Covenant Logistics Group, Inc. (CVLG) Earnings

Management highlights

- Overall Consolidated Financial Performance * Consolidated freight revenue increased 6.6% ($18.2 million) to $294.7 million, driven by the acquired brokerage assets in Managed Freight, partially offset by a 3% revenue decline from combined truckload operations due to intentional fleet reductions. * Consolidated adjusted operating income fell 19% to $12.2 million, primarily due to lower gross margin in Managed Freight. Dedicated improved results, while all other segments saw slight declines. * Adjusted net income declined 9.8% year-over-year, as higher pre-tax earnings from the TEL minority investment and a favorable discrete tax impact partially offset lower operating income. * Net indebtedness as of June 30, 2026 was $289.7 million, a $6.6 million reduction from December 31, 2025, for an adjusted leverage ratio of 2.2x and a debt-to-capital ratio of 41.2%. * Trailing four-quarter return on invested capital was 5.2%, down from 7% in the prior year period. * Average tractor age was 26 months as of quarter-end, up from 22 months year-over-year, in line with the company's asset lifecycle management plan and expedited fleet reductions. - Long-Term Strategic Context * Over the past decade, Covenant has shifted from a mostly volatile irregular route carrier with no long-term contracts to a business focused on specialized, value-added services with multi-year committed customer contracts, to reduce earnings volatility. * This strategy delivered proven results during the 2023-2025 market downturn, where margins held up better than peer averages and the company's own historical results, leading to outperformance of the company's stock. - Near-Term Execution Priorities * Transition expiring contracts into new long-term committed agreements * Shift more uncommitted capacity into committed revenue streams * Restore managed freight gross margins to normal levels as contract rates adjust to rising capacity costs

Guidance

- The company expects sequential margin improvement quarter-over-quarter through the second half of 2026, with higher earnings in Q3 2026 than Q2 2026, and higher earnings in Q4 2026 than Q3 2026. Improvement will be gradual, rather than a sharp, rapid jump. - Net capital equipment investment for the second half of 2026 is expected to range between $50 million and $60 million, varying based on delivery timing and used equipment pricing. Operational cash flow is expected to improve, and net indebtedness is projected to see a modest reduction. - Management forecasts the current industry upcycle will be a multi-year, multi-quarter

Segment performance

1. Expedited: Adjusted operating ratio of 94.6%, 70 basis points higher than the prior year quarter, but up 450 basis points sequentially from Q1 2026. The fleet was reduced by 17% year-over-year, but freight revenue per average tractor improved 6.8%. Elevated insurance claims costs negatively impacted profitability in the quarter. No absolute revenue or contribution percentage was provided for the segment specifically. 2. Dedicated Truckload: Adjusted operating ratio of 95, in line with the prior year quarter. Freight revenue per average tractor improved 8.6% year-over-year. Maintenance and insurance claim cost headwinds offset improved revenue. No absolute revenue or contribution percentage was provided for the segment specifically. 3. Managed Freight: Freight revenue grew 28.4% year-over-year, driven primarily by the brokerage assets acquired in Q4 2025. Operating margin lagged longer-term expectations, as rising costs to secure quality brokerage capacity outpaced contractual rate increases from customers. 4. Warehouse: Revenue met management expectations, but margins failed to improve sequentially due to ongoing labor inefficiencies with a new customer. 5. Minority Investment in TEL: Contributed pre-tax net income of $5.3 million for the quarter, up from $4.3 million in the prior year quarter. Much of the improvement came from higher equipment sale gains that are not expected to recur in Q3.

Risks & headwinds

- Elevated insurance and claims costs are an ongoing industry-wide headwind, with volatility quarter-to-quarter due to self-insurance structures. The Supreme Court's recent Montgomery decision has increased insurance and claims risk for the company. - Tight industry driver capacity limits the company's ability to grow rapidly, as driver pay will need to increase to attract new workers, adding to cost pressures. - Ongoing enforcement of electronic logging device (ELD) rules and CDL requirements will continue to remove excess industry capacity over time, supporting higher rates, but also constrains Covenant's near-term growth. - Managed freight segment margins face ongoing pressure in the early upcycle, as costs to secure third-party capacity are rising faster than the company can implement contractual rate increases for customers. - Insurance costs are volatile quarter-to-quarter due to the timing of claim mediations and settlements, creating difficulty for forecasting and modeling earnings. - The warehouse segment is facing ongoing labor inefficiencies related to a new customer that have suppressed margin improvement.

Analyst Q&A

• Q: The analyst asks for breakdown of one-time maintenance and insurance cost impacts between the expedited and dedicated segments, and the drivers behind higher second quarter maintenance costs.

  A: Excess insurance costs added 1.5 to 2 adjusted operating ratio (OR) points above the normalized run rate for both segments, driven by an unusually high volume of scheduled claim mediations settled in the quarter. Higher maintenance costs added approximately 1 OR point of additional expense on the dedicated side, from equipment preparation for sales and higher-than-normal costs for protein-focused business. Management does not expect these elevated costs to be fully recurring.

• Q: The analyst asks how much more non-strategic business the company plans to exit, and when fleet growth can resume.

  A: Most of the planned churn of non-performing business is complete on the dedicated side. For the expedited segment, the truck count has stabilized, and the current focus is converting as much of the expedited fleet as possible to dedicated multi-year contracts rather than reducing fleet size further. Dedicated fleets are positioned to grow over time once conversion is complete.

• Q: The analyst asks for the company's view on the length of the current upcycle, the pace of margin improvement, and the pricing trend in the current market.

  A: Management believes the industry is in the early stages of a 3-4 year long-term