Q4 2022 Daseke Inc Earnings Call
Okay.
Good morning, everyone and thank you for joining today's conference call to discuss dusky its financial results for the fourth quarter and full year ended December 31st 2022 with US today are Jonathan <unk> co CEO and board member Aaron.
Callie C E.
E V. P N C F O Adrianne Griffin V P of Investor Relations, and Treasurer, and Tracy Graham V. P F F P&A and business analytics.
After our prepared remarks, the management team will take your questions.
You may now download a PDF of the presentation slides that will accompany the 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 <unk> website.
I'd now like to turn the call over to Adrian Griffin, who will read the company's safe Harbor statement.
That provides important cautions regarding forward looking statements within the meanings of the private Securities Litigation Reform Act of 1995 Adrian. Please go ahead.
Thank you Michelle and good morning, everyone. 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 statement.
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 would.
Also like to highlight our decision to update our reporting segment results.
The company had disclosed our corporate segment, which was not an operating segment and included acquisition transaction expenses corporate salaries interest expense and other corporate administrative expenses and intercepted elimination beginning.
Beginning with the fourth quarter of 2022, we began eliminating intersegment revenue and expenses at the segment level and allocating corporate costs to our two reportable segments based upon respective segment revenue all financial information discussed in included in our materials aligns with the new allocations and eliminations.
Encourage you to read our filings with the Securities and Exchange Commission for a discussion of the risks that can affect our business and not to place any undue reliance on any forward looking statements. We undertake no obligation to revise our forward looking statements to reflect events or circumstances occurring after today, 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.
<unk> are not limited to adjusted EBITDA adjusted operating ratio adjusted operating income adjusted net income or loss free cash flow and net debt reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the appendix of the Investor presentation and press release issued this morning, both of which are.
Available on the investors tab of <unk> website, www dot dot dot com and.
In terms of the structure of our call today I will start by turning the call over to Jonathan who will review our business operations and the progress we are making as we execute against our strategic priorities and then Erin who will provide a financial review of the fourth quarter and full year 2022 and.
And Jonathan will then speak about our 2023 outlook and wrap up our remarks with a few closing comments before we open the line for your questions with that I'll turn the call over Jonathan.
Thank you and good morning, everyone I'd like to start the call today by welcoming adrianne to the team she joins us as vice President of Investor Relations and Treasurer.
We are pleased to have her focus on further elevating our IR and treasury functions.
I would also like to thank each of the <unk> team members and especially acknowledge the discipline of our professional driver community.
It's due to the collective effort of team to ask me that we will today report our company's third consecutive year of record adjusted EBITDA.
I'd like to spend just a moment on this slide three.
Whether you are a longtime holder adamski or new to our story.
Given the amount of change we are successfully affected over the last years, we thought it made sense that provides a snapshot slide to help everyone. Appreciate who we are today.
As mentioned 2022 was yet another record year for our company both in total revenue and adjusted EBITDA.
This performance is a noteworthy bellwether of our progress and highlights the continued earnings potential of our business as demonstrated by comparing this past year's record adjusted EBITDA of $234 9 million, which was generated during the peak rate environment of the current cycle.
To the last cycle of peak rates in 2018.
EBITDA was approximately $60 million less.
<unk> hundred $74 3 million. This is a peak to peak improvement of nearly 35%.
It was generated by a 2022 fleet that was 16% leaner than our 2018 fleet before we began to work on initiatives to improve our asset utilization.
With that as a backdrop I'd like to move to slide four where.
Where I will share some of our 2022 accomplishments that set the stage.
For 2023 outlook.
1.2, we delivered solid revenue growth and posted our third consecutive year of record adjusted EBITDA.
We executed a meaningful transformational share repurchase from our founder which was accretive and removed a perceived overhang on our stock given the percentage of the company the founder's ownership represented.
We affirm our ongoing commitment to enhance the strength of our balance sheet through accelerated deleveraging.
We have been more vocal about the resiliency of our operating model one that is unquestionably different from any other publicly traded transportation and logistics Pierre <unk>.
Our blended asset light asset based capabilities exclusively serving the industrial economy with strong diversification by end market and sub vertical.
And through a combination of transformation initiatives and strengthening macro environment. We believe we are well positioned to outperform when the cycle doesn't flex.
If you will turn with me to slide five.
I'd like to discuss our fourth quarter 2022 share repurchases.
On September 30th we announced a $40 million share repurchase plan.
Repurchasing over 803000 shares under this plan at a weighted average price of $6 five.
Before supplanting this plan.
With the announcement of our founder share repurchase on November 14th.
We subsequently closed on the founder share repurchase repurchasing all shares then held by <unk> founder through negotiated terms very favorable to our company and common shareholders.
In total we purchased nearly 30% of our then issued and outstanding common shares funded with $45 million of cash on hand, and the issuance of series B perpetual redeemable preferred stock I'll note that the series B preferreds already mobile at our sole option in whole or in part for $67 6 million plus any accrued and unpaid dividends.
The series B preferreds are not convertible and have no affirmative or negative covenants.
As outlined on this slide these transactions were immediately and significantly accretive based upon adjusted pro forma EPS of $1 52.
For full year 2022.
Simply put this repurchase will provide one of the most profound uplift for our shareholders in the coming years, providing exponential growth opportunity as our consistent performance and strategic execution gives rise to a more accurately valued share price.
And while the allocation of capital in support of this buyback fits squarely within our shareholder value creation framework.
With our focus now on Delevering. The company has no intention to repurchase any additional stock in the foreseeable future.
With that I will now hand, the call over to Aaron who will provide a more detailed walk through of our fourth quarter and full year results Erin.
Thank you Jonathan and good morning, everyone I would like to start with slide six which represents a high level review of our consolidated results for the quarter. Once again, our resilient business model facilitated growth as we delivered quarterly revenue of $408 2 million up three 5% or 30.
<unk> 9 million compared to revenue of $394 3 million in the fourth quarter of 2021.
This included demand strength from high security cargo and the agriculture end market, partially offset by declines primarily in the steel end market and renewable energy vertical plus contributions from a tuck in acquisition completed early in 2022.
Compared to the fourth quarter of 2021.
Adjusted operating ratio declined as inflation increased our total expenses faster than revenue the cost increases came primarily from salaries wages and benefits and operations and maintenance expense and while we achieved year over year improvement in our rate per mile. We also realize realize.
The reduction in miles per tractor.
That said, we're very focused on consistently improving operating ratio by driving operational excellence and strategic execution.
In the quarter, we delivered adjusted EBITDA of $49 6 million equal to the fourth quarter of 2021.
Now turning to slide seven.
Specialized solutions revenues were $242 9 million up 10, 9% versus the prior year as our team performed very well and shifting asset capacity to end markets with strength, including high security cargo agriculture and aerospace.
Which was more than offset by moderating demand in construction end markets and the renewable energy vertical. Furthermore segment rate per mile was strong at $3 50, <unk> and.
An improvement over the prior year as our teams capitalized on demand growth with our asset write fleet mix delivering a 2% increase in company miles spur.
Specialized solutions adjusted operating ratio improved 110 basis points to 91, 8%, while adjusted EBITDA improved 19, 1% to two.
To $32 4 million productivity.
Productivity in the quarter was impacted by shorter length of haul loads and high security cargo and a soft decline in total miles per tractor per day than it was.
Magnified by the recent receipt of new tractors near the end of the year.
We expect a rebound in our miles per tractor per day productivity as seasonality and new equipment deliveries normalize.
On slide eight we outline flatbed solution segment results. Despite the first year over year deep.
Decrease in flatbed market rates since the pandemic.
<unk> was still able to garner garner a premium rate compared to the market.
As shown in the top right chart on this slide declining rates and cooling demand is it the steel end market, partially offset demand growth in manufacturing construction aggregate in the agriculture end markets.
It resulted in a revenue decline of five 7%.
165, 3 million the use of our asset right model in this segment enabled us to focus on cap company asset utilization, which traded lower loading and higher margin freight on the company assets from brokerage revenues, which decreased.
Lower revenue and cost inflation, primarily in operations and maintenance resulted in the segment's adjusted operating ratio increasing to 95, 9% from 91, 8% in the prior year and adjusted EBITDA of $17 2 million, which was 23, 2% low.
Sure than the prior year period.
Now moving to slide nine in 2022, we achieved a consolidated record revenue of $1 8 billion, representing a 13, 9% improvement over the prior year, driven particularly by strength in our high security cargo end market, which grew at nearly 50% over 2021.
As well as growth in agriculture manufacturing construction and aerospace partially offset by declines in the renewable energy vertical and steel end market. We also achieved increases of 10, 5% in the rate per mile and five 4% and revenue per tractor over 2020.
One in 2022, we reported income from operations of $98 4 million compared with $112 8 million in 2022. However in 2022, we had incremental insurance and claims expense of $15 4 million.
A $9 4 million noncash impairment expense, resulting from integration and elimination of trade names $3 8 million of acquisition related expenses and $2 1 million restructuring expenses as compared to fiscal year 'twenty one.
Adjusting for all of these expenses income from operations would've exceeded in 2021. The adjusted operating ratio was 91, 6% in 2022, an increase from the 99% in 2021.
Though we continue to experience inflationary pressures that built across the year, primarily in salaries wages and benefits as well as operations and maintenance, we're able to offset some of these headwinds on our operating ratio by shifting to higher margin company assets and redirecting assets to the most profitable lanes.
The <unk> team delivered commercial execution, and our flexible asset right strategy to deliver value for our shareholders and we set an adjusted EBITDA a record of $234 9 million.
<unk>, surpassing the previous record of $223 1 million set last year, we're very proud of the entire <unk> team for achieving this record.
It shows the agility and resiliency of our team and our operating model.
Let's look now at the segments on a full year basis, starting with specialized solutions on slide 10.
Segment revenue grew 15, 9% to just over $1 billion and accounted for nearly 65% of the company's total revenue growth.
This success was based on strong demand and high security cargo agriculture manufacturing and construction end markets robust commercial execution using all aspects of our asset right strategy to deliver profitable growth and contributions from a tuck in acquisition modestly offset by demand.
Degradation in the renewable energy vertical.
Pleased to report 12, 1% increase in the rate per mile and an eight 4% increase in revenue per tractor versus full year 2021 on essentially flat company miles compared to 2021. Furthermore, adjusted operating ratio improved by 30 basis points to 98.
<unk> versus full year 2022, and adjusted EBITDA increased 11, 5% to $141 2 million versus the prior year due to strong revenue growth.
Wrapping up the segment discussion on a full year basis, we look at slide 11 for flatbed solutions for full year 2022.
Flatbed solutions here was predicated on the ability to capture attractive rate and strong end markets.
And from softer end markets.
And pivoting from softer end markets to company owned assets.
And when circumstances necessitated segment revenue was up 11, 4% year over year.
Two $769 million as gains primarily in construction manufacturing and agriculture end markets outpaced the decline in the steel end market.
Compared to 2021 segment rate per mile increased seven 5%. The total miles declined to eight 5% and overall revenue per tractor grew one 2%.
Adjusted or of 92, 7% worsened from 98% in 2021, primarily due to cost inflation pressures such as market rate driver compensation operations and maintenance and insurance claims more than offsetting revenue growth adjusted EBITDA of <unk>.
$93 7 million and adjusted EBITDA margins of 12, 2% both declined modestly from 2021 for full year results, despite cost inflation and sequential decline in market rates over the second half of 2022.
In terms of cash flow on slide 12, you will see our ability to generate significant free cash flow as well as our robust liquidity position and.
In 2022 free cash flow was $135 8 million.
With cash purchases and proceeds from the sale of equipment property and equipment nearly offsetting for the second year in a row.
We continue to maintain robust liquidity over $264 million with our cash balance created from strong cash flow from operations plus our revolving credit facility, where we had over $110 million of undrawn availability at year end.
I'll note, our cash balances give effect to the.
The $45 million of cash repurchases in the fourth quarter that Jonathan discussed and the $19 1 million to fund a tuck in acquisition without these two uses of cash our year end liquidity could've been in excess of $325 million.
On.
<unk> 13, we.
We provide a strategic update on our balance sheet wouldn't add another yet record year of our results. We have establish a trend of improved performance.
The change our business has taken undertaken over the last few years is real it's lasting and we remain confident in our ability to generate significant positive free cash flow regardless of the prevailing macroeconomic environment. Given this confidence we are committed to directing free cash flow to reduce our leverage and are establishing.
A long term gross leverage target range of one and a half to two times for normalized ongoing operations.
We do note that given the seasonality of the business in the front end loaded capital expenditure plan, our leverage will increase slightly in Q1 before declining to the upper end of the range.
Of the target range in the fourth quarter of 2023, we are proactively evaluating options to expedite our progress toward this goal.
We believe this commitment to fortifying our balance sheet provides another example of our focus to derisk the business and deliver value.
To our shareholders I will now turn the call back to Jonathan for an update on our 2023 outlook Jonathan Thank you Erinn.
Now before we turn the call over and take questions I'd like to provide some perspective on the market environment in 2023, and our outlook for the business in that context on slide 14, as 2023 unfolds, we expect an improvement operational productivity.
<unk> and driver availability, which should allow for the seating of additional higher margin company tractors.
And ultimately improvements in demand for freight haul services by mid year, when our business is seasonally on trend.
We believe in the cross cycle strength of more than a dozen industrial facing and markets. We serve some of which are set for continued growth given their limited correlation to consumer spending or the prevailing macro backdrop.
We expect that all of this will translate into flat to low single digit revenue and net revenue growth compared with 2022.
Though in the near term, we do readily acknowledged the ongoing rate environment challenges that began in the second half of 2022 and inflationary cost pressures that continue to work through work their way through the markets. However, as stated on our last quarterly call. We continue to feel conviction in the ability of our ongoing transformation initiatives to largely offset these collective headwinds.
And to provide additional upside to our earnings profile during the expansionary leg of the next impending cycle.
Given our view of the current macro environment, our specific end market exposure and the levers we have available in each of our variable operating model and transformation initiatives.
We see full year 2023, adjusted EBITDA approximately in line with our record 2020 to print.
And sizing our 2023 net capital expenditures outlook, we view our reinvestment in the fleet as a strategic opportunity one that positions to ask you to maintain the age of our fleet drive margin improvement continue to attract and retain drivers and preserve our favorite standing with our valued OEM partners.
Our expectation is for $145 million to $155 million and net capex expenditures for 2023.
With most of the capital spend expected to occur in the first half of 2023.
We are very pleased with this 2023 outlook, especially building upon record results in 2021 and 2022 now.
Now, we will turn the call back to the operator and take your questions.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
These standby, while we compile our Q&A roster.
And our first question comes from the line of Bert <unk> with Stifel. Your line is open. Please go ahead.
Good morning, and thanks for the question.
Okay.
Yes.
Good morning, good morning, <unk> morning.
Can you maybe give us a little more of an update on how youre thinking about guidance.
Seems like you have if I think about last year's $235 million in EBITDA and then we go forward. This year can you talk about how much of keeping it flat is it related to the cost program versus I guess your expectation that specialized will stay strong in 'twenty three.
Yes, sure I can I can address that and let Aaron Aaron or Adrian chime and accordingly so.
We look we've said this on the last few calls we do still we do still believe that.
That through our transformation initiatives, we're going to see.
Exit run rate exit run rate uplift in 2023 of about $20 million to $25 million and kind of incremental value.
That's going to that's going to start to really taper in through the year, you're going to start to see more of that by.
Mid year. So we do look we do think probably.
On a.
On a 2023 basis youre, taking a snapshot of those transformational activities I'd, probably say likely kind of on average plus or minus <unk> 15 to 17 of that.
In 2023.
The other the other the other kind of components of.
Our thesis this year in 2023.
As you mentioned, our outperformance continued outperformance in specialized we do think that flatbed, although although a little bit softer than Q1 comps.
We will have we will have the Q2 kind of typical Q2, Q3 seasonality, where we think that by mid year the rate environment will be healthy again, I'm not sure. It touches 2022 peaks, but certainly certainly healthy again, so we do feel generally generally pretty pretty confident that we're going to have overall a good year from a rate standpoint. We also have a couple of other things going for us.
So we talked a little bit about the about the diversification of our <unk> and.
In markets you acknowledged acknowledged our specialized end markets, which continue to outperform.
We also will probably have Bert.
Another 100 to 150 trucks on the road. This year. So we are we are kind of net net.
That would be growing our fleet about 100 trucks I don't think youll see the benefit of that probably until Q2, we got a lot of new equipment at the end of the year. So we're bringing the older equipment back. We're we're preparing the new equipment. We're resetting those trucks. So I think you'll start to see the full effect of that really in our and are on on peak season in Q2's in.
Q3, and then certainly in Q4.
We also we also expect as Aaron mentioned.
In his discussion we do expect to increase productivity, we had some we had some.
So end markets on the specialized side.
We also had some headwinds on the flatbed side that.
That kept our miles per truck per day. This year around kind of 380, we're forecasting something in the low four hundreds so kind of an 8% to 10% improvement in productivity on miles per truck.
And and I think that look we've got we've gone back really really on the flatbed side of the business and stressed improvements in productivity, so making sure that we're getting we're getting trucks turn faster.
We're not laying over trucks.
We're we're making sure that we're not we're not being too particular about the loads that we take really looking for that.
Unicorn long long haul.
High rate per mile but understanding.
And appreciating trucking is about velocity, so getting those trucks are key to keeping them out longer so being willing a little bit more willing to take a a more moderated rate per mile load. If it has kind of length of haul with it. So we're really really think about a lot of those things and collectively we think that's going to allow us to hold the line. We also have a few million dollars.
Net of some incremental reserves, we took this year a few million dollars of headwinds and.
In insurance that we knock on wood that we hope we hope we don't see so that also provides a little bit of downside support and keeping EBITDA flat this year.
So maybe just like a.
A follow up on that.
Don't have great data.
So the last downturn.
If we're having this conversation in 12 months and EBITDA was let's say sub $200 million.
Which part of that do you think.
Would have been most expert would have been the driver of that and the only reason I ask it.
During 235, again or something of that in that range. It would clearly be a good outcome, but im sure Theres. Some assessment of what's the potential downside. It sounds like the cost program is pretty solid and that should be savings from what youre seeing today specialized it is resilient and there is some strength in particular end markets and so then it comes down.
To what happens in the rate side and what happens on productivity. If we're looking at this in 12 months.
You didn't hit those marks and it was a little worse what are the things that are or maybe a little more exposed or just whats your assessment of the risk.
Yes, I mean, I think I mean, I think you hit it comes down to it comes down to right I mean, I think thats at the end of the day for for all of US in this industry I mean rates the rates.
The biggest thing out of our control that that will kind of make or break things again, we have a lot of these we mentioned self help.
Business improvement initiatives that we are going to be working on that will that will offset that we also had we talked about it as a as really a headwind. The last two quarters of 2022, which we think will be a tailwind going into 2023, and that's really the shift away from.
Owner, operator drivers LP drivers to more company drivers the last the last few weeks.
2022, and certainly strong into 2023, so far we've seen a march shift and our ability to to see company trucks, which have a much better margin profile and I think that if the rates continue to stay moderated this year.
That will not only can that trend will only continue I think a 200 or something certainly below 200.
<unk> is a pretty pretty draconian pretty.
Pretty draconian assumption or target to suggest we might head to I think that the <unk> <unk> business model today is.
There is much much stronger than it was in the last downturn to last the last trough and so I think that we are.
We're fundamentally we fundamentally have just a different range of earning profile operating profile and our business today I think that if you look at.
If you look at where we're at in the cycle and I know everybody has kind of talked about this but.
We've we've these are like these are typically 36 to 48 months cycles.
And we had we had 18 months or so 18 to 20 months of expansion really 'twenty one into 2022.
And then for the better part of 'twenty two at least the spot rate since January has been slowly falling away. We started to see we started to see some some shakiness in our contract rates in July or August of this year and kind of a print more pronounced leg down in our contract rates again, we're 80% to 85% contract rates, but in October we.
We took a leg down on contract rates.
And as we look at spot rates today, those are certainly starting to firm up in our contract rates.
Or are starting to starting to firm up as well. So I think that we can debate about whether or not we're at the bottom but.
When you look at when you look at the margins that are more commodity.
And markets are generating when you look at.
The demand is sort of I'm, sorry, the supply destruction that capacity destruction, that's going on today in.
The industry I mean, I read something that said net relocations of carrier authorities are 6000 8000 carriers per week right now when you look at a lot of those different things. When you look at the loss of LP drivers owner, operator drivers and.
The shift to company drivers when you start like pulling a lot of those things together I just think the rate environments at the bottom we've never had a Q2 or Q3, where we havent benefited.
Some kind of uplift in seasonality, even if you look at the great recession.
We still had good seasonality in the business and I don't know that people. Appreciate this but really if you take the trough that we had in the great recession. We were we were back to 80, 90% of peak rates pre pre recession peak rates.
Within 12 months, so I think that people.
Your estimate I can't speak for flatbed, but I think people underestimate the resiliency of the industry, particularly the diversification of our model and that it's exclusive exclusively industrial facing so I think.
Is 2023 going to be from a rate standpoint, a blowout year no. It's not it's not going to match, what we had in 2022, but we haven't assumed that theres a lot of other things that we have going for us this year as I mentioned.
I do think that 2024.
We're expecting we're expecting 2024, we'll be at 2022 peak rates and really if you look at cycles and assume that you get some repetition and cycles to predict future performance by 2025, we'll have another we'll have another massive peak. So we're again, we're we're pretty bullish on things and we think that I think the 2023 will be.
The low point, if you had to call it.
I want that alright.
Alright, <unk> averaged just add to that that look we can on our forward looking statements. We can kind of talk about that but just to reiterate we feel we feel very comfortable with our outlook and achieving flat year over year results.
We have a great net capex that delivers.
Quite a bit of free cash flow for value to the shareholders. So we're fully committed to this.
When we talk about 200, it's a nice theory, but we believe the peak to trough frame put in our current budget that we're putting forward is a reasonable assumption that we can deliver.
Got it.
That's super helpful. Maybe just my last question and a clarification.
How should we think about brokerage Jonathan I know you made some comments.
You shift from some of the overflow to using your own assets and Thats, a higher margin opportunity, but if we think about it from a modeling standpoint expect flatbed I guess that brokerage there seeds.
Double digit declines in I guess logistics is maybe a little more healthy and then just my clarification question in terms of share count that's been all over the place and now you have the repurchase should we assume like 50 $53 million as the year starts out. Thanks again for the question.
Yes, so brokerage brokerage, we have going down six or 7% this year.
And you acknowledged it we saw it we saw at the very end of Q4.
And we see it so far into January where we.
Shifting those.
Those loans that would have otherwise been been taken by third party carriers onto our company trucks, which is again the model that we've talked about I think the model that a number a number of our peers employ.
So it's really that that kind of control valve. If you will I would say, though that we've seen at the end of the year and going into <unk> and into 2023. So far is that while brokerage is down the margin on our brokerage is up so it's actually it's actually performing reasonably well.
The share count, let me get you the exact share count.
That were that were working off of now.
It's $47 million Bert.
Got it.
Okay, great well, thanks again for all the time I'll pass it over.
Absolutely absolutely thanks Marty.
Thank you and one moment for our next question. Please.
And our next question comes from the line of Jason Seidl with Cowen. Your line is open. Please go ahead.
Thank you, operator, hey, Jonathan and team arrows everyone.
Hi, Jason how are you able to talk to you.
And it's.
Still earning season for us but wanted to.
Ask a couple on you guys here.
Can you put a little more clarity on the productivity decline in <unk>, because that was a big step down I know you sort of mentioned it was that a mix shift towards some high security cargo stuff that was much.
I'm not sure at all at all.
In Q1 of 2022, Youre, saying there was a.
The most recent quarter here.
Okay, Okay. Okay. Okay.
That's right I mean look a little bit a little bit of it was was.
Was on the that.
The high security cargo side. Those were those are those were shorter length of haul. So on the specialized side that weighed on some of the kind of average productivity metrics.
On the on the flatbed side, we lost some we lost some productivity as again, if you remember, we we really shifted we really shifted more to the asset asset light.
LP owner operator.
Moving into 2022, and so we saw some of that fall away.
Neither owner operators parking their trucks go ahead I have done well for this year and I'm, taking myself out of the get out of the out of the market right now or you had LP drivers that.
We're making the same amount of money because the rate environment changed and they are.
Reevaluating, whether or not the exit the industry or ultimately shift over to being a company driver. So.
There is some movement around there, which we'll figure out where those drivers land probably in Q1 of this year you also had.
Look you also had just the time of the year you had two holidays in Q4 and you are having to write a lot of those drivers back home. So just by virtue of that you lose you lose you lose productivity.
So that's hopefully that answers your question we also.
No it does.
Jason We also took a lot of late deliveries of trucks, which are harder to see when you get them late in the fourth quarter like that.
And so that's part of what drove Robert as well. So we would expect that to start to rebound in Q1, we've been pretty successful with our recruiting classes in January .
And I would imagine you've already has probably seen some improvement in that just by some of the seasonality that you mentioned.
Correct.
Okay.
Next question.
So Jeff I think you talked about.
Unexpected rebound I'm, just sort of be at peak rates.
Back to <unk> rates in 'twenty four you said that you said you expect like another.
Big year for trucking.
You will in 2005.
What's sort of behind those numbers for you guys. When you make those forecasts out.
Yes, I think we've.
We've looked at a number of the past the past cycles and as I mentioned as I mentioned a bird.
We look at these and look at them as.
$3 $3 to three to four year cycles.
No.
If.
If we look at if we try to overlay the cycle that we're currently in a lot of a lot of different things floating around.
But.
We think it generally is going to track what you. What you saw in 2015 kind of the industrial recession, right, where you had.
You had.
About 18 months of kind of uplift 18 to 24 months of outlet leading into that peak in kind of summer of 2015 again and that was on the heels of the.
The trough, where you had back in 2011, you had everybody worried about about the debt ceiling, the downgrade of U S debt.
Kind of the sovereign debt issues around the world quantitative easing all that people kind of got nervous and thinks endings tanked and they quickly came back in and ultimately peaked in 2015.
And you had you had.
You had you had kind of a fall down into that winter of about 10% or so and then you had your normal seasonality. So you got some of that back and then and then the next winter so going into 2016, you kind of fell down some warrants so that 2015 that summer 2015 peak to two.
The trough in winter of 2016, you were down about 15% and again if you look at these cycles.
They typically average peak to trough about 10% to 15% the only the only cycle that we've seen that exceeded that was was the great recession was closer to 2022%, but again 80, 90% of those rates you got back within 12 months. So we look at that and go Okay. We think that we think that the.
The the kind of characteristics and the drivers of the cycle different but we look at where we're at today and go we kind of feel like we're on that same type of cycle, where you have a slow 18 months fall down you do still have seasonality.
Pete and winter, which for us will probably be winter of <unk>.
2023, and then you will and then Youll have kind of a.
Affirming up to whereby by by early to mid 2024 youll be at 2022 peaks again, and you'll have a runway you have kind of a continued runway from there on out back up to a new peak in 2025 and again.
Who really knows but we've done a lot of work again on looking at cycles, and Thats and Thats, our thesis that could obviously change it depending on what the what the fed does I think theres a lot of noise.
Data when you look when you look through data.
Cautiously optimistic that they don't over tighten a little bit concerned about some of the takeaways with with this lost jobs report and how the fed how the fed Rajeev <unk> interprets those and again you had 21 million jobs lost as part of that is part of the.
The kind of Covid effects of 15% of our workforce is taken out and if you look at employment trends.
Adjusted for population growth were still three to 4 million jobs short, where we would advise would've otherwise been had that employment trend continued so I think that when the fed looks at this and said, it's a hot jobs market everything else I think we're still way behind and so I think if they continue to overtime that could cause some issues, but I think you go back to <unk>.
Got the self help initiatives, we've got the diversified end market exposure, we've got some other things going for us ceding more company drivers shifting away from LP lower margin LP owner, operator drivers. So look we're pretty bullish on things to come.
I appreciate the color on that I wanted to try to dive deeper into your comments on the contract market. I think you said you started seeing some softness.
November but it seems like it's Truing up now can you give us some numbers behind that.
Yes.
I don't have I don't have numbers right now to kind of provide but I think that part of this part of this really goes back to Jason.
The customers look our shippers are just frankly, becoming a lot more sophisticated.
And when they're when they're seeing the spot market fall since January of 2022, and Theyre looking at their contracted rates they can't ignore that.
And and and so what we had is October November there was some softening as I mentioned in July .
And and I think what you've seen with a lot of these shippers as they really recalibrated there, they're RFT process and our <unk> approach and so a lot of these guys. Now are going you know what we're going to we're going to go to our ship, we're going to go to our carriers.
On the flight I'm speaking of the flatbed side, we're going to go to them before.
<unk>, they're softer kind of low points in the year. When they are really focused on getting freight really focused on visibility going into going into Q Q3.
Going into Q4 going into Q1, and we're going to ask them to submit submit rates in cement pricing for that.
Look theyre going to be they're going to be hungry or because they want that visibility going into a softer part of the year and then <unk> also added in <unk>.
RFP cycle in April so right in front of our peak season, right. So they've kind of hit you and said look.
We want we want you to really be hungry for capacity going into your down point and then before you have a good sense of really how good Q2 Q3 is going to be for you. We also want you to kind of bid.
<unk>.
The freight so I think thats part of what you saw so it <unk> really in keeping with October November leg down where a lot of those guys have come out before or kind of seasonally soft time of year and said Hey bid. This freight really playing on everybody's concerns expectations that it could get a little tougher and so I think that switched it. That's what you saw manifest in a little bit of a lag.
Down for us in October on contracted rates.
No I appreciate I appreciate all that and last one then I'll turn it over to somebody else here.
Obviously, you mentioned that debt repurchases sort of top of the list here can you talk about.
What are you targeting first is it.
Our series B preferred and then I guess, if you can give any comments on the acquisition market and how it looks now and maybe what you guys would be looking forward.
If you were to pull the trigger on something.
Yes, so from a from a debt standpoint.
Think we're looking at we're looking at that pretty in a pretty Holistically. We had there was kind of a stark difference in opinion between the two ratings agencies on whether or not that new preferred should be treated as equity or debt. One said it should be treated as debt. One said it should be treated as equity.
We're focused on really how our how our investors our shareholders.
<unk> evaluate that new security, but we're looking at we're looking at that Holistically.
And it's going to be probably a meaningful pay down when we ultimately make it we really wanted to again, we really want to start to approach in a quick way start to approach that one five to two turns of gross leverage target that we have now it's a long term target, but we think that there's line of sight and doing that within the next 24 months given that.
The cash flow, we're going to generate this year.
And hopefully next year as well so there's a path there plus the cash on hand, plus you've got some.
Some.
Rolling stock dispositions that we can clean up we've got some real estate assets some duplicative.
Terminals yards things like that that we've looked at cleaning up really to expedite that.
Paydown of our debt, but on the preferred side, we think it's very it's very investor friendly, it's very company friendly paper, but you can't ignore the fact that.
The $20 million of that $67 million has a 13% coupon now what I would tell you is that currently are the pricing on our term loan is about eight 5% right. So.
2022 is $4 75, but with all the rate hikes, we're at about eight 5% so.
The series a.
The series B tranche, one carry 7% good good very friendly paper good coupon good dividend relative to our current interest payment on our term loan debt, so that will likely stay in but 13% is.
Bit onerous and we're looking for ways to Delever, the company and improve the free cash flow profile of the company. So that will likely come out as part of our overall balance sheet enhancement through some kind of large pay down here in the near term.
That makes sense.
And in terms of the acquisition market after the debt pay down.
Yes, the acquisition market still.
Still interesting.
It's been a little bit little bit slower.
Cause of this bid ask spread that had heavily pops up when rates move too quickly up or down.
We do have we do have.
Why that one acquisition under under under Nonbinding LOI.
And we are cautiously optimistic that we'll have that probably closed late February early March it's going to look a lot like the last the last acquisition, we did a little bit bigger, but from a kind of a value standpoint still immediately accretive still a great trend.
We're still a great mulch.
Multiple that we're paying.
And immediately accretive.
We also have another few acquisitions that there were close to getting under under LOI. So we're we're cautiously optimistic more so on the specialized side that we can find good acquisitions that we can transact on.
That will be immediately accretive, but I think that again, we made the comment in our presentation.
We do want to live within this this target leverage profile, we might incrementally take leverage up a little bit to transact on an acquisition. If there's line of sight to getting that leverage profile back down, but what we have on the table today, even some of these potential acquisitions that we're looking at we think that we can fund it with incremental debt.
And cash on hand, even net of a meaningful.
Even net of a meaningful pay down using cash on hand, we think that the remaining cash on hand.
It will allow us to fund some of these acquisitions that we have in the pipeline. So we're feeling pretty good about it and I think that we've sized our acquisition appetite and our expectations right based on where we're at in the cycle and where we're at with our transformation.
Jonathan Erin team appreciate the time as always.
Thank you.
Thank you and as a reminder, if you have a question at this time. Please press star one on your telephone one moment for our next question.
Our next question comes from the line of Greg <unk> with Northland Capital markets. Your line is open. Please go ahead.
Hi, good.
Morning, Jonathan and Eric Thanks for taking the questions.
If I can say.
Okay.
Just wondering maybe kind of high level, how it has changed relative to maybe.
Your sentiment on kind of the Q3 earnings call and maybe what factor that changed the most.
Yes.
Yes.
I think it's I think it's right we saw a little bit more softening.
Specifically flatbed.
Than we did before I think we've said we'd be.
Modestly up from an EBITDA standpoint, now, we're saying flat to modestly up so I think that.
Within.
If you had to quantify within a couple percent probably.
Where we may have guided quote unquote guided.
On the last call so are not meaningfully different but flatbed flatbed has changed.
We've highlighted some of the mitigates.
Two that still optimistic we're going to have a good year, but.
That would be the delta, where we kind of we kind of kind of step back just a little bit on what we talked about in this last quarter.
Sure.
And then I guess with regard to your comments on commitment to accelerated deleveraging in 'twenty three.
Is that kind of reflective of a change in strategic priorities as a result of those rates changing or maybe M&A expectations changing at all or.
Was that kind of the plan all along.
No I mean, I think I think we've I think we've been pretty pretty vocal about about.
Bolstering the strength of our balance sheet for the last couple of years now.
I think that the market created certain opportunities, namely the buyout of <unk>.
Mr <unk>.
Which we thought was was was very opportunistic and very attractive.
And so we kind of stage that is priority one that when that opportunity came about we had previously announced a $40 million share repurchase are directionally, we feel like we ended up in a good spot there, but thats always been one of our of our stated priorities I think that when you look through when you look through things now.
You are absolutely you're absolutely can't ignore the incremental.
Cash.
Cost of our debt I mean, it's going to be an incremental $16 million or so this year.
Cash expense, so we can't ignore that but I think that again, we continue to look around at our peers look around at our valuation again, what what what do we need to do.
To get our our shareholders more comfortable that the desk. He is going to be able to weather storms and to take certain things off the table.
Certain certain I think adverse things off the table that disadvantage us from from kind of a valuation standpoint relative to our peers and leverage continues to be a consistent theme and so we're in light of some of that feedback we did a massive massive share repurchase so.
And open market share repurchase now doesn't it doesn't make sense it wouldn't move the needle.
And and.
And so now our priority is really repaying debt as we talk to as we talk to Jason about we feel like even.
Even net of a pretty meaningful pay down of debt. We can we can fund we can fund 2023.
The 2023 M&A pipeline that we have in front of us with with with incremental debt again think about incremental debt is like incremental debt, but still it's still not funding acquisitions with more than that one five to two turns of leverage and with the rest in cash or cash and equity.
Let me say cash don't Wanna say equity I don't want you to think we're going to issue equity for those but but half cash half debt.
We think we have plenty of runway with the acquisition pipeline, we have in front of us today to do that and still have cash left over is still still allow for a meaningful pay down in leverage so.
We're looking for things to slowly slowly take off the table to give to give a potential investors current investors excuses that we should trade at a discount we are to our peers. We've demonstrated continued strategic.
Strategic strategic Ax solution execution, we have delivered consistently on our financial performance, we have affected a massive share repurchase.
And now we look at this and go look its leverage and margins. We think we're going to continue through transformational initiatives reshaping drivers from LTE to company that will that will improve margins certainly on the next cycle, you're going to really see more of the benefit of that and now it's really focusing on on leverage so.
That's the plan.
Great very helpful.
I'm wondering if you could just discuss kind of the outlook on the supply side of the market and maybe update on the timing of your new equipment purchases.
Sure so.
Look.
Hi.
Are you referring to.
Specifically with respect to our supplier just industry supply thoughts on industry supply side. The supply was kind of part of the first question and then just the update on the timing maybe this year of new equipment purchases.
Yes.
Yeah. So I'll hit the first the latter first so new equipment purchases for us are front end loaded.
We're we're looking to make sure that we have that new equipment. So we can mobilize it utilize it during our peak season, which is Q2 and Q3. So a lot of the Capex spend is disproportionately slanted to Q1 and Q2 versus the drive and guys who are focused on having that equipment in front of Q4, they're busy.
Season, so it's a little bit different for us I mean, typically we see 75% or so of our capex going out the door in Q1 and Q2.
We're trying to smooth out a little bit this year, so it might be.
$60 to 65 in Q1 Q2 that said we also if you noticed on the slide we also had about $22 million and rollover Capex. So our Q4 2022 capex.
Number was was projected to be $55 million, which is.
<unk> spend in Q4 of 2000 22022, because of the supply chain issues and delivery delays by the Oems, we didn't get to all of that out the door.
So thats spilling over into mostly Q1 in part of Q2.
So we have an extra extra $22 million going out the door in Q1 Q2 on top of our normal cycle normal replacement cycle Capex.
That is baked into the $1 45 to $1 55 of total 2023 Capex, though.
And then and then supply look I mean.
Mentioned it to Bert we're seeing we're seeing massive.
Net relocations of carrier authorities based on FMC SA data six to 8000.
Carriers per week.
If you look at if you look at some of the.
Some of the data that's out on class eight orders for January .
They are sequentially down, 40%, which is a little higher than normal.
Year over year, So January to January they are down 12%.
It doesn't quite it doesn't quite jive with with.
The increase in 2023 Capex guide is that a lot of our peers are giving.
So I think people are just being cautiously optimistic there, they're making sure they have the allocations from the Oems, but theyre not.
Not signing up to anything until there's a little bit more visibility into what Q1 is going to look like.
But again I think I think we're already.
But we're already seeing already seeing demand destruction.
Sand demand instruction supply destruction of capacity destruction, we're seeing LP.
LP drivers owner operator drivers leave the market we.
We do think that rates are at the bottom or closer to the bottom and there is more upside than the downside at this point I think I think.
Yes.
<unk>.
A few people have acknowledged this that look on an inflation adjusted basis.
Robbie flat if you look at if you look at if you look at kind of peak peak 2019 rates to peak 2022 rates, where you look at trough.
Kind of off season peak, I'll say, let's say differently off season peak 2019 rates two off season peak 2022 rates both of those are up about 35% okay.
If you if you look at that and say so it's about a 10% CAGR so 10% CAGR over those three years.
Rate and rate increases.
Historically, we've seen we've seen those rate increases track to CPI. So about two 5% a year year on year Outsing. Okay, where you guys are you guys are massively up I think that the counterpoint to that incredible counterpoint to that is if you inflation adjust inflation adjust a lot of those rates were.
We're probably flat to maybe even down if you look at if you look at diesel prices, having nearly doubled if you look at driver wages, increasing 30%. If you look at things like maintenance costs or tires, increasing 50% to 60%.
Lubricants things like that and you and you truly adjust we adjust rates based on inflation adjusted basis, you get to kind of a real rate growth.
I think we're flat to down so I think that you've got a bunch of embedded costs that you are simply not going to walk back and.
And if you do youre going to Youre going to Youre going to blow up youre going to blow up the the supply side of the equation for your for your shippers. So we think that things are starting to stabilize and we're cautiously optimistic again that 2023 is going to be good with a with a really strong rebound in 2024.
Got it very helpful. Thanks, so much.
Thank you and one moment for our next question. Please.
And our next question comes from the line of Ryan <unk> with Craig Hallum. Your line is open. Please go ahead.
Good morning, guys just one for me at this point.
What do you guys think is the maintenance the right maintenance capex level, because if I look at kind of DNA in the past couple of years 90 ish million capex, including all finance costs was about $145 million last year, and then a little bit more than that this year and 23. So curious kind of as we think about fully baked free cash flow.
What's the right maintenance Capex number is and then secondly, how confident are you in generating free cash flow again inclusive of all equipment purchases in that $150 million of Capex.
Yes, Thanks Ryan.
We will talk a little bit about your first question, which is on the maintenance Capex and so our guide for this year is 145 to 155, which includes that's net of proceeds.
So the right way to think about our Capex is this year, we've got about $8 million to $10 million of transformational Capex, where were lightening up trailers.
For a one time event and then we've got about $5 million that were buying some specialized trailers for one of our verticals to pull forward. So we can be in a good position for our renewable energy vertical and so this year is a little bit of a down capex for us, we're pretty happy with where our trucks are at we think one of the ways to measure those as <unk>.
On miles and so we're two and a half to two to two five times.
Two and a half years on a mileage basis, so were pretty happy with where our overall fleet is.
Outlook number on replacement given our current profile in truck count is probably a $130 million to $140 million for an outlet outlook perspective.
That's kind of how we think about that piece of it.
Another piece, you're going to address.
Free cash flow. So if you think about call it $140 million of recurring maintenance Capex and you back out the interest expense, which is gonna be higher tax expense preferred dividends et cetera.
Confident are you after kind of fully baked in everything free cash flow generation this year.
Yes, I mean, we feel very confident with that.
We're doing a good job on our balance sheet management I think we've got opportunities there on our cash conversion cycle, but overall, we feel very comfortable with where we're at and the cash flow numbers that you mentioned.
Yeah, Ryan we're still look we're still.
Philosophically, we're still looking at kind of a 30%, 70% split 70% financed equipment, 30% cash pay on that equipment.
Obviously, the equipment loans and the cost of the equipment that hasn't hasn't gone up as much as the as the spread on our on our on our term loan debt. So we still think it's a.
It's a prudent way to.
To fund Capex, and we'd rather kind of preserve our cash at least in the near term for Optionality, We think that there is probably better.
Better things, we can do with that cash that will create more outsized growth and return versus the cost of that equipment that so that's our that's our philosophy philosophy at least now as it stands today.
Okay.
Great. Thanks, guys. Good luck.
Thank you.
Thank you and I would like to turn the conference back over to Jonathan Chou for closing remarks.
Thank you Michelle.
I'd like to close today's call on slide 15, with some final thoughts on our 2022 performance the <unk> opportunity for 2023 and beyond as the market, leading servicer to complex industrial end markets, we delivered solid revenue growth and third consecutive year of record adjusted EBITDA.
Our resilient business model includes a diverse portfolio of more than a dozen industrial end markets that spanned multiple industry verticals knee with unique non correlated drivers that support our resilience and growth.
<unk> diversified fleet with expansive geographic breadth and serves the unique needs of over 4000 plus customers.
And a commitment to the financial strength that will continue to provide us with strategic optionality to support growth across cycles.
And even in the midst of a challenging backdrop, our current expectations are for flat to low single digit growth over our record 2022 levels with intense focus on continuing to build a strong foundation for outperformance when the economic cycle and flex we remain committed to our fortress balance sheet the goal to which we initially committed to in 2021 relying on continuous improvement.
In our business and strategic execution to generate free cash flow that will enable us to accelerate our deleveraging goals with.
With confidence in our company our team members and our prospective results. We believe we are well positioned as an attractive option for outsized performance within the transportation and logistics industry. Thank you for your time today. This concludes our Q4 and full year 2022 earnings call.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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Yeah.
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<unk>.
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Yes.
Ian.
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Sure.
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The conference will begin shortly to raise and lower Johan.