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 two of the worst and one of the best months we have experienced in the last three 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 three 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 three 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 four 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.

In the second quarter and beyond, 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.

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 over-the-road 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 a little reminiscent of peak. 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 2021 or 2022. And so there's still a long way to go on that, but we're having a lot of discussions with folks around dedicated team capacity as opposed to over-the-road team capacity. So that could be some of what these folks are feeling. But just so you know, we're looking at it more as trying to do 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 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 two 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 forty 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 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 three 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 forty-eight months. Last March is when all this downward spiral started. I mean it's been four 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 data that are backing that up as I think about the last four 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 a couple of days this week and continuing to work. On the Department of Transportation side and Secretary Buttigieg and other leaders, 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 two percent to three percent of capacity has been eliminated. And keep in mind, two percent to three percent capacity elimination changes the market. You take out two percent or three percent of capacity and if rates don't react, the market is tight. And so two percent to three percent 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 twenty percent capacity — excuse me, twenty percent inflation in everybody's P&L in the last four years, I can look at any one of our customers in the eye and say, let me tell you, we need ten percent. We need whatever double-digit numbers, they need to be there. And I think that the industry — 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 four 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 one month, two weeks, four weeks, six 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 four 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 requirements in our company, we would never hire unsuitable drivers. They have to be legal, 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 five percent 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, in 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 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 roughly 30% of 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% to 40% of the wage increase you get from the customer, not immediately, but over the first six months or so. But 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 where we've had significant inflation over the past few years. There are other inflation items, areas around trucks and insurance and some of those that have had a lot of inflation parts the last few years, and 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 the margin improvement, assuming there aren't other inflation items.

And one last follow-up question. This one is for Tripp. Tripp, the Section 232 tariffs made it a little challenging for some of your truck original equipment partners to be able to quote good prices for vehicles this year. Has that clarified yet? Or is it still a situation where the manufacturers 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 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 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's not the perfect equation for a great profitable quarter. And so we're seeing some bottoming in the used equipment market, and I expect it to strengthen throughout the year 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 increases by OEMs because of emissions.

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 the 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 two roads in Washington. One 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 zero percent chance to — my number is a twenty-five percent chance that that is going to happen. And the only reason why I say twenty-five percent is because the administration has been affected so much by war-related issues and legal matters that at least the administration recognizes that reform is important. 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 initial stages of dealing with Congress. We did have good meetings this week with the judiciary committee. And I think that we're going to be presenting to them in the future. So that's good. I mean, if you can't get to the judiciary committee, you're never going to get to the floor. And so we'll see where that goes. And then the other one, again, is that to me, the Department of Transportation 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, CDL school oversight, ELD enforcement is unbelievable. The amount of cheating that happens in this industry is unbelievable. But they're on top of it. And so to me, the message that DOT is hearing from us is sustainability. We have to continue to sustain this effort that they're pursuing and I'm thinking they've taken out two percent or three percent, I mean, guys, it could be easily another five percent or six percent. I mean it's a big number, whether it's three percent, four percent, five percent, or six percent, 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 a twenty-five percent chance, and we'll see what happens there, Scott.

So is your point there that whether or not maybe Dalilah's law speeds 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 earlier. 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 Dalilah's law without it being codified in Congress, which would be great because then it becomes law versus the next DOT Secretary doing whatever they want and not paying attention to it. So you want to get it codified as a law, but they are executing many of the Dalilah's law principles as we speak virtually.

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 four months above 50, et cetera. I think that they're starting to sense that because we went — if you remember, Scott, we went last summer and 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 near-term thoughts about how to think about margins for the businesses, Q2, Q3?

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 getting all of the 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.

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.