Q4 2020 Daseke Inc Earnings Call
Good morning, everyone and thank you for participating in today's conference call to discuss <unk> financial results for the fourth quarter and year ended December 31st 2020 with US today are Jonathan Shopko interim CEO and board member.
Jason Bates, EVP, and CFO, and John Michelle VP of Treasury and Investor Relations.
After their prepared remarks, the management team will take your question. As a reminder, you may now download a PDF of the presentation slides that accompany the remarks made on today's conference call is indicated in the press release, we issued earlier today.
You may access the slides in the Investor Relations section of our website.
Before we go for their I would like to turn the call over to John Michel VP of Treasury, and Investor Relations, who will read the company's safe Harbor statement within the meaning of the private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward looking statements. John Please go ahead.
Thank you for me please turn to slide two for a review of our Safe Harbor and non-GAAP statements. Today's presentation contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 <unk>.
Projected financial information, including our guidance outlook are forward looking statements.
Forward looking statements, including those with respect to revenues earnings performance strategies prospects and other aspects of <unk> business are based on managements current estimates projections and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from our expectations.
And projections I.
I encourage you to read our filings with the Securities and Exchange Commission for a discussion of the risks that can affect our business and to not place undue reliance on any forward looking statements.
We undertake no obligation to revise our forward looking statements to reflect events or circumstances occurring after today.
As a result of new information for.
Or events or otherwise, except as may be required under applicable securities laws.
During the call. There will also be a discussion of some items that do not conform to U S. Generally accepted accounting principles for GAAP, including but not limited to adjusted EBITDA adjusted operating ratio adjusted operating income adjusted net income or loss free cash flow and net debt.
Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the appendix of the Investor presentation and press release issued this morning, both of which are available in the investors tab for website Www Dot <unk> dot com.
In terms of the structure of our call today, Jonathan we will start with a review of our business operations and the progress we are making as we execute against our key strategic priorities. Jason will then walk through our financial review of the quarter and year and then Jonathan will come back to wrap up our remarks with a few closing comments before we open the line for your questions now.
I'd like to turn the call over to desk as interim CEO, Mr. Jonathan Schipke Jonathan.
Thank you John and good morning, everyone.
On slide three we outline a few of the notable takeaways from what was another strong quarter capping off an exceptional and transformational year for the company in late 2019, we made a fundamental shift in how we approach our business and we started the process of rationalizing our operations right sizing our cost structure as the first step in delivering best in class operational.
And financial performance for all our stakeholders.
With a renewed focus our team knew 2020 would be about seamless execution.
I am proud to say, it's strong results delivered during this year reflect significant hard work by everyone. On this team execution of our 2020 priorities.
I'd like to also take this opportunity to thank each of our Opco management teams shoulder much of this change all while successfully managing their businesses through the backdrop of a global pandemic.
This is my first time communicating with the majority of our shareholders. So I'd like to take a brief moment to introduce myself I've been a director of <unk> since we became public in early 2017.
Prior to that I served the company as a board observer beginning in 2014 in 2019 I'd share. It a special operating committee comprised of select board members, including Brian Bonner, our chairman as well as select members from the management team that committee was tasked with architects the tactical pivot and resetting our priorities at the company executed against in 2002.
'twenty Gassy transformation has been focused on operational excellence and improving our cost structure to drive performance reduce costs and achieve greater efficiency.
Looking ahead to 2021, our priorities will be continuing the operational excellence momentum.
Platform optimization, and demonstrating our ability to drive shareholder value for sustainable growth initiatives.
Now I'd like to take a moment to walk through some of the specific highlights for 2020.
As I mentioned this past year, we successfully for fighter platforms and streamlined our business for organizational integrations as well as an enhanced focus on data driven decision making.
This was driven by the successful completion of phase one and two of our operational improvement and integration plans, which contributed meaningfully to our operational and financial performance in spite of a difficult pandemic plagued macro environment of 2020.
We now have a leaner more streamlined business focused on execution and position to immediately accommodated accretive growth opportunities as they arise.
We rationalized, our fleet and fixed asset profile.
Allowing for more efficient reinvestment back into the business.
These efforts also led to material improvements in specific key metrics like operating income and operating ratio.
In fact, our operating ratio Mark the best performance investing history as a public company.
It's also critical for our investors to understand that another big accomplish accomplishment over the past year was the successful completion and building out an entirely new leadership team.
This include adjacent hiring a CFO.
Rich promotion into the role of COO as well as Jim on Julie's Onboarding is our CIO and Chief people officer, respectively.
We also streamlined and assign the responsibilities across the organization underneath these functional area leaders.
While Chris Easter his leadership helped facilitate the necessary transformational pivot our company experienced from 2020.
It was this executive team as well as the very talented operating company management teams that made it all happen.
Yeah.
Yeah.
I think it's also important to note that our business showed tremendous resilience on the face of the pandemic.
Lockdown conditions that no one in this country was prepared for it.
Despite this volatile conditions, we put out numerous profitability records for the second half of the year, which were supported by our portfolio approach and diverse client base understand that this diversity is purposeful and allows for us to flex in a unique accretive opportunities as they arise such as wind and high security cargo in 2020.
And while those two markets made returned to more normalized trends in 2021, we are seeing encouraging signs for rebound and other industrial markets.
That will more deeply impacted by the pandemic last year, Jason will provide a bit more context on this in a few minutes.
Our focus on driving efficiency and more profitable operations combined with the sale of the EBITDA transportation business, which we determined did not complement our portfolio of operating companies and end markets helped us drive significant free cash flow and strength of our balance sheet in a dramatic fashion in 2020.
This included delivering free cash flow from operations of $137 3 million.
And free cash flow.
$168 9 million.
Those those strong cash flow has allowed us to reduce our net debt for $104 9 million for a total of $503 5 million on December 31.
I want to pause there and recognize what a great accomplishment this was particularly while simultaneously navigating abandonment.
We actually lowered our leverage ratio as defined by our bank agreements from three two times for $2 six times as of year end, perhaps most notably we doubled our liquidity versus the prior year end to over $259 million.
As of December 31.
Once again.
Just a phenomenal job for a true team effort across the whole organization top to bottom.
So as we look forward, we remain focused on sustaining our strong recovery momentum and capturing the reflation in industrial markets that are healing fairly quickly.
And are poised to pick up pace of spending on the pandemic conditions abate or.
Our immediate priorities include.
The first completing our CEO search process. This process is well underway and the board and I have already started to evaluate quality candidates as we speak so I can't offer a specific timetable here I can assure you that we will work with a strong sense of purpose with the right candidate complementing the current executive team and demonstrating the ability to drive engagement across the organization.
In respect of long term sustainable growth for our stakeholders.
Second our leadership team has numerous operational and tactical initiatives in progress and we will continue the hard work necessary to drive further financial and operational excellence in 2021.
Third as I've mentioned, we've brought on new talent and promoted from within in several key areas, including finance human resources.
Safety and risk management.
Some of those leaders are just getting started and we believe they will further streamline our organization and maximize efficiency this year.
In particular, we see tremendous opportunity to upgrade our systems infrastructure among.
Among other things these upgrades will allow for further refinement from process improvements such as real time more transfer transparent information flow, which will improve decision making.
And enterprise wide platforms to allow for better coordination and collaboration among our peers.
I think about internal catalyst for shareholder value creation.
One of the biggest opportunities for the company that will help drive better topline and margin performance in the future.
Lastly.
We will further refine and define the <unk> vision and strategy, which we plan to share more detail with you on the coming months, we remain the leading flatbed and specialized transportation and logistics solutions company in North America, we have developed a much stronger balance sheet, which we believe is imperative imperative and being opportunistic across market cycles, and we will continue to drive solid free cash.
Close to further fortify the balance sheet in 2021.
However, <unk> was purpose built to be a platform for growth.
And what we will do on 2021 is continue to build credibility with the market demonstrating that we can use the lessons lessons of the past to inform a better approach to sustainable accretive growth all while maintaining the discipline and further to continue to drive operational improvements across our organization.
With that I will now turn the call over to Jason Bates to review, our fourth quarter and for your financial performance Jason.
Great. Thank you Jonathan.
If youll. Please turn with me to slide for for high level review of the results for the quarter.
Could not be more proud of the execution demonstrated by the entire desk you team during the quarter, which exceeded even our internal expectations. These results were driven by the various ongoing operational improvements, which Jonathan touched on combined with an unusually strong market environment for our fourth quarter, we did not experience the normal year end slowdown in <unk>.
In the quarter and subsequent impact on freight rates, which we believe can partially be attributed to the industrial economy strengthening throughout the second half of 2020 combined with abnormally mild winter weather in the quarter.
As mentioned previously our diverse customer profile is purposeful and allows us to pivot when we see outsized opportunities in mid 2020 that was wind and high security cargo as we've noted on our last earnings call, but it is those sectors began to slow down in to year end, we saw on uplifting construction related verticals.
Specifically lumber roofing steel and even Glatch and we're very proud of our frontline teams ability to quickly redirect assets, where appropriate for the most efficient and markets as we move into 2021, we expect that the wind and high security cargo verticals will likely normalize providing tough year over year comps.
However, we are encouraged by the fact that our diverse end market portfolio facilitates our ability to benefit from strength in other pockets of the industrial world such as those previously discussed.
For those Virginia, and pockets of demand as well as lower capacity and better discipline across the industry yielded a positive rate environment in the fourth quarter, which has continued thus far into 2021.
All of this supports our ongoing commitment to drive consistent operational and financial improvement, which we expect to manifest itself over time through our operating ratio.
We set a long term target to reach 90 operating ratio and there has been no change in our strategy and our commitment to achieve that target in the future.
Let's turn to slide five where we detail our consolidated financial results.
In the fourth quarter consolidated revenues were $335 6 million down.
Down 17% compared to revenues of $403 million in last year's fourth quarter. This decline in revenue was driven in large part by the strategic divestiture of the Aveda business similar to last quarter on the right hand of the slide we are providing our financial performance exclusive of that divestiture.
So in order to help appropriately assess and model our business on a like for like basis.
Excluding the Vita our consolidated revenues were down 7% year over year. The decline in revenues was driven by a combination of factors, including the timing of the completion of certain renewable and wind related projects the strategic reduction of underutilized trucks.
The economic impact of the Covid, 19, pandemic, which led to lower freight volumes in both the flatbed and specialized segments.
Some of our end markets across the industrial economy are still feeling the impacts of the ongoing pandemic pressuring overall demand and weighing on freight volumes. However, this delta to last year's top line its fairly consistent to what we have seen across the back half of the year.
Despite the softer year over year demand impacting the top line the effectiveness of our improved operations and business enhancements continue to flow through to the P&L as we were able to deliver $7 3 million of net income or <unk> <unk> per diluted common share for the fourth quarter. This performance compares to a net loss of $18 for.
$4 million in last year's fourth quarter, when you exclude the Aveda business. The team delivered adjusted net income of $9 2 million or 12 cents a share in the quarter, which also compares favorably versus the adjusted net income of $5 $3 million for six cents a share in the fourth quarter of 2019.
Adjusted EBITDA of $39 5 million improved by 4% compared to the fourth quarter of 2019, or a 6% improvement versus last year's adjusted EBITDA after excluding a veto.
So overall, despite the lower revenue base and the demand pressures brought on by the pandemic our profitability continues to show marked improvement.
On slide six I'll briefly touch on our financial performance measures from a full year perspective.
Again I'll reference these numbers, excluding the impacts of the a beta business divestiture for additional comparability.
For the full year 2020, gasket generated revenues of $1 4 billion, excluding the Vita, which declined 8% versus 2019 again. This topline decline was driven by the lower freight volumes compared to last year as COVID-19, soften demand across the industrial market operating income of 61 4 million improved.
Over 2019.
Adjusted net income of $39 6 million grew more than threefold versus the $9 4 million of adjusted net income delivered across 2019 again further demonstrating the impact of the strategic changes and operational improvements achieved over the last five quarters. The total adjusted EBITDA of $178 7 million.
Improved by 15% compared to last year's results.
Notably the operating segments of the business delivered a combined adjusted EBITDA growth of 6% versus the prior year, while the corporate cost declined by 25% year over year, a function on the corporate cost cutting cost cutting and reorganization initiatives.
Looking at the full year results in aggregate. It is clear that we are capturing the benefits from our operational integrations targeted cost reductions and a more optimized utilization of our assets.
With that I'd like to take some time to walk you through a detailed view of our results at the operating segment level on slide seven we display the quarterly results for our specialized segment.
Now that we've exited the aveda business entirely we believe reviewing our results excluding that business again is more comparable and consistent with our business going forward. So if we flip to slide eight we detail our specialized segment results exclusive of Davita.
Revenues of $196 $5 million were down 9% year over year, driven primarily by lower freight volumes as a result of the pandemic driven softness in demand combined with the strategic fleet reductions undertaken as a part of our improvement plans.
These headwinds impacting freight volumes were for were partially offset by the improving rate environment and select end markets.
Specialized segments adjusted EBITDA result of $29 9 million decreased by 3% versus the $30 7 million captured in last year's fourth quarter, which was seasonally strong due to the timing of certain wind energy products projects at the end of 2019.
Adjusted EBITDA results in the quarter were negatively impacted by the energy projects.
Sorry, if were negatively impacted by the 9% decline in revenue and volumes combined with certain insurance costs associated with the business that had not previously been pushed down from a corporate level to the segment level.
Despite this marginally lower quarterly EBITDA, the segment's EBITDA margins improved.
By 90 basis points to 15, 2% up from 14, 3% from the prior year quarter.
Again, our improved margin performance reflects the enhancements we made to the business for the base business through a more optimized usage of our fleet and moving away from certain less profitable revenues.
Specialized rate per mile up to $2 96 was flat for last year, while revenue per tractor of 59100 grew by four 4% versus last year's results of 56600.
Again, reflecting more profitable operations as we improve the optimization of our fleet.
Moving to slide nine we detail our flatbed segment results for the quarter.
<unk> revenue on the fourth quarter decreased 5% to $142 1 million down from $150 3 million in the last year's fourth quarter.
This decrease was driven primarily by weaker freight volumes and lower brokerage revenues volume declines due to impacts to demand from the ongoing pandemic and through strategic fleet downsizing efforts.
These headwinds were nearly offset by the cost reductions and the improving rate environment.
The segment's rate per mile increased by nearly 9% versus last year's fourth quarter period and revenue per tractor grew by nearly 12% to $43000.
The flatbed segment adjusted EBITDA result of $17 $1 million declined by 4% compared to the result of $17 8 million on last year's fourth quarter.
Much like in the specialized segment higher insurance costs now allocated from corporate down to the segment level offset the impacts of the improving freight rates and operational improvement plans and business integrations. Despite marginally lower adjusted EBITDA for flatbed segment, EBITDA margins improved by 20 basis points to 12%.
<unk>, the more optimized fleet, leading to more profitable operations.
The segment's operating ratio declined 10 basis points to $97 two with the adjusted operating ratio coming in at 94, 9%.
Now turning to slide 10, where we detail our balance sheet and free cash flow metrics.
As of year end desk, you had $176 2 million in cash and total liquidity of $259 4 million, including the available borrowing capacity on our credit facility.
Net debt of $503 $5 million has decreased nearly $105 million year over year as mentioned previously the significant year over year improvements are a testament for the tremendous amount of hard work by our entire organization and highlight our commitment to continue to transform <unk> into an increasingly profitable.
Sustainable and stable company.
Our operating cash flows and capital expenditures across the full year are displayed on the chart on the right hand side of the page across 2020 net cash provided by operating activities was $137 3 million cash Capex was $37 2 million and cash proceeds from the sale of equipment was $68 eight.
Which includes the divestiture of our beta assets. This resulted in free cash flow generation of $168 9 million for the year Capex financed with debt or capital leases totaled $58 3 million across the year, resulting in a net cash flows of $110 6 million.
Looking forward continued enhancement to our cash flow generation as well as a focus on the optimal debt and leverage profile will each remain key focal points in our strategy. We will strive to continue to prioritize improving balance sheet health, while maintaining adequate optionality and financial flexibility through improved liquidity provision.
This is of significant importance as we continue to successfully manage through the impacts of the global pandemic on the macro environment and the economic uncertainties that can cause to our end markets within the industrial economy.
We will remain prudent and conservative with how we manage our liquidity on our balance sheet, while capturing the benefits of higher earnings and cash flows from our improving business model.
I'll close my remarks, with our 2021 outlook, which is offered on page 11.
In terms of our assumptions, we expect our overall freight volumes to remain relatively flat for the fiscal year 2020, we should continue to see improvement in lagging areas, including construction related verticals and other later cycle industrials, but we expect that to be offset by a normalization of volumes in wind and other areas that were up.
Outside in 2020.
We expect to continue to drive operational excellence.
We'll have to overcome from headwinds in 2021 with higher anticipated insurance costs related to the ever tightening insurance market, which we anticipate to be roughly an $8 million headwind year over year.
As well as lower margins, resulting from a mix shift specifically the potential for less highly specialized support of wind and high security cargo markets for the full year 2020, we estimate that we had roughly a $22 million positive adjusted EBITDA impact from above average demand.
On March end markets like wind and high security cargo.
That number is a net number so it assumes how do we not pivoted to those unique high margin opportunities. We would have supported other normal margin business, instead, and that's factored into that $22 million number.
So the combination of those two items alone creates a $30 million adjusted EBITDA headwind as we move into 2021. However, we believe we will be able to largely offset these headwinds through the continuation of our various operational and tactical initiatives, which John and I'll, let Jonathan alluded to previously combined with our strategic.
Deployment of assets to the various end markets, which are experiencing supply demand imbalances as they more fully recover from the Covid pandemic.
So with that set of assumptions and acknowledging that everyone's crystal ball is a little fuzzy right now with the economic political and pandemic uncertainty, we're projecting one four to $1 5 billion in revenues for the full year of 2021, we also expect to deliver $165 million to $175 million and adjusted EBITDA.
Depending on how the year unfolds in relation to the aforementioned points. We feel this range is this range appropriately reflects our performance capability on both ends if the COVID-19 pandemic were to adversely develop or economic or political environments, where to drive the market downward we could see the low end of this range being in play however.
If the Covid vaccine is highly effective and the economy responds strongly or if we were to get regulatory <unk> political support for an industrial or infrastructure Bill we could easily see ourselves at the high end of this range.
As we move throughout the year and have better visibility into 2021, our commitment to you is that we will make the appropriate refinements to this guidance so with that I'll hand, the call back over to Jonathan to offer a few final thoughts John.
Thank you Jason.
I'll conclude on slide 12, with an updated view of our 2021 priorities.
After 18 months of disciplined rigor to affect our wholesale operational improvements across the organization.
For the lessons learned on best practices adopted for continuous improvement mindset will remain part of that he is identity for years income. However.
With this capstone in 2020 performance I'd like to note the end of the heavy lifting phase of our restructuring declare a modest victory on behalf of a tremendous team and talk to you all about life for <unk> going forward specifically.
Specifically 2021 will provide for those optimization of our industry, leading flatbed and specialized segments as well as.
<unk> and strategic growth.
We will leverage our balance sheet, our unmatched asset heavy scale for the operational leverage of our platform to try to drive value for our shareholders.
First it always we will continue to prioritize the safety of our people on our customers.
As we have throughout the last challenging year.
Investments in workflows and technology.
Over the next two years upgrades to systems, and workflows will drive meaningful improvements in our topline and margin profile.
These initiatives will lean on different functional area leaders and capabilities within <unk> and the operationally intensive phases, one and two.
We'll be focused on facilitating better cooperation and data sharing among opco is layering in more robust real time analytics across the platforms to support decision making.
Think about concepts such as SG&A optimization load optimization network profitability pricing and commercial excellence. This improved architecture will also allowed to ask you to evaluate diligence benchmark and onboard potential targets for more efficiency, while also providing our team with the tools to monitor.
<unk> and track on a real time basis, the post closing performance of our targets relative to underwritten purchase expectations.
Moving on.
We continue to receive questions about our balance sheet and leverage profile.
Reality is that we are in a cyclical capital intensive industry and we serve a number of volatile high beta end markets.
We believe a fortress balance sheet is critical to establishing staying power and resilience across market cycles.
We'll continue to prioritize moderating our leverage profile with a shift in focus to optimizing our funding funded leverage profile versus net leverage to ensure we can be opportunistic and proactive across all cycles, whether that's taking market share we're buying on a capitalized competitors during neutral.
Okay.
For next.
Selected pursuit of growth opportunities.
The market.
Company was founded on.
It used to be sales.
This is a highly fragmented industry that would benefit from consolidation.
Gail matters.
Over the past 18 months. This organization has learned significant lessons on how to successfully build efficiencies.
And a great businesses to create value.
We've spent time overhauling our diligence process on <unk>.
Uhm metrics and our on boarding procedures M&A.
M&A will look differently going forward prospective targets will be subject to a high degree of internal scrutiny and rigor.
Our financial objectives will be focused on full cycle, EPS and free cash flow accretion and the question of strategic relevance must be answered at.
At the end of the day for <unk>.
<unk> as big as close to our customer.
By providing the geographical footprint service capabilities scale and pricing that ensures we remain strategically relevant for the end markets, we choose the service.
We have substantial capacity to accommodate growth substantial operational leverage within our platform. This is key to our value proposition.
M&A too.
We'll find attractive growth opportunities that we can bring into our platform without incremental redundant fixed costs further.
Furthermore, because of our scale, we would expect to be able to drive additional sales through those new brands.
And we would expect to use our 2020 lessons learned playbook to also improve variable cost for these targets. So that one's on boarded these opportunities will provide tremendous pull through with outside EBITDA profiles that will be very accretive to our pro forma margin profile.
As I alluded to earlier on this call in the coming months, we hope to be in a position to share our redefined vision with all of you, which among other things will.
We will provide more debt and newer perspectives around organic and strategic growth with that though I'd like to conclude our prepared remarks for this morning.
And I'm excited to turn the call over for your questions.
To ask a phone question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Yes.
And your first question comes from the line of Ryan Cingal with Craig Hallum Capital Group.
Good morning, guys.
Thanks for taking our questions.
First I just want to start.
On wind energy I know you had some outsized projects this year, both year over year quarter over quarter et cetera that didn't repeat from a comp perspective, but it doesn't sound like you're assuming.
That business.
It remained elevated this year in 2021, but given the new administrations embrace of renewable energy initiatives. It seems like Theres a lot of opportunity for SaaS heading into.
Into this year as well as over the next several years. So I guess, how do you think about that opportunity. The wind business generally for you guys and assumptions that are in guidance.
Yeah. Thanks, Brian I appreciate the question. So I think as a lot of you know.
Hey, these things work as you've got the PTC credits that did get extended and renewed and so we at the end of last year, we're coming up on the conclusion of one of those cycles in and there was uncertainty about whether or not that was going to be renewed or if it did get renewed for how long it would be renewed and so part of what drove a lot of the <unk>.
Volume and some of the supply demand imbalances that we experienced in that sector last year was the pull forward of a lot of that activity trying to get it done before.
The deadline and so that you had that combined with COVID-19, which significantly disrupted the supply chain that typically participate in that activity and so our teams did a great job of being there for customers in a pinch when they needed it and so that's what really drove a lot of what we experienced.
Last year.
When you have that kind of a pull forward, even though as you guys probably are aware in the past few weeks. There has been an extension, albeit only a one year extension to the PTC.
On the supply chain is a little dry and so we got to kind of priming that pump and allow things to make their way through through the supply chain before we'll really start seeing some of those heavy volumes pick up and again.
Given that it's just a one year renewal as opposed to the previous multiyear renewal on pipeline, we wouldn't expect it to be at the same levels and then you layer on the additional lack of visibility on unlikely situation of having the same type of pandemic driven supply chain issues.
We really don't anticipate that 2021 will look anything like 2020.
So it could be a quarter or two before that supply chain really well against that he gets pumped prime. So that you can start seeing that flow through and we make to your point see some some decent volumes there.
End of the second quarter and into the back half of the year, but we.
We really don't believe it to be anything at the level that we saw on 2020.
Good then just moving on to within the specialty.
Rates for the.
The decline sequentially was fairly large I guess can you elaborate on what caused that.
Q3, and then which maybe you just answered part of it and that response, but then what are you expecting from rates in specialty specifically on 2021.
Yeah. Good question and you're right that that was really what drove that as we talked about the <unk>.
Third quarter, and we talked about it on the call then and kind of reiterated today and tried to give you guys. Some full year numbers to more fully hope you. Appreciate the size of that debt tailwind that we had this last year, but when you look at the fourth quarter rates at 296 versus the fourth quarter of last year, they're relatively flat and keep in mind that's actually.
Presses that theyre flat, because we because there was a lot of for wind activity going on in the fourth quarter of 2019 that we didn't have any to the same level and for the fourth quarter of 2020, and so while it's flat.
View, it as actually being slightly up when you normalize for that mix effect now to the latter part of your question as we roll forward into 2021, what do we expect to see that.
Something there is a lot of puts and takes their debt.
This factor is definitely going to be.
Something that comes into play.
Again, when we will be down and so the rates are not anticipated anticipated to be as strong, but we will see COVID-19 recovery and the other sectors that were pressured in 2019, so theres a lot of moving pieces, there, but I think net net.
We would expect them to be down on a full year basis year over year exactly the magnitude of debt.
That shortfall.
Hard to.
Ascertain at this point, we would probably err on the side of being cautious with regard to how we would model that going forward.
Good for them.
Thanks, Dave.
Yeah.
And then just you mentioned higher insurance cost this year driver wages continue to be kind of a pressure throughout the industry has been but it seems like you guys are making a lot of good operational improvements margins are for heading higher but.
The headwinds seem to be intensifying as well so I guess as you think about that 90% or that you are targeting how do you think about insurance costs.
And with its driver wages kind of all of the external things you can't control.
What gives you confidence that you can continue to.
<unk> set those over the next couple of years is to aim towards that 90% on that that's still the right expectation.
Yes, great question Ryan.
I've been on this industry for almost 20 years now.
And it seems like there's these cycles right, where you have these ebbs and flows where you have this supply demand imbalance and the right market gets tight and then you have other periods, where we're at.
Your your scrap and to get any rate increases and you've got the driver dynamic that typically kind of followed that same mantra. The key in order to kind of continue to drive sustainable.
Revenues and earnings profile is to have really strong relationships with customers because at the end of the day. We're here for the customers they need us and we need them. Its a symbiotic relationship and so when we get into environments, where insurance costs get tough for wind driver wages that supply demand situations emerge on the driver.
Front.
You got to be ready to have those conversations directly with your customers and we've got some great operations and sales teams out there that have wonderful debt.
Decades long relationships with key customers.
And they need us we need them and we work together and so I guess the short answer to your question is.
Theres always going to be ups and downs and it's about staying in front of them and communicating clearly with customers. So that they can understand what you need and when you need it because sometimes those things they can do other than just giving your rate to help.
Kind of neutralize some of those headwinds and so that's something that we already have been doing this year in terms of talking with customers and really trying to drive at.
The other thing is where there are levers that we can pull this is kind of getting to the latter part of your question about the 90 or.
Listen Ryan there are so many opportunities I mean, when I first got here I think I made reference at one point to the fact that we werent, even picking fruit off the tree, we were picking it up off the ground so that it wouldn't rot.
Now we're at the point, where there's not a ton of that fruit laying on the ground anymore, but theres still a lot of fruit really low on that tree for us to go and get.
And kind of what Jonathan was alluding to about some of the operational initiatives on.
Rick Williams.
All of our operating company Ceos are driving and we've got scorecards and metrics on different things that we're going to be going after this year to help drive improved margin profile going forward and we really to be honest with you Ryan.
We don't need a ton of help from the market or a ton of help.
To be able to drive towards that 90 or we have.
Multiple paths with levers that we can pull that are very company specific that will allow us to get there and then when you layer on some form of growth and maybe we start at certain point looking at acquisitive opportunities of well performing companies.
That can also add to the ability to drive those margins down down into the right.
Yes, Ryan right Jonathan.
I don't want to I mean, certainly everything that Jason said is true I think I think.
Look I think the analysts the investors broadly.
Broadly look at that and look at our or look at some of our margins.
And.
And look there to Jason's point Theres lots of lots of work to do there is internally there is a path to getting or getting our EBITDA margin, where we want it to be without any kind of external growth opportunities strategic growth opportunities, but but again.
We are right sizing the platform right sizing our cost structures.
We respect.
The operational leverage we think we need to take advantage of growth in the coming years. So I do want to make sure that everybody understands this yes disproportionately on our cost structures look high.
When our platform business platform companies starting out that's often the case, we simply havent monetize monetize the platform yet brought into scale to really rightsize our structure. So it's really a two pronged approach going forward and I don't want strategic growth to be.
To be kind of left out of that equation again, we can certainly do.
<unk> drive continued efficiencies internally and we plan to do that but our margin profile is going to change dramatically over the coming years.
As we really ramp ramp the platform on.
Great. Thanks, guys I'll turn it over.
The fruit tree analogy.
Alright, thanks, guys.
Yes.
Your next question comes from the line of David Ross with Stifel.
Hey, good morning, gentlemen, Hi, David.
Hi.
Yes.
Talked about some of the headwinds.
Not not factoring in the mix headwind, but.
<unk> for example on other issues how much of that can be made up with pricing. It's a very strong pricing market right. Now do you think you can cover all that with rate increases.
Yeah, again, I don't I don't know that it's our intent to cover all of it with rate increases I mean, obviously, we will try I think there is other things, though that we can do we've got levers that we can pull as we touched on.
Combined with with the fact that.
We've got operational execution.
Terms of utilization of asset reduction in maintenance expense better fuel routing and things like that that are going to help drive cover some of those headwinds as well.
Yes.
My assumption would be cover the increase the price and then the rest of the improvements gets you closer to your 90.
Yes, correct, yes.
On the DNA outlook for 2021.
Should it stay roughly at the run rate of <unk>, So kind of on a 100 $408 million range.
Yes, I think.
John what do we what do we think in on that one.
Somewhere between 95 to 100.
For a little incremental DNA.
<unk>.
Yes.
Yes.
We are constantly evaluating and taking a look at all of our assets to make sure. We've got them kind of positioned correctly from a kind of book value relative to the to the market. There was a little bit of that that happened in the fourth quarter. So I. Thank you for.
Fourth quarter numbers, a little a little higher than we would expect on a go forward basis, but to John's point, maybe more on that kind of 95 ish range.
Okay and.
Because we think about to ask you a lot of the free cash flow story.
Guys have done a nice job there.
How should we think about EBITDA as a proxy for cash flow from operations, it's usually.
Cash flow from operations, usually comes in lower sometimes much lower.
So any color on working capital this year that may help for her.
Yes, I mean from a working capital perspective, I wouldn't see it to be material, one way or the other.
Youre not going to see a significant impact related debt most of the delta between the two of interest.
Yes.
That was a big thing I was going to mentioned as well if you take the EBITDA target and you deduct the interest.
Got a little bit of a dividend for some preferred.
Sure. So we have out there, but other than that and.
Honestly, we may have some cash taxes this year because.
Of how we've been performing which is a good a good antibody problem I guess.
But other than that I think your the way you're thinking about it is the right way to think about it.
And then lastly, just on the drivers side the owner operator environment.
Tractor count down.
It seems like your owner operators are down as much as company owned.
Some of that in specialized is due to the davita exit.
How do you think about the current on our operating environment and what you need what youre seeing.
Yes, it's a really good question, it's something that we've been talking a lot about internally.
Closing cons to both models right and I think striking that balance is what's going to be important.
Sometimes when the driver market is tough and you've got options or you've got drivers who want to become owner operators or want to have a path to be coming in on our operator.
You may be able to find some capacity that way either from.
People internally that are wanting to elevate their career in that direction or finding people from the outside that are bringing trucks for the table. So it's something that we want to make sure we strike a balance on because you don't want to get.
Too heavy on the owner operator side because at the end of the day.
They are independent and they can do what they want on sometimes you need someone to cover low and you need to be able to tell them they need to cover that load and so there's a balance that needs to be struck there, but but yes. There's no question that the driver market.
<unk> is one that's tough.
Again kind of falling back on on my background.
I look at flatbed visa.
Vis vis <unk> most of my career, which was spent in kind of a traditional drive and 53 foot dry van business, where where drivers I mean, you were literally create drivers out of thin air rights. If they have a pulse on they can get a CEO you train them and you put them on a truck right flatbed and Theres a little bit different do you see these guys are.
Drivers I know you guys are professionals.
<unk> been involved you've got youre, managing extended length loads and Theres, a lot of technical and professional skill sets required.
So while it doesn't mean that we're immune to the same driver pressures that youre going to hear from the nice Swift Warner So the schneiders of the world.
It's not as pronounced as quickly as what they see and so I would just kind of remind you of that debt. That's one of the reasons. We love. This business model is as we are a little bit different we are a little bit niche and it allows and theres. A special is our level of specialization not just for the type of freight we haul but to our driver population as well.
So just a reminder on that front.
Thank you.
Thank you.
Your next question comes from the line of Jason Seidl with Cowen.
Thank you, operator, Hey, gentlemen, good morning.
Wanted to talk a little bit about the pricing on the flatbed side talk about your contracts when they are renewing and.
Sort of how you see that as we progress through the year.
Yes so.
This is one of my money on my favorite ones as you and I know, Jason we've talked about this a lot over the years.
Against getting back to one of the beauties of the Dash E portfolio model is we are very diverse and we have a lot of different end markets that we service we have a lot of different operating companies a lot of different customer relationships and there's not really any one period, where like all of our contracts renew they are literally staggered throughout the.
A year and so that COVID-19.
And certain times Thats really good and other times, you don't get to take advantage of things as much as you'd like.
But I think as I alluded to earlier a lot of it comes down to the relationships, you've got with customers and even though you've got a contract to the extent that you are in a situation where there is escalating insurance costs, our driver wages and you go you have that conversation with your customer.
I'm, not saying that all the time theyre going to.
Acquiesce and work with you, but with the right partners. There is there is a level of back and forth and give and take that we're able to to.
To mutually agree upon.
Okay. So when we look at your guidance you know what.
Does your guidance imply in terms of your rate increases on the contractual side for flip it so.
Flatbed rates, we do expect them to be up right. When you look at 2020 in our.
Combination of the mix combined with the supply demand issues associated with Covid.
The flatbed environment wasn't as strong last year as what we expect to see here in 2021. So we are anticipating flatbed rates to be up.
I don't know that were going to see while we would love to see it I don't know that were going to be seen.
Almost double digit numbers like we saw on the fourth quarter.
I think kind of that mid single digit range is an area that we're going to be targeting and again like.
Like we talked about with driver cost pressures insurance cost pressures I mean, we're going on and we're going to need that to be able to continue to provide the same level of service and support to our customers to make sure there's no disruptions in their supply chain.
Okay, Perfect and then lastly, touching on the on the CEO search you guys.
Sort of update us if you have any additional thoughts on your timing and then also maybe just sort of describe that.
Perfect person that Youre looking for if you could plug on medicine here today.
Yes.
I can take that so look the reality is we're in a completely different place today than we were a year or so ago.
We undertook the search.
We don't need the heavy handed roll up your sleeves operationally intensive turnaround CEO.
We're really looking for a leader someone that can complement the team.
On one that believes in the functional leaders at the table and respects their abilities to get to the right decision and drive execution within their verticals.
So we want someone that can build trust for.
And earn the respect with everyone in the organization.
And our leader that appreciates our culture on legacy.
Look not that not the least of importance, we're looking for someone with skins on the wall. So we're looking for someone with a demonstrable track record of driving shareholder value with on a multibillion dollar organization.
And look at.
And as I said as I said on the call.
Not a lot of specificity around this I'm not trying to be circumspect, but I mean, we.
We've already actually started.
Receiving candidates from the search firm that we're working with so we're well into the process.
One months ahead, where we were on the search last year at this time, so we're making great progress the emphasis is truly going to be though Jason on on finding the right individual.
And making sure that again that person complements this team.
So were on your list does transportation experience fall in terms of the person who are looking for.
Look I think I think we've got again.
I think this team I think the board is very very respectful of the capabilities of this team I think over the last several months.
Jason has been here since April.
Rick Williams has.
Really.
This in April and May, but practically he was functioning as the companys CLO months earlier than that too.
It's absolutely not in the necessity, it's not it's not a number one not a number two maybe even not a top III, we feel that with the Opco talent, we have and with the with the industry depth and experience. We have at the table may truly every executive on our team.
As a trucking veteran debt, we don't we don't need we don't need to add for you to add more debt to our team. We're looking for again somebody that accomplish the team some of them can help help prioritize strategic initiatives to underpin and drive division.
And somebody that can kind of build the right respect for with all levels of the organization.
Okay, well listen that's actually fantastic color gentlemen, I appreciate the time as always everyone be safe out there.
As usual thank you.
We have time for one last question. Your final question comes from the line of Greg <unk> with Northland Securities.
Great. Good morning, guys. Thanks for taking the questions.
I guess first kind of a follow up if we back out some on the rate environment improvement that positively held revenue how should we think about.
The degree to which volumes are down year over year, and then maybe how that's trending on a monthly basis.
More recently.
Yeah, no. It's a great question.
Again, I think you got to kind of look at the business.
In a separate parts right. So when we talk about specialized we highlighted the fact that.
Things have slowed down on the wind side and the high security cargo side and so as we think about volumes. There obviously those have kind of trickle down throughout the quarter, which was anticipated.
Now as we move into 2021, we do believe that.
Net debt our business can't shift those assets, we have a history of doing so so they may not be doing the same level of margin profile business, but there could be significant volume opportunities there and by significant I mean, a few percentage points higher than what we've what we did in 2020, even in spite of some of the strength.
We saw and that wind market on the flatbed side.
What we we didn't we actually had a pretty good volumes last year, but.
Spite of the Covid pandemic, but the rates were pressured and so now that reversed course from the fourth quarter and we've seen that similar trend carrying forward candidly through the month of January which is very unusual for our business flatbed rates and volumes being as strong as they were on the fourth quarter and as strong as we've seen them. Thus.
On January is very seasonally unusual.
Listen we're cautiously optimistic about what we're seeing there and half.
Pretty.
We'd be pretty pleased.
If that trend continues through the rest of the first quarter because as you know busy season for US really is Q2 and Q3 and Thats. When we would expect if we can stay strong through Q1, and then carry that momentum into Q2 and Q3, we for.
Feel like that sets up really well for the year.
Sure Great couple of days.
And then I did want to ask relating to the end markets.
Which end markets are still being impacted I guess, the most by pandemic related issues, you mentioned construction related markets picking up more recently, but.
What markets are you still kind of waiting to see or realize a more of a recovery.
So one of the big ones, obviously is aerospace.
We've seen pressure there.
From the moment the pandemic happened, it's kind of kind of flatlined, it's not continuing to decline, but we haven't seen that recovery yet that we would like to see.
Some of the bigger manufacturing type activities, while improving arent necessarily back to kind of pre pandemic levels.
But I'm pleased that you pointed out construction I mean construction is hot right now and anything related to construction, we're seeing strong demand and strong pricing.
That's from lumber to take Glatch to gypsum to Ian.
Name is theirs.
Even steal some of those things have been picking up.
And so I think there are some puts and takes there but again.
For me.
From the background I came from it's one of the things I love about that.
This diversity of our portfolio. This this broad array of customers markets regions that we service.
There's going to be ebbs and flows in one or the other but they kind of complement each other on any kind of help insulate that volatility.
And again, it's one of the things that really makes it ask a unique.
Great.
For me.
In the past you noted that.
The recent delays I guess at the major ports in the U S really hasnt impacted basket business at all.
Maybe confirm that's still the case and then maybe how we should think about the percentage of the free.
Volume of contracts that are completely domestic here.
Yeah. Good question so I.
I don't want to convey that port disruptions don't ever have any negative effect on debt, but I think our team again it gets back to to the true professional nature of not just our drivers, but all of our frontline employees and even the leaders out at the opco level debt that figure out ways to pivot when there are disruptions.
<unk> and figure out ways to keep the trucks, moving and keep drivers getting paid and getting home.
And so I think we do a really good job of handling those types of disruptions I think COVID-19 is a perfect example of that.
I thought coming here.
In the midst of a pandemic I was bracing for for a really tough second and third quarter end and I was shocked at how this team just mobilized and figure it out creative ways to get things done and so I want to highlight that point and make sure. It's not lost that we are subject to some of the.
Things that happen out in the marketplace, but the team does a great job of maneuvering around that.
But with regard to the percentage of the business that for.
Foreign versus domestic most.
Most of the business that we do is domestic but there there are different pieces of the supply chain that can initiate.
Overseas and make their way to us so it's.
But I would say as you think about the greater <unk> business as a whole I would say.
<unk> percentage of that revenues is more domestic in nature and in the end markets domestic even though it may originate.
Overseas.
Okay, great. Thank you.
Our pleasure.
I would like to turn the call back over to Jonathan <unk> for closing remarks.
Thanks for thanks to everyone for your time today.
We have a proven and highly capable leadership team here at <unk>.
On the successes, we had in 2020 and positioned the company well for 2021.
We're looking forward to a highly successful year and we appreciate your continued support of <unk>. We look forward to talking with you again next quarter have a great day.
Thanks for everyone.
Thanks, everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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