Covenant Logistics Group, Inc. earnings

Management highlights

• First quarter included worst and best months in three years, trajectory positive into April, change in market structural. • Expedited segment negatively impacted by weather and fuel costs, but rates and volumes improving. • New business pipeline for committed truckload capacity strengthened. • Revenue trends strong in first three weeks of April. • Reduction in net indebtedness due to selling used equipment and buying little new equipment. • Average age of tractors increased, consistent with fleet changes. • Return on average invested capital 5% vs 7.6% prior year

Guidance

• 2026 expected to be transition year with sequential financial improvement. • First quarter secured rate and lane improvements, trend to continue. • First quarter activity to show up in subsequent quarters. • Expect improved cash flow and disciplined capital allocation to reduce leverage ratio over time

Segment performance

Consolidated freight revenue increased by 15.9% or approximately $38.7 million to $281.9 million. Consolidated adjusted operating income shrank by 11.5% to $9.6 million. Expedited segment: adjusted operating ratio 99.1, impacted by severe weather and fuel costs; expects sequential improvement. Dedicated segment: adjusted operating ratio 95.5, improvement from prior year, goal to restore double-digit margin. Managed freight: grew revenue and adjusted operating income, but cost to secure brokerage capacity elevated. Warehouse segment: freight revenue grew 14.6%, adjusted operating income declined slightly due to startup costs. Minority investment in TEL contributed pre-tax net income $3.7 million vs $3.8 million prior year

Risks & headwinds

• Leverage ratio may increase modestly in next couple of quarters depending on equipment deliveries and used equipment prices. • Severe weather and fuel costs could continue to impact expedited segment. • Cost to secure quality brokerage capacity remains elevated for managed freight. • Startup costs and operational inefficiencies could affect warehouse segment's adjusted operating margin

Analyst Q&A

• Q: What's going on in the poultry market and DOD business?

  A: Dedicated business pipeline strong for poultry and non-poultry, dedicated rate increases going well; DOD business in expedited is rolling better.

• Q: Are you having peak season discussions?

  A: Not talking about peak yet, but seeing capacity constraints like peak in some markets, more discussions on dedicated team capacity.

• Q: How to think about driver pay increases?

  A: Targeted driver pay discussions ongoing, mid-single digits likely, possibly high single digits if hot.

• Q: What excites about direction?

  A: More excited than in 48 months, industry turning around, manufacturing kicking in, DOT taking out bad drivers.

• Q: How much rate increases net on margins?

  A: Driver pay increase is part of cost, expect multiple rounds of rate increases, likely net 60-70% of bottom line.

• Q: Section 232 tariffs on trucks?

  A: Pricing for next year has $7,000 - $10,000 cost increase, new stuff prices to continue up.

• Q: Delilah Law and tort reform in Washington?

  A: Tort reform has 25% chance, DOT working on taking out bad drivers, LTL volume starting to improve.

• Q: Near-term thoughts on businesses Q2, Q3?

  A: Second quarter to be better than first, third quarter better than second