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spk05: Good morning, everyone, and thank you for participating in today's conference call to discuss Dasky's financial results for the second quarter ended June 30th, 2022, as well as Dasky's 2022 full year outlook. With us today are Jonathan Sepko, CEO and board member, Jason Bates, Executive Vice President and CFO, and Tracy Graham, Vice President of Finance and Investor Relations. After their prepared remarks, the management team will take your questions. As a reminder, you may now download a PDF of the presentation slides that will accompany the remarks today on today's conference call as indicated in the press release issued earlier today. You may access these slides in the investor relations section of our website. Before we go further, I would like to turn the call over to Tracy Graham, Vice President of Finance and Investor Relations, who will read the 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. Ms. Tracy, please go ahead.
spk01: Thanks, Chris. Please turn to slide two for a review of our safe harbor and non-GAAP statements. Today's presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Projected financial information, including our guidance outlook, our forward-looking statements. Forward-looking statements, including those with respect to revenues, earnings, performance, strategies, prospects, and other aspects of Dasky'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 encourage you to read our files with the Securities and Exchange Commission for a discussion of the risks that could affect our business and to not place undue reliance on any forward-looking statements. We undertake no obligation to revise our forward-looking 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 law. During the call, there will also be a discussion of some items that do not conform to U.S. generally accepted accounting principles, or GAAP, including but not limited to adjusted EBITDA, adjusted operating ratio, adjusted operating income, adjusted net income or loss, free cash flow, and net debt. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the appendix to the investor presentation and press release issued this morning. both of which are available in the Investors tab of the Dasky website, www.dasky.com. In terms of the structure of our call today, we'll start by turning the call over to Dasky's CEO, Jonathan Shepko, who will review our business operations and the progress we are making as we execute against our key strategic priorities. Jason Bates, Dasky's CFO, will then provide a financial review of the quarter and speak briefly about our 2022 outlook, at which point Jonathan will wrap up our remarks with a few closing comments before we open the line for your questions. With that, I will hand the call over to Mr. Jonathan Chepko. Jonathan?
spk04: Thank you, Tracy. Good morning, everyone. Let me begin on slide three, where I will speak briefly to a few of the notable takeaways from our second quarter. DASCII delivered another solid quarter of operational performance as demand across most of our key industrial end markets remained strong. Additionally, disruptions in the global supply chain continue to impact the equipment market, perpetuating the supply-demand imbalance, which, coupled with the demand strength, has only further supported a healthy freight environment. That said, these same disruptions have also created challenges to our productivity, with new truck orders approximating nearly 10% of our company truck fleet remaining unfilled. In response, Dasky continued to leverage our asset-right fleet model to adapt to this unprecedented environment. We tapped our expansive asset-light networks, specifically our brokerage services, to drive revenue of $481.3 million in the period. In doing so, we met our customers' strong demand for capacity, maintaining our substantial freight capture despite these equipment delays. While continued emphasis on asset-light capabilities will likely be necessary to ensure the continued servicing of our customers, we remain poised to supplant this capacity with higher margin company-owned equipment as new truck deliveries are made across the second half of the year. The last point I'd like to mention before I hand off to Jason for a more detailed review of our financials is the growth shown in our adjusted operating income of $49.9 million and adjusted EBITDA of $70.8 million. In spite of strong inflationary cost headwinds, a smaller company fleet and a stronger utilization of lower margin asset-like capacity, each necessitated by OEM equipment delays, as well as unfavorable claims development realized this quarter, which Jason will speak to later, we were still able to post modest increases to both adjusted operating income and adjusted EBITDA versus very tough comps we posted in Q2 2021. It's important to note, however, that the fundamental earnings capability of our platform was meaningfully understated this quarter because of these extraordinary events. With that, I will now turn the call over to Jason Bates to review our financial performance for the second quarter of 2022. Jason.
spk02: Thank you, Jonathan, and good morning, all. Please turn with me to slide four for a high-level review of our consolidated results for the quarter. As Jonathan highlighted, Dasky's diverse portfolio of industrial-facing end markets, coupled with our asset rights strategy, help optimize our freight and rate capture once again this quarter. We have proven our ability to strategically leverage this model and outperform traditional trends, seasonal and otherwise, versus that of the broader markets. Despite the current inflationary environment, we are pleased to report another quarter of year over year adjusted EBITDA improvement upon strong growth to our top line. As discussed last quarter, we see healthy demand persisting in our construction, manufacturing, steel, and high security cargo end markets. Robust demand across our key end markets coupled with limited supply continues to support a strong rate backdrop. In the quarter, Datsky delivered revenues of $481.3 million, up 19.1% compared to revenues of $404 million in last year's second quarter. Although somewhat aided by expansion in fuel surcharges, this notable top-line performance also reflects the flexibility of our business model and was primarily achieved as we leveraged our brokerage service offering to capture revenue growth. even as our fleet size decreased slightly year over year due to continued equipment delays. We delivered adjusted net income of $30 million, or $0.42 per diluted share, in the quarter. Adjusted EBITDA of $70.8 million grew by 2.2% compared to the second quarter of 2021. As a result of top-line expansion, strong demand trends driving freight rates, and the strategic deployment of our asset portfolio, This strength in rates was partially offset by cost pressures in driver pay, operations and maintenance, and insurance and claims expense. Our results for the quarter were impacted by a couple of claims from prior periods, which have adversely developed in the quarter. Given the ongoing discussions and sensitive nature of insurance claims, we're unable to discuss specifics, but we do view the development on these claims as unusual and would not expect the same level of claims development in the back half of next year. in the back half of this year. Next, I would like to touch on our approach to the current labor market. Here at Dasky, we continue to retain our driving professionals at a much better rate than the industry average. Having said that, we continually monitor our driver compensation and work-life balance. We have been and will continue to respond to the inflationary environment with pay increases in line with the industry. Notably, while driver pay has increased on an absolute basis, The strong rate environment helps offset these costs, and driver pay as a percentage of rate per mile remains flat in the quarter. Dasky remains firmly committed to providing a positive working environment for our skilled and trusted drivers, and we will continue to keep a close watch on the labor market. Before we take a look at the segment-level results, a final note on corporate overhead expenses. Corporate adjusted EBITDA in the quarter decreased by $2 million year-over-year. which was primarily related to the aforementioned insurance headwinds. On slide five, we present a detailed view of our results at the operating segment level, starting with our specialized segment results. Specialized revenues were $268.6 million, up 18.8% versus the prior year. With this solid top-line growth driven by heightened demand in our high-security cargo, construction, and manufacturing verticals, where we continue to realize strong market rates, This combination of rates and demand, coupled with our unique end-market portfolio approach, helps offset the reduction of high-margin wind energy revenue captured in the year-ago period. As mentioned last quarter, aerospace, which was previously a slower end market, continued to generate incremental improvement in the quarter as demand for aerospace volume further expands. Our specialized segments adjusted EBITDA was up 3% to $44.1 million. while adjusted EBITDA margins decreased 250 basis points versus the prior year's period. The margin compression in the quarter was primarily associated with the change in the mix of business, specifically the decrease in high margin wind revenue and the growth in our asset light service offerings when compared to the strong results in the second quarter of 2021. Adjusted EBITDA growth on an absolute basis was supported by a rate per mile for the segment of $3.59. which increased by 15.1% compared to $3.12 in the second quarter of 2021. Our specialized segment has experienced consistent rate expansion across our portfolio of end markets, driving the year-over-year growth. This is demonstrated by the segment's revenue protractor results of $75,500, which was up meaningfully versus $66,700 in last year's second quarter. On slide six, we outline our flatbed segment results for the quarter. Our flatbed segment delivered revenue in the second quarter of $216 million, an increase of 19.4% from $180.9 million in the prior year quarter. Healthy demand across our construction, manufacturing, and steel verticals continued to support the strong rate environment. We were able to leverage our brokerage service offering to drive revenue growth despite the year-over-year impact of equipment delays on our fleet size. While margins were slightly impacted by the shift towards asset-like, we are confident that as equipment delays ease, we can leverage our flexible business model to push the higher margin freight back to our company assets and continue to leverage our asset-light network to capture incremental freight. In the quarter, we realized a 9.6% increase year-over-year in our rate-per-mile metric. This increase in rate-per-mile was further displayed in revenue of $57,300 per tractor, which increased from $55,500 in the same period the previous year. The segment's adjusted EBITDA results of $34.2 million grew by 6.9% compared to the results of $32 million in last year's second quarter. As the market backdrop continues to encourage a strong rate environment, helping mitigate cost pressures, our adjusted EBITDA margin declined by 190 basis points, with margins for the quarter coming in at 15.8%. primarily due to the aforementioned inflationary environment and a mixed shift away from company-owned assets toward our asset-light solutions. The segment's operating ratio increased 130 basis points to 88.6%, with the adjusted operating ratio coming in at 88.1%. As we have mentioned here today and throughout prior quarters, Dasky has the unique advantage of having a diversified portfolio business model, spanning multiple end markets and industry verticals. We believe this fact, combined with our strong asset fleet composition, positions us to play our strengths in both the specialized and flatbed markets. If you look to the bottom right hand of slide number six, you will see a chart detailing Dasky's rate performance versus that of the broader flatbed trucking market. While the market continues to enjoy the strong rate environment, this chart serves as proof of Dasky's success leveraging our asset right model and our ability to most efficiently and effectively capture attractive freight opportunities at strong margins. Turning to slide seven, I'll take a moment to discuss our cash flow performance. Dasky generated $51.9 million in cash from operating activities. Cash CapEx was $25.2 million, and we collected cash proceeds from the sale of equipment of $20.4 million. This resulted in free cash flow generation of $47.1 million year-to-date. CapEx finance with debt or capital leases totaled $41.3 million, bringing in net after financing to $5.8 million. In terms of our capital sources and balance sheet, we continue to maintain healthy liquidity of over $277 million with our cash balance supported by the strong free cash flowing nature of the model and significant undrawn availability on our revolving credit facility. Looking to slide eight, I will conclude with our outlook for the full year 2022. We continue to see strength in freight rates and have also flexed our asset light service offering to capture additional freight. And as such, we are raising our full year 2022 revenue outlook. We now expect consolidated revenue to increase between 12 and 15% year over year. However, given the various inflationary cost pressures and the increase in our asset light business, which carries inherently lower margins, we are reaffirming our previously provided adjusted EBITDA guidance of 5% to 10% year-over-year improvement. While we have experienced significant equipment delays in the first half of 2022, we expect that a majority of our equipment will be delivered in the second half of the year and are therefore reaffirming our full-year 2022 net capital expenditure outlook of $145 to $155 million. We will continue to keep a close watch on the labor market, inflationary pressures, the rate environment, and equipment availability as we progress into the second half of the year, with the goal of providing further updates as additional information becomes available. We remain confident in our market outperforming driver retention rate and longstanding customer relationships as key differentiating factors that will help support Dasky through market cycles. We are excited about what is to come in the second half of the year as we continue to focus on our transformational initiatives. Dasky is well prepared to excel through macro uncertainty. And as we have proven over the last several quarters, we continue to prioritize driving strong results, remaining a quality employer for our driving professionals and returning value to our shareholders. And with that, I'll hand the call back over to Jonathan to offer a few final remarks. Jonathan.
spk04: Thank you, Jason. If you will please turn with me to slide nine, I'd like to touch on Daski's commitment to value creation for our shareholders. As mentioned throughout our call this morning, we faced a myriad of headwinds in the last several months each pressuring our margin profile and bottom line growth. Our ability to perform well in spite of these challenges, however, whether referencing EPS, return on equity, or operating income as a proxy for success, is a testament to the fundamental shift in the way we think about our business, the way we prioritize initiatives, and the way we measure success. While we have made significant progress as a result of a better delineated vision for the company, along with a few early wins from some of our initial tactical initiatives, We acknowledge that there's still substantial work to be done over the next several quarters during this transformation phase to position this company to average a 90 OR across market cycles. That said, our company is aligned and focused on meeting this challenge. Moving to slide 10, I'd like to conclude today's prepared remarks by highlighting certain attributes that we expect will continue to position us for outperformance through this next cycle. First is our ability to generate positive free cash flow across cycles. As of this second quarter ending, our free cash flow yield, which is defined as trailing 12 months free cash flow as of June 30th, 2022, divided by our market capitalization on the same date, stood at a noteworthy 32%. As mentioned on our last call, even with a 2008 recessionary type occurrence, which we do believe to be an outlier event based on current facts and circumstances, we still believe our company would be in a position to generate modest free cash flow. And with no term debt maturities until 2028, a covenant light term loan, and almost 280 million of current available liquidity, we believe Dasky is well positioned to be nimble and opportunistic irrespective of the prevailing macroeconomic backdrop. Next, I'd like to acknowledge continued progress on the transformational initiatives we announced last quarter. Approximately one half of our operating company integrations are now underway. As we continue to consolidate our operations and move to a more harmonized platform, our ability to strategically deploy resources and drive further efficiencies through cross-functional coordination within our operations will be substantial, creating avenues for even further growth and optimization in the future. Again, alongside our efforts to consolidate and streamline our operations, we are also making investments in technology aimed to streamline back office processes through a common accounting platform and also to support more data-driven decisions, among other things. We continue to reaffirm our expectations that these transformation initiatives will yield 20 to 25 million of annualized benefit on a run rate basis by the end of 2023, and we will provide more updates on our progress over the coming quarters. Next, I'd like to continue to emphasize the unique diversity of the end markets and customer base that we serve, particularly relative to most of our consumer retail-focused publicly traded peers. a pure play bet on the industrial facing economy underpinned by the wherewithal and purpose of a notable top 10 customer list, a pedigree list containing Department of Defense along with eight Fortune 500 companies. Within each of our specialized and flatbed segments, we have a broad base of industrial sub-verticals that we can strategically deploy our assets against to opportunistically capitalize on the strength in particular in markets as pockets of demand present themselves across cycles. It is our continued prioritization to create an all-weather portfolio grounded in this diversification by end market and customer with the flexibility and fleet strategy and asset rate utilization that is the foundation of our resilience. Equally important to our well-constructed portfolio of industrial end markets and shippers is our ability to service these customers, surgically executing across market cycles in order to maximize freight capture while optimizing margins. This quarter, as we've discussed, we had to rely more on our asset-light capabilities because of the OEM equipment delays. While these asset-light strategies pull through revenues at a lower contribution margin, straining both EBITDA margins and OR, the surge capacity it provides allows us to increase our freight capture. Our teams, once again, were able to exceed the average benchmark in each of the flatbed and specialized segments for their respective market indexes. It was this experienced execution, that is the ability to toggle between company asset and asset-like capabilities while also ensuring the highest margin freight is booked to our fleet strategies with the lowest loaded costs that ensures optimal levels of freight capture across freight environments. As the market eventually necessitates a more defensive posture and the freight market softens, we will reduce our use of asset-like capabilities, and although it is likely in that scenario that we may experience an overall reduction in total freight capture, We would prioritize seeding and loading higher margin company-owned assets, reducing use of lower margin asset-like capabilities, thereby dramatically increasing our margin per load. The resulting more profitable mix shift, coupled with our highly variable cost structure and largely contracted rate book of business, provides us tremendous hand in defending margins in softer environments. Finally, I'd like to spend a few moments discussing the current M&A environment. Before doing so, a quick update on the hazmat tuck-in we announced last quarter. The acquisition is performing well and tracking tightly to our post-acquisition plan. By any measure, a very successful transaction. Now, with respect to the current landscape, over the last few months, as we've seen more volatility in the capital markets spurred by macroeconomic concerns and geopolitical fears, we've seen a marked increase in deal flow and a noticeable capitulation by sellers in both their posture towards selling and valuation expectations. We believe that current headwinds are disproportionately impacting the small and micro carriers, and this will lead to continued softening in valuations for the undercapitalized family-owned carrier. As mentioned on previous calls, although we do review materials for marketed processes, the preponderance of our M&A pipeline is comprised largely of sole-source negotiated opportunities. And I'd like to reemphasize that we are committed to our meaningfully overhauled, disciplined approach to M&A, focusing on tuck-in opportunities that complement our existing operations with a clear path to providing full-cycle earnings and free cash flow accretion. We would expect that much of the capital we deploy into M&A will continue to support our shift to targeting niche, defensible, industrial-facing end markets where our specialized knowledge and experience are valued the most. providing an opportunity to pursue such targets that appropriately complement our portfolio of industrial sub-verticals. Conditions are largely conducive to more active consolidation in our industry, and we continue to see M&A as an important component of our long-term growth strategy and a sound long-term value creation opportunity as we consider the spectrum of options competing for our capital. With that, I'd like to conclude our prepared remarks for this morning, and we'll turn the call over to our operator for your questions. Chris?
spk05: Thank you, sir. To ask a question, you'll need to press star one one on your phone. Please stand by as we compile the Q&A roster. And it looks like our first question will come from Ryan of Craig Hallam. Your line is open.
spk07: Good morning, guys. I'm curious, you talked a little bit about the truck supply. It sounds like it's worsened, but hopefully going to improve in the second half. How much visibility do you have that from the OEMs on getting those trucks in the second half of this year? And then secondly, how do you feel your supply is relative to your competitors?
spk02: Yeah, good question. I mean, listen, we do appreciate the partnerships that we have. We don't want to sound like ungrateful partners here. We know that they're doing everything they can to get us the equipment. We have regular conversations with them, real-time updates, and they're looping us in on some of the things, the components and things like that that are leading to some of these backlogs, and we are working together to get this through. Having said that, it doesn't change the fact that we are behind to the tune of almost 10% behind the numbers that we would have expected to have received at this point. And so that, you know, obviously has a lot of flow through kind of challenges that we deal with. But I would say we are not the only ones that are experiencing this. And while I don't want to imply that we're getting any kind of preferential treatment, I do think that especially as one of the larger players out there. My suspicion is that it's probably we're on the front end of receiving things when it comes in. I don't know that that would be materially different than the other large public guys, but I think when you compare us to the majority of the industry that are the smaller family owned, I think we're getting things as quickly as the OEMs can get them to us. And so I don't think that we're behind vis-a-vis our competition in terms of large public players, but it doesn't change the fact that it is definitely a headwind for us and something that we're all battling right now.
spk04: Yeah. Sorry, Ryan. Go ahead.
spk07: No, I was just going to ask a follow. Is it just the tractors or is it trailers and all kinds of equipment where you're having issues? And then can you remind us how changeable, because a lot of the public players are dry van and other parts of trucking, but are you for the same type of allocations or is it a different piece here in heavy haul, just to be aware of?
spk04: It's mostly the tractors, mostly the tractors, Ryan. And look, most of the feedback we get from our suppliers, whether it's them directly or one of their tier one suppliers, I mean, a lot of this goes back to just the chip shortage, which everything we're reading just kind of anecdotally seems to suggest some of those kind of misalignments are starting to bait. There were a couple of the semis who reported this quarter who said they see kind of supply-demand equalizing and some of the pressures going away by this next quarter. So I think if you look at that plus couple that with the feedback we're getting from from the OEMs we work with, we're pretty confident that by the end of the year, we'll generally be kind of on track relative to our target fleet size we had expected at the onset of the year. Now, look, as we get those, that kind of impacts how quickly we can turn those around and get them kind of loaded on the road. If we get kind of a glut of those at one time, it is difficult to kind of process those. get them kind of road ready, get the decals on, get the drivers back with the old truck that we're replacing, get them seated, get them back out there. So, you know, there could be some inefficiencies we see there. But, look, generally we feel we'll be back on track by the end of the year. But, again, 250 trucks, company trucks, higher margin company trucks, light going into the year. We think we fared very well this quarter.
spk07: Then you mentioned some unusual on paper. Yeah, go ahead.
spk02: Yes. Sorry, Ryan. Before you hit the insurance, which we're happy to talk about, you asked the question about kind of transferability of the different assets. On the truck side, there is more transferability. The trailer side, which we are a little behind on trailers too. So while Jonathan's right, we're feeling it more on the tractor side. I did want to point out that we are behind on some trailers as well. And some of those aren't.
spk07: transferable across different you know platforms and in markets so just just as an FYI and then I'll let you ask the question just to make sure I hit it the right way but I think I know where you're going go ahead you could ask your own question for me and apologize for cutting you guys off as well you mentioned unusual claims on favorable quarter I don't believe you quantified it can you and then can you elaborate a little bit more on what you can say there
spk02: Yeah, so obviously claims are sensitive in nature, and so we don't want to go into the details. We don't want to talk about specifics. Inherently, claims develop over time. And so we had a couple of prior period claims that have developed here this year in the first half of the year, which led to reserve increases. I will tell you, I mean, you'll see this when it comes out in the queue tonight, that you're going to note roughly a little over $7.5 million year over year of incremental claims and insurance and claims headwind. Again, we don't add that back because claims in and of itself is a part of business, right? But we do view it as unusual. And we don't expect that same level of development to occur. Now, that doesn't mean that there couldn't be an accident that happens tomorrow. I'm knocking on wood, right? Heaven forbid, but it can always happen. But, you know, with some of the changes that we made last year with the creation of the risk retention group and taking a slightly higher self-insured retention level, inherently with that, you introduce a little bit more volatility there. We're working with our third-party actuaries to develop kind of IVNR accruals and things like that to help kind of streamline that process so we don't experience the same level of volatility in the future. But that is what transpired here this quarter. And so we do view that as unusual. We do not expect that same level of claims development in future periods, but we did want to kind of highlight that as a headwind in the quarter and something that we would deem to be abnormal.
spk07: And was that full $7.5 million recognized in Q2? And then what were you expecting in your previous assumptions on a year-over-year basis? Because I presume there was probably some increase year-over-year, but how much was incremental?
spk02: Yeah, so that number is what was recognized in the second quarter, and that is the year-over-year change. I would tell you that... If you're asking how it compares to what we were budgeting for the year, I don't want to give exact numbers, but I'll tell you it's millions and millions of dollars more than we were anticipating from a budgetary perspective. Now, if you're asking me based on where I was sitting in kind of you know, the April timeframe where we were, you know, working through, you know, these claims and mediations and things like that, you know, I would have told you I expected something. So I don't want to imply that we didn't see this coming back in, you know, Q1, you know, early Q2 timeframe. But vis-a-vis the budget, that would have been, you know, not quite a full $7 million, but, you know, several million dollars of headwind vis-a-vis what we were planning.
spk07: Good. Last one for me. You mentioned or reiterated the $20 to $25 million of annualized earnings improvement by 2023 that you laid out last or earlier this year. How much have you achieved on that? And then I guess any change in confidence or I guess talk through the puts and takes on that since you've announced that.
spk04: Yeah, Ryan. I mean, as we kind of mentioned, we're underway at various stages with really the first phase of some of these integrations. We'll certainly provide more detail as we get a little further along, but still feel very good about the quantum of operating income uplift. I would actually tell you, as you'd suspect, these are big lifts for the opcos that are in play. It's a really big change management exercise. There's a big human component, big social component. We're certainly trying to do everything the right way for our drivers and our customers and our non-driver employees, but it's a big lift and the platform Opco is working double duty here. So it's absolutely, in my opinion, kind of more of a headwind this particular quarter, kind of indirect costs associated with some of those initiatives. I think as we mentioned on the last call, we think that the kind of direct costs are gonna offset any direct gains this year, and we expect to really see some kind of fruits of the labor, if you will, next year. But I think things are going as planned. We feel very confident with the number, and I think we're very close to kind of this first phase of integrations, very close to turning a corner to where we're actually going to start to see some real progress. So that's kind of what I can tell you today.
spk07: Thanks. Good luck, guys. Thank you.
spk02: Thanks, Ryan.
spk05: Thank you. One moment, please, for our next question.
spk06: Our next question will come from .
spk05: Your line is open.
spk09: Thanks, Operator. Good morning, gentlemen.
spk05: Next question will come from . Your line is open.
spk09: Thanks, Operator. Good morning, gentlemen. If we could just focus a little bit on the flatbed side of things. You have that nice chart in there about the outperformance, which is great. But I have noticed that the outperformance has been shrinking as we move here through the quarters. I guess one question, why has it shrunk in two? Do you guys remain confident that you'll continue to be able to outperform the market in the coming quarters?
spk02: Yeah, so I'll hit that first and let Jonathan tack on as well. So I think, as you well know, Jason, and we've been trying to highlight, there was a healthy degree of transformative work that needed to be done here in our organization. And for the first, I would say most of 2020 and even early 2021, there was a lot of tough decisions that were being made about exiting certain pieces of business and and even certain customers and redeploying assets. And so some of the outperformance that we experienced was just a shift in mix, right? We were electing to pursue higher margin, better longer-term strategic partnerships, et cetera. As we continue to progress down that transformation path, some of the lower hanging fruit that you see, like when you look at the outperformance on that lower, if you're looking at slide six, in that lower right-hand quadrant, that gap in Q2 of 21 and Q3 of 21, you'll see that the gap between us and the peers shrink as we move forward. That was expected. The point, though, is that we still believe that our ability to outperform the market exists because of our ability to flex in and out of different end markets. And we've shown an ability to do that even in a normal environment, not walking away from different customers, but just shifting assets to higher margin business or business where there's higher demand. And so we've done that. And so we do believe that that level of outperformance will continue to be there. But we never expected that it would continue to be a quantum. At those prior levels. A thousand basis point differential, yeah.
spk04: Yeah, it's also, Jason, just to point out to you, that's kind of a, it's a rate of change chart. So, you know, we, as Jason said, we kind of started with a higher watermark because I think we were a lot more efficient than kind of our, the other kind of peers in this you know, in the flatbed index or the specialized index, depending on which one you're referencing. But, you know, as we continue to outperform and you're looking at a kind of incremental rate of change and outperformance, it gets harder and harder, more difficult, more difficult to kind of beat the, you know, beat the kind of prior month, prior quarter comp.
spk09: Makes sense. So why have you here? Let's talk a little bit about some M&A. You talked about going after sort of those Niche end markets. Could you give us a little more color? Like, so what are the end markets that you're sort of targeting that you might not have a lot of exposure or any exposure to now?
spk04: Yeah, I mean, look, I think, look, the shift, and we kind of referenced this a couple quarters, and it's really been kind of sprinkling out, you know, the shift in mindset. But, I mean, the shift here is really to kind of focus, move away from trailer-centric, just kind of being industry agnostic and really focused on trailer type to shift more to in-market verticals, in-market industry sub-verticals. And really midway through last year, we identified a dozen plus industry verticals that really all kind of possessed common attributes. And they were largely non-correlated with kind of the macroeconomic backdrop. They required specialized truck trailer configurations, specialized trailer equipment, specialized driver credentials, very niche end markets where you could actually build a strategically relevant leadership position in that respective end market. And in most of those situations, the margin profile of those end markets, because of the specialized nature of those end markets, was a lot more attractive. And so that's where we said, look, That's what we want to be when we grow up here at Dasky is really an in-market focused player, identifying those in-markets, focusing resource allocation in support of those in-markets, and getting to a point where we comprise a good majority, a strategically relevant position within those in-markets, and you get all the things that come with it when you engage with customers. Some of those end markets, most of those end markets we play in at some level today and have played at some level through much of Dasky's life. There are a couple new end markets that, you know, that like life sciences and pharma, probably the only non-industrial facing end market that will actively pursue. But it possesses a lot of those same attributes that I just outlined. And so there are things like that. We did the first acquisition we did last quarter. that the hazardous material, hazardous waste acquisition, that introduced tankers into our fleet, right? We historically hadn't done anything with tankers, so it's not an open deck trailer, but a tanker. So we're thinking about, look, is there a path to kind of building out a meaningful position, meaningful foothold net in market, really generating higher margins, better return on capital, better kind of full cycle kind of pre-cash flow performance in those end markets. And that's the lens that we're looking for. Flatbed, which I think people generally view as a little bit more commodity in nature, it's not as commodity for us given really our scale and our ability to execute very efficiently and effectively in that space. There have been a number of larger carriers that come in, kind of have the scale, have the heft. They haven't been able to figure it out. we've been able to demonstrate that our flatbed segment can be profitable, maintain its margin profile across most freight environments. So we'll continue to do that, but it's a very different game than specialized in-market focus. That's one that requires a lot more focus on scale and absorbing scale the right way, focusing on things like lane densification and things like that, that you can't get as much when you have as diversified as a trailer pool that you do on the specialized segment of the business. So that's really kind of how we're thinking about that dichotomy between looking at M&A between specialized and flatbed, if that answers your question.
spk09: No, it does. It's some great color, and it sounds like the markets are helping you out in terms of potentially getting another dance partner. Yeah, absolutely. one last one and I'll turn it over to somebody else you know earlier today and they're called cat what was talking about maybe potential in positive impacts coming later this year and definitely next year from the infrastructure bill that passed wanted to know what some of the feedback you've been getting from customers and how should we think about her for 2023 yeah no we I
spk02: We've obviously been watching this very closely, and Rick and our COO and a lot of the teams in the field are in regular communication with our customers, trying to understand exactly what their needs are going to be. As we've talked about a lot on this call, truck capacity has been constrained, and it's important for us to understand what kind of things are coming down the pipeline, especially for some of our larger strategic customers like CAT and others. And so yeah, it is something that we are in constant communication with our customers on and are trying to kind of resource plan accordingly we are I Hesitate to overuse this word but cautiously optimistic About the things that are that what we're hearing and what we're seeing from our customers now on the one hand I say cautiously optimistic but also kind of freaking out a little bit given given what it might mean in terms of demand and especially when you look at the tractor situation. And so we want to make sure, and that's why we've, you heard us reference several times. I mean, our brokerage revenues were up 35, 37% in the quarter year over year. That is intentional. That's by design. That is strategic. We want to go out there and capture as much freight and be the best partner we can to our strategic customers. And so that, if and when things do slow down, which doesn't look like it's happening, especially when you talk about this infrastructure bill. But if and when it does, we can shift that business, that additional freight capture that we've realized, back to our company assets and keep them profitably running and moving. Obviously, an infrastructure bill is going to push out that into the future, but the brokerage relationships that we're developing are going to help us continue to support our strategic customers as we move down this path of infrastructure.
spk09: Thanks for the call, Jason, and gentlemen, appreciate the time as always. Thank you, Jason.
spk05: Thank you. One moment, please, for our next question. And next we have Bert Subin of Stifel. Your line is open.
spk08: Hey, good morning, Jonathan, Jason. Morning, Bert. Hey, Bert. So if I look at 22 guidance, 5% to 10% EBITDA growth, that implies margins would moderate, you know, sequentially with 4Q likely sort of bearing the brunt. What incremental inflationary events should we be looking at? Just in terms of, I'm trying to parse together, it sounds like a really good demand environment, perhaps short some trucks and moving more into brokerage, but it would seem like you have good pricing power in that backdrop. Can you just help us understand why maybe that's not the case?
spk04: Yeah, I think, look, I'll let Jason kind of dig into more some of the specific line items, Bert, but I mean, look, I think you're I think you're focused on the right things. I think when you look at the margin profile of our business, and you certainly understand it, I don't know that all of our investors kind of appreciate the impact of mix shift on margins, but when you're down 250 trucks and your company truck fleet is 2,500 or so trucks, and the margin profile of those company trucks is 250 to 300%, that of what you're seeing if you're brokering those same loads, it's a big impact. You also have fuel surcharge running through our revenues, and as some of our peers peg their EBITDA to net revenues as opposed to gross revenues, so you've got some noise there, but I think the big thing that Jason mentioned when he was speaking with Ryan a bit ago is, look, you've got nearly eight million of unfavorable claims, you know, claims development that had that not been there, we probably would have been able to take up EBITDA guidance 3%, 4% this year. And then there's some things on the margin that, you know, that kind of dampen that a little bit further. But, you know, I do think that you're right. We're seeing, you know, tremendous depth in demand. I mean, Jason mentioned CAD. I mean, there's a number of those types of customers that, you know, they're not having discussions with us about, hey, can you can you drop rate, they're having discussions, just getting comfortable that we can provide capacity into 2023. So we think, look, in contrast to kind of our drive van brethren who saw seven consecutive quarters of rate increases with kind of the COVID demand pull through, finally had an inflection this last quarter, we didn't see that. I mean, with the lag in our demand, was a little bit more noteworthy. And I think that there's a lot of pent-up demand. Supply chain issues seem to be easing a little bit, but there's a lot of depth here. And when you look at our end markets, construction, manufacturing, very, very kind of consistent with the PMI print yesterday that the industrial complex is holding together well. And look, we're excited about the prospect of continuing to help our customers out through this. But But rates are going to be there. Inflationary costs to date have kept par or lagged slightly with the rate improvements we've seen. So we do think on a kind of more quote-unquote normalized basis, we'd be able to defend the margin profile. But there were some unusual items this quarter that add a little bit of noise to the picture. I don't know, Jason, if...
spk02: Yeah, no, I think you did a great job hitting the key points there. I did want to reiterate your comments about fuel surcharges. A lot of people, and we, listen, we've been talking about it internally, and we may shift to kind of look at things on a percentage of net revenue, just because it does skew the metrics, especially the margin metrics, when you've got fuel that, I mean, our fuel surcharge revenues last year were $60 million through June 30th. And there are 115 million this year. I mean, that's a dramatic change. And there's not a lot of margin in there, obviously. So you saw fuel expense also rise, you know, between fuel expense and fuel reimbursement to our operators also rise by roughly a commensurate flow through it. So I think that's a big piece of it. But what I don't want is for people to think that that means that there's some kind of a structural issue in terms of our margin generating capabilities. Because when you neutralize for that, absent the, as Jonathan alluded to, kind of unusual things that we realized this year with regard to insurance and claims specifically, outside of that and some of the delays on kind of equipment. Otherwise, you know, the rates are doing a really good job of helping overcome some of the inflationary headwinds. I mean, just to give you a few quick data points, like if you look at like driver pay, we're looking at almost double-digit percent increases If you look at Austin maintenance, you're looking at almost double-digit percent increases. Salaries and wages, you know, for non-driving professionals, you're looking at mid-single digits. And then when you look at the fuel, as we already talked about, you know, being up, you know, 60%, 70%, 80%, right? And then finally, insurance and claims that we've talked about a lot already. So there's just a lot of those things. But again, I think the takeaway is, absent some of the unusual items on insurance and some of the delays we've been experiencing on the equipment and the commensurate flow through, we feel really good about the business. And we feel really good about, back to your point, demand is looking good, rates should be strong, and we're excited about what the back half of the year will look like. And even early 2023, we're already having conversations with customers about kind of demand pull through into 2023. So, yeah, I think we feel pretty good about that, absent some of the puts and takes that we just discussed.
spk04: Maybe a follow-up.
spk02: Yeah, go ahead, John.
spk04: Yeah, no, sorry about that, Bert. No, look, I think some of our other peers have mentioned this, too. I mean, you know, to the extent you do see isolated pressure on rates, we don't think that's a function of kind of underlying demand. We think, look, the fact is that the smaller carrier, the microcarriers are they're being, as we mentioned in our script, I mean, they're being disproportionately hammered by this environment. And they don't have the scale, they don't have the breadth to absorb a lot of these things. And, you know, there was kind of a stark, you know, there was kind of a stark movement in the number of kind of motor carrier authority non-renewals. So you're losing, I think you're losing carriers. You've got a lot of carriers that kind of came into this. And that's, look, that's your marginal capacity in this industry is those smaller carriers. They hopped into this market environment at a time where used truck prices were two to three times what they historically would have been. So they have much higher basis. And so these guys are struggling to survive. They're dropping rate and they're really living kind of paycheck to paycheck just to keep their business afloat. And look, that wave is gonna crash at some point. And so I think, In the very near term, we could lose a lot more capacity. And, you know, again, the demand side, Jason, I spoke to, the demand side is absolutely there. So I think it's going to continue to prop rates for, you know, the foreseeable future.
spk08: Yeah, thanks for the answer to both of you. Maybe my follow-up to that would be, It seems like, you know, obviously like you guys have noted a couple of times now, demand is strong. Can you highlight maybe a rough percentage of your business that's on the books for the second half? Because I would imagine the business that you have not contracted for, you would do so at higher rates to pass business inflation. Is that an opportunity?
spk02: Yeah. So that's absolutely the way our team is going about this. Listen, we try not to be, you know, bad partners. But at the same time, we've got to make sure that we're able to take care of our employees, our shareholders, and we're having those conversations with our customers. And we're looking very hard at what kind of rates we're locking in and for what duration. And listen, we've talked about this in the past, and this is not unique to Dasky. I've been in the industry for 20 plus years and did it on the drive-in side as well. A lot of times you have to go back when fundamentals in the market shift and change, and you have to revisit conversations on price. It is what it is. And so those are conversations that we're having. But again, we're trying to be partners here and not take advantage of situations. But as I just alluded to, we've got several line items that are going up double digit in terms of percentage increases. And And we can't just not pay the drivers, right? We need to take care of the drivers. Otherwise, we've got other issues with regard to servicing customers and taking care of customers. So there's no question that those are dialogues that we're having with customers, and we're trying to manage those dialogues the right way in more of a partnership as opposed to taking advantage of the situation. And so far, it's been well-received, and I think we're going about it the right way.
spk08: Okay, that makes sense. I'll just ask one more and I'll pass it back. Jason, I imagine you've already sort of alluded to early 23 thoughts. I imagine you've thought through a peak to trough analysis for your business. Several of your tri-van peers have sort of quantified that in terms of earnings. I know the industrial cycle tends to be on a little bit of a lag, so perhaps 23 doesn't ultimately end up being a trough year on the industrial side. And then you have a infrastructure that could further prolong the cycle. But if we were to make the assumption that 23 were a trough year, can you provide any color around what that peak to trough would look like in your business? It sounds like you have up to 25 million of cost savings. And I know you've historically talked about the band of OR from good to bad times being pretty narrow. Can you provide any thoughts maybe in terms of what it could mean for EBITDA or whatever metric you think is most applicable?
spk02: Yeah, I'll try to tiptoe this trapeze here. You know, we haven't given any 23 guidance, and it's not our intent to do that right now, but I understand the nature of your question, so I'll try to give you a few data points. We've talked a lot in the past. We've done a lot of rate analysis here as an organization over the last year, and we've gone back 30-plus years and have kind of identified that if you look at, like, the two or three or four kind of big data I'm using air quotes here, recessionary type environments that we've experienced during that timeframe. Typically, they last between 12 and 18 months. I think the biggest one was 24 months, and that was kind of 09. And the peak to trough kind of rate inflection that we've experienced during those times is It's right around 10%, but you fully recover by the end of that 18-month cycle, and you're back to peak again. So peak to drop to peak is we're literally talking on the smaller recession times or slowdowns, 12 months, and on the biggest one, 24 months. And so we've done, to your point, Bert, a lot of sensitivity modeling around that. And, you know, what would happen and what would it mean and what kind of things would we need to do on the cost side? And so there's been a lot of work done. We've got – my FP&A team, you know, wants to jump out the window on certain days when we say, hey, can we run this sensitivity? Can we run this sensitivity? What if we do this with race? What if we do this with trucks? So we've done a lot of that work. What I can tell you is we don't know exactly what 23 is going to look like, but it's looking more and more as we get here into the back half of 22 – That 2023 is probably not going to be that trough year. Now, will things start slowing down in 23 at some point? Yeah, potentially. But I don't know that that's – we still see pretty decent demand, especially when we talk about, as was alluded on the previous question, about the infrastructure bill and some of these other things coming down the pipeline. And then you couple that with, I think you alluded to, we still have some dasky self-help opportunity here. And I just don't want that to get lost in the messaging that we aren't just a, we're going to ebb and flow with the market. And if the market goes down 5% or 7% or 10%, we're going to go down 10%. We have a lot of self-help opportunities here. And then when you look at some of the strategic M&A things that Jonathan alluded to and our unique diverse end market opportunities, portfolio that we can shift assets in and out of different verticals like we did during COVID, like we did when the construction boom happened, like we did when wind energy was strong or when it slowed down or when the DOD was going bonkers. There's a lot of things we can do to kind of preserve margin and minimize negative impacts through a downturn. So we haven't given definitive, we're not going to give definitive guidance right now on 2023. But what I can tell you is that our internal expectations for 2023 is that they will be better than 2022. And I'm pretty comfortable stating that. And that's assuming that things start to slow down a little bit in 2023. I don't know, Jonathan, anything you would add to that?
spk04: Yeah, I mean, look, yeah, the things that, you know, 85%, 88% or so of our business is contract. You know, we don't have the same volatility as some of the more kind of spot-oriented carriers. And, again, 70%, you know, depending on the quarters, 70% to 75% of our cost structure is variable. So we've got a lot of levers to pull to kind of defend margins.
spk08: Very helpful. Thank you both. Thank you.
spk05: Thank you, Bert. Thank you. One moment for our next question. Our next question will come from Greg Gibbous of Northland Capital Markets. Your line is open.
spk10: Hey, good morning. Thanks for taking the questions. Do you have an idea of how much of a margin impact there was from the shift to the more asset-light business model in the quarter?
spk02: Yeah, we do. So, I mean, what I can tell you is we did disclose that, you know, we were up 37%. And I would tell you probably a good way to think about it is that our trucking business, you know, typically will run in the mid to high 80s operating ratio. And our brokerage business is typically going to be in the kind of mid, it can be low 90s, but, you know, that is definitely a dilutive impact when you look at that as much as, you know, 5, 6, 7, 800 basis point differential. Now, the return on invested capital is obviously better on the brokerage business, you know, so you can afford, but it is absolutely dilutive to the margins. And so you can kind of run some of those numbers through your model, and I think it'll get you the answer that you're looking for there. Great.
spk10: Yeah, that's helpful. Awesome. And then, you know, in terms of kind of the leading sources of cost inflation in the business, you know, is it right to think about those being kind of what you've talked about this quarter, you know, driver pay, maintenance costs, and kind of insurance premiums? Or, you know, what would you kind of stack as the leading sources of inflation?
spk02: Yeah, I mean, you hit them, right? So I think driver pay, you know, almost double digit. Ops and maintenance, you know, almost double digit. And in fact, embedded inside of that, if you look at like, you know, tire costs and some of these other ones, they're up even more than, you know, 10%. They're up in closer to the 20% range. So, I mean, there's some big inflationary items there. We talked about non-driving salaries and wages being up, you know, mid-single digits. And then obviously fuel is up substantially, but you've got the fuel surcharge revenue that kind of makes you hold there. And then the last one, which isn't something that I would necessarily characterize as inflationary, but the insurance... the way that that develops. It's not that the premiums were up dramatically. I just want to be clear because I think you referenced premiums. It's that the actual claims reserves that we took were up. We had a couple of claims, prior period claims that developed materially and therefore we took big reserves there, which is not something we would expect to recur, but also not something we would say couldn't happen again in the future. So we just have to be cautious on that. Great, helpful.
spk10: I guess just last one, I wanted to follow up on your comments on the operational and back office improvements. How much of an impact do you maybe expect to realize of that in the second half of this year?
spk04: Yeah, Greg, I think what we're kind of the party line right now is that you know, costs will offset any gains this year. I think we mentioned that on our last call. And I think you should really think about 2023 as, you know, as kind of the turning point where we really start to make some gains as a result of those initiatives. There's just, again, as you can suspect, I mean, there's a lot of moving pieces. You know, I think the team still feels like, you know, net-net. It's a bit of a headwind this year and will be a bit of a headwind this year. But again, very optimistic about what we're seeing in each of those initial kind of phased integrations and continue to be excited about what Dasky is going to look like once those are done.
spk10: Okay, great. Thank you. Sure.
spk05: Thank you. Thank you. And that ends the QA session for today's conference. I would now like to turn the conference back to Jonathan Shipko.
spk04: closing remarks thank you chris i'd like to thank everyone for your time today we look forward to continuing upon the momentum we've generated alongside our broader transformation we thank you for your commitment and confidence and we look forward to translating the market opportunities facing us today into more profitable returns and consistent growth for our stakeholders thank you thanks everyone
spk05: This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.
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