Q2 2022 Daseke Inc Earnings Call

August 2, 2022

The conference will begin shortly.

Good morning, everyone and thank you for participating in today's conference call to discuss that.

<unk> financial results for the second quarter ended June 30th 2022, as well as <unk> 2022 full year outlook.

With us today are Jonathan <unk>.

Oh and board member Jason Bates.

Executive Vice President and CFO , and Tracy Graham Vice President of Finance and Investor Relations. After their prepared remarks, the management team will take your questions.

As a reminder, you may now download a PDF of the presentation slides that will accompany the remarks today on today's conference call as indicated in the press release issued earlier today.

You may access these slides in the Investor Relations section of our website before we go further I would like to turn the call over to Tracy Krumme, Vice President of Finance and Investor Relations, who will read the company's safe Harbor statement that provides important cautions regarding forward looking statements within the meaning of the private Securities Litigation Reform Act.

Net of 1995.

Please go ahead.

Thanks, Chris 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.

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.

Is that could cause actual results to differ materially from our expectations and projections I encourage you to read our filings with the Securities and Exchange Commission for a discussion of the risks that could affect our business and to not place undue reliance on any forward looking statements. We undertake no obligation to revise our forward looking statement to reflect it.

Vince or circumstances occurring after today, whether as a result of new information future events or otherwise, except as may be required under applicable securities law during.

During the call. There will also be a discussion of some items that do not conform to U S. Generally accepted accounting principles or 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 to the Investor presentation and press release issued this morning, both of which are available in the investors tab of the <unk> website, Www Dot <unk> dot com.

In terms of the structure of our call today I will start by turning the call over to <unk> CEO , Jonathan Shopko, who will review our business operations and the progress we are making as we execute against our key strategic priorities, Jason Bates <unk> CFO will then provide a financial review of the quarter and speak briefly about our 2022 outlook at which point Jonathan will wrap.

Up our remarks with a few closing comments before we open the line for your questions with that I will hand, the call over to Mr. Jonathan Shopko Jonathan.

Yeah.

Thank you Tracy and good morning, everyone.

Let me begin on slide three where I will speak briefly to a few of the notable takeaways from our second quarter.

<unk> delivered another solid quarter of operational performance as demand across most of our key industrial end markets remained strong.

Additionally, disruptions in our global supply chain continue to impact the equipment market perpetuating the supply demand imbalance.

Which coupled with the demand strength is only further supported a healthy freight environment.

That said these same disruptions have also created challenges to our productivity with new truck orders approximating nearly 10% of our company and truck fleet remaining unfilled.

In response to ask you continue to leverage our asset write fleet model to adapt to this unprecedented environment.

Capped our expansive asset light network, specifically, our brokerage services to drive revenue of $481 3 million in the period.

In doing so we met our customers' strong demand for capacity, maintaining our substantial free capture despite these equipment delays.

While continued emphasis on asset light capabilities will likely be necessary to ensure the continued servicing of our customers. We remain poised to supplant this capacity with higher margin company owned equipment as new truck deliveries are made across the second half of the year.

The last point I'd like to mention before I hand off to Jason for a more detailed review of our financials is the growth shown in our adjusted operating income of $49 9 million and adjusted EBITDA of $70 8 million and.

In spite of strong inflationary cost headwinds.

A smaller company fleet and a stronger utilization of lower margin asset light capacity, each necessitated by OEM equipment delays as.

As well as unfavorable claims development realize this quarter, which Jason will speak to later, we were still able to post modest increases to both adjusted operating income and adjusted EBITDA versus very tough comps, we posted in Q2 2021.

It is important to note however that the fundamental earnings capability of our platform was meaningfully understated this quarter because of these extraordinary events.

With that I will now turn the call over to Jason Bates to review, our financial performance for the second quarter of 2022, Jason.

Thank you Jonathan and good morning, all.

Please turn with me to slide four for a high level review of our consolidated results for the quarter.

As Jonathan highlighted desk use diverse portfolio of industrial facing end markets, coupled with our asset right strategy help optimize our freight and recapture once again this quarter.

We've proven our ability to strategically leverage this model and outperformed traditional trends seasonal and otherwise versus out of the broader market.

Despite the current inflationary environment. We are pleased to report another quarter of year over year adjusted EBITDA improvement upon strong growth to our top line.

As discussed last quarter, we see healthy demand persisting in our construction manufacturing steel and high security cargo end markets robust demand across our key end markets, coupled with limited supply continues to support a strong rate backdrop.

In the quarter to ask you delivered revenues of $481 3 million.

Up 19, 1% compared to revenues of $404 million in last year's second quarter.

Although somewhat aided by expansion in fuel surcharges. Just notable topline performance also reflects the flexibility of our business model and was primarily achieved as we leveraged our brokerage service offering to capture revenue growth.

Even as our fleet such decreased slightly year over year due to continued equipment delays we.

We delivered adjusted net income of $30 million or <unk> 42 per diluted share in the quarter.

Justice EBITDA of $70 8 million grew by two 2% compared to the second quarter of 2021.

As a result of topline expansion strong demand trends driving freight rates and the strategic deployment of our asset portfolio.

This strength in rates was partially offset by cost pressures in driver pay operations and maintenance and insurance and claims expense.

Our results for the quarter were impacted by a couple of claims from prior periods, which have adversely developed in the quarter.

Given the ongoing discussions insensitive nature of insurance claims we are unable to discuss specifics, but we do view the development on these claims as unusual and would not expect the same level of claims development in the back half of next year and the <unk>.

Back half of this year.

Next I would like to touch on our approach to the current labor market here.

Here at <unk>, we continue to retain our driving professionals at a much better rate than the industry average, having said that we continually monitor our driver compensation and work life balance we have been and will continue to respond to the inflationary environment with pay increases in line with the industry.

Notably while driver pay has increased on an absolute basis, the strong rate environment helped to offset these costs and driver pay as a percentage of rate per mile remained flat in the quarter.

Dusky remains firmly committed to providing a positive working environment for our skilled and trusted drivers and we will continue to keep a close watch on the labor market.

Before we take a look at the segment level results a final note on corporate overhead expenses corporate adjusted EBITDA in the quarter decreased by $2 million year over year, which was primarily related to the aforementioned insurance headwinds.

On slide five we present, a detailed view of our results at the operating segment level, starting with our specialized segment results.

<unk> revenues were $268 6 million up 18, 8% versus the prior year with this solid top line growth driven by heightened demand and our high security cargo construction and manufacturing verticals, where we continue to realize strong market rates. This combination of rates and demand coupled with our <unk>.

Neat and market portfolio approach helped offset the reduction of high margin wind energy revenue captured in the year ago period.

As mentioned last quarter Aerospace, which was previously a slower end market continued to generate incremental improvement in the quarter as demand for aerospace volume further expands.

Our specialized segments adjusted EBITDA was up 3% to $44 1 million, while adjusted EBITDA margins decreased 250 basis points versus the prior year's period.

The margin compression in the quarter was primarily associated with the change in the mix of business specifically the decrease in high margin wind revenue and the growth in our asset light service offerings when compared to the strong results in the second quarter of 2021.

Adjusted EBITDA growth on an absolute basis was supported by a rate per mile for the segment of $3 59.

Which increased by 15, 1% compared to $3 12 in the second quarter of 2021.

Our specialized segment has experienced consistent rate expansion across our portfolio of end markets driving the year over year growth.

This is demonstrated by the segments revenue per tractor results of 75500, which was up meaningfully versus 66700 in last year's second quarter.

On slide six we outline our flatbed segment results for the quarter. Our flatbed segment delivered revenue in the second quarter of $216 million, an increase of 19, 4% from $180 9 million in the prior year quarter.

Healthy demand across our construction manufacturing and steel verticals continued to support the strong rate environment.

We were able to leverage our brokerage service offering to drive revenue growth. Despite the year over year impact of equipment delays on our fleet size.

While margins were slightly impacted by the shift towards asset light. We are confident that as equipment delays ease we can leverage our flexible business model to push the higher margin freight back to our company assets and continue to leverage our asset light network to capture incremental freight.

In the quarter, we realized a nine 6% increase year over year on a rate per mile metric. This increase in rate per mile was further displayed in revenue of 57300 per tractor, which increased from $55500 in the same period the previous year the.

The segment's adjusted EBITDA results of $34 2 million grew by six 9% compared to the results of $32 million in last year's second quarter as.

As the market backdrop continues to encourage a strong rate environment, helping mitigate cost pressures.

Our adjusted EBITDA margin declined by 190 basis points with margins for the quarter coming in at 15, 8%, primarily due to the aforementioned inflationary environment and a mix shift away from company owned assets towards our asset light solutions.

The segment's operating ratio increased 130 basis points to 88, 6% with the adjusted operating ratio coming in at 88, 1%.

As we've mentioned here today and throughout prior quarters <unk> has the unique advantage of having a diversified portfolio of business model spanning multiple end markets and industry verticals. We believe this fact combined with our strong asset fleet composition positions us to play our strengths in both the specialized and flatbed market.

If you look to the bottom right hand of slide number six you will see a chart detailing <unk> rate performance versus that of the broader flatbed trucking market.

While the market continues to enjoy the strong rate environment. This chart serves as proof of <unk> success, leveraging our asset right model and our ability to most efficiently and effectively capture attractive freight opportunities at strong margins.

Turning to slide seven I'll take a moment to discuss our cash flow performance.

Desk, you generated $51 9 million in cash from operating activities.

Cash Capex was $25 2 million and we collected cash proceeds from the sale of equipment of $20 4 million. This resulted in free cash flow generation of $47 1 million year to date.

Capex financed with debt or capital leases totaled $41 3 million, bringing net after financing to $5 8 million.

In terms of our capital sources and balance sheet, we continue to maintain maintain healthy liquidity of over $277 million with our cash balance supported by the strong fleet free cash flowing nature of the model and significant undrawn availability on our revolving credit facility.

Looking to slide eight I will conclude with our outlook for the full year 2022.

We continue to see strength in freight rates and have also flex our asset light service offerings to capture additional freight and as such we are raising our full year 2022 revenue outlook. We now expect consolidated revenue to increase between 12 and 15% year over year.

However, given the various inflationary cost pressures and the increase in our asset light business, which carries inherently lower margins. We are reaffirming our previously provided adjusted EBITDA guidance of 5% to 10% year over year improvement.

While we have experienced significant equipment delays in the first half of 2022, we expect that a majority of our equipment will be delivered in the second half of the year and are therefore, reaffirming our full year 2022, net cap net capital expenditure outlook of $145 million to $155 million.

We will continue to keep a close watch on the labor market inflationary pressures the rate environment and equipment availability as we progress into the second half of the year with the goal of providing further updates as additional information becomes available we remain confident in our market outperforming driver retention rate and longstanding customer relationships is key.

Differentiating factors that will help support desk E through market cycles.

We're excited about what is to come in the second half of the year as we continue to focus on our transformational initiatives.

He is well prepared to excel through macro uncertainty and as we have proven over the last several quarters. We continue to prioritize driving strong results remaining a quality employer for our driving professionals and returning value to our shareholders.

And with that I'll hand, the call back over to Jonathan to offer a few final remarks Jonathan.

Thank you Jason if you'll please turn with me to slide nine I'd like to touch on <unk> commitment to value creation for our shareholders.

As mentioned throughout our call. This morning, we faced a myriad of headwinds in the last several months each pressuring our margin profile and bottom line growth.

Our ability to perform well in spite of these challenges however, whether referencing EPS return on equity or operating income as a proxy for success.

As a testament to the fundamental shift in the way, we think about our business the way, we prioritize initiatives and the way we measure success.

We have made significant progress as a result of a better delineated division for the company along with a few early wins.

Some of our initial tactical initiatives.

We acknowledge that there is still substantial work to be done over the next several quarters. During this transformation phase to position this company to average 90 or across market cycles.

Our company is aligned and focused on meeting this challenge.

Moving to slide 10.

I'd like to conclude today's prepared remarks by highlighting certain attributes that we expect will continue to position us for outperformance through this next cycle.

First is our ability to generate positive free cash flow across cycles.

As of the second quarter, ending our free cash flow yield, which is defined as trailing 12 months free cash flow as of June 32022 divided by our market capitalization on the same date stood at a noteworthy 32%.

As mentioned on our last call.

Even with the 2008 recessionary type of occurrence, which we do believe to be an outlier event based on current facts and circumstances, we still believe our company would be in a position to generate modest free cash flow.

And with no term debt maturities until 2028.

Covenant Lite term loan and almost $280 million of current available liquidity. We believe <unk> is well positioned to be nimble and opportunistic irrespective of the prevailing macroeconomic backdrop.

Next I'd like to acknowledge continued progress on the transformational initiatives, we announced last quarter.

Approximately one half of our operating company integrations are now underway.

As we continue to consolidate our operations and moved to a more harmonized platform our ability to strategically deploy our resources and drive further efficiencies through cross functional coordination within our operations will be substantial creating avenues for even further growth and optimization in the future.

Again, alongside our efforts to consolidate and streamline our operations. We are also making investments in technology aimed to streamline back office processes through a common accounting platform and also to support more data driven decisions among other things.

We continue to reaffirm our expectations that these transformation initiatives will yield $20 to 25 million of annualized benefit on a run rate basis by the end of 2023 and.

And we will provide more updates on our progress over the coming quarters.

Next I would like to continue to emphasize the unique diversity of the end markets and customer base that we serve particularly relative to most of our consumer retail focused publicly traded peers are pure play bet on the industrial facing economy underpinned by the wherewithal and purpose of a notable top 10 customer list.

<unk> list containing department of defense or with eight fortune 500 companies.

Within each of our specialized and flatbed segments.

We have a broad base of industrial sub verticals that we can strategically deploy our assets against to Opportunistically capitalize on the strength in particular end markets as pockets of demand present themselves across cycles.

Our continued prioritization to create an all weather portfolio granted in this diversification by end market customer.

With the flexibility and fleet strategy and asset utilization.

That is the foundation of our resilience.

This quarter as we've discussed we had to rely more on our asset light capabilities because of the OEM equipment delays.

These asset light strategies poultry revenues at a lower contribution margin straining, both EBITDA margins and or the search capacity. It provides allows us allows us to increase our freight capture.

Our teams once again were able to exceed the average benchmark each of the flatbed and specialized segments for their respective market indexes.

It was this experienced execution that has the ability to toggle between company asset and asset like capabilities. While also ensuring the highest margin freight is book to our fleet strategies with the lowest loaded costs that insurers optimal levels of freight capture across rate environments.

As the market eventually necessitates a more defensive posture in the freight market softens, we will reduce our use of asset light capabilities and although it is likely in that scenario.

That we may experience, an overall reduction in total freight capture we would prioritize seating and loading higher margin company owned assets, reducing use of lower margin SLA capabilities.

Thereby dramatically increasing our margin per load.

The resulting more profitable mix shift coupled with our highly variable cost structure and largely contracted contracted rate book of business provides us tremendous hand, and defending margin margins in software environments.

Finally, I'd like to spend a few moments discussing the current M&A environment before doing so a quick update on the hazmat tuck in we announced last quarter. The acquisition is performing well and tracking tightly to our post acquisition plan by any measure a very successful transaction.

Now with respect to the current landscape over the last few months as we've seen more volatility in the capital markets.

Spurred by macroeconomic concerns and geopolitical fears.

<unk> seen a marked increase in deal flow and a noticeable capitulation by sellers in both their posture towards selling evaluation expectations.

We believe that current headwinds are disproportionately impacting the small and micro carriers and this will lead to continued softening in valuations for the undercapitalized family owned carrier.

As mentioned on previous calls, although we do review materials for marketed processes.

The preponderance of our M&A pipeline is comprised largely of sole sourced negotiated opportunities.

And I'd like to reemphasize that we are committed to our meaningfully overhaul disciplined approach to M&A focusing on tuck in opportunities that complement our existing operations with a clear path to providing full cycle earnings and free cash flow accretion.

We would expect that much of the capital we deploy into M&A will continue to support our shift to targeting niche defensible industrial facing end markets, where our specialized knowledge and experience are value. The most providing an opportunity to pursue such targets that appropriately complement our portfolio of industrial sub verticals.

Conditions are largely conducive to more active consolidation in our industry and we continue to see M&A as an important component of our long term growth strategy and a sound long term value creation opportunity as we consider the spectrum of options competing for our capital.

With that I'd like to conclude our prepared remarks for this morning, and we'll turn the call over to the operator for your questions Chris.

Thank you Sir.

To ask a question you will need to press star one one on your phone.

Please standby as we compile the Q&A roster.

Okay.

And it looks like our first question will come from Ryan.

Craig Hallum. Your line is open.

Good morning, guys.

Hey, Brian .

Curious you talked a little bit about the truck supply it sounds like it's worsened SaaS.

Basket, but.

Hopefully going to improve in the second half how much visibility do you have that from the Oems on getting those trucks in the second half of this year and then secondly, how do you feel your supply is relative to your competitors.

Yeah. Good question I mean, we listen we do appreciate the partnerships that we have.

We don't want to sound like Ungrateful partners here, we know that Theyre doing everything they can to get us the equipment, we have regular conversations with them real time updates and Theyre looping us in on some of the things the components and things like that that are leading to some of these these backlogs and we are working together to get this through having said that.

It doesn't change the fact that.

We have we are behind.

Tuna.

10% behind the numbers that we would have expected to have received at this point.

And so that obviously has a lot of flow through.

Kind of challenges that we deal with but I would say.

We are not the only ones that are experiencing this and while I don't want to imply that we're getting any kind of preferential treatment I do think that.

Especially as one of the larger <unk>.

Players out there my my suspicion is that it's probably we're on the front end of receiving things when it comes in I don't know that that would be materially different than the other large public guys, but I think when you compare us to the majority of the industry that are the smaller family owned I think.

We're.

Getting things as quickly as the Oems can get them to us and so I don't think that we're behind vis vis our competition in terms of large public players, but it doesn't change. The fact that it is definitely a headwind for us and something that we're all battling right now.

Yes.

Got it.

Sorry around you have got.

No I was just going to ask a follow up is it just the tractors or is it trailers and all kinds of equipment. We're having issues and then can you remind us how tangible because a lot of the public players or dry van and in other parts of trucking, but.

Yes.

The same type of allocations or is it a different piece here in heavy haul just to be aware of.

Okay.

It's most it's mostly the tractors, mostly the trackers Ryan and.

Look most of most of the feedback we get.

From from our from our suppliers.

Whether it's whether it's them directly or one of their tier one suppliers I mean, a lot of this goes back to just the chip shortage.

Which.

Everything we're reading just kind of anecdotally seems to suggest there.

Some of those so those kind of misalignments are starting.

Starting debate there were a couple of the semis you reported this quarter.

Who said they see kind of supply demand equalizing in some of the some of the pressures going away by this by this next quarter. So I think if you look at that plus coupled out with the feedback we're getting from <unk>.

From the Oems, we work with we're pretty confident that.

By the end of the year will generally be kind of on track relative to our target target fleet size, we had.

We had expected at the onset of the year outlook.

Outlook.

We get those.

That kind of impacts how quickly we can turn those around and get them get them kind of loaded on the road. If we if we get kind of a.

A glut of those at one time, it is difficult to kind of processes.

Get them get them kind of road ready get the details on get the drivers back with the old truck that we're replacing get them seated get them back out there. So there could be some inefficiencies we see there but.

Generally we feel will be back on track by the end of the year, but again 250 trucks company trucks higher margin company trucks light going into the year, we think we fared very well this quarter.

Okay.

And then you mentioned you did.

Yes go ahead.

Yes, sorry, Ryan before you hit the insurance, which we're happy to talk about.

The.

The you asked the question about kind of transferability of the different assets on the on the truck side. There is more transferability the trailer side, which we are a little behind on trailers to site, while Jonathan right. We're feeling it more on the tractor side.

I did want to point out that we are behind on some trailers as well and some of those <unk>.

Arent as transferable across different.

Platforms and end markets. So just just as an FYI.

And then I'll, let you ask the question just to make sure I hit it the right way, but I think I know where youre going to go ahead.

You could ask your one question for me and apologize for you guys.

Got it.

You mentioned unusual claims on favorable quarter I don't believe you quantified. It can you and then can you elaborate a little bit more on what you can say there.

Yeah. So.

Yes. So obviously claims are sensitive in nature and so we don't want to go into the details we don't want to talk about specifics.

Inherently claims develop overtime and.

And so we had a couple of prior period claims that have developed here.

This year in the first half of the year, which led to reserve increases I will tell you I mean, you'll see this when it comes out in the Q Tonight that youre going to Youre going to note roughly a little over $7 $5 million year over year of incremental claims in insurance and claims headwind.

Again, we don't.

We don't add that back because claims in it of itself as a part of business right, but but we do view it as unusual.

And we don't expect that same level of development to occur now that doesn't mean that there couldnt be an accident that happened tomorrow I'm, knocking on wood right Heaven forbid, but it can always happen but.

With some of the changes that we made last year with the creation of the risk retention group and taken a slightly higher self insured retention level inherently with that.

<unk> introduced a little bit more volatility.

We're working with our third party actuaries to develop kind of IV in our accruals and things like that to help kind of streamline that process. So we don't experience the same level of volatility in the future.

But that is what transpired here this quarter and so we do view that as unusual we do not expect that same level.

Claims development in future periods, but we did want to kind of highlight that as a headwind in the quarter and something that we would deem to be.

Abnormal.

And was that full $7 5 million recognized in Q2, and then what were you expecting in your previous assumptions on a year over year basis, I presume there was probably some increase year over year, but.

How much was incremental.

Yes, so that number is what was recognized in the second quarter and Thats that is the year over year change.

I would tell you that.

If you're asking how it compares to what we were budgeting for the year.

I don't want to give exact numbers, but I will tell you, it's millions and millions of dollars more than we were anticipating from a budgetary perspective now if you're asking me based on where I was sitting in kind of the April timeframe, where we were working through.

These claims and Mediations and things like that I.

I would have told you I expected something so I don't want to imply that we didn't see this coming back in.

Q1, early Q2 timeframe, but vis vis the budget that would've been.

Not quite a full $7 million, but.

Several million dollars of headwind vis vis what we were planning.

Last one for me pension to reiterated the 2000 $25 million of annualized earnings improvement by 2023 that you laid out last earlier. This how much have you achieved on that and then I guess any change in confidence.

Or I guess talk through the puts and takes on that since you've announced that.

Yes, Ryan I mean, we're as we kind of mentioned we're.

We're underway at various stages.

With really kind of the first the first phase of some of these integrations will certainly provide more detail as we get a little further along but still very feel very good about the quantum of.

Operating income uplift I would actually kind of tell you.

As you would suspect I mean these are these are big list for the op codes that are in play.

It's a really big change management exercise Theres, a big human component VIX social component.

We're certainly trying to do everything the right way for our drivers and our customers.

In our non driver employees, it's a big lift in the platform platform Opco is working double duty here. So it's absolutely.

Absolutely and might look in my opinion kind of more of a more of a headwind in this particular quarter kind of kind of indirect costs associated with some of those some of those initiatives.

I think as we mentioned on the last call. We think that the kind of direct costs are going to offset any direct gains this year and we expect to really see some kind of fruits of the labor. If you will next year.

I think things are things are going as planned we feel very confident with the number.

And I think we're very close to the FERC. The kind of this first phase of integrations very close to turning a corner, we're actually going to start to see some some real progress.

Kind of what I can tell you today.

Thanks, Good luck guys.

Thank you.

Thanks, Brian .

Thank you.

One moment please for our next question.

Our next question will come from Jason Seidl.

Cowen Your line is open.

Thanks, operator.

Gentlemen.

Next question will come from Jason.

Tal.

Cowen Your line is open.

Thanks, operator.

Gentlemen.

If we could just focus a little bit on the flatbed side of things you have that nice chart in there about the outperformance, which is great, but I have noticed that the outage that the outperformance has been shrinking as we move here through the quarters.

I guess the one question.

Why has it shrunk and two do you guys remain confident that you will continue to be able to outperform the market in the coming quarters.

Yeah, So I'll hit that first and let Jonathan tack on as well. So I think as you well know, Jason then and we've been trying to highlight there was a healthy degree of transformative work that needed to be done here in our organization and for the first.

For sure I would say most of 2020 and even even early 2021, there was a lot of.

Tough decisions that were being made about exiting certain pieces of business.

And even certain customers and redeploying assets and so we.

Some of the outperformance that we experienced was just a shift in mix right. We were electing to pursue higher margin better longer term strategic partnerships et cetera, as we continue to progress down that transformation path. Some of the lower hanging fruit that you see like when you look at the outperformance on that loan if youre looking.

Slide six and that lower right hand quadrant that gap in Q2 of 'twenty. One in Q3 of 'twenty, one you'll see that the gap between us and our peers shrink as we move forward that that was expected.

The point, though is that we still believe that our ability to outperform the market exists because of our ability to flex in and out of different end markets and we've shown an ability to do that even in a normal environment not not walking away from different customers, but just shifting assets to higher margin business or business, where there's higher demand and so we.

We've done that and so we do believe that that level of outperformance will continue to be there.

But we never expected that it would continue to be a quantum of those prior levels.

One basis point differential yeah.

Yes. It makes also Jason just to just to point out to you that that's kind of a.

It's a rate of chain, but what kind of rate of change chart. So.

We as Jason said, we kind of started with a higher higher watermark, because I think we were a lot more efficient than kind of or the other the other kind of peers in this and the flatbed index, where the specialized index, depending on which one you're.

You're referencing but.

As we continue to outperform and Youre looking at kind of incremental rate of change in outperformance.

It gets harder and harder more difficult more difficult to kind of beat the beat.

The kind of prior months prior quarter comp.

Makes sense of why I have you here, let's talk a little bit about some some M&A you talked about.

Going after sort of those niche end markets.

Could you give us a little more color like so what are the end markets that youre that youre sort of targeting that you might not have a lot of exposure or any exposure to now.

Yes, I mean look I think.

Uh huh.

The shift and we kind of referenced this a couple of quarters and that's really been kind of sprinkling out the shift in mindset, but I mean, the shift here is really to kind of focus move away from trailer centric just kind of being industry agnostic and really focused on on trailer type to shift more to.

End market verticals and market industry sub verticals and really.

Midway through last year, we identified a dozen plus.

Industry verticals that really all kind of possessed common attributes.

And they were largely a non correlated with kind of the macroeconomic backdrop.

They required specialized truck trailer configurations specialized trailer equipment.

<unk> driver credentials.

Very niche niche end markets, where you could actually build a strategic strategically relevant leadership position in that respective end market and with most of those situations the margin profile of those end markets.

Cause of the specialized nature of those end markets was was a lot lot more attractive.

And so that's why I said look we.

That's what we want to be when we grow up here to ask is is really kind of an end market end market focused player identifying those end markets, focusing focusing kind of resource allocation and supported those end markets and getting to a point where.

We comprise a.

Majority of strategically relevant position within those end markets and you get all the things that come with it when you engage with customers right and so <unk>.

Some of those end markets most of those end markets. We plan at some level today and have played at some level.

Third through much of <unk> life, there are a couple new end markets that.

Like life Sciences, and pharma, probably the only non industrial facing end markets that will that will actively pursue but it possesses a lot of those same attributes that I just outlined and so there are things like that we did the first the first acquisition, we did last quarter that the hazardous material hazardous waste acquisition that introduced.

Tankers to our fleet right, we historically haven't done anything with tanker. So it's not a it's not an open deck trailer but.

Tanker. So we're thinking about is there a path to.

Building building out a meaningful position meaningful foothold in that end market really generating higher margins better return on capital.

Better kind of full cycle kind of free cash flow performance in those end markets and that's the lens that we're looking for flatbed, which I think.

People generally view is a little bit more commodity in nature.

It's not as commodity for us given given early our scale and our ability to execute very efficiently and effectively in that space. There have been a number of larger carriers that come in and kind of have this scale have the have they haven't been able to figure it out.

<unk> been able to demonstrate that our flatbed segment can be profitable maintained its margin profile across across most freight environment. So we'll continue to do that but that's a very it's a very different game than specialized end market focus. That's one that requires a lot more focus on scale and absorbing scale the right way.

Focusing on things like Wayne Densification and things like that.

You can't get as much when you have as diversified as it is a trailer pool that you do on the specialized segment of the business.

That's really kind of how we are thinking about that dichotomy dichotomy between looking at M&A between specialized and flatbed if that if that answers. Your question no no. It does some great color and it sounds like.

The markets are helping you out in terms of potentially getting another dance partner.

Yes, absolutely.

One last one and I'll turn it over to somebody else earlier today on their call cat.

Talking.

About maybe potential in positive impacts coming later this year and definitely next year from the infrastructure Bill that passed I wanted to know what some of the feedback you've been getting from customers and how should we think about it for 2023.

Yeah.

Yeah no.

You've obviously been watching this very closely and Rick <unk> our CFO .

And a lot of the teams in the field are in regular communication with our customers trying to understand exactly what their needs are going to be as as we've talked about a lot on this call truck capacity has been constrained and it's important for us to understand what kind of things are coming down the pipeline, especially for some of our larger strategic customer.

Like cat and others.

And so yes. It is something that we are in constant communication with our customers on and are trying to kind of resource plan accordingly.

We are.

Hesitate to overuse this word but cautiously optimistic about the things that are that what we're hearing and what we're seeing from our customers now on the one hand, I'd say cautiously optimistic, but also kind of freaking out a little bit given given what it might mean in terms of demand, especially when you look at the tractor.

Situations and so we want to make sure and that's why we.

You heard us reference several times I mean, our brokerage.

Revenues were up 35%, 37% in the quarter year over year that that is intentional that's by design that is strategic.

We want to go out there and capture as much freight and be the best partner, we can to our deep cut.

Customers.

So that if and when things do slow down which doesn't look like it's happening, especially when you talk about this infrastructure bill, but if and when it does we can shift that that business.

With the additional freight capture that we've realized back to our company assets and keep them profitably running them moving.

So obviously an infrastructure bill is going to push out into the future, but the brokerage relationships that were that were developing.

Are going to help us continue to support our strategic customers as we as we move down this path of infrastructure.

Thanks for the color, Jason and gentlemen, appreciate the time as always.

Thank you Jason.

Thank you.

One moment. Please go to our next question.

And next we have Bert Subban of Stifel. Your line is open.

Hey, good morning, Jonathon Jayson.

Good morning Bert.

So if I look at 'twenty, two guidance, 5% to 10% EBITDA growth that implies margins were moderate rate.

Sequentially.

With <unk> likely sort of bearing the brunt, what incremental inflationary events should we be looking at.

Just in terms of I'm trying to parse together it sounds like a really good demand environment, perhaps short some trucks and moving more into brokerage, but it would seem like you have good pricing power in that backdrop can you just help us understand why maybe that's not the case.

Okay.

Yes.

Go ahead Jonathan.

Look I'll, let Jason kind of dig into more some of the specific line items, Bert, but I mean look I think I.

I think youre focused focused on the right things I think when you look at our look at the margin profile of our business and you certainly understand it I don't know that all of our of all of our investors kind of appreciate the impact of mix shift on margins, but when you. When you are down 250 trucks and your company truck fleet is 2500.

So trucks and those the margin profile of those company trucks is.

250% to 300% that of what Youre seeing if youre brokering those those same lows.

It's a big impact you also you also have fuel surcharge running through our revenues.

Or are some of our peers.

Peg peg their EBITDA to net revenues as opposed to gross revenues that you've got.

You've got some you've got some noise there, but I think the big thing that Jason mentioned.

When he was speaking with Ryan.

Then it goes <unk> got nearly $8 million of unfavorable claims claims development that had that not been there we probably would have been able to take up EBITDA guidance three 4%. This year and then there are some things on the margin.

That.

Yes.

Kind of dampened that a little bit further, but I do think that youre right were seeing tremendous depth and in demand.

Adjacent Jason mentioned CAD I mean, there is theres a number of those types of customers that they're not having discussions with us about hey can you can you can you drop rate theyre, having discussions just getting comfortable that that we can provide capacity.

Into 2023, so we think look in contrast.

Our drive dry van brother, and who saw seven consecutive quarters of rate improved kind of rate increases with the COVID-19 demand pull through finally had an inflection inflection this last quarter.

We didn't we didn't see that I mean with the lag in our demand.

Was a little bit more noteworthy and I think that Theres a lot of there's a lot of pent up demand supply chain issues seem to be seem to be easing a little bit, but there's a lot of depth here and when you look at our end markets construction manufacturing.

Very very kind of consistent with the PMI yesterday that that that.

The industrial complex is holding together well we are excited about the prospect of continuing to help our customers out through this but but rates are rates are going to be there inflationary costs to date.

Have.

Kept par or lag slightly with the rate improvements we've seen so we do think on a kind of more quote unquote normalized basis, we'd be able to defend the margin profile, but there were some unusual items this quarter that that add a little bit of noise to the picture.

Jason.

Yes, no I think you did a great job hitting the key points. There I did want to reiterate your comments about fuel surcharges a lot of people and we listen we've been talking about it internally and we may we may shift to to kind of look at things on a percentage of net revenue just because it does it does.

<unk> the metrics, especially the margin metrics when you've got fuel.

Fuel surcharge revenues last year were 60 60 million through.

June 30, and there were $115 million. This year I mean, that's that's a dramatic change in and Theres not a lot of margin in there. Obviously, so you saw fuel expense also rise.

Between fuel expense and fuel reimbursement to owner operators also rise by roughly a commensurate flow through itself. So I think thats, a big piece of it, but but but what I don't want is for people to think that that means that there is some kind of a structural issue.

In terms of our margin generating capabilities, because when you neutralize for that absent the what as Jonathan alluded to kind of unusual things that we realized.

This year with regard to insurance and claims specifically outside of that and some of the delays.

Kind of equipment otherwise.

The rates are doing a really good job of helping overcome some of the inflationary headwinds.

Just to give you a few quick data points like if you look at like driver pay we're looking at almost double digit percent increases if you look at Austin maintenance Youre looking at almost double digit percent increases.

Salaries and wages.

For the non driving professionals youre looking at mid single digits.

And then when you look at the fuel as we already talked about being up.

60, 70, 80% right and then finally insurance and claims that we've talked about a lot already so theres just a lot of those things, but again I think the takeaway is absent some of the unusual items on insurance and some of the delays we've been experiencing on the equipment and the commensurate flow through we feel really good about.

The business and we feel really good about back to your point demand is looking good rates should be strong and.

And we're excited about what the back half of the year will look like and even early 'twenty three.

Already having conversations with customers about.

Kind of demand pull through into 2023, so so.

Yes.

I think we feel pretty good about that absent some of the puts and takes that we just discussed.

Maybe a follow up.

Good job.

Yes, sorry.

Sorry about that Bert look I think some of our other other other peers had mentioned this too I mean.

You do see isolated pressure on rates.

We don't think.

That's a function of.

Kind of underlying demand. We think look the fact is is that the smaller carrier the micro carriers, they're being as we mentioned in our script.

Disproportionately hammered by this by this environment and they don't have the scale they onto Bret.

To absorb a lot of these things in.

There was that there was kind of a <unk>.

Stark.

There was this kind of a stark movement in the number of kind of motor carrier authority Nonrenewals. So youre, losing I think youre, losing carriers, you've got a lot of carriers that kind of came into this.

That's your that's your marginal capacity in this industry is a smaller carriers. They hop to enter this market environment at a time, where.

Used truck prices were two to three times, what they what they historically would have been say a much lower much much higher bases and so these guys are these guys are struggling to survive. They are dropping rate and they are really living paycheck to paycheck just to keep their business afloat and that look that wave is.

Going to crash at some point and so I think.

In the very near term, we could we could lose a lot more capacity.

And again the demand side, Jason I spoke to the demand side is absolutely. There. So I think I think it's going to continue to prop rates for the foreseeable future.

Yes, thanks for the answer to both of you maybe my follow up to that would be it.

It seems like obviously like you guys have narrowed a couple of times now demand is strong.

Can you highlight maybe rough percentage of your business Thats on the books for the second half because I would imagine the business that you have not contracted for you would do so at higher rates in the past as inflation is that an opportunity.

Okay.

Yeah. So that's absolutely the way our team is going about this listen we try not to be.

<unk>.

Bad partners, but at the same time.

Got to make sure that we're able to.

Take care of our employees, our shareholders and we're having those conversations with our customers and we're looking very hard at at what kind of rates, we're locking in and for what duration.

Listen we've talked about this in the past and this is not unique to that I've been in the industry for 20, plus years and did it on the dry van side as well a lot of times you have to go back when fundamentals in the market shift and change and you have to revisit conversations on price.

It is what it is and so those are those are conversations that we're having.

But again, we're trying to be partners here and not take advantage of situations, but as I just alluded to I mean, we've got several line items that are going up double digit in terms of percentage increases.

<unk>.

And we can't just not pay the drivers right, we need to take care of the drivers otherwise we've got other issues with regard to servicing customers and taking care of customers. So so there is no question that those are those are dialogues that we're having with customers and we're trying to manage those dialogues the right way.

And more of a partnership as opposed to taking advantage of the situation but.

And so far it's been well received and I think we're going about it the right way.

Okay that makes sense I'll, just ask one more and I'll pass it back Jason I imagine you've you've already sort of alluded to early 'twenty three thoughts I imagine you've thought through a peak to trough analysis for your business. Several of your dry van peers have sort of quantified that in terms of earnings I know the industrial cycle tends to be on.

A little bit of a lag so perhaps 23 doesn't ultimately ended up being a trough year on the industrial side and then you have.

Infrastructure that could further prolong the cycle, but if we were to make the assumption that 'twenty three we're a trough year can you provide any color around what that peak to trough would look like in your business. It sounds like you have up to $25 million.

Cost savings and I know, you've historically talked about the band of or from good to bad times being pretty narrow can you provide any thoughts maybe in terms of what it could mean for EBITDA or whatever metric you think most applicable.

Yeah.

Yes, I'll try to tiptoe this trap easier.

We haven't given any 'twenty three guidance and it's not our intent to do that right now, but I understand the nature of your question. So I'll try to give you a few data points.

We've talked a lot in the past we've done a lot of rate analysis here as an organization over the last year and we've gone back 30, plus years and have kind of identified that if you look at like the two or three or four kind of big.

I'm using air quotes here recessionary type environment that we've experienced during that timeframe typically they last between 12 and 18 months I think the biggest one was 24 months and that was kind of <unk>.

And.

And the peak to trough kind of rate inflection that we've experienced during those times is it's right around 10%.

But but you fully recover by the end of that 18 month cycle and you are back to peak again, so peak to trough to peak is we're literally talking.

On the smaller recession times slowdowns 12 months on the biggest 124 months and so we have done to your point burn a lot of sensitivity modeling around that.

And what would happen and what would it mean and what kind of things would we need to do on the cost side and so there's been a lot of work done and we've got.

My SBA team wants to jump out the window on certain days, when we say hey can we run this sensitivity can we run the sensitivity what if we do this with rates or what do we do with this with trucks.

So we've done a lot of that work what I can tell you is we don't know exactly what 'twenty three is going to look like but it's looking more and more as we get here into the back half of 'twenty to 'twenty.

2023 is probably not going to be that trough year now will things start slowing down in 'twenty three at some point, yes, potentially but I don't know that thats.

We still see pretty decent demand, especially when we talk about as was alluded on the previous question about the infrastructure Bill in some of these other things coming down the pipeline and then you couple that with I think you alluded to we still have some <unk> self help opportunity here and I just don't want that to get lost in the messaging that we aren't just a well.

We're going to ebb and flow with with the market and if the market goes down 5% or 7% and 10% were going to go down 10, we have a lot of self help opportunities here and then when you look at some of the strategic M&A things that Jonathan alluded to in our and our unique diverse end market portfolio that we can shift asset.

In and out of different verticals like we did during COVID-19 like we did when the construction boom happened like we did when wind energy was strong or when it slowed down or when the Dod was going bonkers.

There's a lot of things we can do.

To kind of preserve.

Margin and minimize negative impacts through a downturn. So we haven't given definitive we're not going to give definitive guidance right now on 2023, but what I can tell you is that our internal expectations for 2023 is that they will be better than 2022, and I'm pretty comfortable stating that.

And that's assuming that things start to slow down a little bit in 2023.

Jonathan anything you would add to that.

Yeah, I mean look.

Yes, the things.

880, 588% or so of our business is contract.

We don't we don't have the same volatility as some of the more kind of spot oriented carriers and again 70, depending on the quarters, 70% to 75% of our cost structure is variable. So we've got a lot of we've got a lot of levers to pull to kind of defend margins.

Very helpful. Thank you both.

Thank you.

Thank you Bert.

Thank you.

One moment for our next question.

Our next question will come from Greg <unk> of Northland Capital markets. Your line is open.

Hey, good morning, Thanks for taking the questions.

Do you have an idea of how much of a margin impact there was from the shift to the more asset light business model in the quarter.

Yes, we do.

So I mean, what I can tell you is we did disclose that we were up 37%.

And and.

And I would tell you probably a good way to think about it is that our our trucking business typically will run in the mid to high <unk> operating ratio.

And our brokerage business is typically going to be in the kind of <unk>.

It can be low ninety's, but but that is definitely a dilutive impact when you look at that.

As much as.

567, 800 basis point differential now the return on invested capital is obviously better on the brokerage business.

So you can afford but it is absolutely dilutive to the margin and so you can kind of run some of those numbers through your model and I think it will get you the answer that you're looking for there.

Great Yes, that's helpful.

Awesome and then.

In terms of kind of the leading sources of cost inflation in the business.

Is it right to think about those being kind of what you've talked about this quarter, you know driver pay maintenance costs and kind of insurance premiums are.

What would you kind of.

<unk> is the leading sources of inflation.

Yes, I mean, you hit right. So I think driver pay almost double digit ops and maintenance.

Almost double digit.

And in fact embedded inside of that if you look at like.

Tire costs in some of these other once they are up even more than 10%.

Closer to 20% range. So I mean, there is some some big inflationary items, there, we talked about non driving salaries and wages being up mid single digits and then obviously fuel is up substantially but you've got the fuel surcharge revenue that kind of makes you hold there.

And then the last one which isn't something that I would necessarily.

Characterizes inflationary, but the insurance.

The way that that develops its not that the premiums were up dramatically I just want to be clear because I think you referenced premium.

Is that the.

The actual claims reserve that we took were up yeah. We had we had a couple of claims prior period claims that developed materially.

And therefore, we took big reserves, there, which is not something we would expect to reoccur, but also not something we would say it couldn't happen again in the future. So we just have to be cautious on that.

Great helpful. I guess, just last one I wanted to follow up on your comments on the operational and back office improvements.

How much of an impact do you maybe expect to realize that in the second half of this year.

Yes, Greg I think what we're kind of kind of the party line right now is that.

Costs will offset any gains this year I think we mentioned that on our last call.

And I think you should really think about 2023 is as is kind of a turning point, where we really start to.

Really start to make some gains as a result of those initiatives Theyre just again.

As you can suspect I mean, there is theres a lot of a lot of moving pieces.

I think the team still feels like net net.

It's a bit of a headwind this year and will be a bit of a headwind this year.

But again very optimistic about what we're seeing in each of those each of those initial kind of phased integrations and continue to be excited about what he is going to look like once those are done.

Okay, great. Thank you.

Sure.

Thank you. Thank you.

And that ends the Q&A session for today's conference I would now like to turn the conference back to Jonathan Shopko for closing remarks.

Thank you Chris I'd like to thank everyone for your time today, we look forward to continuing upon the momentum we've generated alongside our broader transformation. We thank you for your commitment and confidence and we look forward to translating the market opportunities facing us today in a more profitable returns and consistent growth for our stakeholders. Thank you.

Thanks, everyone. This concludes today's conference call today's conference call. Thank you all for participating you may now disconnect and have a pleasant day.

The conference will begin shortly to raise Johan during Q&A you can dial one one.

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Good morning, everyone and thank you for participating in today's conference call to discuss.

<unk> financial results for the second quarter ended June 32022, as one <unk> 2022 full year outlook with.

With us today, Jonathan <unk>.

Oh and board member Jason Bates.

Executive Vice President and CFO , and Tracy Graham Vice President of Finance and Investor Relations. After their prepared remarks, the management team will take your questions.

As a reminder, you may now download a PDF of the presentation slides that will accompany the remarks today on today's conference call as indicated in the press release issued earlier today.

You may access these slides in the Investor Relations section of our website before we go further I would like to turn the call over to Tracy Graham Vice President of Finance and Investor Relations, who will read the Companys Safe Harbor statement that provides important cautions regarding forward looking statements within the meaning of the private Securities Litigation Reform Act.

Of $19 95.

Please go ahead.

Is that could cause actual results to differ materially from our expectations and projections.

I encourage you to read our filings with the Securities and Exchange Commission for a discussion of the risks that could affect our business and to not place undue reliance on any forward looking statements. We undertake no obligation to revise our forward looking statement to reflect events or circumstances occurring after today, whether as a result of new information future events or other.

Except as may be required under applicable securities law during.

In terms of the structure of our call today I will start by turning the call over to <unk> CEO , Jonathan <unk>, who will review our business operations and the progress we are making as we execute against our key strategic priorities, Jason Bates <unk> CFO will then provide a financial review of the quarter and speak briefly about our 2022 outlook at which point Jonathan will wrap.

Up our remarks with a few closing comments before we open the line for your questions with that I will hand, the call over to Mr. Jonathan Checkout Jonathan.

Thank you Tracy and good morning, everyone.

Let me begin on slide three where I will speak briefly to a few of the notable takeaways from our second quarter.

<unk> delivered another solid quarter of operational performance as demand across most of our key industrial end markets remained strong.

Additionally, disruptions in the global supply chain continued to impact the equipment market perpetuating the supply demand imbalance.

Which coupled with the demand strength is only further supported a healthy freight environment.

That said these same disruptions have also created challenges to our productivity with new truck orders approximating nearly 10% of our company truck fleet remaining unfilled.

In response to ask you continue to leverage our asset write fleet model to adapt to this unprecedented environment.

We tapped our expansive asset light network, specifically, our brokerage services to drive revenue of $481 3 million in the period.

In doing so we met our customers' strong demand for capacity, maintaining our substantial freight capture despite these equipment delays.

In spite of strong inflationary cost headwinds.

A smaller company fleet and a stronger utilization of lower margin asset light capacity, each necessitated by OEM equipment delays as.

It is important to note however that the fundamental earnings capability of our platform was meaningfully understated this quarter because of these extraordinary events.

With that I will now turn the call over to Jason Bates to review, our financial performance for the second quarter of 2022, Jason.

Thank you Jonathan and good morning, all.

Please turn with me to slide four for a high level review of our consolidated results for the quarter.

As Jonathan highlighted <unk> diverse portfolio of industrial facing end markets, coupled with our asset right strategy help optimize our freight and recapture once again this quarter.

We've proven our ability to strategically leverage this model and outperformed traditional trends seasonal and otherwise versus that of the broader market.

Despite the current inflationary environment. We are pleased to report another quarter of year over year adjusted EBITDA improvement upon strong growth to our top line.

In the quarter to ask you delivered revenues of $481 3 million.

Up 19, 1% compared to revenues of $404 million in last year's second quarter.

Even as our fleet size decreased slightly year over year due to continued equipment delays.

We delivered adjusted net income of $30 million or <unk> 42 per diluted share in the quarter.

Adjusted EBITDA of $70 8 million grew by two 2% compared to the second quarter of 2021.

As a result of topline expansion strong demand trends driving freight rates and the strategic deployment of our asset portfolio.

This strength in rates was partially offset by cost pressures in driver pay operations and maintenance and insurance and claims expense.

Our results for the quarter were impacted by a couple of claims from prior periods, which have adversely developed in the quarter.

Back half of this year.

Next I would like to touch on our approach to the current labor market.

Notably while driver pay has increased on an absolute basis, the strong rate environment helped to offset these costs and driver pay as a percentage of rate per mile remained flat in the quarter.

Dusky remains firmly committed to providing a positive working environment for our skilled and trusted drivers and we will continue to keep a close watch on the labor market.

On slide five we present, a detailed view of our results at the operating segment level, starting with our specialized segment results.

Specialized revenues were $268 6 million up 18, 8% versus the prior year.

This solid topline growth driven by heightened demand and our high security cargo construction and manufacturing verticals, where we continue to realize strong market rates. This combination of rates and demand coupled with our unique end market portfolio approach helps offset the reduction of high margin wind energy revenue captured.

In the year ago period.