Q3 2024 Covenant Logistics Group Inc Earnings Call
Unknown Executive: Welcome to today's Covenant Logistics Group, third quarter earnings release and investor conference call.
Welcome to today's Covenant Logistics group third quarter earnings release, and Investor Conference call. Our hosts for todays call. If trip grant at this time, all participants will be in a listen only mode. Later, we will conduct a question and answer session.
Trip Grant: Our host for today's call is Trip Grant.
Unknown Executive: At this time, our participants will be in a listed-only mode.
Unknown Executive: Later, we will conduct a question-and-answer session.
Trip Grant: I would now like to turn the call over to your host, Mr. Grant. You may begin.
Speaker Change: I'd now like to turn the call over to your host Mr. Grant you may begin.
Trip Grant: Good morning, everyone, and welcome to the Covenant Logistics Group's third quarter 2024 conference call. As a reminder, this call will contain forward-looking statements under the Private Securities Litigation Reform Act, which are subject to risks and uncertainties that could cause actual results to differ materially. Please review our SEC filings and most recent risk factors.
Speaker Change: Good morning, everyone and welcome to the Covenant Logistics group third quarter 2024 conference call.
Speaker Change: As a reminder, this call will contain forward looking statements under the private Securities Litigation Reform Act, which are subject to risks and uncertainties that could cause.
Speaker Change: Actual results to differ materially. Please review, our SEC filings and most recent risk factors, we undertake no obligation to publicly update or revise any forward looking statements.
Trip Grant: We undertake no obligation to publicly update or advise any forward-looking statements. A copy of our prepared comments and additional financial information is available on our website at www.covenantlogistics.com slash investors.
Speaker Change: A copy of our prepared comments and additional financial information is available on our website at www Dot Covenant logistics Dot dot com slash investors.
Trip Grant: I'm joined on the call today by David Borker and Paul Bunn. Our core business performed well in the third quarter, overcoming softer than anticipated volumes in our expedited division as a result of lingering weakness in our overall freight environment. Compared to a year ago, consolidated freight revenue increased by approximately 5.2 million or 2.1%. 258.6 million in adjusted operating income increased by 1.5 million, or 8.3%, to 19.3 million. The year-over-year increase in freight revenue was primarily derived from new business growth within our dedicated segment. Partially offset by reductions from expedited segment and managed freight segment. The growth in adjusted operating income was partially derived from both dedicated and warehousing segments.
Speaker Change: I'm joined on the call today by David Parker and popcorn.
Speaker Change: Our core business performed well in the third quarter overcoming softer than anticipated volumes in our expedited division as a result of the lingering weakness in our overall freight environment.
Speaker Change: Compared to a year ago consolidated freight revenue increased by approximately $5 2 million or two 1%.
Speaker Change: $258 6 million and adjusted operating income increased by $1 5 million.
Speaker Change: Or eight 3% to $19 3 million.
Speaker Change: The year over year increase in freight revenue was primarily derived from new business growth within our dedicated segment.
Speaker Change: Partially offset by reductions from expedited segment managed freight segment.
Speaker Change: The growth in adjusted operating income was partially derived from both dedicated and warehousing segments offset by reductions from expedited and managed freight.
Trip Grant: Offset by reductions from expedited and managed freight. Adjusted net income of 15.2 million for the quarter was essentially flat with the third quarter of 2023, primarily because higher adjusted operating income was offset by 0.6 million increased pre-tax interest expense in a 1.3 million dollar reduction in pre-tax earnings from our equipment leasing company investment tell. Key highlights for the quarter include our asset-based truckload operations consisting of expedited and dedicated grew its average tractor count by 169 units for 7.9%. Group freight revenue by 11.4 million dollars for 7.2% improved its adjusted operating income by 1.6 million dollars or 12.6%.
Adjusted net income of $15 2 million for the quarter.
Speaker Change: Was essentially flat with the third quarter of 2023, primarily because higher adjusted operating income was offset by $1 6 million.
Speaker Change: Increase in pre tax interest expense and a $1 3 million dollar reduction in pretax earnings from our equipment leasing company investment tail.
Speaker Change: Key highlights for the quarter include.
Speaker Change: Our asset based truckload operations, consisting of expedited and dedicated grew its average tractor count by 169 units or seven 9%.
Speaker Change: Grew freight revenue by $11 $4 million or seven 2% and improved it suggested operating income by $1 $6 million or 12, 6%.
Trip Grant: Our asset light operations consisting of managed freight and warehousing experienced a 6.2 million dollar reduction in freight revenue were 6.5%, but was able to improve margin in a manner so that total adjusted operating income was only reduced by 0.2 million dollars or 3%. Our net capital investment for the revenue-producing equipment was approximately 18 million dollars for the quarter, consisting of both specialized equipment cap-ex for growth and maintenance cap-ex. The average age of our fleet at September 30th improved to 20 months compared to 23 months a year ago.
Speaker Change: Our asset light operations, consisting of manage freight and warehousing experienced a $6 $2 million reduction in freight revenue were six 5%, but it was able to improve margin in a manner showed that total adjusted operating income was only reduced by <unk> $2 million or 3%.
Speaker Change: Our net capital investment for the revenue producing equipment was approximately $18 million for the quarter, consisting of both specialized equipment capex for growth and maintenance Capex.
Speaker Change: The average age of our fleet at September 30th improved to 20 months compared to 23 months a year ago.
Trip Grant: Diego. The sale of revenue equipment resulted in a $0.2 million loss in the quarter compared to a $0.6 million gain in the prior year. Tell produced 22 cents per diluted share compared to 29 cents per diluted share versus a year ago period.
Speaker Change: The sale of revenue equipment resulted in a $2 million loss in the quarter compared to a <unk> $6 million gain in the prior year.
Speaker Change: <unk> produced 22 cents per diluted share compared to <unk> 29 per diluted share versus a year ago period.
Trip Grant: Our net and net in this as a September 30th decline sequentially by $36.6 million to $236.7 million, yielding an adjusted leverage ratio of approximately 1.6 times and a debt to capital ratio of 35.4%.
Speaker Change: Our net indebtedness as of September 30th declined sequentially by $36 6 million to $236 7 million, yielding an adjusted leverage ratio of apartment approximately one six times and debt to capital ratio of 35, 4% on an adjusted basis return on invested capital.
Trip Grant: On an adjusted basis, return on invested capital was 8.1% for the current quarter versus 10% in the prior year. The decline is primarily attributable to the increase in the average invested capital base associated with acquisitions, growth cap ex, and reducing the average age of our fleet.
It was eight 1% for the current quarter versus 10% in the prior year. The decline is primarily attributable to the increase in the average invested capital base associated with acquisitions growth Capex and roof, reducing the average age of our fleet now.
Paul Bunn: Now I'd like to turn it over to Paul for some more color on items affecting the individual business segments. Thanks, Trill. Our expedited segment fell slightly short of our operating expectations this period with freight revenue of 87.4 million and adjusted operating income of 7 million, resulting in an adjusted operating ratio of 92. The miss was primarily a result of declines in utilization that resulted from softer than anticipated volumes and an imbalance net work, particularly in the last month of the quarter. This softness is extended into the fourth quarter, and we are currently working hard to mitigate its impact through new business awards and repositioning equipment to optimize our network.
Speaker Change: Now I'd like to turn it over to Paul for some more color on items affecting the individual business segments. Thanks trip or expedited segment fell slightly short of our operating expectations. This period with freight revenue of $87 4 million.
Speaker Change: <unk> operating income of 7 million, resulting in an adjusted operating ratio of 92. The Miss was primarily a result of declines in utilization that resulted from softer than anticipated volumes in an imbalanced network, particularly in the last month of the quarter. The softness has extended into the fourth quarter and we are currently working harder.
Speaker Change: Mitigate this impact through new business awards, and repositioning equipment to optimize our network.
Paul Bunn: Dedicated was successful in growing both freight revenue and operating income while yielding an adjusted operating ratio of 91. Compared to the prior year, freight revenue grew 15.7 million or 23.5%, and adjusted operating income grew 3.2 million or 73.9%, and margin improved 260 basis points compared to the prior year. Managed freight experienced a 9.1% reduction in freight revenue and a 29.5% decrease in adjusted operating profit compared to the prior year, reporting an adjusted operating ratio of 95.7. The reductions in freight revenue and adjusted operating income are attributed with a combination of lower volumes of profitable freight and cargo-related claim expenses incurred in the period compared to the prior year.
Speaker Change: <unk> was successful in growing both fright revenue in operating income, while yielding an adjusted operating ratio of 91 compared to the prior year freight revenue grew $15 7 million or 23, 5%.
Speaker Change: It just started operating income grew $3 2 million or 73, 9% and margin improved 260 basis points compared to the prior year.
Speaker Change: Managed freight experienced a nine 1% reduction in freight revenue and a 29, 5% decrease in adjusted operating profit compared to the prior year reporting an adjusted operating ratio of 95.7.
Speaker Change: The reductions in freight revenue and adjusted operating income are attributable to the combination of lower volumes of profitable freight and cargo related claim expenses incurred in the period compared to the prior year.
Paul Bunn: Our warehouse segments saw a half a percent increase in freight revenue and an 85.1% increase in adjusted operating profit compared to the prior year, reporting an adjusted operating ratio of 91.5. We are pleased with the improvement in profitability within this segment, which struggled to produce adequate returns during the prior two years when the business was rapidly growing and labor inflation outpaced our ability to obtain rate increases from our customers.
Speaker Change: Our warehouse segment saw a half a percent increase in freight revenue and an 85, 1% increase in adjusted operating profit compared to the prior year reporting an adjusted operating ratio of 91.5, we are pleased with the improvement in profitability within this segment, which struggled to produce adequate returns during the prior two years.
Speaker Change: When the business was rapidly growing and labor inflation outpaced our ability to obtain rate increases from our customers.
Paul Bunn: Our minority investment in tail contributed pre-tax net income of 4 million for the quarter compared to 5.3 million in the prior year period. The decrease was largely due to the continued softness and the equipment markets surpassing gains, suppressing gains on the self-used equipment and increased interest expense.
Speaker Change: Our minority investment in tail contributed pretax net income of 4 million for the quarter compared to $5 3 million in the prior year period. The decrease was largely due to the continued softness in the equipment market surpassing game, so pricing gains on the sale of used equipment and increased interest expense sales revenue in the quarter increase.
Paul Bunn: Tills revenue in the quarter increased 6% and pre-tax net income decreased by approximately 24% versus a third quarter of 23. Tills increased its truck fleet in the quarter versus the year go by 133 trucks to 2,328 and increased its trailer fleet by 477 to 7,409.
Speaker Change: 6% and pretax net pre tax net income decreased by approximately 24% versus the third quarter of 23.
Speaker Change: <unk> increased its truck fleet in the quarter versus a year ago by 133 trucks to 2000, and 328 and increased its trailer fleet by 477 to 7490.
Unknown Executive: Attorney. Regarding our outlook for the future, for the remainder of the year we believe the General Freight Market will remain challenging despite overall fundamentals slowly improving with excess care capacity, exiting an environment that has been had unstable conditions.
Speaker Change: Regarding our outlook for the future for the remainder of the year. We believe the general freight market will remain challenging despite overall fundamentals slowly improving with excess carrier capacity exiting <unk>.
Speaker Change: In an environment that has been had unstable conditions absent an outside catalysts to facilitate improved demand. We remain uncertain about the pace was general freight conditions will meaningfully improve allowing us to improve our margins with customers who are not providing an adequate return on capital. Despite these challenges we remain very optimistic about our business.
Unknown Executive: Absent and outside catalysts to facilitate improved demand, we remain uncertain about the pace at which General Freight conditions will meaningfully improve, allowing us to improve our margins with customers who are not providing an adequate return on capital.
Unknown Executive: The spot these challenges we remain very optimistic about our business model is evidenced by the durability and growth of our core operations over the last 24 months. In the fourth quarter, we believe we have both the momentum and team to continue to improve the efficiency of our operations and execute on opportunities that present themselves regardless of the status of the freight market.
Speaker Change: Small business model as evidenced by the durability and growth of our core operations over the last 24 months in the fourth quarter believe we believe we have both the momentum and team to continue to improve the efficiency of our operations and execute on opportunities that present themselves regardless of the status of the fright market. Thank you.
Unknown Executive: Thank you for your time, and we will now open up the call for any questions.
Speaker Change: For your time, and we'll now open up the call for any questions.
Unknown Executive: If you would like to ask a question, please press star one on your telephone keypad. You will be placed into the queue, and you are to receive. Please be prepared to ask your question when prompted. Once again, if you would like to ask a question, please press star one on your phone now.
Speaker Change: If you would like to ask a question. Please press star one on your telephone keypad now.
Speaker Change: He will be placed into the queue in the order received please be prepared to ask your question. When prompted once again, if you would like to ask a question. Please press star one on your phone now.
Scott Group: And our first question comes from Scott Group from Wolf Research. We go ahead, Scott. Hey, thanks, morning guys. Maybe just start on the demand environment and how it played out through the quarter. What have you seen so far in queue four, post these storms? Is this sort of regional tightness? Is it potentially spilling over to become more broader than that? Just any sort of high level color?
Speaker Change: And our first question comes from Scott Group from Wolfe Research. Please go ahead Scott.
Scott Group: Hey, Thanks morning, guys, maybe just start on the demand environment and what you've seen and you know how it played out through the quarter. What have you seen so far in Q4 post these storms or is this sort of regional tightness is it potentially spilling over to become more broader than that just any sort of.
Speaker Change: High level color.
Paul Bunn: Yeah, I've got this, Paul. I'll give you a bit of color. You know, July felt pretty good the first, you know, first 15, 20 days, and then softened up a little. You know, August is a month that doesn't have any holidays in it. So we felt pretty good about revenue in the month of August. And then we started sensing a little bit of softness in the month of September. And I would say, in general, that's carried over to the month of October. And that's primarily within the, within the expedited network. And as you know, we, you know, there's a lot of PT type accounts in there.
Speaker Change: Yeah. Scott This is Paul I'll, I'll give you a little bit of color.
Speaker Change: The July felt pretty good. The first you know first 15 20 days and then and then softened up a little you know August is.
Speaker Change: Months that doesn't have any holidays in it. So so we felt pretty good about revenue in the month of August.
Speaker Change: And then we started since in a little bit of softness in the month of September and I would say in general that's carried over to the month of October and that's primarily within the within the expedited network and as you know, we you know theres a lot of.
Speaker Change: P. P top accounts in there and you guys are seeing what the <unk> industry has done and so that's some of it.
Paul Bunn: And you guys have seen what the LTO industry's done. And so that's some of it. But, you know, there was a little bit of uptick and tightness we saw right around the hurricane. And, you know, I would say both hurricanes, and it faded; it faded pretty fast. It didn't, it didn't last that long.
Speaker Change: There was a little bit of uptick in tightness, we saw right around the hurricane and yeah, I would say, both hurricanes and it's faded it faded pretty fast they didn't it didn't last that long.
David Borker: And especially with just the nature of our customer base, David, you want to add anything to that?
Speaker Change: And especially with just the nature of our customer base, David you want to add anything to that yeah.
David Borker: Yeah. I agree. I think, Scott, I think it's the same thing that we have felt for the last two years. It is still there. I mean, I know that I read all of y'all's writings.
Speaker Change: I agree I think Scott I think.
Speaker Change: The same thing.
Speaker Change: We have felt for the last two years.
Speaker Change: It is still there I mean, I know that our radar riyals writings and I do believe that we're at the bottom or not they were just kind of going along the bottom or widening on our catalyst step yet moved to thank board. So that's where I think the freight market is that.
David Borker: And I do believe that we're at the bottom. And I think that we're just kind of going along the bottom. We're waiting on the catalyst, you know, to move the thing forward. So that's where I think of the freight market is that.
Scott Group: Can you just remind us like what percentage of the expedited business now is the LTL line haul? Like, is that ultimately what, what feels like it's gotten? Worse than the last couple of years. Yeah, our LTL air freight, it's all we lump it all into transportation businesses and it runs about 55 to 60 percent of the total of expedited. So it's a big portion that is there and you know when Apple came out with the release, there was game busters for about two or three weeks and then, and then you know that that got done.
Speaker Change: Yeah.
Speaker Change: Can you just remind us like what percentage of the expedited business now is the L. T. L line haul is that ultimately what feels like it's gotten worse in the last I don't know.
Speaker Change: Couple of hour hour trip, Yeah, our L T L Air freight.
Speaker Change: Forward I'm forwarding, it's all we lump it all ends up transportation businesses and they have it wrong.
Speaker Change: About 55 or 60%.
Speaker Change: The total of expedited dominate the big Big portion that is there.
Speaker Change: When Apple came out with a release there was gang busters for about two or three weeks and then and they added that that got done. So it's not that it's horrible it's not horrible I mean, you know that.
David Borker: So, and it's not that it's horrible. It's not horrible. I mean, you know last month I think our utilization on our expedited was over 15,000 miles of truck. So I mean it's extremely, you know, it's not it's not horrible, but it's not the way it was six months ago. So you know it's it's okay.
Speaker Change: I think our utilization on our expedited was over 15000 miles of truck. So I mean, it's extremely it's not it's not horrible, but it's not.
Speaker Change: The way it was six months ago.
Speaker Change: No.
David Borker: I don't want to act like the world's come to an end. It may just had a little bit of softness there, and I think it's similar to what I see you're riding on the LTLs. I think it has slowed down a little bit for them, and I think it's mostly the industrial base.
Speaker Change: It's okay I don't want to act like the world's come to the end of May just add a little bit of softness there and I think it is similar to what I say you are riding on the L. T cells I think that it has slowed down a little bit more and I think it's mostly the industrial base.
Scott Group: It makes sense, and just lastly, David, I know last quarter you talked about starting to get a couple customers with some pricing increases. Yeah. And as we get to start to approach bidsies and start doing with more customers, how are you thinking about pricing this kind of cycle in terms of can rates go up? Can they go up a little, a lot? Just any thoughts? I would tell you that good memory last quarter. I think I said two, and now I'm up to five or six. So, so we've done three or four since the last phone call.
Speaker Change: Yeah.
Speaker Change: Yeah. It makes sense and just lastly, David I know last quarter, you talked about starting to get a couple of customers with some pricing increases.
Speaker Change: You know as we get to.
Scott Group: Start to approach bid season, and start doing with more customers. How are you thinking about pricing has come down cycle in terms of can rates go up can they go up a little a lot just any thoughts.
Speaker Change: I would tell you that.
Good memory last quarter, I think I said too now that add up to five or six so so we've done three or four since the last phone call.
David Borker: But we've been, you know, those that that we've done, we've been successful. What do I think? Number one, I think that we will be successful in obtaining rate increases. It's not going to be from a lack of asking our customers. I don't think that our customers are expecting us and this industry to go three years without a rate increase. I don't believe that, and I think that we will be successful. Now what do I think that number is? I think that number could be two to three percent. I think the number then in the second half of the year could be two to three percent.
Speaker Change: We bid those that that we've done we've been successful why do I think number one.
Speaker Change: I think that we will be successful in obtaining rate increases, it's not going to be from a lack of asking our customers.
Speaker Change: Don't think that our customers are expecting us and this industry to go three years without a rate increase I don't believe that and I think that we will be successful now why do I think that number is that they got number.
Speaker Change: It could be 2% to 3%.
Speaker Change: Thank the number then in the second half of the air debate, 2% to 3%.
Scott Group: And you know I don't know that you can go to a customer right this moment say here's five percent even though we've gotten a couple of five percenters. But can I go overall and say, here's five percent? I'm not sure that you can, but I do believe that we can get two to three now and say let's look at it in the summer. That's exactly what we're telling ourselves, department. What I just said to you, and that's what we're hitting the road hoping to obtain. And again it won't be from a lack of asking, and I think that we got relationships enough with our customers that we can be successful in getting something.
Speaker Change: And you know I don't know that you can go to a customer right. This moment say, here's 5%, even though we've gotten a couple of five percenters.
Speaker Change: That cannot go overall and say here is 5% I'm not sure that you can but I do believe that we can get two to three now.
Speaker Change: Let's look at it in the summer that's exactly what we're telling ourselves department, what I, just said to you and that's what we're hitting the road, hoping to obtain and again it won't be from a lack of asking it I think that we got relationships enough with our customers that we can base successful in getting some.
Scott Group: Thank you, guys. Appreciate the time.
Speaker Change: Thank you guys appreciate the time.
Unknown Executive: Thanks, Scott.
Scott Group: Thanks Scott.
Jason Sidel: Our next question comes from Jason Sidel from TD Cowan. Please comment on that question a little bit.
Speaker Change: Our next question comes from Jason Seidl from TD Cowen. Please go ahead Jason.
Jason Seidl: Thanks, operator, good morning, gentlemen.
Jason Seidl: Piggybacking on that question a little bit.
David Borker: David, would you define success as two to three percent in this market, given we're cost. Yes, if somebody said, "here's January 1, here's 2.5%." We'll just use that number. Here's 2.5%. I would say that's successful. Seeing if the market gets better, and then say we gotta come again.
Jason Seidl: Yes.
Jason Seidl: David would you define success as 2% to 3% in this market given where costs have gone.
Jason Seidl: Yes.
Jason Seidl: Yeah. If somebody said here is January 125%, we'll just use that number here is two 5% I would say that successful say in if the market gets better and then say we got to come again.
Jason Sidel: Okay, well, then let's take that and extrapolate it out for the 425. As I look this year, you guys are probably about $4. Give or take, right?
Jason Seidl: Okay.
Jason Seidl: Well, then, let's let's take that and extrapolate it out for the <unk>.
Speaker Change: 25 is that as I look this year you guys have going on probably about $4 give or take right. So.
Jason Sidel: So, you know, what type of earnings growth can we expect knowing that you guys, you know, have a little bit of a different business mix than your stereotypical truckload player in a 2% to 3% uppricing scenario.
What type of earnings growth can we expect knowing that you guys have a little bit of a different business mix than your stereotypical truckload player.
Speaker Change: 2% to 3% up pricing scenario.
David Borker: Jason, so I think that we can absolutely, you know, I've gotten some comments on the release and about operating leverage and rate increases. And here's what I know. I know that in 2024 year-to-date, we've absorbed a lot of costs. And a lot of those were absorbed in 2023, and they've just escalated. We're doing everything in our power to manage costs to this extent possible. And we're, I feel like we're about out of bullets on what we can manage. With that being said, you know, absorbing the costs into the P&L, the costs are in there today.
Jason Seidl: Jason So I think that we can absolutely.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Gotten some comments on the release about operating leverage and rate increases in <unk>.
Speaker Change: Here's what I know I know that in 2024 year to date, we've absorbed a lot of cost since a lot of those were absorbed in 2023 and they've just escalated.
Speaker Change: We're doing everything in our power to manage cost to this extent pop are possible and where I feel like we're about out of bullets on what we can manage.
Speaker Change: With that being said you know absorbing the costs into the P&L of the costs are in there today and like you said, we make washout at $4 I don't I'm, not saying that that's where it's going to land, but that's.
David Borker: And like you said, we may wash out at $4. I'm not saying that that's where it's going to land, but that's just repeating your words. But, you know, with that, so you take that and extrapolate it, and you think about the number of miles that we run each year based on where we are today. It's a little under 300 million. One percent, two percent goes a long way in terms of operating leverage. So, if you think most of that goes straight down to the bottom line on rate, you could see a pretty big lift in operating income and certainly EPS with a low share count.
Speaker Change: I'm just repeating your words, but.
Speaker Change: So you take that and extrapolate it and you think about the number of miles that we run each year.
Speaker Change: Just on where we are today slow under $300 million, 1%, 2% goes a long way in terms of operating leverage. So if you think most of that goes straight down to the bottom line on rate you could see a pretty big lift in operating income and certainly EPS with a low share count.
David Borker: But, you know, we're going to try to go to the market and get what we can get. And it may require kind of a two-phase effort, like David had said, but I absolutely think that we can grow operating income. I like the momentum we've gotten dedicated with the growth that we have. We've got the youngest fleet of equipment that we've operated in some time.
Speaker Change: But you know we're going to try to go to the market and get what we can get and.
Speaker Change: It may require a kind of a two phased effort like David said, but I, absolutely think that we can grow operating income I like the momentum we've got in dedicated with the growth that we have we've got the youngest fleet of equipment that we've operated in some time and I.
David Borker: And I think we're poised for this upswing whenever it happens. We're ready to be successful in it. And, you know, a lot of that's predicated on what the market's going to give us. So, but whatever it is, we're ready. We're going to take advantage of it to the most, to the extent, greatest extent possible.
Speaker Change: Think we're poised for this upswing whenever it happens we're ready to be successful in it and you know a lot of that is predicated on what the market's going to give us, though so but whatever it is we're ready and we're going to take advantage of it in the most to the extent greatest extent possible.
Jason Sidel: No, that's great color. And you sort of are leading me in the right next question. You talked about the youngest fleet.
Speaker Change: That's great color and you sort of are leading me to my next question you talked about the youngest fleet how should we think about capex as we look at 25.
David Borker: How should we think about CAPEX as we look at 25? I think you'll see a reduced number in CAPEX. If we just give you some round numbers. And it gets a little bit fuzzy because we've had a little bit of growth, or quite a bit of growth. This year we've had; we'll probably land the year, and this is in the release. At about $90 million of CAPEX, I would say a big portion of that, not the majority, maybe $40 million of that has been related to growth CAPEX. I think next year what you'll see is continued investment in capital expenditures, mostly on the maintenance side.
Speaker Change: I think you'll see a reduced number in capex if we.
Speaker Change: Just give you some round numbers and it gets a little bit fuzzy because we've had a little bit of a quite a bit of growth.
Speaker Change: This year we've had.
Speaker Change: We'll probably land the year, if and this is in the release at about $90 million of Capex I would say a big portion of that not the majority maybe $40 million of that has been related to growth Capex I think next year, what you'll see is.
Speaker Change: Continued investment in capital expenditures, mostly on the maintenance side.
David Borker: We've got some extra equipment ready set aside for some growth CAPEX early in the year already. So, that's bought and paid for, so to speak. So, you'll see a little bit of a lighter CAPEX, you know, much lighter than $90 million. Probably somewhere in the neighborhood of 50 to 60 million dollars is what I'm thinking right now.
Speaker Change: We've got some extra equipment ready set aside for some growth capex early in the year already so that's <unk>.
Speaker Change: <unk> paid for so to speak so.
Speaker Change: So you'll see a little bit of a lighter capex.
Speaker Change: You know much lighter than $90 million at.
Speaker Change: Probably somewhere in the neighborhood of $50 million to $60 million is what im thinking right now our capex plans have not been finalized yet, but understood. We are going to continue to invest in.
David Borker: Our CAPEX plans have not been finalized yet, but we are going to continue to invest. and so if it's 50 to 60, so what would maintenance CapEx be for you guys about 40 fish? Yeah, that'd probably be right. I mean, 50 to 60. I would say 50 to 60 next year; it would be our maintenance CapEx number. We've got some growth; we've got some CapEx ready for growth this year. If we do start to see business materialized, we've got some levers within in-house capacity to kind of absorb that for a short period of time, and so you may, if we grow and dedicated more than kind of what we're expecting or get some big wins, which is completely possible because we've gotten some big wins this year that we weren't anticipating.
And so if it's 50 to 60, so so what would maintenance capex be for you guys about 40 ish.
Speaker Change: That'd probably be right I mean, 50 to Cigna I would say 50 50 to 60 next year would be our maintenance Capex number we've got some great. We've got some capex ready for growth. This year, if we do start to see business materialize.
Speaker Change: Got some levers within in house capacity to kind of absorb that for a short period of time and say your mace, if we grow in dedicated.
Speaker Change: Then kind of what we're expecting or get some big wins, which is completely possible because we've gotten some big wins this year that we weren't anticipating.
Jason Sidel: And I think we can move quickly, and you may see that number go up a little bit. Okay, that's fair enough.
Speaker Change: And.
Speaker Change: I think we can move quickly and you may see that number go up a little bit.
Speaker Change: Okay, that's fair enough.
Jason Sidel: And just to follow up a little bit on the LTL line haul stuff, has there been a recent drop in the LTL line haul, or was that more consistent through the quarter? Yeah, I would say Jason, probably probably more in the second and third month of the quarter. We start sensing it a little bit post-forth as you eye, and then it kind of materialized over the balance of the quarter. Okay, June was really good in that space as it always is, and coming back from the holiday, it felt pretty good; and then it softened up in the latter eight to ten weeks of the quarter.
Speaker Change: And just to.
Speaker Change: Follow up a little bit on the LTI line haul stuff is has there been a.
Speaker Change: A recent drop in the <unk> line haul or was that more consistent through the quarter.
Speaker Change: Yeah, I would say, Jason it probably probably more in the in the second and third month of the quarter. When we start since in it a little bit post fourth of July and then it kind.
Speaker Change: Materialized over the balance of the quarter.
Speaker Change: Okay June was really good in that space as it always is and you know coming back from the holiday It felt pretty good and then it softened up.
Speaker Change: Bladder eight to 10 weeks of the quarter.
Unknown Executive: Gotcha.
Unknown Executive: Gentlemen, I appreciate it as always. Thanks, thank you, Jason.
Jason Seidl: Got you gentlemen, I appreciate it as always.
Speaker Change: Thank you Jason.
Daniel Imbrow: And our next question comes from Daniel Imbrow from Steven's. Please go ahead, Daniel. Hey, hey, good morning, guys. Maybe to follow up on that expedited piece. So maybe the LTL demand stays softer in the near term, and it's how they best your expectation.
Speaker Change: And our next question comes from Daniel Umbro from Stephens. Please go ahead Daniel.
Daniel Umbro: Hey, good morning, guys.
Daniel Umbro: And then maybe to follow up on that expedited pieces. So maybe the hotel demand stays soft here in the near term it sounds like that's your expectation just curious with the network being out of whack I guess, what can you do to drive up utilization.
Daniel Imbrow: Just curious, with the network being out of whack, I guess what can you do to drive up utilization as you look to improve then the fourth quarter and kind of start leveraging those costs. And then related, maybe to follow up in the last one, just how are you thinking about expedited tractor counts? Should we see that fleet go down if demand stays challenged for a while, or is how you think about investing there? So a couple things, Daniel, I would say is I think the fleet can't stay about the same because I feel like we're already making progress on getting some of those imbalances rectified.
Daniel Umbro: As you look to improve that in the fourth quarter and kind of start leveraging those costs and then related maybe to follow up on the last one just how are you thinking about expedited tractor counts should we see that fleet go down if demand stays challenged for a while or how you're thinking about investing there.
Daniel Umbro: Couple of things I would say is.
Speaker Change: I think the fleet count will stay about the same because I feel like we're already making progress on getting some of those imbalances rectified. So we're out really trying to you know.
Paul Bunn: So we're out really trying to fill some holes to balance the network. I would say we've made some progress in the last couple of weeks; still got some progress to go. Peaks right around the corner, and that's a word that we don't use around here near as much as we used to. But there's no doubt that we've got a little bit of peak business starting to kick off now in November and early December; we'll have a little more. And so I think the combination of our team really, really trying to hawk and hunt for freight to fill some of these gaps to make the trucks move more efficiently than maybe they did in the last 10 weeks.
Speaker Change: Fill some holes to balance the network I would say we're we.
We've made some progress in the last couple of weeks still got some progress to go.
Speaker Change: You know peaks right around the corner and that's the word that we don't use around here near as much as we used to but there is no doubt that you know, we got a little bit of peak business starting to kick off now in November and early December will have a little more and so I think the combination of <unk>.
Speaker Change: Our team really really trying to hawk and hunt for fright to fill some of these gaps to make the trucks move more efficiently than maybe they did in the last 10 weeks I think that that's in process and I think we're.
Paul Bunn: I think that's in process, and I think we're probably going a little old school on three or four meetings a week, everybody accountability to fill these gaps because it's a pretty tight network, and so it doesn't take a lot of, we're not talking thousands of lows, we're talking a couple hundred lows, a couple hundred lows in the right spot on the right days, and it gets this thing where it needs to be. So anyway, I think it's just blocking and tackling on that part, and then I would say followed up by a little bit of peak and is what we're doing.
Speaker Change: I would say, we're probably gone a little old school one.
Speaker Change: Three or four meetings a week.
Speaker Change: Accountability to fill these gaps because it's our networks, it's a pretty tight network and so.
Speaker Change: It doesn't take a lot of work.
Speaker Change: Talking thousands of Lowe's, we're talking a couple of hundred loads a couple of hundred loads in the right spot on the right days and that gets us staying where it needs to be so anyway, I think it's just blocking and tackling on that part and then I would say followed up by a little bit of peak and is what we're doing.
Paul Bunn: Topol, and then maybe shift over to the dedicated side of the business. I think if I remember at LiveBird, should be strengthening here in the fourth quarter, that should be OR or creative, just from a mixed standpoint. So how do you think about maybe dedicated OR here in the near term in the fourth quarter? Are there any offsets we should be aware of that would offset that benefit from the strength in LiveBird? Yeah, I do think the poultry business will be strong in the fourth quarter. We're seeing that; that's really starting to roll this week, and between now and Christmas, it will just continue to get stronger.
Speaker Change: That's helpful and then maybe shifting over to dedicated side of the business I think if I remember right live bird should be strengthening here in the fourth quarter that should be or accretive just from a mix standpoint. So how are you thinking about maybe dedicated or here in the near term in the fourth quarter are there any offsets we should be aware of that would offset that benefit from the strength in Lubbock.
Speaker Change: Yeah, I do think the poultry business will be will be strong in the fourth quarter.
Speaker Change: We're seeing that that's really starting to roll. This week and you know between now and Christmas. It will it will just continue to get stronger.
Paul Bunn: I would say we had a few rate adjustments with some customers to keep some business in the third quarter that will have the full quarter effect of. And so I'd say the puts in the takes; I'd say dedicated is probably evenish, third quarter versus fourth quarter. I don't think it'll, I don't think it'll get better, but I don't think it'll get materially worse.
Speaker Change: I would say.
Speaker Change: We had a few.
Speaker Change: Right adjustments with some customers to keep some business in the in the third quarter that'll you'll have the full quarter effect of and so I'd say the puts and takes I'd say dedicated is probably.
Speaker Change: Even ish start third quarter versus fourth quarter.
Speaker Change: I don't I don't think it will get better, but I don't think it will get materially worse.
Daniel Imbrow: Great, I appreciate it. Last one for me, just on the cash flow side, you mentioned cat vaccine down next year, maybe margins are getting better if we get the rate. I guess that should spit out more free cash.
Speaker Change: Great I appreciate it and last one for me just on the cash flow side, you mentioned capex being down next year, maybe margins are getting better if we get some rate.
Speaker Change: I guess I shouldn't spit out more free cash how are you thinking about M&A opportunities out there you're seeing anything else getting shaken loose.
David Borker: How are you thinking about just M&A opportunities out there? You've seen anything else getting shaken loose, given the prolonged downturn? You know, I would tell you, I think everybody knows what we're looking for, and it's, you know, nichey, stable, good margin business that's not competing with the OTR environment, not competing with all the general freight environment. And we continue to have a number of things come across our desk. And so I think we will continue to look at those. And, you know, we're not going to let any cash burn a hole in our pocket. If we do something, it's going to have to be the right deal at the right time with the right business model.
Speaker Change: Given the prolonged downturn.
Yes.
Speaker Change: I would tell you I think everybody knows what we're looking for.
Speaker Change: It's you know.
Speaker Change: They achieved stable good margin business, that's not competing with the with the OTR environment not competing with all the general freight environment and.
Speaker Change: We continue to have a number of things come across our desk and and so I think what we will continue to look at those in and.
Speaker Change: We're not going to we're not going to let any cash burn a hole in our pocket.
Speaker Change: If we do something it's going it's going to be the right deal at the right time with the right business model and so we're just going to continue to evaluate and see what happens over the next year or so.
David Borker: And so we're just going to continue to evaluate and see what happens over the next year or so.
David Borker: Daniel, I would say I would just echo Paul's comment on that. I mean, you probably saw the reduction and net that during the sequential reduction, which is basically a building of cash. That's not, you know, saying that we've got any sort of eminent, you know, acquisition targeted out there. But I do like to have a little bit of a cushion of cash as just a really good quarter. But I would say our playbook is not changed. I mean, and, you know, the key for us is just being patient, finding the right acquisition, the right fit for us, the right culture, the right leadership team.
Speaker Change: Yes, Daniel I would say I would just echo Paul's comment on that I mean, you probably saw the reduction in net debt during the sequential reduction which is basically a building of cash and that's not.
Speaker Change: Saying that we've got any sort of eminent.
Speaker Change: Acquisition targeted out there, but I do like to have a little bit of a cushion of cash is.
Speaker Change: It was just a really good quarter, but I would say our playbook has not changed I mean and the key for US is just being patient finding the right acquisition the right fit for us the right culture, the right leadership team and we've been successful for that or with that over the last couple of acquisitions last three acquisition for <unk>.
David Borker: And we've been successful for that or with that over the last couple acquisitions, last three acquisitions, four acquisitions, I would say. And we're going to continue that playbook. So we like our playbook, and I think you'll see us continue following it.
Speaker Change: Acquisitions I would say.
Speaker Change: And we're going to continue that playbook, so we like our playbook and I think youll see us continue following it.
Daniel Imbrow: Make sense. Thanks so much.
Speaker Change: It makes sense. Thanks, so much.
Jeff Costman: And our next question comes from Jeff Costman from Vertical Research Partners. Please go ahead, Jeff. Thank you very much and congratulations on, you know, in a very difficult environment.
Speaker Change: And our next question comes from Jeff Kauffman from vertical Research partners. Please go ahead Jeff.
Jeff Kauffman: Thank you very much and congratulations.
Jeff Kauffman: Very difficult environment.
David Borker: I want to look beyond the fourth quarter and kind of pick your brain on kind of the longer term that you're seeing in the market. You know, we all know the markets dislocated. I think people are talking about how long this downturn's been, you know, although arguably we're coming off for sugar high when we started, but kind of what changes do you think you've seen in the market structurally versus what kind of weakness we're seeing is more just the short-term normal ebb and flow of the market. You know, I'll throw a couple of things out there, and some of these will tie into some of the things Daniel talked about on specialized businesses. Continue to do really good.
Jeff Kauffman: I wanted to look beyond the fourth quarter.
Jeff Kauffman: Trying to pick your brain.
Jeff Kauffman: On kind of the longer term that youre seeing in the market.
Jeff Kauffman: We all know the market is dislocated I think people are talking about how long this downturn spin, although arguably we're coming off of a sugar high when we started but kind.
Jeff Kauffman: What changes do you think you've seen in the market structurally.
Jeff Kauffman: Versus what kind of weakness we're seeing is more just just short term normal ebb and flow of the market.
Jeff Kauffman: You know I'll I'll throw a couple of things out there in some of these will tie into some of the things Daniel.
Jeff Kauffman: Talked about them.
Jeff Kauffman: Okay.
Jeff Kauffman: Specialized businesses continue to do really good I mean, even ones, we get dex arm that we may or may not be interested in I.
David Borker: I mean, you know, even ones we get decks on that we may or may not be interested in. I would say specialized businesses continue to perform really well. I think the proliferation of brokers continues to negatively affect the ability for this market to rebound, along with the small carriers that just made so much money, you know, just crazy margins during the second half of 21 and 22. And, you know, had cash reserves going into this thing and have basically taken a lot of freight that, you know, at well below the, you know, at well below the cost structure.
I would say specialized businesses continue to perform really well I think the.
Jeff Kauffman: The proliferation of brokers continues to.
Jeff Kauffman: Negatively affect our ability for this market to rebound.
Jeff Kauffman: Along with the.
Jeff Kauffman: The small carriers that just made so much money you know just crazy margins there in the second half of 'twenty, one and 'twenty, two and had cash reserves going into this thing and have basically taken a lot of freight that you know.
Jeff Kauffman: At well below their at well below their cost structure and so.
David Borker: And so I would, you know, I would say the proliferation of, especially the small brokerages that blew up during COVID and of the small transportation companies that blew up and some of the, I'll call it decisions they've made in the last 24 months that kind of defy economics. That's something that's just lasted a really long time. People that are, if you get businesses that are, you know, outside that space, not bidding on a bunch of commoditized businesses, they still run like a business should. And that is, you got to get a return on your capital.
Jeff Kauffman: Say, the the proliferation of especially small brokerages that blew up Darrin COVID-19 and of the small transportation companies that blew up and some of the I'll call. It decisions they've made in the last 24 months that kind of define economics.
Jeff Kauffman: Sure.
Jeff Kauffman: Thats something this has lasted a really long time people that if you get businesses that are outside that space not bad not a bunch of commoditized businesses. They still run like a business should and that is you got to get a return on your capital in.
David Borker: And those businesses are still operating with us. They're pretty good economic fundamentals.
Jeff Kauffman: And those businesses are still operating with I'd say pretty good economic fundamentals.
Speaker Change: I agree 100%.
David Borker: So I want to go back then to your comment on, "we feel like we're almost out of bullets here." I mean, I love the niche strategy, you know, if you will, to your point on the specialized businesses. But, you know, at this point, is it really just we batten down the hatches and we're waiting patiently for the turn? Or, you know, are there nieces that you aren't as heavily exposed in today that makes sense more than they used to in this kind of market? I think it's both of those. I think you think that you need to be prepared to do both.
Speaker Change: So I want to go back then to your comment on we feel like we're almost out of bullets here.
Speaker Change: Yes.
Speaker Change: Love the niche strategy, if you will to your point on the specialized businesses, but.
Speaker Change: At this point is it really just we batten down the hatches and we're waiting patiently for the term or are there niches that you arent as heavily exposed in today that makes sense.
Speaker Change: They used to in this kind of market.
Speaker Change: I think it's both of those I think you I think that you need to be prepared to do both and that is that down the hatches and when is this thing going to turn and I'll also say that I can paint a picture of that.
David Borker: And that is batten down the hatches. And when is this thing going to turn? Now, I'll also say that I can paint a picture that, you know, with a fan, what they did, 50 basis points. And are they going to do another 25 and 25? I personally don't know that they've got inflation straightened out yet or not. But, you know, that's a side note. But, you know, if they reduce interest rates, we're going to feel that. It's going to be failed. And there's a lot of freight and housing. There's a lot of freight and automotive that will start coming forth in the next few months.
Speaker Change: With the fed what they did <unk> basis points and are they going to do another 25% and 25 I personally don't know that they've got inflation straightened out yet or not but that's a sad note but.
Speaker Change: <unk> reduced interest rates were going to feel that it's going to be felt and theres a lot of freight in housing and theres a lot of pride in automotive that will start coming forward in the next few months.
David Borker: Because if the fan continues to lower interest rates, and I think the election is going to be a very important election, I think if it goes one way, I think it's going to be some more freight out there. If it goes the other way, I think that we might have kind of where we're at today. But aside, whichever president wins the election, I think that what the fan is doing on interest rates is going to help transportation in the next few months. The other side of that, so you batten your hatch down at the same time, I think you're going to get some help.
Speaker Change: The fed continues to lower interest rates and I think.
Speaker Change: The election is going to be a very important election, I think if it goes one way I think it's going to be some more freight out there that goes the other way I think that we may have kind of where we're at today, but as that whichever president.
Speaker Change: As the election I think what the fed is doing on interest rate is going to help transportation in the next few months that the other side of that though you batten hatched down at the same time I think you will get some help and then as Paul said, we continue to look at acquisitions.
David Borker: And then, as Paul said, we continue to look at acquisitions that make sense. And the niche ones make sense. And so it's just a matter, if you find the one that has the interest or find the one that you can gray up on, because that's the way in which we're building our company in the future.
Speaker Change: That makes sense and.
Speaker Change: The niche ones make sense and so it's just a matter of defined the one that has the interest or find the one that you can grab pone up because thats the way in which we're building our company in the future.
Jeff Costman: Richard. That was tremendously helpful. Thank you.
Speaker Change: J F.
That was tremendously helpful.
David Borker: And just kind of following along that path, I think we all agree capacity isn't going to be our savior here because it's just coming out too slowly. But, you know, absolutely housing. Is there anything out there that would make a material difference, positive or negative, to your 25 outlook in terms of parts of the economy? Great question. I think domestic industrial production going up definitely would definitely help. And I'll be honest with you, I've talked to a few folks just from my prior life in public accounting and some stuff. I think a piece of this industrial production slowed in.
Speaker Change: Thank you.
Speaker Change: I'm just kind of following along that path I think we all agree capacity isn't going to be our savior here.
Speaker Change: It's just coming out too slowly but.
Speaker Change: Outside of housing.
Speaker Change: Is there anything out there that would make a material difference positive or negative to your 25 outlook in terms.
Speaker Change: Parts of the economy.
Speaker Change: Oh, great question.
Speaker Change: Sure.
Speaker Change: I think domestic industrial production going Oh, yeah definitely it would definitely help.
Speaker Change: And I'll be honest with you.
Speaker Change: I've talked to a few folks just from from my prior life in public accounting and some stuff out I think a piece of this industrial production slowdown.
David Borker: It's the old election year thing. And you know, I think you might see a pickup in industrial production post-election no matter who wins. There's a lot of people who are sitting on the sidelines right now between interest rates and the election. And so, you know, a cap expending, you know, that fueled by, you know, industrial production. I think that. I think housing, I think all though, I think all those things would be really beneficial to us. No, I agree, decision paralysis. Break that up and be very helpful.
Speaker Change: The old election year.
Speaker Change: And you know I think you might see a pickup in industrial production post election, no matter, who wins there was a lot of people just sitting on the sidelines right now between interest rates and the election and so.
Speaker Change: Capex spending.
Speaker Change: You know that fueled by.
Speaker Change: Industrial production I think that I think housing I think Aldo I think all those things would be really beneficial to us.
Speaker Change: No great.
Speaker Change: Great decision paralysis.
Speaker Change: Great that'd be.
Jeff Costman: Well, all things considered, congratulations and thank you.
Speaker Change: Very helpful.
Speaker Change: All things considered congratulations and thank you.
Unknown Executive: Thanks, Jeff.
Jeff Kauffman: Thanks, Jeff.
Michael Vermut: And the next question comes from Michael Vermitt from Newland Capitol.
Speaker Change: And our next question comes from Michael <unk> from Newland Capital. Please go ahead Michael.
Michael Vermut: Please go ahead, Michael.
Michael Vermut: Hey gentlemen, how are you doing? Fantastic operating through all this. You know, you certainly separated yourselves from everybody else out there. Thank you. So, just getting back to the, you know, cashflow situation and, you know, we got the youngest lead already. I assume you know CapEx is it will be coming down. If you just do the math here with the free cashflow we'll have over the next two to three years, you could, you know, if no large acquisitions come by, we're pretty much debt free, you know, maybe, you know, two, three years, something like that, we're close.
Michael: Hey, gentlemen, how are you doing fantastic operating through all this.
Speaker Change: Certainly separated yourselves from everybody else out there.
Speaker Change: Thank you.
Speaker Change: So just getting back to the cash.
Speaker Change: Cash flow situations.
Speaker Change: You know, we got the youngest fleet already I assume capex is that'll be coming down can you just do the math here.
Speaker Change: With the free cash flow, we'll have over the next two to three years you could if no large acquisitions come by.
Speaker Change: We're pretty much debt free maybe two.
Speaker Change: Two three years something like that we're close.
David Borker: Where do you look at this? We're trading at 12, 12 times now. The group's trading 20 to 40 times; you know, massive discount here. Is there a point if we don't find these acquisitions; you start buying back stock. Is there an optimal leverage spot we'll get to? And then you think about that, but, you know, the amount of free cashflow generator over the next two to three years is going to be significant. So, how do you look at that?
Speaker Change: Where do you look at this we're trading at 12 12 times now the group's trading.
Speaker Change: <unk> 40 times.
Speaker Change: <unk> discount here is there a point if we don't find these acquisitions you start buying back stock is there a optimal leverage.
Speaker Change: Spot will get to and then you think about that but yeah. The amount of free cash flow generated over the next two to three years is going to be significant. So how do you. How do you look at that I would say that nothing has changed than it was two years ago. When we started on this.
David Borker: I would say that nothing has changed than it was two years ago when we started down this track that, you know, internally, that I say, somebody's going to love us. Wall Street loves us. So, we're going to love ourselves, and we've loved ourselves to the tune of buying back a bunch of stock and doing acquisitions. So, whichever avenue opens up for us is the way we're going to go. The math is going to be with the math is going to be whatever it's going to be, and I'm happy with either one of those, and we can continue to do acquisitions, and a great acquisition comes.
Speaker Change: Track.
Speaker Change: That.
Speaker Change: Entirely that I said somebody is going to allow that wall Street law, we're going to love, our say often wave loved our staff to the tune of buying back a bunch of stock.
Speaker Change: And do an acquisition so it really whichever Avenue opens up for US is the way we're going to go from <unk> body with a mask on my whatever it is going to be and I'm happy with either one of those and we can continue to do acquisitions and a great acquisition comes we're going to do it.
David Borker: We're going to do it. But if it doesn't, then you're going to expect us to do something with our cash, and we all know what we've done in the past. So, whichever way opens up is the way, Michael, that I want us to go.
Speaker Change: But if it doesn't then you can expect us to do something with our cash and we all know what we've done in the past, so which ever way opens up is the way Mike.
Speaker Change: Michael that I want us to go yes, Mike I would echo David's thought to me I'm pretty happy with our capital allocation. The playbook again like I told Jeff is working.
David Borker: Yeah, Mike. I would echo David's thoughts. I mean, I'm pretty happy with our capital allocation of the playbook. Again, like I told Jeff, it's working. You know, we've had three acquisitions. We significantly restructured that our business in 2020. A lot of significant changes, and I still don't think investors maybe have gotten that message yet. The longer part of our history would suggest that we're a very, very volatile company, and I get kind of frustrated when people try to look at 10-year, 15-year averages of how we've performed. I might don't pay attention to that because it's a very, very different structural company, much more efficient, much more resilient, much more insulated, poised for growth, and I think that we're going to just keep focusing on the things that we can control and try to be the best that we can be at those things.
Speaker Change: We've had three acquisitions, we significantly restructured that our business in 2020.
Speaker Change: A lot of significant changes and I still don't think investors, maybe have gotten that message yet.
Speaker Change: The longer part of our history would suggest that we're very very volatile company and I get kind of frustrated when people try to look at 10 year 15 year averages of how we've performed I'm I don't pay attention to that because it's a very very different structural company much more efficient much more resilient much more insulated poised for growth.
Speaker Change: And.
Speaker Change: I think that you know we're going to just keep focusing on the things that we can control and be try to be the best that we can be at those things execute at a high level continue where their capital allocation playbook and I think you're going to see more of the same of what you've seen over the last three or four years.
David Borker: Executed a high level, continue where their capital allocation played book and I think you're going to see more of the same of what you've seen over the last three or four years. We're in a great position. I mean, we mentioned some headwinds in the release, but I would say that, you know, we've had headwinds throughout the last two and a half years that we've overcome, and this one just kind of came at the tail end of what we thought was going to be a fantastic quarter. And it is a good quarter, but you know, they come and go, and I think there's more blue sky ahead of us than there are clouds.
Speaker Change: We're in a great position I mean, we.
Speaker Change: We mentioned some headwinds in the release, but I would say that you know we've had headwinds throughout the last two and a half years that we've overcome and this one just kind of came at the tail end of.
Speaker Change: What we thought was going to be a fantastic quarter and it is a good quarter, but but they come and go and I think theres more blue Sky ahead of US and then there are clouds.
Michael Vermut: Edge. Excellent. One of the last things, you know, in a lot of your releases you discuss, you know, the model now is much more consistent and you may not have as much upside leverage as others; you'll have still dramatic upside leverage. That's on an operating income level, I assume, because when you look at the capital structure, I think you've looked down to three million shares over the last four years, something like that. So the bottom line, the bottom line, there will be dramatic leverage, right? I'm saying that you've changed that capital structure forever. So it's really the leverage on the up-income line, not the bottom line.
Speaker Change: Excellent and then one of the last thing.
Speaker Change: A lot of your releases you discuss it with them.
Speaker Change: Now is much more consistent.
Speaker Change: May not have as much upside leverage as others, you'll have still dramatic upside leverage.
Speaker Change: That's on the operating income level I assume because when you look at the capital structure I think you've retired it took down two 3 million shares over the last four years something like that so.
Speaker Change: The bottom line, there will be dramatic leverage right I'm, saying it that.
Speaker Change: You've changed that capital structure, if I ever so it's really the leverage on the op income line not the bottom line.
David Borker: That's right, that's right. And so I'm absolutely excited about it. I think that, you know, one of the things we have to remind investors, again, going back, it's a different company. We were so volatile on the past, and I've read some releases before where there still be a mention. And there's still not a full conviction that we are, in fact, a different company. And we are more contractual; we are more profitable; we're more stable. But we've pulled the share count down, or, you know, has materially improved in a trough market. I mean, the fundamentals of our business, the team is solid.
That's right that's right.
And so I'm absolutely excited about it I think that one of the things we have to remind investors again going back it's a different company.
Speaker Change: We were so volatile in the past and I've read some releases before were.
Speaker Change: Still be had mentioned and.
Speaker Change: There is still not at full can like conviction that we are in fact, a different company than we.
Speaker Change: We are more contractual we are more profitable we're more stable but.
Speaker Change: We've pulled the share count down or or you know has materially improved in a trough market I mean, the fundamentals of our business that team is solid I'll pull on the rope in the same directions, we're going to continue down the path that we've been on there's no reason for us to deviate and so I think that there is you know like I said every indicator.
David Borker: I'll pull in the rope in the same directions. We're going to continue down the path that we've been on. There's no reason for us to deviate. And so I think that there's, you know, like I said, every indicator gives me the confidence that makes me believe that we're going to continue to be successful over the longer term.
Speaker Change: It gives me the confidence that bullet to makes me believe that we're going to continue to be successful over the longer term.
Michael Vermut: Excellent. All right. Congrats, guys. Eventually, we'll be recognized. So congrats. Thanks, Mike.
Speaker Change: Excellent all right congrats guys that eventually will be recognized so congrats.
Speaker Change: Thanks, Mike.
Dan Moore: Our next question comes from Dan Moore from Scopus. Please go ahead, Dan. Hey guys, congratulations again on a great quarter to go, everybody else's comments. Thank you. How do you have a few? Yeah, my pleasure.
Speaker Change: Our next question comes from Dan Moore from scope. Please go ahead Dan.
Dan Moore: Hey, guys. Congratulations again on a great quarter to echo everybody else's comments.
Speaker Change: Thank you Dan.
Dan Moore: Yeah, My pleasure I had a couple of questions I wanted to run by you and kind of the spirit of.
Dan Moore: I had a couple of questions I wanted to run by you, and kind of the spirit of some questions that have already been asked, dovetailing and on kind of a longer term framework. This is about as long and as nasty a downturn as I've ever seen. And I've been doing this a while. It seems to me like we have a pretty good idea of where trough earnings reside. So what I'd like to do is just spend a minute or two on what the next cycle upcycle can look like for you. And to add some context, maybe trip, you mentioned, you know, a few percentage points of rate can go a long way in terms of earnings growth and leverage.
Speaker Change: Some questions that have already been asked dovetailing in on kind of a longer term framework.
Speaker Change: This is about as long.
Speaker Change: And as nasty, a downturn as I've ever seen.
Speaker Change: And I've been doing this a while.
Speaker Change: Seems to me like we have a pretty good idea of where trough earnings reside so what I'd like to do is just spend a minute or two on what the next cycle Upcycle can look like for you and.
Speaker Change: And.
Speaker Change: To add some context, maybe trip you mentioned you know a few percentage points of rate can go a long way in terms of.
Speaker Change: Earnings growth and leverage.
David Borker: It seems to me that this next cycle, it's not unreasonable to assume that we could see margins improved by 500 basis points, but that we're not going to see because of the stability of the model, the type of volatility, i.e. a 300 basis point or 300 percent improvement in profits like we used to see 10 and 15 years ago. With that kind of opportunity for cash flow improves, you're going to have a lot of opportunity to redeploy capital both in terms of the business as well as share repurchases.
Speaker Change: It seems to me that this next cycle.
Speaker Change: It's not unreasonable to assume that we could see.
Speaker Change: Margins improved by 500 basis points, but that we're not going to see because of the stability of the model all.
Speaker Change: The type of volatility I E 300 basis point improvement.
Speaker Change: 300 <unk>.
Speaker Change: Improvement in profits.
Speaker Change: We used to see 10 and 15 years ago.
Speaker Change: With that.
Speaker Change: That kind of odd.
Speaker Change: Opportunity.
Speaker Change: Free cash flow improves youre going to have a lot of opportunity to redeploy capital both in terms of the business as well as share repurchases can you speak to just for a few minutes.
David Borker: because can you speak to, just for a few minutes, the glide path that exists to take rates higher in an upmarket, improve margins, and what you think the earnings power of the businesses today relative to what it's been in the past. Thank you. Yeah, yeah, I'd be happy to talk to you that, I mean, you know, we've, if you look at our adjusted earnings last, last period or last year, I think we came at $4.16 and I think if you look at how we've performed this year without, I'll use the number that somebody else, maybe it was Jeff or Jason mentioned if we come in somewhere around $4, not predicting anything, I'm just using his number this year, I think we've hung in there very, very well from an earnings perspective and when I think about the cost, I think, you know, David and I were just walking through this, if you factor in a two percent rate increase to our, you know, our earnings, it winds up being on 280 mile, 280 million miles, it's, I mean, it's $6 million of operating income, we've taken on a lot of costs that a lot of much of that is going to fall down to the bottom line and so it's, you know, that $6 million translated is over 30 cents, I think of EPS and I also thinking in upright market, you're going to see, tell, get a little bit stronger, they've kind of felt like they've bottomed out right now, they've got a lot of debt and some good equipment to employ and deploy, not, you know, doing as strong because of the higher interest rates and, but if you look at the longer term trajectory on tell, they've done an outstanding job of growing their business.
Speaker Change: The the glide path that exists.
Speaker Change: To take rates higher in an upmarket improve margins and what you think the earnings power of the business is today relative to what it's been in the past. Thank you.
Speaker Change: Yeah, Yeah, I'd be happy to talk to that I mean.
Speaker Change: We've.
Speaker Change: If we look at our adjusted earnings last last period or last year. I think we came at $4 16 sense and I think if you look at how we performed this year without I'll use the number that somehow.
Speaker Change: Somebody else may be it is Jeff for Jason.
Speaker Change: And if we come in somewhere around $4.
I'm not predicting anything I'm just using his number this.
Speaker Change: This year I think we've hung in there very very well from an earnings perspective, and when I think about the cost I think you know David and I were just walking through this if you factor in a 2% rate increase to R. R.
Speaker Change: Our earnings it winds up being on 280 mile 280 million miles. It's I mean, it's $6 million of operating income we've taken on a lot of costs that are lot much of that is going to fall down to the bottom line and so.
Speaker Change: It's you know that 6 million translated as over 30 cents I think of EPS and I also think in an upright market youre going to see <unk> get a little bit stronger.
Speaker Change: They've kind of felt like they've bottomed out right now they've got a lot of debt and some good equipment to deploy and deploy them not doing as strong because of the higher interest rates and.
Speaker Change: But if you look at the longer term trajectory on tail they've done an outstanding job of growing their business. They have gone down over this down turn but I have every expectation that you'll see them continue to.
David Borker: They have gone down over this downturn, but I have every expectation that you'll see them continue to make progress over the long term and grow in their business. So I really don't want to put any numbers from an earnings perspective out there, but, you know, we have goals to. The biggest wildcard in our segment and all of four of our segments that are managed rate business because you can look back in 21 and 22 and see what it did, and I don't think the sub, you know, 90 OR is realistic for a managed rate segment, certainly not long term.
Speaker Change: Make progress over the long term and growing their business. So I really don't want to put any numbers from an earnings perspective out there, but you know we have goals to the biggest wildcard in our segment and in all four of our segments that are managed freight business. Because you can look back in 'twenty, one and 'twenty, two and see what it did and I don't think a sub.
Speaker Change: You know 90 or is realistic for our managed freight segment.
Speaker Change: Certainly not long term. So you know our focus is going to be growing the things that we control focusing on profitable business and our customers that we can add value to and I think you'll see profitability grow.
David Borker: So, you know, our focus is going to be growing the things that we control, focusing on profitable business and customers that we can add value to, and I think you'll see profitability grow or improve and are dedicated in our expedited segments. And we do, we have a very good mix of customers today and that we're happy with and partner with, and I think that as we grow, we're going to look to grow with customers that we continue to add value to, and they provide a sufficient return to us as well. So there's a lot of things in there moving pieces, but I think there's, you know, significant upside.
Speaker Change: Grow or improve and our dedicated in our expedited segments and we do we have a very good mix of customers today.
Speaker Change: Today, and that we're happy with and partner with and I think that as we grow we're going to look to grow with customers that we continue to add value to and they provide.
Speaker Change: A sufficient return to us as well so there's a lot of things in there are moving pieces, but I think there's.
Dan Moore: You may not see what we earned in 21, or I guess 22 was kind of our calf year, but there's definitely upside to the earnings, I would say. That answer your question, Dan.
Speaker Change: Significant upside you may not see what what we earned in 'twenty, one or I guess 22 was kind of our caf ear, but.
Speaker Change: There's definitely upside to the earnings I would say.
Speaker Change: That answer your question Dan.
Dan Moore: Yeah, no, I just, you know, it strikes me that the whole industry is, is, you know, suffering from significantly depressed rates and that we could see rates move, you know, five to 10% higher over the course of the next couple of years, and it's the kind of leverage that you, you, you would realize from something like that wouldn't, you know, candidly would, would result in close to a doubling of earnings. At a 10% type of improvement. So, yeah, I, I, I'd like to like to maybe talk with you some more about that offline and just get a better sense of how I should be thinking about some of these businesses. But that being said, congratulations again on a great quarter; a lot of heavy lifting over the last couple of years certainly paid off, and I look forward to following up again here after a few years.
Dan Moore: Yeah, No I just you.
Dan Moore: It strikes me that the whole industry is suffering.
Dan Moore: Suffering from significantly depressed rates and that we could see rates move.
Dan Moore: Five year to 10% higher over the course of the next.
Dan Moore: <unk> of years and it's.
Dan Moore: The kind of leverage that you you you would realize from something like that.
Dan Moore: Candidly would would result in close to a doubling of earnings edits.
Dan Moore: At a 10% type of improvement so.
Speaker Change: Yeah I I.
Speaker Change: I'd like to like to maybe talk with you more about that offline and just get a better sense of how I should be thinking about some of these businesses, but that being said congratulations again on a great quarter well a lot of a lot of heavy lifting over the last couple of years.
Speaker Change: Certainly paid off and look forward to.
Speaker Change: Pulling up again here after after December quarter. Thank you.
Unknown Executive: Thank you.
Speaker Change: Thanks.
Unknown Executive: And this time there are no further questions.
Speaker Change: Yes.
Speaker Change: And this time there are no further questions I'd like to turn the call back over to Trevor for closing remarks.
Trip Grant: I like to turn the call back over to for closing remarks. All right, everyone, thank you for joining us today, and thank you for your interest in Covenant Logistics. We look forward to speaking with you in the fourth quarter or in July for our January for our fourth quarter results.
Trevor: Alright, everyone. Thank you for joining us today and thank you for your interest in Covenant logistics.
Trevor: We look forward to speaking with you in the fourth quarter or in July for our January for our fourth quarter results have a good day.
Unknown Executive: Have a good day.
Unknown Executive: This concludes today's conference call.
This concludes today's conference call. Thank you for attending.
Unknown Executive: Thank you for attending. The host has ended this call.
Speaker Change: The host has ended this call goodbye.
Unknown Executive: Goodbye.