Daseke, Inc. (NASDAQ:DSKE) Q4 2022 Earnings Call Transcript

Daseke, Inc. (NASDAQ:DSKE) Q4 2022 Earnings Call Transcript February 6, 2023

Operator: Good morning everyone and thank you for joining today’s conference call to discuss Daseke’s Financial Results for the Fourth Quarter and Full Year Ended December 31, 2022. With us today are Jonathan Shepko, CEO and Board member; Aaron Coley, EVP and CFO; Adrianne Griffin, VP of Investor Relations and Treasurer; and Traci Graham, VP of FP&A and Business Analytics. After their prepared remarks, the management team will take your questions. As a reminder, you may now download the 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 Daseke’s website. I would like to turn the call over to Adrianne Griffin, who will read the Company’s Safe Harbor Statement that provides important cautions regarding forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Adrianne, please go ahead.

Adrianne D. Griffin: Thank you Michelle and good morning everyone. Please turn to Slide 2 for a review of our Safe Harbor and non-GAAP statements. Today’s presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Projected financial information, including our guidance outlook, are forward-looking statements. Forward-looking statements, including those with respect to revenues, earnings, performance, strategies, prospects and other aspects of Daseke’s business are based on management’s current estimates, projections, and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.

I would also like to highlight our decision to update our reporting segment results. Previously the company had disclosed a corporate segment which is not an operating segment and included acquisition transaction expenses, corporate salaries, interest expense, and other corporate administrative expenses and intersegment eliminations. 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 and included in our materials aligns with the new allocations and eliminations. I encourage you to read our filings with the Securities and Exchange Commission for a discussion of the risks that can affect our business and 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 the U.S. generally accepted accounting principles or GAAP, including and not limited to adjusted EBITDA, adjusted operating ratio, adjusted operating income, adjusted net income or loss, free cash flow and net debt. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the appendix of the investor presentation and press release issued this morning, both of which are available in the Investors tab of the Daseke website, www.daseke.com.

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 Aaron who will provide a financial review of the fourth quarter and full year 2022. 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.

Jonathan Shepko: Thank you. Good morning, everyone. I’d like to start the call today by welcoming Adrianne to the team. She joins us as the Vice President of Investor Relations and Treasurer. And we are pleased to have her focus on further elevating our IR and Treasury functions. I would also like to thank each of the Daseke team members and especially acknowledge the disciplined commitment of our professional driver community. It’s due to the collective effort of Team Daseke 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 3, whether you are a long time holder of Daseke or new to our story, given the amount of change we have successfully affected over the last years, we thought it made sense to provide 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 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 since 2018, where an EBITDA was approximately $60 million less at 174.3 million. This is a peak to peak improvement of nearly 35% and was generated by a 2022 fleet that was 16% leaner than our 2018 fleet before we began to work on an issue to prove our asset utilization. With that as your backdrop, I’d like to move this slide forward where I will share some of our 2022 accomplishments that set the stage for our 2023 outlook.

In 2022 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 — the perceived overhang on our stock given the percentage of the company the founders ownership represented. We affirmed our ongoing commitment to enhance the strength of our balance sheet through accelerated deleveraging. We have been vocal about the resiliency of our operating model one that is unquestionably different from any other publicly traded transportation and logistics peer. A blend of 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 5, I’d like to discuss our fourth quarter 2022 share repurchases. On September 30th, we announced the $40 million share repurchase plan, alternately purchasing over 803,000 shares under this plan at a weighted average price of $6.05. Before starting this plan with the announcement of a founder share repurchase on November 14th. We subsequently closed on the founder share repurchase repurchasing all shares then held by Daseke’s 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 preferred already is our sole option in whole or in part for 67.6 million plus any accrued and unpaid dividend. If Series B preferred are not convertible and have no affirmative or native comments. As is outlined in 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 uplifts for our shareholders in the coming years, providing exponential growth opportunity as our consistent performance and strategic execution gives rise to a more aptly valued share price. And while the allocation of capital and 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 walkthrough of our fourth quarter and full year. Aaron.

Aaron Coley: Thank you, Jonathan and good morning everyone. I would like to start with Slide 6, 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 3.5% or 13.9 million compared to revenue of 394.3 million in the fourth quarter of 2021. This included demand strength on high security cargo and the agriculture end markets, which were 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, our 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 realized a 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 7. Specialized solutions revenues were 242.9 million, up 10.9% versus the prior year as our team performed very well in 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, an improvement over the prior year as our teams capitalized on demand growth with our asset-light fleet mix delivering a 2% increase in company miles. Specialized functions adjusted operating ratio improved 110 basis points to 91.8%. All adjusted EBITDA improved 19.1% to 32.4 million. Productivity in the quarter was impacted by shorter length of haul loads in high security cargo and a soft decline in total miles per tractor per day that 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 8, we outlined Flatbed Solutions segment results.

Photo by Yassine Khalfalli on Unsplash

Despite the first year-over-year decrease in flatbed market rates since the pandemic, Daseke was still able to garner a premium rate compared to the market. As shown in the top right chart on the slide, declining rates and cooling demand entered the steel end market, partially offset demand growth in manufacturing, construction, and the agriculture end markets resulted in a revenue decline of 5.7% to 165.3 million. The use of our asset right model in this segment enabled us to focus on company asset utilization which traded lower loading, higher margin freight on the company assets from brokerage revenues which decreased. Lower revenue and cost inflation, primarily in operations and maintenance resulted in this segments 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% lower than the prior year period.

Now moving to Slide 9, 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 the steel end market. We also achieved increases of 10.5% in the rate per mile and 5.4% in revenue per tractor over 2021. 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 non-cash impairment expense resulting from integration and elimination of trade names, 3.8 million in acquisition related expenses, and 2.1 million restructuring expenses as compared to fiscal year 2021.

Adjusting for all of these expenses, income from operations would have exceeded 2021. The adjusted operating ratio was 91.6% in 2022, an increase from the 90.9% 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 rate to higher margin company assets and redirecting assets to the most profitable lines. The Daseke team delivered commercial execution in our flexible asset light strategy to deliver value to our shareholders and we set an adjusted EBITDA record of 234.9 million suppressing the previous record of 223.1 million set last year. We’re very proud of the entire Daseke team for achieving this record as 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 $1 billion and accounted for nearly 65% of the company’s total revenue growth. This success was based on strong demand in high security cargo, agriculture, manufacturing, and construction end markets. Robust commercial execution using all aspects of our asset light strategy to deliver profitable growth and contributions from tuck in acquisition modestly offset by demanding degradation in the renewable energy vertical. We’re pleased to report 12.1% increase in the rate per mile and an 8.4% increase in revenue per tractor versus full year 2021, essentially flat company miles compared to 2021. Furthermore, adjusted operating ratio improved by 30 basis points to 90.8 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 year was predicated on their ability to capture attractive rate in strong end markets and from softer end markets and pivoting from softer end markets to company owned assets which when circumstances necessitated. Segment revenue was up 11.4% year-over-year to 769 million as gains primarily in construction, manufacturing, and agriculture end markets outpaced the decline in the steel end market. Compared to 2021 second rate per mile increased 7.5% though total miles declined to 8.5% and overall revenue per tractor grew 1.2%. Adjusted OR of 92.7% worsened from 90.8% 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 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. 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 $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 have been in excess of 325 million. On Slide 13, we provide a strategic update on our balance sheet. With another yet record year of our results we have established a trend of improved performance. The change our business has taken undertaking 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’re 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 and 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’re proactively evaluating options to expedite our progress towards this goal. We believe this commitment to fortifying our balance sheet provides another example of our focus to de-risk the business and deliver value to our shareholders. I’ll now turn the call back to Jonathan for an update on our 2023 outlook. Jonathan.

Jonathan Shepko: Thank you, Aaron. 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 in operational productivity, improvements in driver availability which should allow for the seeding 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 end 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 acknowledge 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 2022 to print.

In sizing our 2023 net capital expenditures outlook, we view our reinvestment in the fleet as a strategic opportunity, one that positions Daseke to maintain the age of our fleet, drive margin improvement, continue to attract and retain drivers, and preserve our favored standing with our valued OEM partners. Our expectation is for 145 million to 155 million in 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 we will turn the call back to the operator and take your questions.

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Q&A Session

Operator: Thank you. . And our first question comes from the line of Bert Subin with Stifel. Your line is open. Please go ahead.

Bert Subin: Hey, good morning and thanks for the question.

Adrianne D. Griffin: Good morning.

Jonathan Shepko: Good morning Bert.

Bert Subin: Can you maybe give us a little more of an update on how you’re 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 related to the cost program versus I guess, your expectation that specialized will stay strong in 2023?

Jonathan Shepko: Yeah, sure I can address that and let Aaron or Adrianne chime in accordingly. So we — look, we’ve said this in the last few calls, we do still believe 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 in kind of incremental value. That’s going to start to really taper in through the year. You’re going to start to see more of that by midyear. So we do — look, we do think probably on a 2023 basis you’re taking a snapshot of those transformational activities. I’d probably say likely kind of on average plus or minus 15, 15 to 17 of that in 2023. The other kind of components of our thesis this year in 2023, as you mentioned, outperformance — continued outperformance in specialized, we do think that Flatbed although a little bit softer than Q1 comps 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 healthy again. So we do feel generally 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 diversification of our end markets. You acknowledged our specialized end markets which continue to outperform. We also will probably have another 100 to 150 trucks on the road this year. So we are kind of net-net be growing our fleet about 100 trucks. I don’t think you’ll 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 preparing the new equipment, we’re reseeding those trucks. So I think we’ll start to see the full effect of that really in our on peak season in Q2 and Q3 and then certainly in Q4.

We also expect, as Aaron mentioned in his discussion, we do expect increased productivity. We had some end markets on the specialized side. We also had some headwinds on the flatbed side that kept our miles per truck per day this year around kind of 380. We’re forecasting something in the low 400. So kind of an 8% to 10% improvement in productivity on miles per truck. And I think that look, 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 trucks turned faster. We’re not laying over trucks. We’re making sure that we’re not being too particular about the loads that we take, really looking for that unicorn long haul, high rate per mile. But understanding and appreciating trucking is about velocity.

So getting those trucks out, keeping them out longer. So being willing, a little bit more willing to take a more moderated rate per mile load if it has kind of length of haul with it. So we’re really thinking 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 in insurance that we, knock on wood, that we hope we don’t see. So that also provides a little bit of a downside support in keeping EBITDA flat this year.

Bert Subin: So maybe just a follow-up on that. We don’t have great data for 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 — would have been the driver of that and the only reason I ask is doing 235 again or something in that range would clearly be a good outcome. But I am sure there is some assessment of what’s the potential downside. It sounds like the cost program is pretty solid and that should be savings from what you’re seeing today. Specialized is resilient and there’s some strength in particular end markets. And so then it comes down to what happens in the rate side and what happens to productivity. If we’re looking at this in 12 months and you didn’t hit those marks and it was a little worse, what are the things that are maybe a little more exposed or just, what’s your assessment of the risk?

Jonathan Shepko: Yeah, I mean I think you hit it, it comes down to rate. I mean, I think that’s at the end of the day, for all of us in this industry, I mean rate is the biggest thing out of our control that will kind of make or break things. Again, we have a lot of these we mentioned self-help business improvement initiatives that we’re going to be working on that’ll offset that. We also had, we talked about it 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 few weeks of 2022 and certainly strong into 2023. So far we’ve seen a marked shift in our ability to seek company trucks which have a much better margin profile.

And I think that if the rates continue to stay moderated this year, that trend will only continue. I think a 200 or something certainly below 200 is a pretty draconian assumption or target to suggest we might hit to. I think that the Daseke business model today is much stronger than it was in the last downturn, the last trough. And so I think that we are fundamentally — we fundamentally have just a different range of earning profile, operating profile in 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’s kind of talked about this, but we have — these are typically 36 to 48 month cycles and we had 18 months or so, 18 to 20 months of expansion, really 2021 and into 2022. And then for the better part of 2022 at least, the spot rate since January has been slowly falling away, we started to see some shakiness in our contract rates in July or August of this year and kind of a more pronounced leg down in our contract rates.

Again, we’re 80% to 85% contract rates, but in October we took a leg down on contract rates. And as we look at spot rates today, those are certainly starting to firm up and our contract rates are starting to firm up as well. So I think that we can debate about whether or not we’re at the bottom. But I think when you look at the margins that are more commodity end markets are generating, when you look at the demand, sorry, the supply destruction, the capacity destruction that’s going on today in the industry, I mean, I’ve read something that said net relocations of carrier authorities are 6000 to 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 pulling a lot of those things together, I just think the rate environment is at the bottom.

We’ve never had a Q2 or Q3 where we haven’t benefited with 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 back to 80%, 90% of peak rates, prerecession peak rates within 12 months. So I think that people underestimate, I can’t speak for Flatbed, but I think people underestimate that the resiliency of the industry, particularly the diversification of our model, and that its 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.

There’s a lot of other things that we have going for us this year, as I mentioned. But I do think that 2024 we are expecting 2024 will be at 2022 peak rates. And really, if you look at cycles and assume that you get some repetition in cycles to predict kind of future performance, by 2025 we’ll have another massive peak. So again, we’re pretty bullish on things and we think that 2023 will be the low point if you had to call it.

Aaron Coley: Sorry Bert, I would just add to that, look, we can on a forward-looking statements we can kind of talk about that. But just to reiterate, 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 and when we talk about 200, it’s a nice theory, but we believe the peak trough frame put in our current budget that we’re putting forth is a reasonable assumption that we can deliver.

Bert Subin: Got it. That’s super helpful. Maybe just my last question and clarification, how should we think about brokerage, Jonathan, I know you made some comments saying you just shift from some of the overflow to using your own assets and that’s a higher margin opportunity. But if we think about it from a modeling standpoint, can you expect Flatbed I guess, that brokerage there sees double-digit declines, and 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 53 million as the year starts out? Thanks again for the question.

Jonathan Shepko: Yeah, so brokerage we have going down 6% or 7% this year. And you acknowledged it and we saw it at the very end of Q4. And we see it so far into January, we’re shifting those loads that would have otherwise been taken by third party carriers onto our company trucks, which is, again, the model that we’ve talked about. It’s a model that a number of our peers employ. So it’s really that kind of control valve, if you will. I would say, though, that what we’ve seen at the end of the year and going into 2023 so far is that while brokerage is down, the margin on our brokerage is up. So it’s actually performing reasonably well. The share count, let me get you the exact share count that we’re working off of now, it’s 47 million Bert.

Bert Subin: Got it. Okay, great. Well, thanks again for all the time. I’ll pass it over.

Jonathan Shepko: Absolutely.

Operator: 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.

Jason Seidl: Hey, thank you operator. Hey, Jonathan and team how is everyone.

Jonathan Shepko: Hey, how are you?

Jason Seidl: Hanging in. It’s still earning season for us, but I wanted to ask a couple on you guys here. Can you put a little more clarity on the productivity decline in 1Q because that was a big step down, I know you sort of mentioned it, was that a mixed shift towards some high security cargo stuff that was much shorter than hauls?

Jonathan Shepko: In Q1 of 2022 you’re saying there was

Jason Seidl: Most recent quarter here?

Jonathan Shepko: Oh yeah, okay. That’s right. I mean, look, a little bit of it was on the high security cargo side, those were shorter length of hauls on the specialized side, that weighed on some of the kind of average productivity metrics. On the Flatbed side, we lost some productivity. And again, if you remember, we really shifted more to asset life, LP owner operator moving into 2022. And so we saw some of that fall away. Either owner operators parking their trucks, going, I’ve done well for this year and I’m taking myself out of the market right now. Or you had LP drivers that weren’t making the same amount of money because the rate environment changed and they’re reevaluating whether or not they exit the industry or ultimately shift over to being a company driver.

So there’s some movement around there which we’ll figure out where those drivers land probably in Q1 of this year. Look, you also had just the time of the year, you had two holidays in Q4, and you’re having to route a lot of those drivers back home. So just by virtue of that, you lose productivity. So hopefully that answers your question.

Aaron Coley: We also took

Jason Seidl: No, it does.

Aaron Coley: 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 it as well. So we would expect that to start to rebound in Q1. We’ve been pretty successful with our recruiting classes in January.

Jason Seidl: And I would imagine you’ve already probably seen some improvement in that just by some of the seasonality that you mentioned?

Aaron Coley: Correct.

Jason Seidl: Okay, next question. Jonathan, I think you talked about an expected rebound and to sort of be at peak rates back to peak 2022 rates in 2024. And I think you said you expect like another big year for trucking if you will in 2025, what sort of behind those numbers for you guys when you make those forecasts out?

Jonathan Shepko: Yeah, I think we have looked at a number of the past cycles. And as I mentioned to Bert, I mean, we look at these and look at them as really three to four year cycles. And, if we look at — if we try to overlay the cycle that we’re currently in and a lot of different things floating around. But, we think it generally is going to track what you saw in 2015, kind of the industrial recession, right. You had about 18 months, it’s kind of uplift 18 to 24 months of uplift, leaning at peak in kind of summer of 2015 again, and that was on the heels of the trough where you had back in 2011, you had everybody worried about the debt ceiling, you had to downgrade U.S. debt, you had the kind of the sovereign debt issues around the world, quantitative easing all that and people got nervous and things tanked and they quickly came back, and it ultimately peaked in 2015.

And you had to kind of 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 the next winter, so going into 2016, you kind of filled out some more into that 2015, that summer 2015 peak to 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 cycle that we’ve seen that exceeded that was the Great Recession, where it was closer to 20% to 22%. But again, 80% to 90% of those rates you got back within 12 months. So we look at that and go, okay, we think that the kind of characteristics and the drivers of the cycle are 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 month fall down, you do still have seasonality, you kind of peak in winter, which for us will probably be winter of 2023, and then you’ll have kind of a firming up to where by, by early to mid-2024, you will be at 2022 peaks again, and you’ll have a runway, you’ll have going to have 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 that’s our thesis, that could obviously change depending on what the Fed does. I think there’s a lot of noise in data when you look through data. Cautiously optimistic that they don’t overtighten. A little bit concerned about some of the takeaways with this last jobs report and how the Fed Reserve interprets those. And again, you had 21 million jobs lost as part of the kind of COVID effects of 15% of our workforce is taken out. And if you look at employment trends, adjusted for population growth, we’re still 3 million to 4 million jobs short, where we would have otherwise been had that employment trends 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 over tighten, that could cause some issues. But I think you go back to, okay, we’ve got the self-help initiatives, we’ve got the diversified end market exposure, we’ve got some other things going for us, seeding more company drivers shifting away from LP, lower margin LP owner operator drivers. So we’re pretty bullish on things to come.

Jason Seidl: 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 in November, but it seems like it’s trending up now. Can you give us some numbers behind them?

Jonathan Shepko: Yeah, I don’t have numbers right now to kind of provide but I think that 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 seeing the spot market fall since January of 2022 and they’re looking at their contracted rates, you can’t ignore that. And, so what we had is October, November, there were some softening, as I mentioned in July. And, I think what you’ve seen with a lot of these shippers is they’ve really recalibrated their RFQ process and their RFQ approach. And so a lot of these guys now are going, you know what we’re going to go to our ship, we’re going to go to our carriers, on the — I’m speaking on the Flatbed side.

We’re going to go to them before they’re softer, kind of low points in the year when they’re really focused on getting freight, really focused on visibility going into Q4 then in Q1 and we’re going to ask him to submit rates and submit pricing for that. They’re going to be hungrier because they want that visibility going into softer part of the year. And then they’ve also added an RFQ cycle in April. So right in front of our peak season, right. So they’ve kind of hit you and said, look 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 or Q3 is going to be for you, we also want you to put to kind of bid the freight. So I think that’s part of what you saw. So it said really in keeping with October, November laid down where a lot of those guys have come out before our 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 push if that’s what you saw manifest and a little bit of a leg down for us in October on contracted rates.

Jason Seidl: Appreciate all that and last one, and then I’ll turn it over to somebody else here. Obviously, you mentioned that debt repurchase is sort of top of the list here. Can you talk about what are you targeting first, is it the 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?

Jonathan Shepko: Yeah. So from a debt standpoint, I think we’re looking at debt pretty holistically. We had — there was a 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 and one said it should be treated as equity. We’re focused on really how our investors, our shareholders evaluate that new security. But we’re looking at that holistically and it’s going to be probably a meaningful pay down when we ultimately make it. We really want to — again, we really want to start to approach in a quick way, structure approach that one and half to two terms of gross leverage target that we have now, it’s a long term target.

But we think that there’s line of sight in doing that within the next 24 months, given 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 rolling stock dispositions that we can clean up, we’ve got some real estate assets and duplicative terminals, yards, things like that we looked at cleaning up really to expedite the pay down of our debt. But on the preferred side, we think 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 the pricing on our term loan is about 8.5%, right. So 2022 is 4.75 but with all the rate hikes, we’re at about 8.5%.

So the Series A, I’m sorry, the Series B tranche one that carry 7%, good, very friendly paper, good coupon, good dividend relative to our current interest payment on our term loan debt. So that’ll like to stay in. But, 13% is a bit onerous, and we’re looking for ways to de lever 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.

Jason Seidl: That makes sense. And in terms of the acquisition market, after the debt paid down?

Jonathan Shepko: Yeah, the acquisition market is still interesting. It’s been a little bit slower because of this bid ask spread that heavily pops up when rates move too quickly up or down. We do have one acquisition under non-binding LOI. And we’re cautiously optimistic that we’ll have that probably closed, late February, early March. It’s going to look a lot like the last acquisition we did, a little bit bigger but from kind of a value standpoint, still immediately accretive, still a great trend, still a great multiple that we’re paying and immediately accretive. We also have another few acquisitions that were close to getting under LOI. So 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 target leverage profile. We might intermittently 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 have a meaningful pay down using cash on hand. We think that the remaining cash on hand 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 transformations.

Jason Seidl: Jonathan, Aaron, and team, appreciate the time as always.

Aaron Coley: Thank you.

Operator: Thank you. . Our next question comes from the line of Greg Gibas with Northland Capital Markets. Your line is open. Please go ahead.

Greg Gibas: Hi, good morning, Jonathan and Aaron, thanks for taking the questions. . Just wondering maybe kind of high level how it’s changed relative to maybe your sentiments on kind of the Q3 earnings call and maybe what factor has changed the most?

Jonathan Shepko: Yeah look, I mean, I think it’s a ray, we saw a little bit more softening in specifically Flatbed than we did before. I think we said we’d be, modestly up from an EBITDA standpoint, now we’re saying flat to modestly up. So I think that within a — if you had to quantify within a couple of percent probably of where we may have €œguided€, on the last call. So it’s not meaningfully different but, Flatbed has changed, I think we’ve highlighted some of the mitigates to that. I’m still optimistic, we’re going to have a good year. But I think that would be the delta, where we kind of stepped back just a little bit on what we talked about this last quarter.

Greg Gibas: Sure. And then I guess, with regard to your comments on commitment to accelerated deleveraging in 2023, is that kind of reflective of 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?

Jonathan Shepko: No, I mean, I think we’ve been pretty vocal 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 Mr. Daseke, which we thought was very opportunistic, and very attractive. And so we kind of staged that as priority one that when an opportunity came about, we had previously announced the $40 million share repurchase. So, directionally we feel like we ended up in a good spot there, but that’s always been one of our stated priorities. I think that when you look through — when you look through things now, you’ve absolutely — you 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 of 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 and go what do we need to do to get our shareholders more comfortable that Daseke is going to be able to weather storms, and to take certain things off the table. Certain, I think, adverse things off the table that disadvantaged us 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 share repurchase, so doing an open market share repurchase now doesn’t make sense, and it wouldn’t move the needle. And, so now our priority is really repaying debt. And as we talked to Jason about, we feel like even net have a pretty meaningful pay down in debt.

We can fund 2023 — the 2023 M&A pipeline that we have in front of us with incremental debt. Again, think about incremental debt as, look incremental debt, but still not funding acquisitions with more than that, one and a half to two terms of leverage and with the rest in cash or cash and equity. Let me say cash, I don’t want to say equity. I want you to think we’re going to issue equity for those 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 and still allow for a meaningful pay down in leverage. So we’re looking for things to slowly take off the table to give potential investors, current investors excuses that we should trade at a discount we are to our peers.

We’ve demonstrated continued strategic execution, we’ve delivered consistently on our financial performance. We’ve 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, re-shifting drivers from LP to company, 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 leverage. So that’s the plan.

Greg Gibas: Great, very helpful. 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?

Jonathan Shepko: Sure, so, look — are you referring to our — specifically with respect to our supply or just industry supply, plus on industry supply?

Greg Gibas: part of the first question and then just the update on the timing, maybe this year of new equipment purchases?

Jonathan Shepko: Yeah, so I’ll hit the first, the ladder first. So new equipment purchases for us our front end loaded. We’re looking to make sure that we have that new equipment so we can mobilize it, utilize it, during our kind of peak season, which is Q2 and Q3. So a lot of the CAPEX spend is disproportionately slanted to Q1 and Q2 versus the drive in guys who are focused on having that equipment in front of Q4, their 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 that a little bit this year, so it might be 60 to 65 in Q1 and Q2. That said, we also if you noticed on the slide, we also had about 22 million in rollover CAPEX.

So our Q4 2022 CAPEX number was projected to be 55 million, which is a massive spin in Q4 2022 because of supply chain issues and delivery delays, by the OEMs. We didn’t get all that out the door. So that’s spilling over into mostly Q1 and a part of Q2. So we have an extra $22 million going out the door in Q1 and Q2 on top of our normal cycle, normal replacement cycle CAPEX that is baked into the 145 to 155 of total 2023 CAPEX though. And then supply, look, I mean, I mentioned it to Bert, we’re seeing massive net relocations of carrier authorities based on FMCSA data, 6000 to 8000 carriers per week. If you look at some of the data that orders for January, they’re sequentially down 40%, which is a little higher than normal year-over-year. So January to January, they’re down 12%.

Doesn’t quite jive with the increase in 2023 CAPEX guides that a lot of our peers are giving. So I think people are just being cautiously optimistic. They’re making sure they have the allocations from the OEMs. But they’re 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 we’re already seeing already seeing demand destruction — I am sorry, I keep saying demand destruction, supply destruction, capacity destruction. We’re seeing LP drivers, owner operator drivers leave the market. We do think that that rates are at the bottom or closer to the bottom. And there’s more upside than the downside at this point. I think, a few people have acknowledged this that look on an inflation adjusted basis we’re probably flat if you look at kind of peak 2019 rates to peak 2022 rates, where you look at trough kind of offseason peak, I’ll say that say definitely, offseason peak 2019 rates to offseason peak 2022 rates, both of those are up about 35%.

If you look at that and say so it’s about a 10% CAGR, so 10% CAGR over those three years in rate and rate increases. Historically, we’ve seen those rate increases tracked to CPI so about 2.5% a year. Year in and year out saying okay, well you guys are — you guys are massively up. I think that the counterpoint to that, the credible counterpoint to that is, is if your inflation adjusts. If inflation adjust, a lot of those rates were probably flat to maybe even down. If you look at diesel prices having nearly doubled, if you look at driver wages increasing 30 plus percent. If you look at things like maintenance costs or tires increasing 50% to 60%, lubricants, things like that, and you truly adjust — you adjust rates based on an 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’re simply not going to walk back. And if you do, you’re going to blow up the supply side of the equation 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 really strong rebound in 2024.

Greg Gibas: Got it, very helpful. Thanks so much.

Operator: Thank you and one moment for our next question, please. Our next question comes from the line of Ryan Sigdahl with Craig-Hallum. Your line is open. Please go ahead.

Ryan Sigdahl: Good morning, guys. Just one for me at this point. What do you guys think is the maintenance, right maintenance CAPEX level because if I look at kind of DNA over the past couple of years 90ish million CAPEX, including all finance costs was about 145 million last year, and then a little bit more than that this year in 2023. So curious 10 as we think about fully baked free cash flow, what the right maintenance capex number is? And then secondly, how confident are you in generating free cash flow? Again, inclusive of all equipment purchases, that 150 million to CAPEX?

Aaron Coley: Yeah, thanks, Ryan. So we’ll 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 debt net of proceeds. And so the right way to think about our CAPEX is this year we’ve got about 8 million to 10 million of transformational CAPEX. We’re lightening up trailers, for a one-time event, and then we’ve got about 5 million that we’re 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 is on miles. And so we’re two and a half, or two to two and a half times, two and a half years on a mileage bases.

So we’re pretty happy with where our overall fleet is. And outlook number on replacement, given our current profile and truck count is probably 130 million to 140 million for an outlet outlook perspective. That’s kind of how we think about that piece of it.

Ryan Sigdahl: free cash flow. So if you think about call it 140 million of recurring maintenance CAPEX and you back out the interest expense, it’s going to be higher tax expense, preferred dividends, etc. Guess how confident are you after kind of fully baked and everything free cash flow generation this year?

Aaron Coley: Yeah, 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.

Jonathan Shepko: Yeah, right. And we’re still — philosophically, we’re still looking at kind of a 30% 70% split, so 70% financed equipment 30% cash pay on that equipment. You know, obviously, the equipment loans, and the cost of the equipment debt hasn’t gone up as much as the spread on our term loan debt. So we still think it’s a prudent way to FUND CAPEX, and we’d rather kind of preserve our cash at least in the near term for optionality. We think that there’s probably better things we can do with that cash that’ll create more outsized growth and return versus the cost of that equipment debt. So that’s our philosophy at least now as it stands today.

Ryan Sigdahl: Alright, thanks, guys. Good luck.

Jonathan Shepko: Thank you.

Operator: Thank you. And I would like to turn the conference back over to Jonathan Shepko for closing remarks.

Jonathan Shepko: Thank you, Michelle. I’d like to close today’s call on Slide 15, with some final thoughts on our 2022 performance and the Daseke 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 to expand multiple industry verticals, with unique non correlated drivers that support our resilience and growth. Large and diversified fleet with expansive geographic breadth that 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.

We funneled our strong cash flow generation into a vector changing opportunity to effect an immediately accretive share repurchase, providing increased ownership to our shareholders and expanding earnings profile of our business. And even in the midst of a challenging backdrop, our current expectations are flat to low single digit growth over record 2022 levels, with intense focus on continuing to build a strong foundation for outperformance when the economic cycle inflects. 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 confidence in our company, our team members, and our perspective 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.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.