Q3 2022 Daseke Inc Earnings Call

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

[music].

Yeah.

Good morning.

And thank you for participating in today's conference to discuss <unk> financial results for the third quarter ended September 30 of 2022 as well as SaaS keeps 2022 full year outlook with us today are Jonathan.

Sure.

<unk> Executive Officer, and Board member, Aaron Kelly Executive Vice President and Chief Financial Officer, 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 remarks.

<unk> made 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.

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 securities.

We are engaged with.

Please go ahead.

Thanks, Norma 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 $19 95 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 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.

Due reliance on any forward looking statements, we undertake no obligation to revise our forward looking statements to reflect events or circumstances occurring after today, whether as a result of new information future 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 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.

Are available in the investors tab of the <unk> website, www Dot <unk> dot com in terms of the structure of our call today, we will start by turning the call over to <unk> CEO , Jonathan <unk>, who will review our business operations and the progress we're making as we execute against our key strategic priorities. Then we will provide a final.

Annual review of our 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 Chaplin, Jonathan Thank you Tracy and good morning, everyone I'd like to start the call today by welcoming welcoming Erin colleague to the desk the exec.

<unk> team is experienced as a transformational CFO .

Ideally suited relative to where desk yesterday and will be invaluable in supporting our efforts in achieving our long term strategic vision. We look forward to you all getting to know erinn better over the coming quarters.

Thanks, Jonathan and good morning, everyone, it's great to be here with the desk a team.

Now moving on to slide four I'll speak briefly to a few key takeaways on our performance. This quarter I am excited to report another strong quarter of performance with $64 8 million of adjusted EBITDA and revenue improvement of 9% year over year to $462 8 million.

We've talked at length about the effectiveness of our unique business model to respond favorably across cycles and this quarter's performance is continuing evidence of the strength.

While we began to see some softness in a few of our flatbed end markets. This quarter. This was offset by strong demand within several of our key other flatbed and specialized end markets, specifically high security cargo aerospace and agriculture.

Exposure to several end markets and numerous sub verticals across the industrial complex, some high beta and others with non with strong non cyclical tendencies provides us with a highly diversified portfolio of revenue contribution by customer.

Our third quarter adjusted operating ratio, excluding fuel surcharge of 89, 3% was one of the best in the company's history.

A representative of our continued business transformation efforts and decisive execution by our seasoned operating teams.

As we maintain focus on improving the quality of our earnings and cash flow profiles. We continue to post strong adjusted operating income and free cash flow $42 7 million and $54 $2 million, respectively, fueling our liquidity at all.

Allowing us to further deleverage as.

As we look to 2023, the macroeconomic and geopolitical uncertainty as heavy consideration as we evaluate capital allocation priorities that said, we are well positioned to both be defensive and opportunistic with our current liquidity and balance sheet.

We are a quarter ending liquidity of $311 7 million market will be higher than any of our peers as a percentage of market capitalization.

We have a covenant lite term loan with no near term maturities and our net leverage profile of one nine times.

We have a stock that despite several consecutive quarters of consistently positive performance is trading unfathomably at nearly a 50% discount to our peer group.

Against the backdrop of a stock that is dramatically undervalued on both a relative and an absolute basis, our ongoing commitment to our shareholders is to find a prudent balance between continuing to build a fortress balance sheet with a focus on total funded leverage while also being thoughtful about ways to drive long term shareholder value.

With that I will now turn the call over to Tracy Graham to review, our financial performance for the third quarter of 2022 Tracy.

Thank you Jonathan and good morning, everyone. Please turn with me to slide five for a high level review of our consolidated results for the quarter. Once again <unk> resilient model based on our diverse portfolio of industrial facing end markets continued to support our strong financial performance, we saw demand strength and high security cargo construction agriculture.

<unk> and manufacturing end markets against a softer market rate backdrop in the quarter desk, you delivered revenues of $462 8 million up 9% compared to revenues of $424 6 million in last year's third quarter fuel surcharge drove a majority of the increase as our fuel surcharge program is working as designed we <unk>.

Adjusted net income of $24 1 million or <unk> 34 per diluted share in the quarter adjusted EBITDA of $64 $8 million declined by five 3% compared to the third quarter of 2021, due to increasing costs and driver pay operations and maintenance and insurance claims corporate adjusted EBITDA in the quarter decreased by 3 million.

On a year over year, which was primarily due to an increase in insurance and claims and compensation expense on.

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

Specialized revenues were $274 million up 10, 8% versus the prior year with growth driven by demand in a high security cargo aerospace and agricultural agriculture verticals, where we continue to realize strong rates as mentioned last quarter aerospace continues to generate incremental improvement for us.

After having been a slower end market for some time as demand from aerospace was again strong this combination of rates and demand that we maximize through our unique end market portfolio approach continues to help offset the reduction of high margin wind energy revenues versus the year ago period.

Our specialized segments adjusted EBITDA was up six 6% to 47 million, while adjusted EBIT margins were just 70 basis points below the prior year's period the margin compression in this quarter was primarily driven by the change in mix from the prior year, specifically the reduction in high margin wind revenue. These results against a very strong prior year.

Year period comp speak to the strength of our end market portfolio approach and the resilience of our margins through cycles.

Adjusted EBITDA growth on an absolute basis was supported by a rate per mile for the segment of $3 66.

<unk> increased by seven 3%.

Compared to the $3 41 in the third quarter of 2021, our specialized segment continues to experience rate expansion across and Mark's driving year over year growth.

This was again demonstrated by the segments revenue per tractor results of 74000, which was noticeably higher than the 7300 recorded in last year's third quarter.

On slide seven we outline our flatbed segment results for the quarter. Our flatbed segment delivered revenue in the third quarter of $194 7 million, an increase of five 8% from the $184 million in the prior year quarter healthy.

Healthy demand across our construction and manufacturing customer base more than offset a decline in steel reserve, resulting in overall revenue growth.

In the quarter, we saw a modest one 2% increase year over year in rate per mile. As we continue to earn a premium to prevailing market rates. However revenue per tractor decreased to 51500 from 56000 in the third quarter of 2021 due to lower miles driven.

The segment's adjusted EBITDA results of $27 2 million was 11, 4% lower than the $37 million generated in last year's third quarter. Our adjusted EBITDA margin also declined by 270 basis points and margins for the quarter or 14%, mainly due to an increase in driver pay which caught up with.

Previously realized rate increases as a result, the segment's operating ratio increased 260 basis points to 91, 1% and adjusted operating ratio was 98%.

We continue to believe strongly that our unique business model based on a diversified portfolio that spans multiple end markets and industry verticals combined with our strong fleet composition positions us to maximize our strengths in both the specialized and flatbed markets. The bottom right hand of slide seven updates <unk>.

<unk> performance versus that of the broader flatbed trucking market this quarter the wider flatbed markets on a year over year rate deterioration for the first time in nine quarters, but <unk> was again able to garner a premium premium rate compared to the market based on our service and execution for customers leveraging our asset right model to capture attractive freight opportunities.

<unk> at strong margins and are predominantly contract based rates.

Turning to slide eight we thought it would be useful devoting a single slide to providing some adjusted figures for two noteworthy callouts that are creating some noise in our normalized adjusted numbers one for fuel surcharge and the other for an unusually large single event insurance claim.

First with respect to fuel surcharge, we have provided a quick summary of our operating ratio adjusted for the removal of fuel surcharge, which resulted in revenues net of fuel surcharge. This net revenue figure is widely used in the industry as it presents a more accurate gauge of overall performance because of the modest cost plus fuel surcharge.

<unk> does not pull through at the same margin profile as the core operating business. So it provides a drag on margins, which can be magnified in high priced fuel environment. As you can see excluding fuel surcharge our operating ratio at 89, 3%. This quarter is on trend with the improvements we have delivered across the past several years.

Looking to the bottom portion of the slide we have provided a Q3 and year to date add back adjustment to neutralize the effect of an unusually high insurance claim amount for a single event that was settled this quarter.

Net to <unk> interest our total exposure on this claim was $10 million with $4 million hitting this quarter's numbers and the other $6 million been reserved for in the first quarter of the year.

This table at the bottom of the Slide then provide third quarter and year to date figures pro forma for these adjustments.

The takeaway here is that with these adjustments.

Which we would contend provide a better perspective of normalized as potential of our business. Our results are meeting and in some cases exceeding consensus expectations on a year to date year to date basis when.

When we look at how Daphne.

Through this effort.

Thank you.

So that can cause some pain.

Cash flow generation deleveraging momentum and the flexibility to thoughtfully allocate capital to drive shareholder value.

Turning to slide nine I'll briefly discuss our cash flow performance. The company continued to generate strong free cash flow was $54 8 million in cash from operating activities. During the third quarter driven from improvements in networking capital and $106 7 million in net cash from operating activities year to date cash.

Capex year to date was $33 4 million and we collected cash proceeds of $28 million from equipment sales, resulting in free cash flow of $101 3 million on a year to date basis Capex.

Okay.

Okay.

Net after financing to $7 6 million.

During the first half of the year experienced delays receiving equipment due to global supply chain disruptions. However, we have started to receive more of our equipment and anticipate we will receive a majority of our planned equipment by year end.

Moving to capital sources in the balance sheet, we continued to maintain healthy liquidity of over $311 million with our cash balance supported by the strong free cash flow of the business and our revolving credit facility, where we continue to have over $123 million of Undrawn availability.

Looking to slide 10, I will conclude with our outlook for the full year 2022, while there continue to be.

Within the framework, we remain confident in our ability to earn premium rates are unique portfolio approach and asset right model, which enables us to maximize our earnings from defensible revenue streams and our ongoing transformation initiatives with that backdrop, we are reaffirming our full year 2022 revenue outlook of 12% to 15.

Percent year over year improvement, we also expect our adjusted EBITDA to improve by the previously provided range of 5% to 10% year over year, albeit towards the lower end of the range as inflationary cost pressures persist. We are also reaffirming our net capital expenditure outlook of $145 to 155 million.

For the full year 2022.

Moving to the bottom of the slide.

We are still preparing our formal 2023 outlook, we did want to offer a preliminary perspective on 2023 Directionally, though we do expect continued softness in some of our end markets and continued inflationary pressures to drive additional operating cost creep, we expect that a few of our key specialized segments will remain strong providing.

Adding counterbalance. Additionally, we expect to see an inflection in our transformation process such that we will begin to see a net positive impact from our transformation initiatives in 2023 with an estimated annualized 2023 exit run rate EBITDA uplift from these efforts in the 20 to 25 million.

Range, we would expect these efforts to provide the additional support to mute any inflation or rate environment headwinds such that we are highly confident we will be able to show a modest improvement to both revenue and adjusted EBITDA in 2023.

More to come on this on our call in early February .

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

Thank you Tracy on slide 11, before we get to Q&A. This morning, I'd like to spend some time discussing our leverage.

As we enter 2020 after operational pivot in 2019, the company re prioritize the importance of a strong balance sheet as.

As business transformation initiatives executed in mid late 2019 and began to take root and operations began to improve the.

The improvement trend line or a company's free cash flow generation began to build.

As our adjusted EBITDA Reflated, our leverage profile began to organically decline and in early 2021.

Our $484 million term loan.

With a $400 million Covenant Lite term loan net of a one time debt repayment of $84 million.

The chart on the top right quadrant of this slide nicely illustrates the meaningful progress. The company has made over the last few years, reducing net leverage by approximately 40% and increasing adjusted EBITDA by nearly 54%.

On this trend our net leverage could be zero within two to three years.

The chart in the bottom left quadrant summarizes uses of capital as a percentage of cash flow from operations for several of our peers noticed at approximately 50% of our cash flow from operations from 2020 through the third quarter of 2022 has been used to repay debt bolstering our balance sheet.

As we approach the leveraged profile there is closer to industry convention.

Which we would expect could occur in the next 24 to 36 months.

This capital currently being used to support our leverage reduction priority as well as the cash interest expense savings will be funnel activity is more likely to drive further shareholder enhancements such as M&A more consistent share repurchase programs and possibly even an annual dividend program.

I direct you to a quick summary of our credit profile in the bottom right quadrant before moving to the next slide Moody's.

Moody's and S&P have both upgraded our ratings within the last few months and each is also described the outlook for our company is stable.

Even in consideration of the macro geopolitical ambiguity.

Our $150 million revolving credit facility remains largely untapped with the exception of roughly $22 million of outstanding letters of credit.

With $123 4 million of availability under our revolver and total cash balance of $188 3 million or total liquidity as of September 30th stood at $311 7 million versus our term loan balance of $394 million.

Also as mentioned previously extremely germane to our profile is the fact that our term loan has no financial maintenance covenants, only 1% annual amortization with no other material maturities for nearly five and a half years in March 2028.

We would hope that your takeaway is that our debt burden is manageable our liquidity is ample at our confidence and our ability to generate positive free cash flow across cycles will continue to support the further strengthening of our balance sheet.

Next slide please.

This is a slide we showed a few quarters back with several updates on.

So I think it's one of the most compelling slides in the deck I won't spend too much time on it because I would hope the takeaways.

I hope the takeaway is fairly self explanatory since.

Since 2009 team vascular showed consistent improvement rationalizing our fleet improves.

Improving operating ratio as well as virtually all of our financial metrics and as discussed on the last slide meaningfully enhancing the credit profile of our company.

Yes, the discount at which we trade relative to our peer group is somehow continue to widen to 46%.

With our multiple to enterprise value multiple of enterprise value to TTM adjusted EBITDA as of September 32022 Lane languishing around three six times and implied enterprise value there.

That is even less than that of the fair value of our assets.

Our team believes this company is still must understood and still miss priced and we commit to each of our shareholders. Our resolve to continue to execute and drive long term equity appreciation.

Next slide please.

I'd like to close with a big picture drivers of value in support of what we believe to be a differentiated thesis within the value investing arena.

First is our market position as the leader in industrial end markets.

We're in wherein our unrivaled scale of differentiated capabilities allow us to organically increase rate capture improving market share with our blue chip shipper base, a tight freight markets, which provides a buffer and softer times.

While being the premier carrier to a diversified pool of industrial facing end markets is the foundation of our portfolio approach. The second driver is our ability to opportunistically shift capacity across these end markets the highest and best use while also maintaining the ability to flex capacity by toggling, our asset light fleets up or down provides.

A matrix of diversification that positions us for resilience across rate cycles.

And with approximately 80% to 85% of our business being contract based we simply do not have the same volatility as many of our spot based peers.

Number three an established trend of improved performance the change our business has undertaken over the last few years is real it's lasting.

And we remain confident in our ability to generate positive free cash flow irrespective of the prevailing macro environment.

Moving on and number four we continue to be excited about our ongoing transformation plan and auto consolidation strategy.

At the beginning of these processes headwinds are typically encountered this plan is critical to laying the groundwork for our future strategic ambitions.

As we surgically rationalize the people processes and systems in preparation for our next phase of optimization these business transformation and operational improvement initiatives.

Our fundamentally and incrementally changing how we how our business will operate in the future.

And we remain confident in our $25 million target an exit run rate uplift by the end of 2023.

Beyond our transformation speaking to number five.

We have a number of highly actionable highly impactful growth opportunities, which we plan to begin executing against in 2020 for once the transformation phase is complete.

From organic growth into new and adjacent markets and further refinement and optimization of our core business to expansion of our capabilities through organic and strategic vertical integration that will align with our industrial and market focused strategy.

Lastly, our current share price, we do strongly believe that we are in deep deep value territory and the balanced decidedly favors returned over risk given our current multiple relative to afford proposition of our earnings potential.

To underscore this conviction, we announced a $40 million share repurchase program on September 30 of this year.

While these last two slides were intended to provide the high level contours of our valuation thesis.

We would encourage you all to spend some time evaluating our story and our wins over the last several quarters.

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

Thank you to ask a question you will need to press star one on your telephone. Please wait for your name to be announced please standby, while we compile the Q&A roster.

Okay.

Our first question comes from Bert <unk> with Stifel. Your line is now open hey.

Good morning, and thank you for the question.

Hey, how are you.

Good.

Jonathan first question for you.

Highlight as mentioned in the prepared remarks, you noted your valuation versus the peer group and sort of how that compares to the fair value of the company.

What do you think closes that gap over time and with divestitures beyond the table is a way to simplify the business and perhaps unlock value or do you not think that's the right strategic direction.

Yes, yes, I mean, I think that look I think that particularly in this in this environment.

The market sentiment is generally risk off I think levered names.

We are being hit disproportionately more.

Thank you.

Right or wrong, the market views us as a levered name, who can we kind of mentioned the.

<unk> nature of our term loan our strong balance sheet no near term maturities.

To kind of above that but I think thats I think thats one of the one of the concerns and then look I mean, we can and to be perfectly honest, we can't ignore ignore some of the noise.

The company the company enjoyed a couple of years back and so we're we've been consistently performing for the last.

A few years now, but but I think that the market is going to have to see US go through go through essentially in 2023 go through some kind of some kind of some kind of tougher period right some kind of growth recession or whatever 2023 brings.

And ensure that this is truly a different team different company and come out on the other side of that in good form which was look which we're prepared to do so I think when you have that and we can go look we've executed successfully across a pandemic, we took advantage executing executing decisively.

And a healthy rate environment over the last 18 months and we kept that we kept the ship straight in.

Improved revenue improved EBITDA three growth recession, I think thats, a pretty compelling story and supports our.

Portfolio diversification kind of all weather strategy approach.

I would hope that that does it.

Okay. That's helpful. Thanks, Jonathan.

Highlighted your expectations for 'twenty, three EBITDA, which was very helpful.

When you guys think that it could rise year over year with sales.

It would clearly be a positive outcome based on what we're hearing across the industry.

I know, it's early days, but can you sort of talk about what gives you confidence in that and sort of how we should think about the durability of your various end markets and the slowdown.

Clearly aerospace high security potentially wind energy could be tailwind, but do you think that those are sufficient.

Sufficient tailwind to offset what you're seeing.

Construction manufacturing and steel.

Yes, I think that look.

Completely fair question, so where we are.

Obviously provide more more transparent visibility into guidance for 2023 on our next call, but yes.

Yes, I think we have a.

Kind of a handful of things going going for us I mean again, we talked about and you mentioned.

Specialized our specialized end markets.

<unk>.

'twenty 'twenty, depending on depending on the quarter, 25% to 30% of those are our non cyclical anti anti recessionary type type markets. So.

Irrespective of what happens next year within reason, we're going to continue to.

Move along.

The flatbed flatbed markets that we service.

There's kind of puts and takes.

Across that arena some of them are actually softening some of them are showing signs.

Kind of green shoots where they're actually improving strengthening we are just anecdotally. We are getting we are getting calls from customers and again our business is largely contract. So we don't have the volatility of kind of a spot based business. We are getting we are getting calls from customers, whether it's infrastructure driven or inflation reduction driven.

Really really asking us to kind of confirm capacity availability and when we look ahead, even even currently load count year over year is steady our brokerage is up 26% on the flatbed side.

Focus on slide but for a second.

Year over year. So we actually are capacity is booked solid so to the extent to the extent the rate environment moderates more we have the ability to take from take from brokerage shift to company trucks take take capacity from Lps shift to company trucks higher margin higher margin.

If you think about our margin profile of our different fleet strategies.

Brokerage it goes from brokerage owner, operator LP and highest highest highest margin.

Strategy as company trucks. So we've got a lot of we've got a lot of excess right now that we're capturing but we're relying on kind of our flex capacity or asset light capacity to really take advantage of that if the market softens a bit will shrink those lower margin there is lower margin offerings and shift that freight to our to our higher margin company trucks. So.

There's a lot of then we've got that and then I think they'll look we've got the transformation.

Transformation efforts, which.

It's going to be both a big a big fixed cost.

Move as well as well as kind of refinements to our variable cost structure against 75% of our business is variable cost structure.

And when you think about things like maintenance when Youre doing 500 million miles a year.

One penny to penny improvement in maintenance cost per mile.

As to a big number, but we think look again the resiliency in our end markets, particularly on the specialized and certain end markets like manufacturing construction and agriculture, we've had a lot of conversations with those respective customers who are predicting a good 2023, and then and then the additional counterbalance of of R. R.

Our transformation initiatives are going to are going to help us kind of tow the line here in 2023.

Okay.

Thanks for all the color there just final question for me, we've consistently heard from from some of your peers.

There is an expectation for small carrier exits to start to accelerate just in this backdrop, where spot rate environment has been challenged inflation has been a headwind can.

Can you give us some commentary on how you're thinking about the supply side for industrial transportation and if you think there is a similar story there.

Yes, I think it's absolutely the same narrative I mean, if you look at you look at a lot of those and were actually kind of already already seeing that.

Particularly in our space.

90, 90, depending on what what you read I mean, 90, 90% plus of the capacity and flatbed open deck.

As small carriers and if you look at the if you look at the cost creep.

If you look at the wage inflation.

The cost of fuel the working capital such that that all of those all of those drivers really necessitates now those a lot of those smaller carriers were under capitalized are thinly capitalized going into this market.

And really do live live month to month and so when you when you have all those costs all of a sudden hit your business.

Youre kind of go on paycheck to paycheck and they are the they are the kind of incremental provider capacity in this space, so they're having to they're having to drop rate to fund the given weeks.

Payables.

Driver pay and so I think that that.

Waves about waves about crest. The other thing that you saw I mean, <unk> been very fortunate to have some extremely strong relationships with the Oems. If you look at the equipment, both last year and this year were.

Particularly the small carriers, but even some of the larger carriers.

Cut back 30% to 35% of their orders and their truck orders.

We're probably going to get this year and the year with probably something that feels like 99% of of what we ordered this year. So we've been actually to maintain that the age of our fleet and our company truck fleet is probably now less than two years, we took advantage.

Of the opportunity and of our relationships with our with our Oems to also reduce our our LP the fleet of our fleet.

And so when you when you think about all those things those are those relationships at the small carriers don't have so they went into COVID-19.

Conserving capex not knowing what that was going to really play out to be.

And then you get to the next year to 2021, and you have supply chain issues. The Oem's can't deliver trucks and you get to 2022 now same story. So a lot of those smaller carriers. In addition to in addition to kind of the fixed cost creep in the variable cost creep now have the problem of going look these trucks that we wanted to cycle out of after five years are going on.

Seven eight years old and so I think theres going to be a big reckoning with the with the smaller carrier. So I think it is absolutely a phenomenon we talked to a fuel vendor a couple of weeks ago, just anecdotally the fuel vendor said that.

If they look at charge offs charge offs fuel charge offs last year.

The entire entire entire year of 2021, all the charge offs. They took they actually had the same number of charge offs in a single month this year.

So things are absolutely and if youre not paying your fuel vendor then I think you've got bigger problems, but so I think that I think things are absolutely going to change and I think it's absolutely going to strip capacity out of the market.

Thanks, Jonathan and congratulations to Aaron.

Thanks, I appreciate that.

Thank you one moment for our next question.

And our next question comes from Jason Seidl with Cowen. Your line is now open.

Thank you, operator, Hey, Jonathan a team.

Yes, Hi, Jason.

Yeah.

Wanted to talk about a few things.

Number one you sort of teased about $20 million to $25 million in your transformational initiatives could you break that down a little bit in terms of what are some of the bigger buckets.

I think.

Jason one of the biggest is going to be our fixed cost reduction that we've kind of alluded to and through a lot of the transformation initiatives. We have been able to start seeing some of that just very high level and so we really expect it to pick up next year.

And there is some opportunity within our variable cost model as well, where we can find some squeeze a little bit out of that.

Those are probably the biggest and we have some potential optimization on the revenue front as well in terms of asset utilization and.

Kind of pushing the top line. So those are probably the three biggest buckets, but again, that's all going to be underpinned by the technological advances that we're implementing as well in terms of.

A unified back office more.

More of a more uniform.

Systems across our operating companies as well as a data lake to try and help drive some of that as well.

And are there any key dates for when you guys plan to have these things done.

Yes, I mean, we're Jason we're focused on completion of this phase.

By the end of 2023.

And then we will move into which we haven't provided a lot of we've kind of referenced but then we'll move into what we're calling optimization, which.

Which will be kind of another layer of kind of incremental layer of evaluation.

But again I think.

Notice, we kind of mentioned in the 2000 $25 million range in the script I think in my script I referred to 25 I think at this point, we feel very comfortable with 25 plus of.

Incremental value.

Based on an exit annualized run rate at the end of 2023 alright.

Alright. Thank you guys for 'twenty to 'twenty, five and I was wondering if that plus I'll keep you talking we'll get to 30%.

Yeah.

I appreciate all the color on that.

Let's talk a little bit.

Flatbed.

Jonathan You said in your remarks, you have.

Seeing some softening in some strengthening can you talk about some of the key end markets that are softening in some of the key.

Markets that might be strengthening in blended.

Yes.

AG.

On the flatbed side agriculture.

Manufacturing are still are still very strong on the.

The markets that we're seeing some softening at your steel lumber building materials as you would expect I mean, when you think about we've gotten this question before when you think about building materials.

That's probably about 30% of our of our flatbed business.

And then within building materials about 20% of that 30% is residential facing so about 5% to 6% of our overall revenue.

As residential housing.

Facing so not not a big part of that but.

I don't know.

Any other questions around that.

No I think thats, good and I guess my last one here is really going to be just sort of allocation of capital.

You guys just announced.

Buyback like you will like you stated.

You had a nice reaction in the stock today, but still.

The argument that you are still trading at a tremendous discount to your peers.

Any reason right now that youre not going to be.

Really be aggressive with the buyback at these levels.

Yes, I mean look I think I think we're trying to we're trying to evaluate everything as I said, we're trying to find the right balance here again, it's what we can do to maximize value we have the $40 million out there.

We certainly think that we are.

We're drastically undervalued. So we're absolutely buyers of our stock in this price range I think that there are certain.

We're trying to we're trying to strike the right balance of our of our kind of Investor group, our shareholder base and I think everybody that we've talked to agrees or the stock is undervalued.

Why they are buyers thats why their holders, but I think you also have some people that said look we'd like to we'd like your leverage to look and feel like some of your peers and we've gone back and forth on that so.

I would expect that.

Come 2023.

We think about we think about kind of leverage and whether or not there is another kind of onetime pay down because I think that.

Some people focus on that leverage some people focus on gross leverage or total funded leverage so.

So we certainly have the liquidity to do that and again high high conviction in our ability to generate strong free cash flow in 2023. So.

And as we Delever, we talked about it just the the unlevered cash flow free cash flow capability of this business as we continue to pay debt down.

We have we have more free cash flow to some fund things with so we're going to we're going to strike a good balance, but if the stock stays in this range and doesn't respond I mean, we're absolutely going to be.

<unk> be prudent and we're going to be supportive of making sure that we that we do something about it.

Okay fair enough.

Leveraging you sort of teased a potential dividend at some point.

What is your leverage has to look like for you to initiate a dividend.

Yes, I think I think it depends on I think it depends on a number of things I think I'd look at how do we think about best uses of cash and where we're going to get the best response from.

Broadly from shareholders.

But.

I would think that funded leverage would have to be something very manageable something in the kind of the one five times range before we do that and I think that we have to have good line of sight that we're able to continue to fund M&A, which right now we're being extremely extremely as you might imagine extremely extreme.

Really vigilant about.

What if M&A any M&A, we do we do have we do I don't want to get too off topic here, but we do have kind of a small non binding LOI signed with somebody that.

That will probably close on in February if all goes well.

But I think we still want to we still want to continue to kind of go back to the to the M&A trough and really really provide a story, where we've got organic growth plus a layer of strategic growth and really where kind of.

We're a value oriented.

Kind of growth story with within this space. So I think that we'll be thoughtful about that but I think we will try to match.

Matches match, the dividend rate and a payment that we think that we can we can support across across rate environments for right now our free cash flow profile.

We're optimistic 2023 should be good if we go out into 2024 and I think the team May swap me for saying this but we would hope that we would hope that whatever the fed is doing.

Starts to unwind by then.

Higher beta names.

Particularly transportation logistics box truck load stocks outperformed coming out of a recession. So we think that things those things those things will go right go go go extremely well, we think that wind Bay.

Based on conversations with our wind customers, who were thinking that far out.

When is going to start to pick up a big way in 2024. So we do think that if you want to call. It a low point. This is probably the low point for us.

Just knock on wood for you. After you said that so I appreciate it.

Yes exactly.

You mentioned acquisitions, you said you have a small.

A letter of intent there.

Really tuck ins is really all we should be looking for from you guys in the near term correct.

That's right that's right I think I think a year ago. When we started talking about the acquisitions, we said opportunistic in.

We were looking at some some some larger acquisitions I think that with everything with everything going on now is just the uncertainty in the world.

And frankly the success, we're having the transformation.

And some of the ensuing value add initiatives that offset will follow on with that we're going to be focused on tuck in I do think also that.

The key point that I want to make sure people appreciate is.

Look we're certainly are.

A trucking company today, but we do want to think about the end market strategy and over time and this is certainly not going to happen overnight, but over time I think.

About how to vertically integrate and not just not just provides trucking capacity, but warehousing freight forwarding.

Things like that pre transport transport capabilities, maybe even get into multimodal services and that's that's a bit further out so we're not going to deliver to say, we're going to do that tomorrow, but I think that we're thinking about the strategy and how we can do more than just provide trucking, where we have a pretty captive relationship with some of those customers and some of those end markets.

That's good color, Jonathan and team I appreciate the time zones.

Thank you Jason. Thank you. Thank you one moment for our next question.

Okay.

And our next question comes from Ryan <unk> with Craig Hallum. Your line is now open.

Hey, Jonathan and welcome Erin.

Just two for us covered a lot of ground here, but curious on your contract negotiations as you look into next year kind of what Youre hearing from your customers, how they're feeling willingness to lock in contracts I presume are certainly a lot of puts and takes but I would imagine they would want to lock in capacity with a strong carrier like yourself versus.

Risking that lot of those things you mentioned on the smaller carrier side, but just any qualitative commentary there.

Yes. Those are I mean look those are those are those are ongoing.

Every every.

Or.

It's just a different times and Youre right a lot of them are trying to lock in capacity.

There have been a few that try to point to spot rates and go Hey look this is where this is trending.

We're not we're not look generally we're not interested in those types of relationships. We truly view our customers are really starting to view our customers.

Our shippers as truly strategic partners.

You mentioned that about a year ago. When the rate environment was was was even more frothy than it was today that look we are probably leaving a little bit of money on the table, but we think about these relationships as long term so customers that come to us and try to get look the spot rates doing this I know our contract says this we just say look guys. We're our capacity is completely <unk>.

<unk>.

We're increasing freight capture through through brokerage and if youre not wanting to pay a fair market rate really build a relationship with us and we're just not interested so again, we are having some of those conversations but most of them right now the large the large part of those are hey look we appreciate where things are at it's too early to say that that the hand has shifted in there.

Relationship and a lot of people are still going there could be some pressure and tightening from a capacity side given some of the things we were.

We mentioned too.

<unk>.

And so I think <unk> been pretty they've been pretty balanced conversations and discussions so far.

Okay.

Great and then just on the outlook for this year.

Nice to see you guys reaffirm that despite the challenges out there.

Any bias towards the higher lower end of that given kind of incremental puts takes over the last couple of months.

Yes, I think just since we've seen a little bit of the softening that Jonathan alluded to on the flatbed side, while we've seen other end markets remained strong and offset some of that.

We're kind of thinking more towards the bottom end of that the lower range of the guide, but still within the guide.

Where we're seeing that today.

I will tell you Brian that October was a good month for us so.

<unk>.

Pro for whatever that's worth.

Understood makes sense thanks, guys.

Thank you. Thank you.

And at this time I would like to hand, the conference back to Mr. Jonathan <unk> for closing comments.

Thank you Norma I'd like to thank everyone for your time today, we look forward to building 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, we are presented with today and a profitable returns and consistent growth of our stakeholders. Thank you.

This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.

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

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Okay.

Yes.

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Thanks.

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Good morning.

And thank you for participating in today's conference to discuss <unk> financial results for the third quarter ended September 30 of 2022 as well as SaaS, Keith 2022 full year outlook with us today are Jonathan.

Shopko, Chief Executive Officer, and Board member, Aaron Coli, Executive Vice President and Chief Financial Officer, 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 remarks made 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.

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.

Karen Please open litigation.

Thanks.

Go ahead go ahead.

Thanks, Norma 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 management's 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 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.

Our reliance on any forward looking statements, we undertake no obligation to revise our forward looking statements to reflect events or circumstances occurring after today, whether as a result of new information future 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 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.

Are available in the investors tab of the <unk> website, www Dot <unk> dot com in terms of the structure of our call today, we will start by turning the call over to <unk> CEO , Jonathan <unk>, who will review our business operations and the progress we're making as we execute against our key strategic priorities. Then we will provide a finance.

For a review of our 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 Jonathan. Thank you Tracy and good morning, everyone I'd like to start the call today by welcoming welcoming Erin colleague to the basket.

The team has experience as a transformational CFO .

Ideally suited relative to where desk yesterday and will be invaluable in supporting our efforts in achieving our long term strategic vision. We look forward to you all getting to know erinn better over the coming quarters.

Thanks, Jonathan and good morning, everyone, it's great to be here with the desk team.

Now moving on to slide four I'll.

I'll speak briefly to a few key takeaways our performance this quarter I am excited to reported another strong quarter performance with $64 8 million of adjusted EBITDA and revenue improvement of 9% year over year to $462 8 million.

We've talked at length about the effectiveness of our unique business model to respond favorably across cycles and this quarter's performance is continuing evidence of the strength.

Sure.

While we began to see some softness in a few of our flatbed end markets. This quarter. This was offset by strong demand within several of our key other flatbed and specialized end markets, specifically high security cargo aerospace and agriculture.

Exposure to several end markets and numerous sub verticals across the industrial complex, some high beta and others with non with strong non cyclical tendencies provides us with a highly diversified portfolio of revenue contribution by customer.

Our third quarter adjusted operating ratio, excluding fuel surcharge of 89, 3% was one of the best in the company's history.

Representative of our continued business transformation efforts and decisive execution by our seasoned operating teams.

As we maintain focus on improving the quality of our earnings and cash flow profiles. We continue to post strong adjusted operating income and free cash flow $42 7 million and $54 2 million, respectively, fueling our liquidity at all.

Allowing us to further deleverage as.

As we look to 2023, the macroeconomic and geopolitical uncertainty has a heavy consideration as we evaluate capital allocation priorities that said, we are well positioned to both be defensive and opportunistic with our current liquidity and balance sheet.

We are a quarter ending liquidity of $311 7 million markedly higher than any of our peers as a percentage of market capitalization we.

We have a covenant lite term loan with no near term maturities and our net leverage profile of one nine times.

We have a stock that despite several consecutive quarters of consistently positive performance as trading unfathomably at nearly a 50% discount to our peer group.

Against the backdrop of a stock that is dramatically undervalued on both a relative and an absolute basis, our ongoing commitment to our shareholders is to find a prudent balance between continuing to build a fortress balance sheet with a focus on total funded leverage while also being thoughtful about ways to drive long term shareholder value.

With that I will now turn the call over to Tracy Graham to review, our financial performance for the third quarter of 2022 Tracy.

Thank you Jonathan and good morning, everyone. Please turn with me to slide five for a high level review of our consolidated results for the quarter. Once again <unk> resilient model based on our diverse portfolio of industrial facing end markets continued to support our strong financial performance, we saw demand strength and high security cargo construction agriculture.

<unk> and manufacturing end markets against a softer market rate backdrop in the quarter Daphne delivered revenues of $462 8 million up 9% compared to revenues of $424 6 million in last year's third quarter fuel surcharge drove a majority of the increase as our fuel surcharge program is working as designed we.

Adjusted net income of $24 1 million or <unk> 34 per diluted share in the quarter adjusted EBITDA of $64 $8 million declined by five 3% compared to the third quarter of 2021, due to increasing costs and driver pay operations and maintenance and insurance claims corporate adjusted EBITDA in the quarter decreased by 3 million.

Dollars year over year, which was primarily due to an increase in insurance and claims and compensation expense on slide six we present, a detailed view of our results at the operating segment level, starting with our specialized segment results.

Specialized revenues were $270 4 million up 10, 8% versus the prior year with growth driven by demand in a high security cargo aerospace and agricultural agriculture verticals, where we continued to realize strong rates as mentioned last quarter aerospace continues to generate incremental improvement.

After having been a slower end market for some time as demand from aerospace was again strong this combination of rates and demand that we maximize through our unique end market portfolio approach continues to help offset the reduction of high margin wind energy revenues versus the year ago period.

Our specialized segments adjusted EBITDA was up six 6% to 47 million, while adjusted EBIT margins were just 70 basis points below the prior year's period the margin compression in this quarter was primarily driven by the change in mix from the prior year, specifically the reduction in high margin wind revenue. These results against a very strong prior year.

Year period comp speak to the strength of our end market portfolio approach and the resilience of our margins through cycles.

Adjusted EBIT growth on an absolute basis was supported by a rate per mile for the segment of $3 66.

Which increased by seven 3%.

Compared to the $3 41 in the third quarter of 2021, our specialized segment continues to experience rate expansion across and Mark's driving year over year growth.

This was again demonstrated by the segments revenue per tractor results of 74000, which was noticeably higher than the 7300 recorded in last year's third quarter.

On slide seven we outline our flatbed segment results for the quarter. Our flatbed segment delivered revenue in the third quarter of $194 7 million, an increase of five 8% from the $184 million in the prior year quarter healthy.

Healthy demand across our construction and manufacturing customer base more than offset a decline in steel results, resulting in overall revenue growth in the quarter. We saw a modest one 2% increase year over year in rate per mile. As we continue to earn a premium to prevailing market rates, however revenue per <unk>.

<unk> decreased to 51500 from 56000 in the third quarter of 2021 due to lower miles driven.

The segment's adjusted EBITDA results of $27 2 million was 11, 4% lower than $30 $7 million generated in last year's third quarter. Our adjusted EBITDA margin also declined by 270 basis points and margins for the quarter were 14%, mainly due to an increase in driver pay which caught up with.

Previously realized rate increases as a result, the segment's operating ratio increased 260 basis points to 91, 1% and adjusted operating ratio was 98%.

We continue to believe strongly that our unique business model based on a diversified portfolio that spans multiple end markets and industry verticals combined with our strong fleet composition positions us to maximize our strengths in both the specialized and flatbed markets. The bottom right hand of slide seven updates <unk>.

<unk> performance versus that of the broader flatbed trucking market this quarter the wider flatbed markets on a year over year rate deterioration for the first time in nine quarters, but <unk> was again able to garner a premium premium rate compared to the market based on our service and execution for customers leveraging our asset right model to capture attractive freight opportunities.

<unk> at strong margins and are predominantly contract based rates.

Yeah.

Turning to slide eight we thought it would be useful devoting a single slide to providing some adjusted figures for two noteworthy call outs that are creating some noise in our normalized adjusted numbers one for fuel surcharge and the other for an unusually large single event insurance claim.

First with respect to fuel surcharge, we have provided a quick summary of our operating ratio adjusted for the removal of fuel surcharge, which resulted in revenues net of fuel surcharge. This net revenue figure is widely used in the industry as it presents a more accurate gauge of overall performance because of the modest cost plus fuel surcharge.

<unk> does not pull through at the same margin profile as the core operating business. So it provides a drag on margins, which can be magnified in high priced fuel environment. As you can see excluding fuel surcharge our operating ratio at 89, 3%. This quarter is on trend with the improvements we have delivered across the past several years.

Looking to the bottom portion of the slide we have provided a Q3 and year to date add back adjustment to neutralize the effect of an unusually high insurance claim amount for a single event that was settled this quarter.

Net to <unk> interest our total exposure on this claim was $10 million with $4 million hitting this quarter's numbers and the other $6 million being reserved for in the first quarter of the year.

This table at the bottom of the Slide then provides third quarter and year to date figures pro forma for these adjustments.

Takeaway here is that with these adjustments.

Which we would contend provide a better perspective of normalized there is potential of our business. Our results are meeting and in some cases exceeding consensus expectations on a year to date year to date basis when.

When we look at how Daphne.

Through this effort.

<unk>.

Performance that can smell.

And enhanced cash flow generation deleveraging momentum and the flexibility to thoughtfully allocate capital to drive shareholder value.

Turning to slide nine I will briefly discuss our cash flow performance. The company continued to generate strong free cash flow was $54 8 million in cash from operating activities. During the third quarter driven from improvements in networking capital and $106 7 million in net cash from operating activities year to date cash.

Capex year to date was $33 4 million and we collected cash proceeds of $28 million from equipment sales, resulting in free cash flow of $101 3 million on a year to date basis Capex.

The work category.

Okay.

Net after financing to $7 6 million.

During the first half of the year, we experienced delays receiving equipment due to global supply chain disruptions. However, we have started to receive more of our equipment and anticipate we will receive a majority of our planned equipment by year end.

Moving to capital sources in the balance sheet, we continued to maintain healthy liquidity of over $311 million with our cash balance supported by the strong free cash flow of the business and our revolving credit facility, where we continue to have over $123 million of Undrawn availability.

Looking to slide 10, I will conclude with our outlook for the full year 2022.

They are to continue to compete.

Within the framework, we remain confident in our ability to earn premium rates are unique portfolio approach and asset right model, which enables us to maximize our earnings from defensible revenue streams and our ongoing transformation initiatives.

With that backdrop, we are reaffirming our full year 2022 revenue outlook of 12% to 15% year over year improvement. We also expect our adjusted EBITDA to improve by the previously provided range of 5% to 10% year over year, albeit towards the lower end of the range as inflationary cost pressures persist.

We are also reaffirming our net capital expenditure outlook of $145 to $155 million for the full year 2022.

Moving to the bottom of the slide while we are still preparing our formal 2023 outlook. We did want to offer a preliminary perspective on 2023 Directionally, though we do expect continued softness in some of our end markets and continued inflationary pressures to drive additional operating cost creep, we expect that a.

Few of our key specialized segments will remain strong providing counterbalance. Additionally, we expect to see an inflection in our transformation process such that we will begin to see a net positive impact from our transformation initiatives in 2023 with an estimated annualized 2023 exit run rate EBITDA up.

From these efforts in the $20 million to $25 million range. We would expect these efforts to provide the additional support to mute any inflation or rate environment headwinds such that we are highly confident we will be able to show a modest improvement to both revenue and adjusted EBITDA in 2023 more to come on this on our call.

In early February .

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

Thank you Tracy on slide 11, before we get to Q&A. This morning, I'd like to spend some time discussing our leverage.

As we enter 2020 after operational pivot in 2019, the company re prioritize the importance of a strong balance sheet.

As business transformation initiatives executed in mid late 2019 began to take root and operations began to improve the.

The improvement trend line or a company's free cash flow generation began to build.

As our adjusted EBITDA Reflated, our leverage profile began to organically decline and in early 2021, we replaced our $484 million term loan.

With a $400 million Covenant Lite term loan net of a one time debt repayment of $84 million.

The chart on the top right quarter to this slide nicely illustrates the meaningful progress. The company has made over the last few years, reducing net leverage by approximately 40% and increasing adjusted EBITDA by nearly 54%.

On this trend our net leverage could be zero within two to three years.

The chart in the bottom left quadrant summarizes uses of capital as a percentage of cash flow from operations for several of our peers noticed that approximately 50% of our cash flow from operations from 2020 through the third quarter of 2022 has been used to repay debt bolstering our balance sheet.

As we approach a leverage profile that is closer to industry convention.

Which we would expect could occur in the next 24 to 36 months.

This capital currently being used to support our leverage reduction priority as well as the cash interest expense savings will be funneled to activity is more likely to drive further shareholder enhancements such as M&A more consistent share repurchase programs and possibly even an annual dividend program.

I direct you to a quick summary of our credit profile in the bottom right quadrant before moving to the next slide Moody's.

Moody's and S&P have both upgraded our ratings within the last few months and each is also described the outlook for our company is stable.

Even in consideration of the macro geopolitical ambiguity.

Our $150 million revolving credit facility remains largely untapped with the exception of roughly 22 million of outstanding letters of credit.

With $123 4 million of availability under our revolver and total cash balance of $188 3 million or total liquidity as of September 30th stood at $311 7 million versus our term loan balance of $394 million.

Also as mentioned previously extremely germane to our profile is the fact that our term loan has no financial maintenance covenants, only 1% annual amortization with no other material maturities for nearly five and a half years in March 2028.

We would hope that your takeaway is that our debt burden is manageable our liquidity is ample at our confidence and our ability to generate positive free cash flow across cycles will continue to support the further strengthening of our balance sheet.

Next slide please.

This is a slide we showed a few quarters back with several updates on.

So I think it's one of the most compelling slides in the deck I won't spend too much time on it because I would hope the takeaways.

I would hope to takeaway is fairly self explanatory since.

Since 2019 vascular showed consistent improvement rationalizing our fleet improving.

Improving operating ratio as well as virtually all of our financial metrics and as discussed on the last slide meaningfully enhancing the credit profile of our company.

Yes, the discount at which we trade relative to our peer group is somehow continue to widen to 46%.

With our multiple to enterprise value multiple of enterprise value to TTM adjusted EBITDA as of September 32022 Lane languishing around three six times and implied enterprise value.

That is even less than that of the fair value of our assets.

Our team believes this company is still must understood.

And still Miss priced and we commit to each of our shareholders. Our resolve to continue to execute and drive long term equity appreciation.

Next slide please.

I'd like to close with Big picture drivers of value in support of what we believe to be a differentiated thesis within the value investing arena.

First is our market position as the leader in industrial end markets.

We're in we're in our unrivaled scale and differentiated capabilities allow us to organically increase rate capture improving market share with our blue chip shipper base in tight freight markets, which provides a buffer and softer times.

While being the Premier carrier diversified pool of industrial facing end markets is the foundation of our portfolio approach. The second driver is our ability to opportunistically shift capacity across these end markets the highest and best use while also maintaining the ability to flex capacity by toggling, our asset light fleets up or down.

Providing a matrix of diversification that positions us for resilience across rate cycles.

And with approximately 80% to 85% of our business being contract based we simply do not have the same volatility as many of our spot based peers.

Number three an established trend of improved performance the change our business has undertaken over the last few years is real it's lasting and.

And we remain confident in our ability to generate positive free cash flow irrespective of the prevailing macro environment.

Moving on and number four we continue to be excited about our ongoing transformation plan and auto consolidation strategy.

At the beginning of these processes headwinds are typically in chartered this plan is critical to laying the groundwork for our future strategic ambitions.

As we surgically rationalize the people processes and systems in preparation for our next phase of optimization.

These business transformation and operational improvement initiatives.

Fundamentally and incrementally changing how we how our business will operate in the future.

And we remain confident in our $25 million target an exit run rate uplift by the end of 2023.

Beyond our transformation speaking to number five.

We have a number of highly actionable highly impactful growth opportunities, which we plan to begin executing against in 2020 for once the transformation phase is complete.

From organic growth into new and adjacent markets and further refinement and optimization of our core business to expansion of our capabilities through organic and strategic vertical integration that will align with our industrial end market focused strategy.

Lastly, our current share price, we do strongly believe that we are in deep deep value territory and the balanced decidedly favors returned over risk given our term multiple relative to afford proposition of our earnings potential.

To underscore this conviction, we announced a $40 million share repurchase program on September 30 of this year.

While these last two slides were intended to provide the high level contours of our valuation thesis.

We would encourage you all to spend some time evaluating our story and our wins over the last several quarters.

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

Thank you to ask a question you will need to press star one on your telephone. Please wait for your name to be announced please standby, while we compile the Q&A roster.

Okay.

Our first question comes from Bert <unk> with Stifel. Your line is now open hey.

Good morning, and thank you for the question.

Hey, Brett how are you.

Good.

Jonathan first question for you.

You highlight as mentioned in the prepared remarks, you noted your valuation versus the peer group and sort of how that compares to the fair value of the company.

What do you think closes that gap over time and with divestitures beyond the table is a way to simplify the business and perhaps unlock value or do you not think that's the right strategic direction.

Yes, yes, I mean, I think that look I think that particularly in this in this environment.

The market sentiment is generally risk off I think levered names.

Yes.

Being hit disproportionately more.

I think that's right or wrong the market views us as a lever name who can we kind of mentioned the.

The <unk> nature of our term loan our strong balance sheet no near term maturities.

To kind of above that but I think thats I think thats one of the one of the concerns and then look I mean, we can't.

Perfectly honest, we can't ignore ignore some of the noise.

The company the company enjoyed a couple of years back and so we're we've been consistently performing for the last.

A few years now, but but I think that the market is going to have to see US go through go through essentially a 2023 go through some kind of some kind of some kind of tougher period right some kind of growth recession or whatever 2023 brings.

And ensure that this is truly a different team different company and come out on the other side of that in good form which was which were prepared to do so I think when you have that and we can go look we've executed successfully across a pandemic, we took advantage executing executing decisively.

At a healthy rate environment over the last 18 months and we kept that we kept the ship straight in.

Proved revenue improved EBITDA three growth recession, I think thats, a pretty compelling story and supports our.

Portfolio diversification kind of all weather strategy approach.

I would hope that that does it.

Okay. No. That's helpful. Thanks, Jonathan you just highlighted your expectations for 'twenty, three EBITDA, which was very helpful.

Do you guys think that it could rise year over year with sales.

I would clearly be a positive outcome based on what we're hearing across the industry.

I know, it's early days, but can you sort of talk about what gives you confidence in that and sort of how we should think about the durability of your various end markets and the slowdown.

Clearly aerospace high security potentially wind energy could be tailwind, but do you think that those are.

Sufficient tailwind to offset what you are seeing.

Construction manufacturing and steel.

Yes, I think that look completely completely fair question. So we're we're going to obviously provide more more transparent visibility into guidance for 2023 on our next call, but yes.

I think we have a kind of a handful of things going going forward. So I mean again, we talked about and you mentioned.

Our specialized our specialized end markets.

'twenty 'twenty, depending on depending on the quarter, 25% to 30% of those are our non cyclical anti anti recessionary type type markets. So.

Those irrespective of what happens next year within reason, we're going to continue to.

Move along.

The flatbed the flatbed markets that we service.

There's kind of puts and takes.

Across that arena some of them are actually softening some of them are showing signs some kind of green shoots where they're where they're both actually improving strengthening we are just anecdotally. We are getting we are getting calls from customers and again our business is largely contract. So we don't have the volatility of kind of a spot based business. We are getting we are getting calls from customers whether it's.

Infrastructure, driven or inflation reduction driven.

Really really asking us to kind of confirm capacity availability and when we look ahead, even even currently load count year over year is steady our brokerage is up 26% on the flatbed side.

Focus on slide but for a second.

Year over year. So we actually have our capacity is booked solid so to the extent to the extent the rate environment moderates more we have the ability to take from take from brokerage shift to company trucks take take capacity from Lps shift to company trucks higher margin higher margin.

If you think about our margin profile of our different fleet strategies.

Brokerage it goes from brokerage owner, operator LP and highest highest highest margin.

Strategy as company trucks. So we've got a lot of we've got a lot of excess right now that we're capturing but we're relying on kind of our flex capacity your asset light capacity to really take advantage of that if the market softens a bit will shrink those lower margin there is lower margin offerings and shift that freight to our to our higher margin company trucks. So.

There's a lot of then we've got that and then I think they'll look we've got the transformation.

Transformation efforts, which.

It's going to be a both a big a big fixed cost.

Move as well as well as kind of refinements to our variable cost structure again, 75% of our business is variable cost structure.

And when you think about things like maintenance when Youre doing 500 million miles a year.

One penny to penny improvement in maintenance cost per mile.

As to a big number when we think look again, the resiliency in our end markets, particularly on the specialized and certain markets like manufacturing construction and agriculture. We've had a lot of conversations with those respective customers who are predicting a good 2023, and then and then the additional counterbalance of of R. R.

Our transformation initiatives are going to are going to help us kind of tow the line here in 2023.

Okay.

Thanks for all the color there just final question for me, we've consistently heard from some of your peers.

There is an expectation for small carrier exits to start to accelerate just in this backdrop, where spot rate environment has been challenged inflation has been a headwind can.

Can you give us some commentary on how you're thinking about the supply side for industrial transportation and if you think there is a similar story there.

Yes, I think it's absolutely the same narrative I mean, if you look at you look at a lot of those and were actually kind of already already seeing that.

Particularly in our space I mean, 90 90, depending on what what you read I mean, 90, 90% plus of the capacity and flatbed open deck.

As small carriers and if you look at the if you look at the cost creep.

If you look at the wage inflation.

The cost of fuel the working capital such that all of those all of those drivers really necessitates now those a lot of those smaller carriers were under capitalized or we are thinly capitalized going into this market.

And really do live live month to month and so when you when you have all those costs all of a sudden hit your business.

Youre kind of go on paycheck to paycheck and they are the they are the kind of incremental provider capacity in this space, so they're having to they're having to drop rate to fund the given weeks.

Payables.

Driver pay and so I think that.

That waves about waves about to crest. The other thing that you saw I mean <unk> been very fortunate to have some extremely strong relationships with the Oems. If you look at the equipment, both last year and this year.

Particularly the small carriers, but even some of the larger carriers.

Cut back 30% to 35% of their orders and their truck orders.

We're probably going to get this year and the year was probably something that feels like 99% of of what we ordered this year. So we've been actually to maintain that the age of our fleet and our company truck fleet is probably now less than two years, we took advantage of.

Of the opportunity and of our relationships with our with our Oems to also reduce our our LP the fleet of our fleet.

And so when you when you think about all those things those are those are the relationships at the small carriers don't have so they went into COVID-19.

Conserving capex not knowing what that was going to really play out to be.

And then you get to the next year to 2021, and you have supply chain issues. The Oem's can't deliver trucks and you get to 2022 now same story. So a lot of those smaller carriers. In addition to in addition to kind of the fixed cost creep in the variable cost creep now have the problem of going look these trucks that we wanted to cycle out or after five years are going on.

Seven eight years old and so I think theres going to be a big reckoning with the with the smaller carrier. So I think it's absolutely a phenomenon we talked to a fuel vendor a couple of weeks ago, just anecdotally the fuel vendor said that.

If they look at charge offs charge offs fuel charge offs last year.

The entire entire entire year of 2021.

All of the charge offs. They took they actually had the same number of charge offs in a single month this year.

So things are absolutely and if youre not paying your fuel vendor then I think you've got bigger problems, but so I think that I think things are absolutely going to change and I think it's absolutely going to strip capacity out of the market.

Thanks, Jonathan and congratulations to Aaron.

Thanks, I appreciate that.

Thank you one moment for our next question.

And our next question comes from Jason Seidl with Cowen. Your line is now open.

Thank you operator, hey, Jonathan on the team.

Yes, Hi, Jason.

Sure.

Wanted to talk about a few things.

Number one you sort of teased about $20 million to $25 million in your transformational initiatives could you break that down a little bit in terms of what are some of the bigger buckets.

I think.

Jason one of the biggest is going to be our fixed cost reduction that we've kind of alluded to and through a lot of the transformation initiatives. We have been able to start seeing some of that just very high level and so we really expect it to pick up next year.

And there is some opportunity within our variable cost model as well, where we can find some squeeze a little bit out of that.

Those are probably the biggest and we have some potential optimization on the revenue front as well in terms of asset utilization and.

Kind of pushing the top line. So those are probably the three biggest buckets, but again, that's all going to be underpinned by the technological advances that we're implementing as well in terms of.

Unified back office more.

More of a more uniform.

Systems across our operating companies as well as a data lake to try and help drive some of that as well.

And are there any key dates for when you guys plan to have these things done.

I mean, we're Jason we're focused on completion of this phase.

By the end of 2023.

And then we'll move into which we haven't provided a lot of we've kind of referenced but then we'll move into what we're calling optimization.

Which will be kind of another layer of kind of incremental layer of evaluation.

But again I think.

I noticed we kind of mentioned in the 2000 $25 million range in the script I think in my script I referred to 25% I think at this point, we feel very comfortable with 25 plus of.

Incremental value.

Based on an exit annualized run rate at the end of 2023, Alright. Like this you guys 20 to 25 and I was wondering five plus I'll keep you talking we'll get to 30%.

[laughter].

I appreciate all the color on that.

Let's talk a little bit about flatbed I think.

Jonathan You said in your remarks, you have seen some softening in some strengthening could you talk about some of the key end markets that are softening in some of the key.

So it might be strengthening in blended.

Yes.

AG.

On the flatbed side agriculture, and manufacturing are still are still very strong on the.

The markets that we're seeing some softening at your steel lumber building materials.

You would expect I mean, when you think about we've gotten this question before when you think about building materials.

That's probably about 30% of our of our flatbed business.

And then within building materials about 20% of that 30% is residential facing so about 5% to 6% of our overall revenue.

As residential housing.

Facing so not not a big part of that but.

I don't know.

Any other questions around that.

No, but I think thats, good and I guess my last one here is really going to be just sort of allocation of capital.

You guys just announced a.

Buyback like you will like you stated.

You had a nice reaction in the stock today, but still.

The argument that you are still trading at a tremendous discount to your peers.

Any reason right now that youre not going to be.

Really be aggressive with the buyback at these levels.

Yes, I mean look I think I think we're trying to we're trying to evaluate everything as I said, we're trying to find the right balance here again, it's what we can do to maximize value we have the $40 million out there.

We certainly think that we are.

We're drastically undervalued. So we're absolutely buyers of our stock in this price range I think that there are certain.

We're trying to we're trying to strike the right balance of our of our kind of Investor group, our shareholder base and I think everybody that we've talked to agrees that the stock is undervalued.

Why they are buyers thats why they are holders, but I think you also have some people that said look we.

We'd like to we'd like your leverage to look and feel like some of your peers and we've gone back and forth on that.

I would expect that.

Come 2023.

We think about we think about kind of leverage and whether or not there is another kind of onetime pay down because I think that some.

Some people focus on that leverage some people focus on gross leverage or total funded leverage so.

So we certainly have the liquidity to do that and again high high conviction in our ability to generate strong free cash flow in 2023. So.

And as we Delever, we talked about it just the the unlevered cash flow free cash flow capability of this business as we continue to pay debt down.

We have we have more free cash flow to some fund things with so we're going to we're going to strike a good balance, but if the stock stays in this range and doesn't respond I mean, we're absolutely going to be.

Be prudent and we're going to be supportive of making sure that we that we do something about it.

Okay fair enough and speaking of leveraging you sort of teased a potential dividend at some point what is your leverage has to look like for you to initiate a dividend.

Yes, I think I think it depends on I think it depends on a number of things I think I'd look at how do we think about best uses of cash and where we're going to get the best response from.

Broadly from shareholders.

I would think that funded leverage would have to be something very manageable something in the kind of the one five times range before we do that and I think that we have to have good line of sight that we're able to continue to fund M&A.

Right now we're being extremely extremely as you might imagine extremely extremely vigilant about.

What if M&A any M&A, we do we do have we do I don't want to get too off topic here, but we do have kind of a small non binding LOI signed with somebody that.

We'll probably close on in February for all goes well.

But I think we still want to we still want to continue to kind of go back to the to the M&A trough and really really provide a story, where we've got organic growth plus a layer of strategic growth and really we're kind of.

We're a value oriented.

Kind of growth story within this space. So I think that we'll be thoughtful about that but I think we'll try to match.

<unk> matched the dividend rate and a payment that we think that we can we can support across across rate environments for right now our free cash flow profile.

We're optimistic 2023 should be good if we go out even into 2024 and I think the team may swap me for saying this but we would hope that we would hope that whatever the fed is doing.

Starts to unwind by then.

Higher beta names, particularly transportation logistics box truck load stocks.

Performed coming out of a recession. So we think that things will things will things will go right Gogo go extremely well, we think that wind.

Based on conversations with our wind customers, who are thinking that far out.

<unk> is going to start to pick up a big way in 2024. So we do think that if you want to call. It a low point. This is probably the low point for us.

Just knock on wood for you. After you said that so really appreciate it.

Exactly.

You mentioned acquisitions, you said you have a small.

Letter of intent there.

Really tuck ins is really all we should be looking for from you guys at least in the near term correct.

That's right that's right I think I think a year ago. When we started talking about the acquisitions, we said opportunistic and we were looking at some some some larger acquisitions I think that with everything with everything going on now just the uncertainty in the world.

And frankly the success, we're having the transformation.

And some of the ensuing value add initiatives that will set a follow on with that we're going to be focused on tuck in I do think also.

The key point that I want to make sure people appreciate is.

Look we're certainly are.

A trucking company today, but we do want to think about the end market strategy and over time and this is certainly not going to happen overnight, but over time, I think about how to vertically integrate and not just not just provide trucking capacity, but warehousing freight forwarding.

Things like that pre transport transport capabilities, maybe even get into.

Multimodal services and that's that's a bit further out so we're not going to don't want to say, we're going to do that tomorrow, but I think that we're thinking about the strategy and how we can do more than just provide trucking, where we have a pretty captive relationship with some of those customers and some of those end markets.

That's good color Jonathan a team I appreciate the time zones.

Thank you Jason Thank you.

One moment for our next question.

Okay.

And our next question comes from Ryan <unk> with Craig Hallum. Your line is now open.

Hey, Jonathan.

Welcome Erin.

Just two for us covered a lot of ground here, but curious on your contract negotiations as you look into next year kind of what Youre hearing from your customers, how they're feeling willingness to lock in contracts I presume are certainly a lot of puts and takes but I'd imagine they'd want to lock in capacity with a strong carrier like yourself versus <unk>.

Risking a lot of those things you mentioned on the smaller carrier side, but just any qualitative commentary there.

Yes. Those are I mean look those are those are those are ongoing and I think every every shipper approach presents a different times and youre right a lot of them are trying to lock in capacity.

All right.

There have been a few that try to point to spot rates and go Hey look this is where this is trending.

We're not we're not look generally we're not interested in those types of relationships, we truly view, our customers and really starting to view our customers our shippers as truly strategic partners, we mentioned that about a year ago. When the rate environment was was was even more frothy than it was today that look we are probably leaving a little bit of money on.

On the table, but we think about these relationships as long term so customers that come to us and try to get a look the spot rates doing this I know our contract says this we just say look guys. We're our capacity is completely booked we're increasing freight capture through through brokerage and if youre not wanting to pay a fair market rate really build a relationship.

With us.

And we're just not interested so again, we are having some of those conversations but most of them right now the large the large part of those are hey look we appreciate where things are at it's too early to say that that the hand has shifted in the relationship and a lot of people are still going there could be some pressure and tightening from a capacity side given some of the things we.

We mentioned two Bert.

And so I think <unk> been pretty they've been pretty balanced conversations and discussions so far.

Okay.

Great and then just on the outlook for this year.

Nice to see you guys reaffirm that despite the challenges out there.

Any bias towards the higher lower end of that given kind of the incremental puts takes over the last couple of months.

Yes, I think just since we've seen a little bit of the softening that Jonathan alluded to on the flatbed side, while we've seen other end markets remained strong and offset some of that.

We're kind of thinking more towards the bottom end of that the lower range of the guide, but still within the guide.

Where we're seeing that today.

I will tell you Ryan that October was a good month for us so.

Pro for whatever that's worth.

Understood makes sense thanks, guys.

Thank you. Thank you and at this time I would like to hand, the conference back to Mr. Jonathan <unk> for closing comments.

Thank you Norma I'd like to thank everyone for your time today, we look forward to building upon the momentum we've generated alongside our broader transformation.

Thank you for your commitment and confidence in.

And we look forward to translating the market opportunities, we are presented with today and a profitable returns and consistent growth for our stakeholders. Thank you.

This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.