of ELD users ache it. 30% of ELDs out there running are competing with my teams with a so driver, 30% of them, and it could be greater, but it's a big number on ELDs.

And they just hit the ball out of the batter's box. I mean, that thing has got a long run as we take out capacity on that. And then I'm not going to go over all the CDLs and the truck driving training schools and the cab, gigantic, when these trucks are not operating in the United States for 30 days, they're either going up, and they're going back. And they're now starting to measure that.

They had to get Homeland Security involved to make sure that they are on top of that. Capacity is leaving. So I say all that, Elliot, when can we grow? I don't know.

A thing I know is that I'm going to be a lot more profitable. A thing I know is I'm going to have a lot more earnings coming to the bottom line. The only thing I know is that my retained earnings are going to go up.

We're going to recapture a lot of profitability that we've lost, and we're one of the best ones in the market in the last 4 years that you can go back and look at.

But there's a lot of earnings that we didn't get, and we're going to go get those earnings. So my thing is not how big can I get, how many white trucks do I want to run?

Mine is, how profitable can I get? How can I recapture the less earnings that I had over the last 4 years? And guys, this is 53 years I've been in this, and I couldn't be more excited about what is happening that's going to give us the opportunity.

Now, is it going to happen in the second quarter? It didn't. Is it going to happen in the third quarter? No. Fourth quarter, it's going to happen. I've seen some write-ups in the last 6, 8 months.

You are saying '27 is going to be a blowout year. I think there's going to be obstacles in '27, but I think it's going to be a very good year. I do. I think you are correct on that in your thoughts. It isn't going to happen in the second quarter or the third quarter.

We're going to continue to make progress. You're going to see it in the next 2 quarters. You're going to see it in '27. You're going to see it in '28. I mean, I think this is a long-term 3- or 4-year super cycle is the word I was looking for, super cycle, and I believe that it is.

Anyway, Jason, I'll shut up.

And then maybe, you talked about adding some new ag protein business, exiting some nonspecialized contracts. Can you talk about like the pipeline for Dedicated?

I guess, like how are customers thinking about the dedicated offering in light of the Montgomery ruling? I mean it should improve your product offering as more shippers look to high-quality asset-based carriers.

But curious about your thoughts on whether you're starting to see that pipeline expand.

Pipeline is the best it's ever been, period. You agree, Paul. Best pipeline we've ever had on Dedicated, the best opportunities. We do.

We have customers right now that are wanting to grow Dedicated. Yes, it's exciting. Again, we all got to make sure we got drivers, but there's going to be a lot of opportunities in dedicated.

So yes, what you are sensing or feeling or believing is happening.

And Elliot, this is even bleeding over. Paul mentioned it a little bit, but I want to make sure that it's stated that it's even bleeding over into some of our expedited fleet as we lock up multiyear committed capacity with high-value freight that's serving the industrial, heavy industrial data type center work.

And those trucks are really, really running, and there's a good pipeline on that, too.

And our next question comes from Jeff Kauffman from Citizens Bank.

So David, thank you for that fantastic answer to the previous question. I've got a more boring question. It won't be as much of a passion point. So there was guidance in the release on $50 million to $60 million in net CapEx spend in the second half.

You talked in the release about not shrinking the fleet anymore at this point. But with what is starting to happen in the industry, free cash is eventually going to start to build.

As we think about maybe moving beyond '26 and getting into '27 and beyond, I know the average fleet age is up, and Tripp mentioned that was part of the plan. But is there a CapEx investment that needs to occur as free cash comes along?

Do we want to get debt down to a certain level? I don't want to spend it before you earn it, but how are we thinking about free cash and capital deployment as we see the super cycle that David was just talking about?

Yes, Jeff, I can take that. If you look back in the past few years, our net CapEx has been a little bit clunky for a couple of reasons.

We were in a post-COVID recovery where we were recovering from a period of time where we couldn't buy any capital equipment and were trying to replace some really, really old stuff.

Then we acquired Lew Thompson, which requires certain specialized trailers and certain spec tractors, and we couldn't just use what we had. And so we were growing that fleet pretty materially and keeping some of the other stuff flat.

And so there's some growth in CapEx and specialized stuff and some offset by some reductions in nonspecialized stuff. So it's been elevated, I would say, for the last few years.

This year in total, I think it's going to be a little bit below our normal capital replacement cycle for a couple of reasons. One, we entered the year in really, really good shape.

Two, the mix of our freight is changing, becoming more low-mile dedicated type stuff that has a longer replacement cycle and fewer expedited tractors that are putting 180,000 miles on a tractor per year.

And even in that fleet, we're seeing the utilization come down a little bit with some of the specialized dedicated light business that we're doing in Expedited.

So net-net, it's a little bit of a clunky year because we had sold a bunch of equipment in Q1 and then we bought a bunch of equipment in Q2. So net, we're about even on net capital investment from not really doing anything in the first half of the year.

And I think what we're going to see in Q2 or Q3 and Q4 is that $50 million to $60 million range. And so I don't anticipate us. I think we've got to justify the cost of capital before we start ramping capital investments up.

I think that while I don't think the fleets are going to be reduced, I still feel like we're in really good shape from an average age considering the mix change.

Our goal is to minimize disruptions from large capital equipment purchases in one single quarter and try to spread it out pretty evenly throughout the year.

So I think going into next year with a combination of costs and quantities, you'll probably see a little bit more net CapEx, mostly just replacement CapEx, but there may be a little bit of growth in there. But it's too early to tell.

We haven't nailed that number down yet.

And then just a follow-up. Terrific contribution from TEL this quarter. It looks like equipment values are beginning to rise. I don't want to take this quarter and assume it's a run rate, but how should I think about what's going on at TEL and how I should think about that contribution as we move ahead?

Jeff, it's Paul. Related to TEL, yes, they did have a great quarter. I probably wouldn't use that as a run rate. I agree because it was a little higher than what we expect.

But I do think somewhere minimum of what they made in Q1, somewhere between Q1 and Q2 maybe is what they'll see. If you think about it, TEL's customer base over the last -- they've been hit pretty hard by this freight recession, too, because a lot of their customers were these small to midsized carriers who were hit pretty hard by the freight recession.

Conversely, there were bad debts in there, and we were struggling to keep the lease counts flat, just like truckers are struggling to time to keep enough freight to keep truck counts flat.

I think what we've seen is their customer base that's made it through the rough years is set to thrive for the next 3 or 4 years of this cycle. And so David and I met with the TEL management team a couple of weeks ago. And I think similar to what you heard, I think you're going to see slow, steady progress for TEL over the next couple of years.

And so we're really excited about where they're at and where they're going. And I think they'll continue to build quarter after quarter. But I agree that Q2 was a little bit hot based on some large equipment sales they were able to push through.

But you're going to see a really solid trend for TEL over the next couple of years.

Yes. And I would even add to that: what we're seeing in July- I think this is probably a broader industry comment is a pretty steep pickup.

We've spoken to a lot of different folks out there; we're seeing some strengthening. I would say what we've kind of encountered in the first half of the year is just an appetite for volumes.

I haven't seen a lot of price improvement, but just an appetite for volumes, which is kind of step one. And now what we're seeing is an appetite for volumes and a little bit of a step-up in price that hopefully will impact us positively in the third quarter.

And then, Tripp, finally, I know in the comments in the release, you said cost per mile was up about 16 and change percent, and you explained that a fair amount of that was because of all the settlements that you were seeing on insurance and claims.

Did you quantify how much of that you would consider to be an unusual lump in the quarter and kind of as that recedes toward normal levels, what kind of cost per mile increases should we be thinking about in aggregate?

Yes. I'd be cautious when we talk about insurance. It's just so volatile, Jeff. But I will say, I mean, there's no doubt about it.

It shocked all of us the way it developed this quarter, and you can look back historically and even with the trend in insurance and claims-related costs going up, this is a spike without a doubt.

I would say anywhere from the combination of probably -- I mean, it could be anywhere from probably $0.05 to $0.08 a share probably from just a spike, which I don't know -- I would be cautious in modeling that from Q2 to Q3 to Q4 just because of the volatility of it.

It was unusual without a doubt, historically looking back; that's a fact. But the forward-looking guidance is what I'm hesitant to say.

[Operator Instructions]

And at this time, there appears to be no further questions. I'll turn the call back over to our speakers to close out the call.

All right. Thank you, Ross. We just want to thank everybody for your interest in Covenant, and we look forward to speaking with you next quarter.

Thank you. This concludes today's conference call. Thank you for attending.

Welcome to today's Covenant Logistics Group First Quarter Earnings Release and Investor Conference Call. Our host for today's call is Tripp Grant. I would now like to turn the call over to your host. Mr. Grant, you may begin.

Good morning, everyone, and welcome to the Covenant Logistics Group First 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 www.covenantlogistics.com/investor. Joining me today are CEO, David Parker; President, Paul Bunn; and COO, Dustin Koehl. Our first quarter was unique in that it included 2 of the worst and one of the best months we have experienced in the last 3 years. The trajectory was positive and has continued into April, leaving us with conviction that the change in the market is structural, not seasonal.

Our Expedited segment was most negatively impacted by both weather and fuel costs in the quarter, with improved rates and volumes in March and April, which we believe will continue to improve throughout the year, giving us plenty of operational leverage. Our new business pipeline for committed truckload capacity continued to strengthen in the quarter for both our expedited and dedicated fleets. Revenue trends during the first 3 weeks of April remained strong across all of our business units. In our view, we are finally feeling the impact of declining industry-wide driver and truck capacity and improving demand in certain segments and geographies. With that background, I will move on to the quarter's statistical review.

Year-over-year highlights for the quarter include consolidated freight revenue increased by 15.9% or approximately $38.7 million to $281.9 million, primarily as a result of the assets acquired in the fourth quarter of 2025 that are now being operated as Star Logistics Solutions. Consolidated adjusted operating income shrank by 11.5% to $9.6 million, primarily as a result of margin compression in our Expedited segment, which was particularly challenged with reduced utility from severe weather and higher net fuel costs. Our net indebtedness as of March 31 decreased by approximately $51 million to $245.3 million compared to December 31, 2025, yielding an adjusted leverage ratio of approximately 1.8x and debt-to-capital ratio of 37.6%.

The reduction in net indebtedness was a result of selling a significant amount of used equipment in the quarter and buying very little new equipment. With equipment deliveries concentrated in the last 3 quarters, leverage ratio may increase modestly in the next couple of quarters depending on the timing of deliveries and the prices for used equipment. Ultimately, we expect improved cash flow and disciplined capital allocation to reduce the leverage ratio over time, excluding acquisitions and other strategic options. The average age of our tractors at March 31 increased to 26 months compared to 20 months a year ago, consistent with year-over-year reductions to our high-mileage expedited fleet and growth in our less capital-intensive dedicated fleet. On an adjusted basis, return on average invested capital was 5% for the trailing 4 quarters versus 7.6% 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 99.1% for the quarter, performance that fell well short of our expectations. Severe weather and rising fuel costs adversely impacted this segment more than any other in the quarter due to its linehaul nature, requiring high utilization to cover the fixed cost for the operation. Going forward, we have line of sight to sequential improvement in this segment throughout the year. Over time, our goal was to average a double-digit adjusted operating margin across the freight cycle to generate an accepted return on capital. Dedicated's 95.5% adjusted operating ratio was an improvement compared to the 98.1% achieved in the prior year.

Although this segment also encountered cost headwinds in the current period, those headwinds were not as severe as the impact of avian influenza in 2025. Going forward, our goal is to restore adjusted operating margin to double digits, grow the fleet serving high service niches and reduce the fleet that is exposed to more commoditized end markets where returns are inadequate. We were pleased with Managed Freight's performance for the current period, growing both revenue and adjusted operating income compared to the prior year. While the growth in freight revenue outpaced the growth in adjusted operating income, the cost to secure quality brokerage capacity has remained elevated from the fourth quarter of 2025.

Due to the asset-light nature of this business, we note that an adjusted operating margin in the mid-single digits generates an acceptable return on capital. The Warehouse segment successfully grew freight revenue 14.6% compared to the prior year as a result of organic growth with a new key customer in the fourth quarter of 2025. Despite the growth in revenue, adjusted operating income declined slightly, primarily due to increased start-up costs and operational inefficiencies associated 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. Our minority investment in TEL contributed pretax net income of $3.7 million for the quarter compared to $3.8 million in the prior year period.

Regarding our outlook for the future. We believe 2026 will be known as a transition year in the freight market with sequential incremental financial improvement to occur each quarter. During the first quarter, we secured rate and lane improvements with existing customers and developed a mature pipeline of new customers with attractive pricing on a level that has not occurred since 2022. We expect this trend to continue as the year unfolds. The nature of these bids is the new rates and lanes take effect a few weeks after being negotiated. So the first quarter activity will begin to show up in the second quarter and so on.

It will take time for our 2026 efforts to be fully reflected in our financial results. This explains why the market impact was more than offset by the softness we experienced in January and February. Nevertheless, for the first time in multiple years, we have line of sight to capturing operational leverage from these environmental tailwinds. Our team is refreshed, energized and ready to execute. Thank you for your time, and we will now open the call for any questions.

[Operator Instructions]

It's Jason Seidl. I didn't hear the operator introduce me. Sorry about that.

We didn't either. It's kind of weird.

Yes. No, I was wondering what kind of happened. Well, listen, a couple of quick questions. You guys are sort of in a unique position in that you have some product lines that are not exactly traditional OTR dry van. I was wondering maybe you could dive into some of the dynamics going on in the poultry market as well. Maybe give us an update on the DoD business.

Yes, Jason, a couple of things. I would say on the dedicated side in general, Tripp talked about it, we're really happy with our pipeline, poultry and non-poultry. And I would say we continue to lean in on that space to specialized equipment, niche. It doesn't mean that, that's all we're doing, but it means that's a heavy percentage of what we're doing. And so just excited for both sides of our dedicated business, poultry and the non-poultry on how the pipeline is building. Dedicated rate increases are going pretty well as well. So excited about that. The DoD business, as you know, rolls up in Expedited, and that business was pretty good in February, better in March and better in April than it was in March. So it's rolling pretty good right now.

All right. Glad to hear that. One of your competitors out there noted that they're starting to have peak season capacity discussions now and it's sort of unprecedented to happen in early April. Are you guys having the same discussions with customers? And then I have another follow-up.

Yes. I would say we haven't gotten as far as talking about peak now. But I would tell you, some of the capacity constraints in some markets are -- remind you of peak a little bit. It's kind of market dependent, day of week dependent. What I would say, and Dustin just reminded me of this, is that we're seeing more people want to talk about dedicated capacity on the team side than we've seen since '21 or '22. And so there's -- we still got a long way to go on that, but having a lot of discussions with folks around dedicated team capacity as opposed to OTR team capacity. So that could be some of what these folks are feeling is -- but just so you know, we're looking at it more on trying to more of a multiyear, longer-term type deal than just peak season.

That makes a lot of sense. And finally, before I turn it over to the next person, how should we think about driver pay increases? Because we're hearing about a much -- a tightening market in general by getting some of the questionable capacity off of the road. Once we start seeing a little help in the economy, which it appears that industrial is recovering somewhat, there's obviously going to be increased demand for those remaining drivers. So how should we think about that as we move throughout the year?

Here's what I'd tell you. You're definitely right. Dustin and I were texting last night about driver pay. I was with -- been with 2 of our larger customers, one this week, one last week, and driver pay came up in both of those conversations because for the first time in 40 months, drivers are starting to get tied out there. And so there are definitely targeted driver pay discussions that are going on. As far as how much of it is retention pay versus sign-on bonuses versus rate pay or weekly minimums, that's going to -- I think that's going to bounce around based on the business unit and maybe even down to the account level. But there's no doubt you're talking something in that mid-single digits probably on driver pay, maybe high single digits if this thing gets really hot.

And our next question will come from Jeff Kauffman with Vertical Research Partners.

I was wondering what was going on with the question queue there for a minute. Question for David. Everybody is starting to talk about positive things for the first time in about 3 years in terms of fundamentally tightening up, margins getting better, et cetera. And your company is executing, I think, in a lot of areas where others aren't. Managed freight looks good, warehousing looks good, Dedicated looks good. What excites you the most about kind of what's going on in the direction things are heading? And I guess as a second part of that, what do you think can go right better than we're thinking as optimistic as we might be getting? And what do you think might go wrong that we might not be giving enough weight to?

Jeff, yes, I am more excited right now than I have been in 48 months. Last March is when all this downward spiral started. I mean it's been 4 years since we've been in this trough that the industry has been going through. And so it's been a very difficult time. But I'm here to tell you that it is absolutely turning around. And I remember back in October on the third quarter earnings call, someone asked the question, and we -- A, we didn't know. But B, we just said we believe it's kind of an April event to get through the first quarter and what we were seeing in October, we think that April will really be sensing that. It really started -- excluding the fuel that kicked everybody's bottom in the month of March, it really started turning around nicely in March.

And we have seen that continue into April. And you're really starting to get a lot of staff that are backing that up as I think about the last 4 months of PMI and those kind of things that manufacturers really starting to make a nice play because before then, it was all related to capacity, I believe, November, December, January, February, again, excluding weather, but just the feel of the business was, in my mind, capacity related. And now you have got manufacturing that is really starting to kick some bottom. And so that's nothing but a cherry on top of how I'm feeling here about the business environment. And I think that I would say a couple of things, positives, negatives.

I was up in Washington 2 days, a couple of days this week and continuing to work. Washington DOT [Shaun], Secretary Duffy [indiscernible] and they are doing unbelievable jobs, and I've told them that, that they are taking the bad drivers, the people that should not be on a truck, they are in the process of taking them off trucks. I believe to the tune right now that somewhere around 2% to 3% of capacity has been eliminated. And keep in mind, 2% to 3% capacity increase or decrease changes the market. You take out 2% or 3% of capacity and we're not raising rates and you take out those 2% to 3% of capacity and the market is tight. And so 2% to 3% is a major number.

And I think they're just at the beginning stages of it. So what could the upside be is that. I think drivers are going to continue coming out of the market. Therefore, capacity is going to continue to come out of the market. I personally feel we're just at first base. I think it's going to be an industry-changing environment in the near future. I mean April is better than March, and I expect May is going to be better than April and those kind of things and especially in particular, when we get into third quarter, there's going to be a great opportunity as capacity gets tighter to raise pricing, evident by the fact that we all need it, evident by the fact that we got 20% capacity -- excuse me, 20% inflation in everybody's P&L in the last 4 years, I can look at any one of our customers in the eye and say, let me tell you, we need 10%.

We need whatever, whatever double-digit numbers, they need to be there. And I think that the industry that we -- none of us are interested in just buying another white truck or red truck or blue truck. That's not the desire. We've got to replace earnings that we've lost for the last 4 years. And I think everybody is really committed to saying that's the game plan that we're on. And so that's going to be interesting. What could go wrong? I want the war to get over with because capacity is increasing. I mean, manufacturing is increasing even there in the sense of the war, but the longer it lingers and lingers and lingers does it start affecting the economy. That's a concern that I've got.

I believe if it gets over in the next whatever, in 1 month, 2 weeks, 4 weeks, 6 weeks sometime, it's going to get better. It's going to take a while for oil to go down, but you let oil get down from $95 a barrel down to $75 a barrel, and it reduces gasoline by $0.50 a gallon. The American people will sense that and feel that, and I think they'll continue to spend. And so I could not be any more excited than I have been in these 4 years. I think that we got our company exactly where we need it in the segments that we're in. And I'm just excited about adding to what already is happening in the industry.

That was awesome. One follow-up kind of following a little bit on Jason Seidl's question is how much of the rate increases do you think end up being leaked out because we got to pay more wages to get drivers and taking into account your other cost inflation? Kind of what can you net on these rate increases to help margins get back to where they are?

Well, I'll let Paul and Dustin answer some of that. But that said, no doubt, I do believe that driver pay is going to go up because we can sense that as we speak, the industry is and that is DOTs taking out drivers, and it has a domino effect. It's not that we hired any of those drivers. We got English-speaking things that go on in our company, we would never hire them. They got to be legal immigrants, et cetera, et cetera. But it has a domino effect on the industry. And so I think that we're just at the beginning stages of feeling that. And I don't know what that means from a standpoint of increases because I think the first thing you're going to do is, hey, you stay with me, I'll pay you this and I'll pay you a bonus to get new drivers in.

I don't know that it's going to be -- here's a 5% driver pay increase. I think we'll be around the edges until we know that we know that we know how difficult it will be. So that part, I think, going to say, for the second, third quarter, I think that everybody is just going to be around the fringes, and it will be a number, but it's not going to crazy -- I say crazy, these drivers deserve everything they get. But from a cost standpoint, it's not going to be a crazy number. And I truly believe if capacity continues to tighten, whatever we got to get, we're going to get more than that in increased rates.

I mean, Jeff, historically, driver pay is 30% of maybe total cost, give or take, depending on the exact team or dedicated or regional or whatnot. But if driver pay is in that 30% of your total cost range, I think it probably eats up 30% of your -- 30%, 40% of your wage of what you get from the customer, not immediately, but over the first 6 months or so. But if -- as there's more pressure on driver pay, then you'll go back and get more rate again as a second bite in the apple because, as David said, driver pay is not the only inflation item that we're trying to cover for that where we've had significant inflation over the past few years. And there's some inflation items. I mean the areas around trucks and insurance and some of those that have had a lot of inflation parts the last few years, I don't see that inflation slowing down. And so I think it will be multiple rounds of rate increases. And so you'll probably end up netting 60% to 70% maybe of bottom line without other inflation items.

And one last follow-up question. This one is for Tripp. Tripp, the Section 232 tariffs made a little challenging for some of your truck OE partners to be able to quote good prices for vehicles this year. Has that clarified yet? Or is it still a situation where the [indiscernible] that are selling your trucks or manufacturing in Mexico still can't quite get the pricing down?

No. I would say, Jeff, we do have pricing for next year, and that is a big question for us. So we've got so many like near-term opportunities in terms of how we're thinking about managing our portfolio of business and our assets on the road today. we just unloaded a lot of extra capacity or a lot of extra trucks that weren't being efficiently used, which is one of the reasons why cash flow was so good. But the things we've talked about is the notion of a prebuy in Q4, and I don't think we're leaning towards that because I think our goal is to try to buy capital or buy equipment as smoothly throughout the year as possible with the exception of Q1, it was just a really light buying quarter, which it typically is.

And so we are looking at probably a $7,000 to $10,000 probably cost increase, I would say, on the average across all the different types of trucks that we buy for next year. And we'll be factoring that into account as well when we think about rate increases. It's another -- we've seen -- it's just one more thing that Paul and David were talking about in addition to driver pay that has not slowed down, and it's compounded in a loose market where used equipment has never been sold cheaper. And so when you're buying stuff at the highest points and you're selling stuff at the lowest points, it -- it's not the perfect equation for a great profitable quarter. And so we're seeing some strengthening, I would say, or bottoming, I would say, in the used equipment market, and I expect it to strengthen throughout the year as this economy -- or as this freight market turns. So we're optimistic. I mean we'll get some help on the used equipment side, but I think the new stuff is going to continue to go up. And we're going to continue to focus on using our stuff efficiently with the right customers, and it will be what it will be.

Jeff, let me clarify when Tripp talks about the increases next year, those are not tariff-related increases. They're more price [indiscernible] OEMs because of emissions.

[Operator Instructions] We'll move next to Scott Group with Wolfe Research.

David, you mentioned -- you just mentioned you were in D.C. I'm hoping maybe you can share a little bit of insight of what you learned. Is there a path forward to Dalilah's Law, Dalilah bill to become a law this year? Anything on Montgomery case and how you think that may or may not impact the industry or anything else that you think is interesting?

We're going down 2 roads in Washington. On e road is CDLs, immigrants, CDL schools to make sure they -- the bad ones are shut down and the good ones are still producing, insurance requirements. Those are one road that we're going down and the other road we're going down is Tort reform. And I would say on Tort reform, we've gone from a 0% chance to -- my number is 25% chance that, that is going to happen. And the only reason why I say 25% is because President Trump has been affected so much by warfare and law fare or whatever word you want to use there that at least the administration recognizes that. And the administration cannot lead it, but the administration can support it. And so we're working Congress awfully hard to get behind it, and we got some folks that are definitely behind it. And we're just at the infinite stages of dealing with Congress.

We did -- we had good meetings this week with judiciary committee. And I think that we're going to be presenting to them in the future. And so that's good. I mean, if you can't get to the judiciary committee, you're never going to get us to the floor. And so we'll see where that goes. But again, to me, we're at 25% that we're able to get to reform, but it was at 0 a year ago. So we'll see. And then the other one, again, is that to me, the DOT is doing exactly what they need to do.

So ours is to continue to encourage them and continue to support them and all the things they're doing, again, CDO school, ELD is unbelievable. The amount of cheating that happens in this industry, unbelievable. And -- but they're on top of it. And so to me, the message that DOT is hearing from us is sustainability. We got to continue to sustain this effort that you're going and I'm thinking they've taken out 2% or 3%, I mean, guys, it could be easily another 5% or 6%. I mean it's a big number, whether it's 3% or 4%, 5% or 6%, but whatever it is, it's a big number that is out there. They said my phone just died. Can you all hear me?

We got you.

Okay, good. Tripp texted me there, said my phone died, so good. As long as you all can hear me that's all that matters. So anyway, it could be a large number on capacity coming out. So that's what my efforts in Washington and others is there, but we're definitely getting in front of the right people that can help and they can see us and we'll carry the football. The question is, will we get across the goal line. And I think DOT is a given again, sustainability, Tort reform is 25% chance, and we'll see what happens there, Scott.

So is your point there that whether or not maybe Dalilah's law speed things up, but even without that, that the Department of Transportation is going to -- may take a little bit longer, but they're working on all the stuff on their own even without this law.

I didn't answer your question. I believe Dalilah's law will pass. I do believe that. But I'm going to tell you that they are doing the things in DOT that is really the Dalilah's law without it being rectified in Congress, which would be great because then becomes law versus the next DOT Secretary that doing whatever they want and not paying attention to it. So you wanted to get it codified as a law, but they are doing the Dalilah's law as we speak virtually.

Yes. Okay. And then just in terms of your business, right, you've got in the Expedited segment I think still pretty meaningful LTL exposure. Are you seeing the same sorts of improvements on that side of the business? Maybe are you seeing some life in the LTL volume? Just any thoughts on that.

Yes. I would say in the last couple of months, you started seeing the LTL side coming back. I think it relates to PMI being 4 months above 50, et cetera. I think that they're starting to sense that because we went -- if you remember, Scott, we went, I don't know, last summer, fall, and we started seeing some trends that were not good year-over-year for our LTL freight that we do anyway. And we started seeing that upticking now, and we're starting to sense that the LTL side of the business is starting to get better out there for us, and I think for them probably as an industry.

Okay. And then maybe just last thing real quick. Tripp or Paul, whoever, I know you talked about some longer-term margin targets for the different businesses. Any sort of -- I don't know, just near-term thoughts about how to think about margins for the businesses, Q2, Q3?

Okay. I think we probably found that -- we probably found out Scott. They died and me and you're talking to each other. I would tell you, yes, you're going to continue to see margin improvement. I think that second quarter is going to be -- April is better than March, and March wasn't bad, but we're not going to be -- we're not getting out of rate increases April 15 either. So April, May and June is going to be layered in on whatever we're getting as we speak. And so I think that you'll see second quarter definite improvement over first quarter. And then I think you'll see third quarter improvement over second quarter.

[Operator Instructions]. And it appears that there are no further questions at this time. I'll turn the conference back to our presenters for any additional or closing remarks.

Yes. Thanks, Jen. And I just want to thank everyone on the call for your interest in Covenant and our Q1 earnings, and we look forward to speaking with you again in Q2. Thanks very much, and have a great week.

And this concludes today's conference. Thank you for attending.

Welcome to today's Covenant Logistics Group Q4 2025 Earnings Release and Investor Conference Call. Our host for today's call is Tripp Grant. [Operator Instructions].

I will now turn the call over to your host. Mr. Grant, you may begin.

Yes. Thank you, Ross. Good morning, everyone, and welcome to the Covenant Logistics Group Fourth Quarter 2025 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 www.covenantlogistics.com/investors. Joining me today are CEO, David Parker; President, Paul Bunn; and COO, Justin Koehl.

We're going to modify our opening comments from the usual format and address 3 key areas before covering the usual statistical and segment information. One, our view on the freight market; two, the equipment impairment charge in our capital plan; and three, a small acquisition we made in the fourth quarter, the freight market. We believe the freight market continues to evolve towards equilibrium between shippers and carriers. In fact, we might be an equilibrium now.

During the fourth quarter, spot rates rose meaningfully revenue trends during the first 3 weeks of January have meaningfully improved compared to the prior year in all business units. We are also experiencing a sharp increase in bid activity with shippers who are interested in securing capacity contractually. Currently, we have also secured a few low to mid-single-digit rate increases that take effect during the first quarter within our expedited fleet and anticipate additional increases across both expedited and dedicated to take effect early in the second quarter.

Based on regulatory changes, cost inflation and the amount of insurance and claims risk inherent in the industry, we would not be surprised for industry-wide driver and truck capacity to continue to decline perhaps materially. At the same time, most trucking cycles were led by demand in RV inventory restocking tax stimulus and corporate earnings are biased in favor of improved demand. equipment charge and capital plan, operating a safe, fuel-efficient late-model fleet requires constant cycling of equipment to keep operating costs down and driver satisfaction up.

With intentional fleet reductions and declining used equipment values in 2025, we deferred some trades, stacked up deliveries and have too much underutilized equipment. To improve our operations and balance sheet, we have moved a group of assets to held-for-sale status and lowered our expectations, we expect a modestly smaller fleet at the end of 2026 and only $40 million to $50 million of net CapEx for the year. Within our asset-based fleet, we expect the agricultural-related business within our Dedicated segment to grow and the other fleet serving more commoditized freight to shrink remain stable through our weed and feed approach.

Overall, our goal is to reduce balance sheet leverage and improve return on capital. The acquisition. During the fourth quarter, we acquired the assets of a small truckload brokerage company. The business, we will operate in the name of Star Logistics session has 2 niche customer bases, state and federal government emergency management departments, which represent represents an episodic and highly profitable sector response capability that skills quickly to address hurricanes and other natural disasters, and two, high-service consumer packaged good companies, which affords leverage to general commodity freight market cycles that our asset-based truckload operations lag.

With synergies, we expect Star to be accretive to earnings during the first half of 2026. With that background, I will move on to the quarter's statistical review. Year-over-year highlights for the quarter end cleared. Consolidated freight revenue increased by 7.8% or approximately $19.5 million to $270.6 million. Consolidated adjusted operating income shrank by 39.4% to $10.9 million, primarily as a result of margin compression in our expedited managed freight and warehousing segments, partially offset with improvement to dedicated operating income within our Dedicated segment.

Our net debt in the -- December 31 increased by $76.9 million to $296.6 million compared to December 31, 2024, yielding an adjusted leverage ratio of approximately 2.3x and debt capital ratio of 40.3% as a result of executing our share repurchase program and acquisition-related payments. The average age of our tractor at December 31 increased to 24 months -- cared to 20 months a year ago as a result of year-over-year reductions to our high mileage expedited fleet and growth in our less capital-intensive dedicated fleet. On an adjusted basis, return on average invested capital was 5.6% versus 8.1% 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 97.2% for the quarter. performance that did not meet our expectations even in light of a softer freight environment. Results were partially impacted by the U.S. government shutdown, which persisted for nearly half the quarter. Despite these external challenges, the segment did not perform to our operational standards. Accordingly, we will continue our disciplined approach to fleet optimization by reducing fleet size and focusing on higher yield freight.

Looking ahead, we anticipate fleet cast will adjust modestly in response to market conditions. As the market improves, our strategic priority remains enhancing margins through target rate increases exiting less profitable business and onboarding more optical opportunities.

Dedicated 92.2% adjusted operating ratio was the best for any quarter during the year. We're pleased by how this segment improved its results each quarter throughout the year and are excited about the momentum we are taking with us into 2026. Dedicated grew the fleet by 90 average tractors or approximately 6.3%, compared to the prior year as we have continued to win new business and specialize in high-service niches within that segment.

Going forward, we plan to focus our efforts on continuing to grow these high service niches and reduce certain of our fleet that is exposed to more commoditized end markets where returns are not justified. Managed Freight experienced a significant improvement to freight revenue in the quarter as a result of the Star Logistics Solution acquisition that occurred in October, but margins were compressed as a result of the growing cost to secure quality brokerage capacity.

Over the longer term, our strategy is to grow and diversify this segment. Given the asset-light nature of this business, we note that an operating margin in the mid-single digits generates an acceptable return in capital given the asset-light nature of this segment. During the quarter, our warehousing segment successfully launched operations with a key new customer, resulting in a 4.6% increase in freight revenue, of $1.1 million compared to the same period last year.

However, adjusted operating income declined by $1.6 million, primarily due to increased strip costs and operational inefficiencies, associated with onboarding the new customer as well as higher labor expenses, including overtime at other warehouse locations to manage peak volume demand. Looking ahead, we remain committed to driving organic growth within this segment and are focused on enhancing our operating income margin with a target of reaching high single digits.

Our minority investment intel contributed pretax net income of $3.1 million for the quarter compared to $3 million in the prior year period. The impact of compressed leasing margins, soft used equipment market and incremental bad debt expense in the quarter placed continued pressure on sales pretax net income.

Although Intel's overall business and balance sheet remains strong, exiting capacity from the general rate environment is expected to continue to impact them over the short term. Regarding our outlook for the future, we remain optimistic about improving freight fundamentals -- fundamentals. Our ability to be more efficient with our equipment and capture operating leverage and improve financial results in 2026.

The improvements are likely to come later in the year. with the first quarter being impacted by seasonality, extreme weather, a still developing freight market situation of potential margin squeeze in managed freight. The last few years have been characterized by acquisitions dispositions and share buybacks as we have revamped the company. We have a stronger, more stable business and have recently added a piece of restores a measure of freight cycle upside.

2026 is all about execution, and we are hard at work to get that done. Thank you for your time, and we will now open the call for any questions.

[Operator Instructions]. And our first question comes from Jason Seidl from TD Cowen.

Thank you, operator. Good morning guys. Appreciate the time. I guess my first question is you mentioned in your expedited segment, you're getting low to mid-single-digit price increases that are pushing through. Is that the average now? Or is that just you're starting to see a few of those roll through? And I guess, what are your expectations as we move through the bid cycle.

Jason, it's David. Yes, it's both. The answer is both. And that is that it is -- the average is kind of around that 3.5% number for the first 3 weeks of January. And so it is something that's continuing to build momentum. And so far, I will tell you that I'm not disappointed in how the conversations are going. I'm not ready to say that the number is going to be 3.5 or all over, but the customers are very open. I mean I think the customers realize that the industry has done hole on rates for the last 4 years, and maybe there's some pit out there from our customers. So I'm pretty optimistic about what the opportunities are on rates. And I can only tell you that as it starts and depending upon what the economy does, will depend upon what -- how the numbers end up being because if we got 3.5 now, and we're being very upfront with our customers. We're being very upfront, very good conversations, but hopefully, we end back in June, those kind of things. So that is where we're at for the first 3 weeks. And we still got a ways to go to be able to say this is a trend, but I like the first 3 weeks of what we've done.

And I would add to that. I mean, I would add a little bit to that on the rates from existing customers is one thing, but we're also starting to win business. at higher rates. And one of our themes for this quarter has been capital allocation, and I think we're going to have some opportunities to redistribute capital to some of these newer, higher-performing businesses with customers that perhaps we can't get the appropriate rate with. So it's not just pure rate on existing customers. I think that one of the bright sides of what we're seeing and we said in the release or the opening comments was that we are starting to win business pretty decent price. You go back 12 months ago, to win business, you were having to price it at a breakeven or a slight loss just to win anything.

Yes, I agree a year ago, 24 months ago, new business was coming in and even the less now new business, all new business can replace business that's less profitable.

Now it feels like there's a lot more bids now than there was, let's say, a year ago in the marketplace where people just trying to pull forward the bid because they're worried about maybe how the supply-demand market is going to look for truckload, call it, 6 months from now.

Yes. It's both of those, Jason, that our bids in the month of January are up 33% over fourth quarter, up 33%. And that is something Pat is twofold. One, they're trying to get ahead of it and that's okay. I don't amine doing the same thing. They're trying to get ahead of it as well as -- a lot of this bid that we're getting is brand-new customers. And so they are -- they don't like what they're seeing or one there, I believe I am sensing, Jason, 3 weeks into it, is that they're concerned about capacity. And so those are the 2 things that I look at that relates to...

They're concerned about capacity. And I would tell you cargo theft has ticked up a little bit in the last 4, 5 months. It was really bad in 2023, early 2024. A lot of people did a lot of things. And I would say it was beat down pretty good for 2 years. And what I'm seeing people say, especially, I need a high-value program, I need assets. More in the past 6 to 8 weeks than in the last 6 to 8 months or 16 months.

That's great color. I got 2 more quick ones, and I'll turn it over to the next person here. On the warehousing side, it seems like your revenue is up, obviously, profit is not, but it's -- there were some start-up costs. Should we expect that sort of...

It will get better.

It will get better. And my question in terms of the warehouse space bookings, it looks like Prologix had some positive commentary on that. I'm just wondering what you're seeing out there in terms of the bookings. And then I got a balance sheet question after that.

Yes. Here's what I'd say on the warehousing side, Jason. Everybody remembers it '21, '22, tightest we've ever seen. A lot of overbuilding in the warehouse space and then it got pretty -- it's been pretty loose, '23, '24, first part of '25, and I'll agree with you. It's things are tighter now than they've been in the last 24 months from a warehousing standpoint, but nowhere near as tight as they were in '21 and '22.

And to your first question, yes, we took on 2 big accounts in '25. And one of them was in was in November, it was the start-up. And so they put a pretty good drag on the fourth quarter. Here's what I'd say, Q1 will be better than Q4 and Q2 of this year will be better than Q1. So it will incrementally get better every quarter.

That makes sense. And then Tripp, obviously, you guys just made an acquisition of a company that looks like it diversifies the business mix a bit in terms of getting more governmental relief contracts and everything else. But how should we think about you guys going to market for the remainder of '25 given the balance sheet that you have now and what's your level of comfort and taking that leverage ratio?

Yes. I think you meant for '26, but yes, I'll make that mistake often. So what I would say is -- our leverage today after this acquisition is a little bit above where we would kind of want it longer term. We haven't been public about a point or a range or anything, but we want to be kind of moderately leveraged. And I think when you think about some of the excess equipment that we've got that hasn't sold that we expect to sell in the first quarter the new acquisition that we got in October, I think that, that pushes us to a point where I think we'll start to see it improve. The leverage ratio improved starting in the first quarter. I think it will improve sequentially with our capital plan.

And I think about it like this. I mean, obviously, in our in our script and in our press release, we're pretty optimistic about 2026. And future acquisitions require -- well, any acquisition requires a lot of work. And I think our priority for 2026 is going to be to integrate what we got today with the Star acquisition, and prepare ourselves to take advantage for any opportunities that we -- which we're already seeing. I think there will be more to come with this shift in the market. I think there will be a lot of disruption with cost of capital deficiencies with other peers, and I think that we're going to be prime and ready to take advantage of new opportunities, bring on new business, and we've got to be prepared to move and allocate our capital as efficiently as we can.

Doing an acquisition in 2026 in the midst of all this could be beneficial long term, but I also think it creates a distraction. So our primary focuses are reducing our debt, providing flexibility and taking advantage of this market swing as it develops.

Appreciate all that color, Tripp, and you guys try to stay warm out there.

And our next question comes from Jeff Kauffman from Vertical Research Partners.

Thank you very much. Good morning, everybody. So a lot going on this quarter. Can you differentiate? And I appreciate your early comments on the equipment change, moving equipment to for sale status and then kind of taking an adjustment to what your expectation is for sale price. Is this going to lead to an unusually large loss on sale in the first quarter or an usually large gain on sale as you get rid of some of this equipment?

No. Jeff, this is Tripp. I don't think it's going to be a large loss or a large gain. What we call that -- what we did with that equipment is basically market to market, which is an accounting requirement as we pulled that equipment early and as it specialized probably at a time when capacity is coming out of the market and the market is being flooded with excess used equipment. It's just difficult. There's not much of an appetite for used equipment.

So we marked it down to a number that we considered as fair value based on our channels of how we kind of dispose of our equipment and I think that going forward in Q1, we don't depreciate our equipment down to taking losses historically or taking gains historically, we try to do it where that noise is pulled out of it. And so I would expect kind of status quo from a go-forward depreciation standpoint, I would also kind of factor in flattish depreciation sequentially on an adjusted basis from Q4 to Q5. It's been flat for the pretty much all year long. And if you look at our gains and losses on sale of equipment throughout the year, I think we're at a -- almost a breakeven. We may have lost about $300,000. So we're not -- we're going to -- there are some things short term where we may have to accelerate depreciation on some equipment coming out of service in 2026. We're watching the market. But it's a really hard thing to do because the market moves pretty quickly.

But overall, we're going to have fewer equipment sitting on the fence depreciated too. So I think what you're going to have is a wash. But on a cents per mile basis, you may see a little bit of an increase. But on an absolute dollar basis, I think sequentially, you'll see flat depreciation and any no real big variance to gain loss in the quarter -- next quarter.

Okay. Question for Paul and David. Thank you. So can you help us understand, I guess, 2 things. Number one, where should we be thinking about fleet count for expedited and dedicated post the 4Q adjustments? And then as we integrate Star, into the new business, not all of that's going to be managed freight. There's going to be an element that affects expedited. Will that require an equipment increase as a result of that? Kind of how should we think about the Star revenues basing across your divisions?

Yes. I would say on the Star revenue across the divisions. One, it won't require any increase. We'll be able to -- any of that business that flows over to the team side. We'll be able to handle what the teams we have. And then I would say revenue in our brokerage space, you'll remember, we lost a customer that we disclosed in the third quarter. So I think our revenue in the kind of the managed freight space will be flat to up, flat to up every quarter going forward with the acquisition. As it relates to fleet count, I think we'll see. But I think your expedited count will kind of trend down slightly, maybe 25 trucks a quarter-ish kind of numbers as we try to optimize this. I mean there's some really good freight in there and then there's some freight that just doesn't make sense for the capital that it takes to run the teams.

Strategically, we're trying to push that freight over to manage freight. So if it economically doesn't make sense to run on the assets, we're trying to get the contract square to that freight over and run it on managed freight.

On the dedicated side of the business, I think you'll continue to see us try to weed and feed the non-ag business continue to have some work to do there. I think you'll continue to see us grow the ag business. And so that truck count will probably, I would say, stay flattish, but I think we'll continue to improve the margin profile in that space. Did that help you?

Yes, very much so. And then one other question. So looking at the metrics, it looked like the rev per mile ex fuel dropped by a fair amount and expedited. And I'm assuming some of that might be related to the government shut down and the lack of it was...

So would we treat the fourth quarter more as an anomaly and kind of go back to the third quarter.

Yes. There's probably a couple of points, Jeff, that the couple of points and you can back -- it probably reconciles back to the exact sense per mile of rates you're looking for that related to the government business.

Okay. And then switching gears to managed freight. I think we understand what happened with spot rates and gross margins in that business. You mentioned new customer contracts coming in on your contract business. How long do you think it will take to get the expedited freight margins back to where you want them to be? How long will it take to kind of adjust this pricing to customers for the new reality of the market on the managed freight side?

So what you just said there, the statements you just made, Jeff, is the answer. And that is how long will it take to get the operating margins back to what is acceptable to us. And it's going to be through rate increases. I mean we can -- we're always looking to try to cut costs, and we will continue to try to cut costs. But at the end of the day, us and the industry, we got to have whatever number you want to use, 5, 6, 7, 8, 10, 12, we're going to have percentages of increase to improve our margins. So again, you heard at the beginning, I was happy about where we're at in the first 3 weeks of January. And I hope that, that continues as we continue to get into our larger accounts. And as we're bringing on brand-new business, that's probably 7% to 8% higher in rates than our existing. So that's kind of our formula.

So I'd like to see that the 3.5% continues to maintain right now and then start climbing in March, start climbing in April because if you remember, second quarter is a big quarter for us, so rate increases on some of the larger customers.

Jeff, I'll give you an anecdotal point just with these storms. I was on the phone 3 times last night and twice already this morning. And we're covering some of that with our teams or covering some of it with -- I'd say the bulk of it with managed freight and we're getting some really, really good rates on that, but that capacity out there is crazy tie in demanding a lot of month. I mean it is way tighter than it's been in any of the first quarters, the past few years.

And I mean I would say the second storm coming in, we're getting more we're having to ask our customers for more than we did last week this time. I guess what the carriers are asking us for more. And so it is -- it's tied out there right now that's -- we that spot and storm activity. But I think that's what's going to roll on over -- and the customers are starting to see to move some of this stuff, we're going to pay a little more.

All right. So I guess the takeaway thought is a lot going on right now, but this is more of a kind of clear the deck for future opportunities quarter.

And our next question comes from Reed Seay from Stephens.

I had a quick clarify from a previous question. On the managed freight revenue, you talked about being flat to up through 2026. Is that on a sequential or on a year-over-year basis?

I think on a sequential basis, I think if you look at managed freight, the $80 million in freight revenue included the basically 2 months of the new early, 2.5 months of the new acquisition plus some peak. And then I think you'll see it fall back a little bit in Q1, but I think you'll start to see that grow to where you're going to be. The biggest question is going to be how we look I would say in the third and fourth quarter, if we can grow it like we think we can. But I think you're going to be somewhere below where we landed in Q4 for Q1 of 2026, and then you're going to start to see incremental improvement in top line revenue after that, just say average $80 million a quarter plus depending on whatever we did on the third, any incremental business we do in the third and fourth quarters.

Got it. And then on the dedicated and exercised side, you mentioned and expedited in 4Q, you had some headwind from government that you called out in 3Q as expected. How should we think about maybe your margin sequentially from 4Q to 1Q? And then I guess, what your goal would be for 2026 as maybe you have some stabilization of demand within that expedited and as you continue to improve your mix within that dedicated segment?

Yes. So I do expect sequential improvement from expedited in the fourth quarter. And I would caveat that by saying that -- yes, I'm sorry, from the fourth quarter of 25% to the first quarter of '26. And I would caveat that with saying that there is a looming potential for net additional U.S. government shutdown, which could negatively impact us. There is a looming potential for additional severe weather that could negatively impact us. But all things being equal, I think with our government business firing on all cylinders for all 3 months of the first quarter of 2026, I think we have a really good shot combined with some rate increases from a select group of customers, we have a really good shot at improving our operating ratio in that segment during the first quarter compared to the fourth of 2025.

And it'd be hard to say maybe 150 to 200 basis points is kind of where I'm looking at it, but it's early in the quarter, and I haven't even seen anything to suggest that, that is realistic in terms of how January -- these numbers, I just see in top line revenue. But in conditions like these, costs can be up even though revenue is up.

So still a lot to learn, but I'm hopeful that we can improve it pretty meaningfully. In a sequential -- in a soft quarter, I mean, quite honestly, Q1 is our softest quarter. You've got drivers. That will take a while to come off of the new year, and it just -- even without weather, it takes a little while to get started. But generally, if you can get some good weather in February, you can start to make headwind in March is typically a really good operational month. And so we're just hopeful for that.

And then what was your question on dedicated?

It was similar in terms of what margin progression you would expect throughout 2026. I think Tripp answered it saying you expected some sequential improvement through the year? I guess last 1 real quick. I appreciate you entertaining some near-term question, dedicated on the next side, you're making a lot of moves to improve the business here in your revenue quality. What long term would you target for your margin profile of both of these businesses? If these initiatives continue and they play out as you expect?

I'll tell you, I won't be happy until -- in the 80s, and I think that dedicated is [ 88 to 9 ] it's kind of where I think dedicated is going to go, and I think expedited is going to be in the 80s. Now when we get there, I don't know , but that's our goal, and that's where I expect it to be at.

And our next question comes from Scott Group from Wolfe Research.

I wanted to just take a step back, David, 3 months ago on this call, you got really excited about sort of what was happening in the market with supply and regulations and all that sort of stuff. I guess, 3 months later, how do you feel -- are you feeling more convicted in this last -- any more data points in terms of how many of the drivers you think have already exited just...

Yes. Yes, I'm absolutely much more excited right now than I was 3 months ago, and I was pretty excited back then. But what I saw back being just continued to build and I just think -- I just really believe that we are on the beginning stages of of the trucking industry getting back to where it needs to be at. And I see a lot of green shoots. I mean, is it January? Yes. Do I have some trumps and I want to run downstairs and get loaded.? Yes. But I want to tell you, the green shoots are planted for and its dollar right from a standpoint of the beds being up, getting new business at higher rates.

Number one, getting business; number two, getting that business at higher rates we've won some great business this week that I'm excited about just the last 48 hours, but that's a side note. But the bids being up, and as I look at capacity is absolutely coming out of the market I see it through our managed freight and all of us truckers because our margins are not where we want them, but that's expected as we all know, from a standpoint that the managed freight, broker trucks are going to demand more before we get it from the customers, but we will get it from the customers if that continues, but we're 3 months into that. So right now, as we speak, we will start running with that about increasing the pricing on that.

But look, and there's an interesting stat. I don't even know if anybody has looked at this. But we know that DOT, which I think Duffy is the best DOT person we ever had I had the formation to meet with him in December, and I told him that in my 53 years doing this, he's the best DOT person I've ever seen. And as I look at these illegal CDL schools that we all read about and know about it are true.

In 2019, there were 19,000 of them. They went up during the 4 years of the Biden administration, they went from 19,000 to 39,000 schools. I mean, 6,000 to 39,000 schools -- come out, come out. 19,000 up to 39,000 and now DOT has taken out 6,000 of them. We're at 33,000. And I look at some of the things that they are doing from the -- you all know the English proficiency, we are fencing that not only in our managed freight, but we're setting that in our customers. I believe that's one of the reasons why our customers that we're winning more freight at higher rates. It's one of the reasons our rates are up 3.5%. It's another reason I believe that we will continue to get our rates up is because of capacity because a side note, as we all know.

Do I think that GDP is going to be stronger in the next 3 quarters, 4 quarters, than it was the previous 4 quarters. And the answer is yes. I mean I look at 2026 and I look at second quarter, 3.4% GDP fourth -- the third quarter is 4.3% GDP. Fourth quarter -- what's the number, 4% to 5% is going to be with the government being shut down 1 month, let's just say 4% when it comes out. I think there's going to be some 5% GDP growth in 2026. And I just go back in the last couple of years before that, and we were at we were at 1.9%. We're at 2.3%. We're doubling GDP.

At the same time, we all know capacity is coming up. Is it 1% or 4% I don't know. I don't know 2% moves the market, 2% up, 2% down in capacity moves the market. And so trucks are coming out. And so as I look at not as many drivers are leaving, trucks are coming out, it's going to be harder to get into the industry. GDP is going to grow Anyway, a lot of green shoots, Scott. Did I answer your question?

I think so. Okay. I guess my other question is, you guys have expedited has made a big mix shift over the last bunch of years to LTL. What are you seeing from that sort of end market? Does the shift to LTL sort of limit some of the upside the leverage on the upside? Just how does the LTL mix shift? What are you seeing LTL right now? And then how does that mix shift impact how we should think about your upside operating leverage?

So here's what I would say. We did shift a lot to LTL come up, especially in '21, '22, '23, even '24. I would say that number reduced by a pretty good bit last year as the volumes and tonnages and LTLs went down as you've seen and reported on a lot of those. And so I would say maybe something we weren't as vocal about, but the LTL market, we kind of rightsized our LTL exposure last year just with what happened in the LTL market. So it's a lot less today than it was in 2023. That said, our LTL customers are they're pretty steady right now, but they're not doing as good as they want to do. David?

I agree with that. But we also, though, in lieu of that, that we've gone to the market with a lot of our airfreight customers. And so I'm seeing a lot of that, that is building. I just think, Scott, at the end of the day, whether it's our LTL portfolio or whether it's our airfreight portfolio, freight forwarder portfolio that we do a lot of business with because of our technology and high security program that we've got. It's all about pricing.

And when pricing is available to us to be able to pass on, you'll see returns coming back down or ORs coming back down, margins, whatever.

And our next question comes from Dan Moore from Baird.

A couple of quick questions or at least 1 question. So I think a lot of questions are being asked around this idea of how much inherent flexibility you have in the model to respond to what could be a better market. A lot of the things you kind of addressed on the call a few moments ago with Scott's question, just in terms of fundamentals that are starting to show themselves to be better. The big question is what if demand recovers in '26 because of tax rebates because of a variety of other potential catalysts, how do you pivot as an organization and as an enterprise to take full advantage of that. So my question relates to the following. If demand gets better in April, May or June. How much -- what's your go-to-market strategy in a market environment where there's an actual uplift in demand? What changes in that market relative to what we've seen here over the last 3 or 4 months, which is a fairly unique supply narrative?

Yes, Dave, I think the first couple of quarters and whenever that happens, whether we're in the process, maybe we're at home plate, we're getting ready to hit the ball to run the first base, and we still got to go second, third and fourth -- second, third and home. I think that when that happens, I think what you will say for the industry, I know you'll see from us, but I think it's the industry is that it's time to reclaim some of the profits that we've given away for the last 4 years. And it's not like I'm interacting running out here and buying 200 trucks to say, let's just -- let's do what we've all done that is throwing a lot of capacity at. I want to get my rates up to acceptable numbers, get my expedited down in the 80s, getting dedicated into the high 80s or 90s kind of number and led by managed freight be able to over whatever the leftover is there to be able to continue to grow yet. So I would tell you that for the first 2 quarters, when that day does happen, I think you're going to see getting healthy once again at the industry. And so that would be my goal and the flexibility that we'll have when the market turns.

Maybe same song, different verse. What percentage of the book, the total enterprise book renews in the first quarter? What percent in the second, what percent in the third and in a market environment that gets better would that look different? Would you be taking a second drink?

Yes. Well, there's 2 things. I will tell you, number one, second quarter is a heavy quarter for us as I think about our poultry and as I think about our expedited in particular, those 2 segments of our business as it has been always. And -- there's no doubt that we've got cuts correctly even at lower rates, and we had to be competitive in the rates over the last 4 years but if they contracted out for 20 loads a week, they've done a good job of giving us the 20 loads a week. And we will abide by that. And we agreed upon rates -- that will be next January before we're going to go back to those customers.

I would tell you that 40% of the customers are that of the customers will be taking 2 or 3 rate increases and 1 that thought they were going to give us 20 loads a week, and they gave you 7 and they took advantage of the market, and we weren't getting our volumes, we will be there 14x, loving them and thinking them and God bless in them, but we got to have more money. And so that's probably 60% of our business if that gives you any idea.

And gentlemen, at this time, there are no further questions.

All right. Well, we'd like to thank everyone for joining us today, and we look forward to talking again next quarter. Thank you.

This concludes today's conference call. Thank you for attending.

Welcome to today's Covenant Logistics Group Q3 2025 Earnings Release and Investor Conference Call. Our host for today's call is Tripp Grant. [Operator Instructions]

I would now like to turn the call over to your host, Mr. Grant. You may begin, sir.

Good morning, everyone, and welcome to the Covenant Logistics Group Third Quarter 2025 Conference Call. As a reminder, this call will contain forward-looking statements under the Private Securities Litigation Reform Act, which are subsequent 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.

Joining me today are CEO, David Parker; President, Paul Bunn; and COO, Dustin Koehl.

Our business remained resilient in the third quarter, although margins were compressed, particularly in our Asset-Based Truckload segment due to an inflationary cost environment, persistently high claims expense, headwinds from excessive unproductive equipment and continued pressure on volume and yields in our Expedited and Dedicated segments.

Year-over-year highlights for the quarter include consolidated freight revenue increased by 4% or approximately $10.2 million to $268.9 million. Consolidated adjusted operating income shrank by 22.5% to $15 million, primarily as a result of year-over-year increases within our combined Truckload segment.

Our net indebtedness as of September 30th increased by $48.6 million to $268.3 million compared to December 31st, 2024, yielding an adjusted leverage ratio of approximately 2.1x and debt-to-capital ratio of 38.8%, as a result of executing our share repurchase program and acquisition-related earn-out payments. The average age of our tractors at September 30th increased to 23 months compared to 20 months a year ago. On an adjusted basis, return on average invested capital was 6.9% versus 8.1% in the prior year.

Now providing a little more color on the performance of the individual business segments. Our Expedited segment yielded a 93.6% adjusted operating ratio. While this result falls short of our expectations for this segment, we've been pleased with the resilience of this segment over the prolonged downturn. Compared to the prior year, Expedited adjusted operating ratio increased 160 basis points.

The average fleet size shrunk by 31 units or 3.4% to 861 average tractors in the period. We expect the size of this fleet to flex up and down modestly based on various market factors. As market conditions improve, our focus will be on improving margins through rate increases, exiting less profitable business and adding more profitable business.

Dedicated's 94.7% adjusted operating ratio also fell short of both the prior year and our long-term expectations for this segment. We were successful in growing the dedicated fleet by 136 tractors or approximately 9.6% compared to the prior year as we have continued to win new business in specialized and high service niches within our Dedicated segment. Going forward, we plan to reduce certain of our fleet in this segment that is exposed to more commoditized end markets, where returns are not justified and continue to invest in areas that provide value-added services for customers.

Managed Freight exceeded both revenue and adjusted operating income compared to the prior year. but fell backwards sequentially due to the loss of a short-term customer that scaled up in the first half of 2025 and rolled off in Q3. Our team showed resilience through this difficult freight cycle with their ability to bring on new freight, handle overflow freight from Expedited and reduce costs to offset lost business.

Over the longer term, our strategy is to grow and diversify this segment. And we know that an operating margin in the mid-single digits generates an acceptable return on capital given the asset-light nature of this segment.

Our Warehouse segment experienced freight revenue and adjusted operating income that was slightly below the prior year quarter and yielded an adjusted operating ratio of 92.1%. The adjusted operating profit and adjusted operating ratio in this segment was a solid improvement sequentially. Going forward, we anticipate top line revenue growth and operating income growth, as a result of a large customer start-up scheduled for November.

Our minority investment in TEL contributed pretax net income of $3.6 million for the quarter compared to $4 million in the prior year period. The impact of incremental bad debt expense in the quarter compared to the prior year reduced TEL's pretax net income. Although TEL's overall business remains strong, exiting capacity from the general freight environment is expected to impact them again in the fourth quarter and potentially beyond.

Regarding our outlook for the future, we anticipate the fourth quarter of the year to remain challenging. with the continuation of the soft freight market, combined with the impact of company-specific factors that will result in what we believe to be an unseasonably soft quarter despite a slight positive impact from peak.

Company-specific factors within our line of sight include the negative impact of increased claims accruals, the negative impact the U.S. government shutdown is having on volumes of freight we carry for the Department of Defense and accelerated customer bankruptcies with TEL will all prove to be challenges for the quarter.

In addition, as capacity exits accelerate within the general market, we anticipate the cost to procure transportation will likely lead our ability to capture rate increases from our customers in our Managed Freight segment, resulting in constrained margins.

Despite both the general market and company-specific challenges over the short term, we are increasingly optimistic about the pace at which the freight market should recover. Recent enforcement of government policies concerning English language and non-domicile drivers have seemed to accelerate the pace of capacity exiting the market. We believe the impact of this trend is being masked by consumer pause and uncertainty as a result of elevated interest rates and volatility of global trade policy.

Our belief is that consumer demand will improve with the continuation of monetary easing and the eventual settlement of trade tensions. In addition, the impact of recent tax policy will further facilitate demand.

Regardless of when the market environment turns, our team is ready to move quickly to execute with urgency to capture additional market share and the appropriate amount of operational leverage that returns appropriate levels of capital to our shareholders.

Thank you for your time, and we will now open the call for any questions.

[Operator Instructions] And our first question comes from Scott Group of Wolfe Research.

So I want to start where you wrapped up just talking about the capacity backdrop and maybe just give us some color on what you're actually seeing in the market with respect to capacity exits? How big of a deal do you think this is going to have? And then I don't know maybe just like -- there's certainly more talk in the market about this. Why don't you think we're seeing any impact on like national spot rates? I know there's a lot of talk about local markets getting tighter, but why do you think this isn't showing up necessarily in national spot rate data?

Scott, it's David. Yes, I mean, this is something that didn't drive me crazy trying to figure out where all this is going. And I would say a couple of things because great first question. From a standpoint, I'm more excited. I've been in this thing 53 years. I'm more excited right now than I've ever been in my entire career for the next 2 to 3 years. I see some things that we've never ever been in a position, where we are starting to get the government that is now starting to get concerned about who's driving trucks and why should they be driving them, and you are sensing that, and I just see an avalanche that's in the process of happening.

And as I think about from spot rates, I mean, we have seen compression on margins on our brokerage side in the last 3 weeks when all this stuff started. And it is right now defined to a lot of individual states. And I met yesterday with our brokerage group and California, Texas, Oklahoma, Chicago, those are states and cities that keep coming up over and over. And you have got third parties that are scared to go to those states, right, wrong or indifferent. And that's the reason why you are seeing instead across the board that you are seeing, I believe, spot areas of the country, where it's becoming tighter and rates have gone up in those areas because a lot of these truckers are still going to go.

I'm not going to Oklahoma. I heard Oklahoma pulling over 135 trucks and [ sending by the ] jail and all those stories that we're all hearing. I'm not going to Laredo, Texas. They're going to stop everybody that can't speak English. And so that is really leading the effort.

Now that said, will it be a red versus blue states, red being aggressive, blue not being as aggressive. But I'm here to tell you that if they continue to have -- if we all continue to wake up every day, with another fatality accident by illegal immigrant, it is going to spread throughout the United States.

And as I look at this, as I look at non-domiciled CDLs, as I look at the English-speaking issue, as I look at ELDs, there is more cheating going on and toggling is unbelievable guys to what's going on with ELDs. And so far, the government has suspended 5 or 6 companies. I'm here to tell you there's going to have to be hundreds -- there's about 950 that are approved ELD suppliers, and they need to look at every one of these ELD suppliers.

We all thought that when we went to ELDs that everything was going to be legal and you're not going to have log books and everybody is not going to be cheating. Well, I'm here to tell you, us big guys, we love the ELDs. We love not having log books. But when you got toggling going on, it's rampant cheating that is happening. I run a truck 100,000 miles, they're running trucks 140,000 miles. And so the government is just now for the first time ever that it's starting to go down this road

And so, I feel very confident that over the next 6 months, 1 year, 2 years, whatever it's going to be, it's going to be a snowballing effect that we are going to have less drivers on the road. We're going to have safer drivers on the road. We're going to have English-speaking people that can have the ability to speak English and understand it.

We are going to have ELDs are going to be in much better shape, get rid of the multiple MC numbers. Guys, it's rampant with shutting down this, opening up that one. Today, I shut down tomorrow, I open up another one. We're just now learning about this and just now starting to do anything about it.

So as I look at capacity, one of the things that strikes me is this is coming to a head. It's going to be -- it's in the process of exiting. But as good as anything, I'm here to tell you the funnel is stopping coming in. whatever that number is, that's leaving, whether it's 1,000 or 200,000, they're going to leave, but there's not going to be a flood of entries coming in

And so, that is extremely encouraging that for the first time in my 53 years, there's actually a constraining of supply that's happening. And there's not going to be a bunch of new drivers from all over the world that's entering the truck driving workforce. I looked at that, Scott, and I'll shut up here in a minute. You asked the first question of what I've been [ alive ] with for the last month.

But as I look at this supply, then I start looking at what the Fed is doing on interest rates. They're going to continue to lower interest rates. They're going to continue to pump the economy up. This physical -- the stimulus package that we all hear Trump talk about $17 trillion, $20 trillion [indiscernible] I don't know what the number is.

One thing I do know it's gigantic. And there is a lot of freight on these plants that are being built in America, even if it takes 2 years, there is a lot of business that's coming to America that's got a lot of freight in it from these new plants that are going to be coming up.

So as I look at supply, I am more excited than I've ever been. There is no doubt. I think we and the industry, we got some jump to go through. What do I mean by that? Brokerage, margin compression is happening now. I see it in our business. All the brokers are going to see it in their business.

As I look at used truck market as we speak today, it's less than what I want, but I believe it's going to turn around fairly soon, maybe next year because nobody is going to buy a Class 8 truck. We don't know what we're going to pay for a Class 8 truck. I'm at ATA next week in San Diego, and I can't tell you what a price of a truck is right now or if I'm even going to buy one. So it's going to drive up the used truck prices. So that I'm happy about that.

This government shutdown. It hurt me on my Department of Defense business, but I'm a month into it. We'll see what happens there, but it's not helping. Eventually, it will -- eventually will go back to work and everything will be good there.

But -- and lastly, I was just telling the guys here before we got on here, one of the things that I'm really excited about, as we all know, our industry has not raised rates in 4 years. I haven't raised rates virtually at all in 4 years. And I was in a meeting in the last couple of days with sales and both on our legacy dedicated and on our expedited, we got 8 or 10 accounts that we have asked for rate increases and actually have been given 2.5% to 4% in the last couple of weeks. That excites me. Is that something that's going to happen on every customer I got? I don't know, but I haven't seen it in 4 years, and I'm starting to see it.

I'm starting to see bids at all-time highs. So you're seeing the customers -- our bids are up 17% since August. Well that don't happen. That's a November, December, January, February event, and it started happening in August and September. Why is that? It's because our customers are concerned about capacity, even though we all need freight right now. So Scott, I'll shut up. As I look at it, I'm more excited than I've ever been about '26, '27, '28. If anybody is ever going to buy a trucker, it's now. If they don't buy truckers now, they don't need to be buying truckers. So that's where I'm at.

Thanks, Scott. Let me give you a couple of things. David talked a lot about the regulation, and there's no doubt that we're sensing it. And then we've given some color on maybe demand freight going forward. I would say there's a couple of words we're using internally right now. One is patience. I think we're all going to have some patience, and I'll get a little bit into that. The other is there's going to be some pain before there's some gain and pain in used truck prices and [ see ] smaller guys go bankrupt and flood the market, pain with some brokerage compression. But every time in history in this business, there has to be pain before there's gain. And I think that's where we're at.

On the patient side of things, specific to your spot market question, the week after Secretary Duffy came out and talked about the non-domiciled CDLs, I think you did see spot rates go up and especially in those markets David was talking about.

And what happened was a lot of those folks just stayed home. A lot of these non-domiciled CDLs have been issued in a -- they're concentrated in a handful of states. I mean there's some in every state, but there's some West Coast states that had a lot of these non-domiciled CDLs.

The reason you hadn't seen the spot rates jump up is that the 2 largest West Coast states that have the non-domiciled CDLs, they have not -- they're in the process of trying to figure out what are they going to do with the people that have the non-domiciled CDLs.

And so I think California is supposed to decide in the next 5 days, they're supposed to direct carriers what to do with those drivers. And so the first 5, 6, 10 days, you had some people that maybe had those type licenses stay home. Well, they've had to get back to work. So they're still out there running around.

In the next 5 to 10 days, you're going to -- California is going to tell the carriers, here's what we want you to do. Here's the process to do that. And so I think that's when you're going to start seeing some of that capacity exit. And I think on that side, it's probably sooner than later.

And then to David's point, the other is you're stopping filling the bucket with new entrants into the market. So I don't know if that helps paint a picture on maybe why the spot rates haven't jumped. But you had some of them stay home right when it came out, then they've gotten back to work. But I think in the next 5 to 10 days, you're going to see some of these states roll out the policies that here's what you do. And I think over 30 days after that is when you'll start seeing some of this capacity exit.

Okay. Super helpful. David, at the risk of getting your blood pressure any higher. I'd like to ask a follow-up if I can. How do I think about like how many of these drivers do you have from just your perspective on enforcement, like it's always been easier to enforce large fleets than mom-and-pop truckers. Like how do you change this? And then like -- but is your perspective here that ultimately, like this is going to be a big help for large fleets? And is it a risk to a brokerage model in general?

Yes. Yes. I mean, we got a $200 million brokerage, and it does concern me because I think led by Duffy at DOT, I think that they're going to -- I think there's going to be enough leading from DOT that is going to go after more of the small carriers that are illegal than it is the big carriers. So yes, I think that I'm concerned about compression on my margins, on my brokerage. But I think after a period of time, whether that's 3 months, 6 months, I don't know, but a period of time that you'll start seeing the asset rates rise very nicely that will offset any of the brokerage compression.

Yes. I think, Scott, when I was referring to there's going to be some pain before there's gain. I think that, that was probably more on the brokerage side because there will be some pain going through this with a lot of brokerages. And to your point, it should help asset companies more. Brokers make money -- brokers make money when rates are rising hard, when rates are falling hard. And so, where they are getting troubles in the middle and if you got contract rates and hadn't [ reset ]...

And if the government was not doing nothing, if the government was just going to be on the sidelines, it all go back to the way it's always been for 40 years. But I don't believe that's happening. There's unbelievable amount of pressure, that the government is putting on it, but I think constituents are putting back to the government now saying, am I going to wake up every day to a fatality accident.

Okay. And then just last one, if I can, just turning to your business. You talked about near-term pain in Q4. Any way to sort of size sort of what you're thinking about for Q4? And I know you've got a lot of like that linehaul LTL business. How is that performing right now?

Yes. The LTL is down, and it's interesting because forever, LTL would slow down in November, December, that was typical, to be honest with you, from COVID for 2, 3 years, say, '21, '22, '23, we really didn't see the LTLs really slow down a lot. But the LTL guys are slow. I mean, their business has been hit. And I think overall, the volumes are down, and I don't know when that is necessarily going to come back. It will, but I don't know when it's going to be.

So yes, I look at that, that concerns me. I look at how long is the government shutdown going to be on my DoD business because it's only half of what it was. And so, we got to deal with that and then compression on the brokerage side of the business. So I think we got to go through that junk.

In our TEL business, I'm happy about a couple of things. They've grown more business, more sales, more leases is what I'm trying to think of. The customers so far in the last 6 weeks, which is a good sign, but they also had to take back more trucks than they've had. So I'm seeing some sloppiness in the TEL business that concerns me.

And so, I think all that adds up to fourth quarter that it isn't going to be third quarter. It's going to be less than third quarter, and I'll let [indiscernible].

Yes. I think it's too early to put a number on it, Scott, but I would say it's softer than what it seasonably will be for all of the reasons that David talked about, mostly on the truckload side and also on the TEL side.

I think from our line of sight and what we have seen, even though it's early in this quarter and then the visibility that we have into the peak, which there's some -- a little bit of good peak in freight in there, but it's not enough to offset some of the negatives that we've seen over the last first 2 or 3 weeks of October. So I do think it's unseasonably softer, but I'd be hesitant to put up.

That's interesting because I am somewhat optimistic about what I'm seeing about peak business. And some of our customers have already gotten back with us saying that carriers have given back freight to them, which is on the brokerage side. And so that's also interesting to me. So yes, peak is not going to take care of some of the reductions, but I am optimistic that peak seems like it might be a decent peak for us.

Guys, I don't know if you can still hear me, but just so we can hear you.

Okay. Thank you. We're going to put it on mute. Our operator has disappeared.

Yes, we're trying to see if there's any other questions.

Maybe you convince the operator who's busy buying trucking stocks.

He is busy. The market is open. We're trying to get the operator to see if they can facilitate any questions. So we'll see what happens.

Just so there's [indiscernible], do you want me to ask more questions?

Yes, please.

So sure. I mean, let's talk pricing a little bit. You -- I think you said you're starting to have some bid activity. Just what you're seeing from a pricing standpoint, early thoughts on '26 bid season.

Scott, it's early. As David said, we're going out to some customers. And I think low single digits is kind of the norm. I mean, we need a lot more than that. Inflation has been significant in '22, '23, '24, '25. And I'm betting the price of trucks is going to go up next year and health insurance and casualty insurance is going to go up. And so, we need a lot more. But I think low single digits, there are customers that are willing to have good active discussions around those numbers just from the recent experience we've had.

Okay. And you made a comment that no one wants to buy trucks right now. What -- you're going -- and you'll be at ATA next week, but what are you doing from a fleet perspective? What are you thinking about from a CapEx standpoint

So a couple of things. Yes, I'll speak to it and then let David follow up. First off, nobody's pricing -- most years, most of the large fleets already have pricing by this point. But with all the questions around tariffs and there were some announcements in early -- late September, early October about additional potential big truck tariffs.

And is that on the whole truck? Is that on parts of the truck? Is that which vendors? There's a lot that's been up in the air. Hopefully, by next week, we'll know more. We're meeting with all the OEMs while out in San Diego.

And so I think nobody has been placing orders because you don't know what the price is, a; b, the order boards at all these OEMs are very slack right now. I mean, in the fourth quarter, going into next year, order boards are very, very slack on truck and trailer equipment.

As far as our fleet numbers, I think our total fleet size in total, it's probably be about the same. We may rationalize a little bit of business if we can't get the margin out of it. From a net CapEx standpoint next year, I'll let you give a math.

Yes. I think, one, it's a big question mark. It is going to be somewhere probably net in the neighborhood between $70 million to $80 million, but I would be hesitant to commit to that. I would say that could be subject to change.

We have a number of new trucks that we have financed and are sitting on the fence that are ready to go into service. And so we have quite a bit of unproductive equipment right now, whether it's new or used. We don't want to fire sell it. We don't -- I think we're in the position to kind of sit on it for a little bit longer and take advantage of a market swing.

But at the same time, our fleet, although it aged probably 2 or 3 months compared to the prior year, it's a little bit of a misnomer because we've got a lot of new equipment that hasn't gone into service. So our fleet is very, very healthy. Our balance sheet remains very, very healthy, and we're going to buy some equipment. We just -- it's hard to commit to a number when you don't have pricing on it.

And I think that gives us a little bit of an advantage over some of the other peers in our group, as we've been pretty consistent about replacement and replacing our fleets in bad times and having a good healthy fleet with the latest and greatest safety equipment on it and the best MPG, if you will, so fuel economy. And so that's what we're going to continue to do. We're going to continue to operate that playbook.

And I think we've got a little more flexibility than maybe some of the others in the market to whether it's either delay purchase or reduce purchases next year, but we're just kind of in wait and hold mode in terms of absolute volumes.

Have you guys tracked on the operator yet?

No [indiscernible].

Our next question comes from Jason Seidl from TD Cowen.

I appreciate you joining the fray again. David, one of the things I love about you, you're just so calm about the markets and not really ever enthused. So [indiscernible]. I wanted to touch a little more on 2 different things. Can you talk a little bit about the government shutdown in the DoD? You said that business is down about half. Sort of how should we expect that to flow through the P&L? And once the government does reopen, whatever that may be, how quickly do you expect that freight to come back? And then I have a question on sort of capacity.

Yes. So Jason, this is Paul. A couple of things. On the DoD business, I would say about half that business will kind of just be lost. There's kind of the way they move that freight. Some of it is just inventory movements and then some of it is vendor type freight. And so, it's not like the -- some of it will build a backlog that has to be moved eventually and some of it won't. It will just be kind of lost freight.

We've moved a lot of those trucks onto a lot of Expedited loads just to keep the trucks moving and keep the drivers getting paid and that kind of stuff. And so I think you'll see a little bit of a spike whenever the government opens back up. But I don't know that it's not going to be a one-for-one makeup.

As far as it flowing through the P&L, I think the question is, does if it lasts the whole quarter, it's going to be pretty impactful on Expedited's results. If it's -- if they get something done first week of November, which I guess that's next week at this point, then maybe it will be a little muted. I hate that we've lost the month of October because a lot of these bases shut down around Thanksgiving, a lot of them shut down around Christmas.

And so, October is a month that we really, really run hard in that fleet. I mean, really, October 1 to about November 15th is when that fleet is really flowing. And so the government shutdown could come at a less opportune time. I mean it's going to hit us. As David said, it kind of stinks, and that's another one of my -- there's pain before the game, but that business will come back.

And I guess turning back to capacity, as Scott mentioned, we're really not seeing much of an impact in the spot market. But I think, obviously, you've seen what we've written. I think that eventually comes back as we keep sort of rolling through the months here. But my question is, what could accelerate this? Is there -- we've heard some smattering that some insurance companies have talked about taking some actions and then some customers have talked about taking some actions in terms of exposure to carriers who might have non-domiciled drivers. How should we sort of frame that up? And what are you hearing in the marketplace?

I think everything you just said there, Jason, is in the process of happening. I think you're going to see insurance companies that are not going to insure non-domiciled CDL license. I think that, that will be happening. And as Paul is saying, of course, California is leading it. We're going to hear next week or so what California is planning on doing about it.

But I think you got insurance companies that are in the process of saying, we're not going to insure this. I guarantee they're sitting around in their offices right now, looking at their book of business, saying, what do we have on the books, and they're going to have to get their hands around that. But the process will be that there's going to be a bunch of folks, who aren't going to have no insures. So I think that, that is one thing that is definitely going to be transpiring, but then it's just going to be pressure from the government owned all the stuff.

We didn't talk about cabotage. I mean, that's unbelievable how much cheating is going on in cabotage. And these people coming out of Mexico and going to Canada and going to the United States is supposed to go straight back and they sit here for a month going back and forth. The government is under that. That's under [ Christy Dan ] 39:57. They are under that, and that is coming to the top that I think will bring more freight back to us, U.S. carriers.

There's just a lot of stuff that whether it takes between now, if I was going to throw one it's April, I don't know, only because fourth quarter is virtually over with here. It is what it is. And first quarter gets into the weather. But with the government's heavy hand, of which I agree with, their heavy hands, you are going to see capacity leaving the market, but better than anything, no new capacity coming.

I don't know if you saw this, Jason, but we look at a number that is a plus and minus of MC numbers on a weekly basis. And to give you an idea, for the last few months, that number has been negative 50 to 100 MC -- less MC numbers a week, 50 to 100. Last week, it was over 400 -- 400 less. That was powerful.

I look at another number that I keep an eye on. Look at total volume, a report that we look at that has taken all the reports that are coming out on whether it's cash or truck stop this and they accumulate them all and volume is down 17%, but rejections are up almost 2%. What is that saying? This is -- this week volume is down 17%, but rejections are up almost 2%. It's telling you something about capacity. And so that's the kind of stuff that we're looking at as we go forward.

Well, David, let's say you're right and the recovery is in April with the start of spring shipping season because you finally get the volume back. Bid season, we're going to be well into that already and probably not at exceedingly favorable rates at this stage. What's your ability to go back to the customers and say, "Hey, look, it's June, the market is different, right?

100%, not 99%, 100%. I mean, I love my customers. Nobody love my customers like I love my customers. But at the same time, if I've not raised you in 4 years, if I cannot make an argument that says 3 months into a pathetic rate, then I don't have the ability to be able to get a rate increase when the market allows me, then we have no relationship. And I don't want them in my portfolio. And so that, you will -- but it won't be me. It will be the entire industry.

So as I look at that on the rates, Jason, that we talked about in DoD, and we got a margin compression on this, and we got to go through some difficult times that I think -- I think it is -- I'm happy with it. I'm very pleased with it because as I step back from this junk that we're having to go through and -- or the negatives or whatever word you want to use, and I look at how much positive demand opportunities, foreign investments, accelerated depreciation, as I look at rate cuts from the Federal Reserve, as I look at all this domestic investment that Trump is bringing, as I look at the Bill Back America Beautiful or whatever they're calling the -- whatever that bill is called. I mean, it is going to be -- and with ISM being down below 50 for 3 years, with what Trump is doing on bringing back plants, I promise you, interest rates going down, it is going to feed the economy with capacity leaving. So that's why I'm excited. A perfect storm.

[ I can ] certainly see it. And listen, I don't have 50 years in trucking, but I have just over 30 years. So it's -- it's definitely one of the more interesting times I've seen for sure. But listen, gentlemen, I appreciate the time as always, and I want to stay safe out there.

And our next question comes from Reed Seay from Stephens.

You've given a lot of good color, but I wanted to come back and touch on some of this government business. You mentioned like the volume will come back once the government comes back. But here in the fourth quarter, let's say maybe we get a shutdown here at the end of the month. Could we potentially see a catch-up of these volumes in 4Q? Or how would you expect maybe the cadence following a return of these volumes?

Yes. Reed, here's what I'd say. That's then to go and I speak to that. It won't be a full catch-up. It'd be a partial. There could be a partial catch-up. And part of what handcuffs the catch-up is these bases are -- they're going to shut down around Thanksgiving and they're going to shut down around Christmas.

And so just the way the calendar is going to fall, it's going to hamper a full recovery and just some other things just around the nature of the freight. I mean, it's still moving. It won't be a full catch-up. You can have a partial catch-up if the government reopened sooner than later.

And then it looks like during the quarter, costs were moving in the right direction. Can you talk about maybe some actions that you've taken on the cost side here in 3Q? And maybe is there any more to come in 4Q if we have demand continue to be weak in the LTL or in certain parts of the business?

We've continued to try to make sure our headcount matched our -- was matching our freight volumes and tried to make sure we weren't getting frivolous on overhead. We've really shut down any significant growth in overhead. We did that earlier in the year, maybe even the end of last year, knowing this market was continuing to drag out.

We saw -- I would say we're happy with maintenance costs, some things we've done on those and to really manage them down. And so I would say it's just more of blocking and tackling Reed and trying to make sure that we're battening down the hatches for the -- we've been in this storm for 36 to 40 months now. You can't be getting that over your skis on costs.

Yes. Yes, I agree. There were some call-outs. I'll just add on to what Paul was saying. There were some call-outs to some pretty hard cost-cutting decisions in the quarter for which we provided a table in there that kind of reconciled those. But those were difficult decisions. But I would also say that throughout the year, we've been very cost conscious and some of the headwinds that we saw probably earlier in the year, whether it's first quarter or second quarter, were equipment-related costs.

And just as we grow certain of our dedicated fleets and we start to expand geographies, and it takes a while to begin to optimize your cost profile in those geographies and within those fleets and -- we're trying to find the sweet spot. We're trying to develop the amount of density needed to efficiently operate that equipment.

And there was some cost in the quarter in Q3 related to some start-up costs, I would say, for shops and new hires, shop salaries and things like that, that we think will make us more efficient in the long run. So we continue to invest in the things that are going to return the right capital to our shareholders. It's just clunky. And I will say there was some clunkiness in the quarter. But I think longer term, as we continue to grow that business, you're going to see some efficiencies from it.

And our next question comes from Jeff Kauffman from Vertical Research Partners.

Just some quick kind of look ahead here. What are you expecting to hear from the other carriers at ATA that might be a little different than what you were thinking a couple of weeks ago?

I think it's just going to be an add-on Jeff; of everything we've talked about today. I think you've got motor carriers that are mad at. I think you got motor carriers that are happy with what the government is doing. And I think that, that's going to be the tone at ATA. I really do.

Then the side note is going to be OEMs, what are we going to do about trucks. I think that will be -- I think that's going to be the 2 pressing issues. Don't you, Paul?

Yes, truck. I think it's going to be government regulation. It's going to be how bad has inflation been over the last 36 to 42 months that you haven't been able to get in rates and regulation trucks and inflation that has been a recovery in rates. That will be the 3 big talking points.

And then just one follow-up question because I know a lot of questions were asked by Scott Group. The shares are about 9x earnings right now, give or take. I know it frustrates you. It just is what it is. I know the balance sheet is in good shape, but what are you thinking in terms of share repurchase here? I mean, you don't want to get over your skis and buying them in a tough environment. On the other hand, shares appear like a bit of a gift at these valuations for a buyback.

No, I agree with you. I think our shares are highly discounted. And I think there's a lot of potential value there. To your point, the balance sheet is in good shape. Our debt today in terms of EBITDA leverage is just over 2x. We -- for a variety of reasons, we bought back a ton of stock. In the first half of the year, we had an earn-out payment, and we front-loaded to avoid some tariffs on almost all of our equipment.

And so I do think our margin -- our debt potentially, just call it, free cash flow, if you will, maintenance CapEx and cash from ops, cash flow from operations will improve in the fourth quarter and will allow us opportunities.

And I don't want to commit. We do have some availability under our share repurchase program that was approved by the Board. But I don't want to commit to say that we're going to buy back any of that, but we have a full range of options that we've exercised in the past, whether that's M&A or whether that's share repurchases and continuation of dividends. And we feel like our formula is working, and we're going to stick with that.

At this time, there are no further questions. I'll turn the call back over to Tripp for closing remarks.

All right. Well, thank you, everybody, for joining us for the third quarter earnings call for Covenant Logistics. We look forward to talking to you next quarter. Thank you very much.

This concludes today's conference call. Thank you for attending.