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spk05: Good morning, everyone, and thank you for joining today's conference call to discuss Deskey's financial results for the fourth quarter and full year ended December 31st, 2022. With us today are Jonathan Shetko, CEO and board member, Aaron Coley, EVP and CFO, Adrienne Griffin, VP of Investor Relations and Treasure, and Tracy Graham, VP of FP&A and Business Analytics. After 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 Deskey's website. I would now like to turn the call over to Adrienne Griffin, who will read the company's safe harbor statement that provides important caution regarding forward-looking statements within the meanings of the Private Security Litigation Reform Act of 1995. Adrienne, please go ahead.
spk08: Thank you, Michelle, and good morning, everyone. Please turn to slide two for a review of our safe harbor and non-GAAP statements. Today's presentation contains forward-looking statements within the meaning of the Private Security 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 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 would also like to highlight our decision to update our reporting segment results. Previously, the company had disclosed a corporate segment which was 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. Acceptance 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 Dasky website, www.dasky.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?
spk06: Thank you. Good morning, everyone. I'd like to start the call today by welcoming Adrienne 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 DASCI team members and especially acknowledge the disciplined commitment of our professional driver community. It's due to the collective effort of Team Dasky that we will today report our company's third consecutive year of record-adjusted EBITDA. I'd like to spend just a moment on this slide three. Whether you are a longtime holder of Dasky 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 this snapshot slide to help everyone appreciate who we are today. As mentioned, 2022 was yet another record year for our company. both in total revenue and adjusted EBITDA. This performance is a noteworthy bellwether of our progress and highlights the continued earnings potential of our business, as demonstrated by comparing this past year's record adjusted EBITDA of $234.9 million, which was generated during the peak rate environment of the current cycle, to the last cycle of peak rates in 2018, 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 initiatives to improve our asset utilization. With that as a backdrop, I'd like to move to slide four, where I will share some of our 2022 accomplishments that set the stage for our 2023 outlook. In 2022, we delivered solid revenue growth posted our third consecutive year of record-adjusted EBITDA. We executed a meaningful, transformational share repurchase from our founder, which was accretive, and removed a perceived overhang on our stock, given the percentage of the company the founder's ownership represented. We affirm our ongoing commitment to enhance the strength of our balance sheet through accelerated deleveraging. We have been more vocal about the resiliency of our operating model, one that is unquestionably different from any other publicly traded transportation and logistics peer. a blend of asset-light and asset-based capabilities exclusively serving the industrial economy with strong diversification by in-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 does inflect. If you will turn with me to slide five, I'd like to discuss our fourth quarter 2022 share repurchases. On September 30th, we announced the $40 million share repurchase plan ultimately purchasing over 803,000 shares under this plan at a weighted average price of $6.05, before supplanting 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 Dasky'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 preferreds are redeemable at our sole option in whole or in part for $67.6 million plus any accrued and unpaid dividends. The Series B preferreds are not convertible and have no affirmative or negative covenants. As 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 in support of this buyback fits squarely within our shareholder value creation framework, with our focus now on delevering, The company has no intention to repurchase any additional stock in the foreseeable future. With that, I will now hand the call over to Aaron, who will provide a more detailed walkthrough of our fourth quarter and four-year results. Aaron?
spk09: Thank you, Jonathan, and good morning, everyone. I would like to start with slide six, which represents a high-level review of our consolidated results for the quarter. Once again, our resilient business model facilitated growth as we delivered quarterly revenue of $408.2 million, up 3.5%, or $13.9 million, compared to revenue of $394.3 million in the fourth quarter of 2021. This included demand strength from high-security cargo and the agriculture end market, partially offset by declines, primarily in the steel end market and renewable energy vertical. plus contributions from a tuck-in acquisition completed early in 2022. Compared to the fourth quarter of 2021, 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 seven, specialized solutions revenues were $250 million 42.9 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 right fleet mix, delivering a 2% increase in company miles. Specialized solutions adjusted operating ratio improved 110 basis points to 91.8%, while 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 eight, we outlined flatbed solution segment results. Despite the first year-over-year decrease in flatbed market rates since the pandemic, DATSC 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 in 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 cap company asset utilization, which traded 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 the segment's adjusted operating ratio increasing to 95.9% from 91.8% in the prior year, an adjusted EBITDA of $17.2 million, which was 23.2% lower than the prior year period. Now moving to slide nine. In 2022, we achieved a consolidated record revenue of $1.8 billion. representing a 13.9% improvement over the prior year, driven particularly by strength in our high-security cargo in-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 in-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 21. Adjusting for all of these expenses, income from operations would have exceeded 2021. The adjusted operating ratio is 91.6% in 2022, an increase from the 90.9% in 2021. Though we continue to experience inflationary pressures that build 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 freight to higher margin company assets and redirecting assets to the most profitable lanes. The Dasky team delivered commercial execution and our flexible asset right strategy to deliver value for our shareholders and we set an adjusted EBITDA record of $234.9 million, surpassing the previous record of $223.1 million set last year. We're very proud of the entire Dasky 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 over $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 and markets, robust commercial execution using all aspects of our asset rights strategy to deliver profitable growth and contributions from a tuck-in acquisition, modestly offset by demand 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 on 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 the ability to capture attractive rate in strong end markets and pivoting from softer end markets to company-owned assets 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, segment 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 EBDA of 93.7 million and adjusted EBDA margins of 12.2%, both declined modestly from 2021 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 results, we have established a trend of improved performance. The change our business has undertaken over the last few years is real. It's lasting. And we remain confident in our ability to generate 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 1.5 to 2 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 toward 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.
spk06: 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 seating of additional higher-margin company tractors, and ultimately improvements in demand for freight haul services by mid-year when our business is seasonally on trend. We believe in the cross-cycle strength of more than a dozen industrial-facing end markets we serve, some of which are set for continued growth given their limited correlation to consumer spending or the prevailing macro backdrops. 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 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 in-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 print. In sizing our 2023 net capital expenditures outlook, we view our reinvestment in the fleet as a strategic opportunity, one that positions Dasky 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 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.
spk05: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile our Q&A roster. And our first question comes from the line of Burt Seven with Stiefel. Your line is open. Please go ahead.
spk02: Hey, good morning. Thanks for the question.
spk08: Good morning. Morning. Morning, Bert.
spk02: Morning. 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 23?
spk06: Yeah, sure. I can address that and let Aaron or Adrian chime in accordingly. So, look, we've said this on the last few calls. We do still believe that through our transformation initiatives, we're going to see exit run rate uplift in 2023 of about 20 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 you know, by mid-year. So we do, look, we do think probably on a, you know, on a 2023 basis, if you're taking a snapshot of those transformational activities, I'd probably say likely kind of on average plus or minus 15 to 17 of that in 2023. The other, you know, the other kind of components of, you know, of our thesis this year in 2023, you know, as you mentioned, are, look, 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. 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 other things going for us. So we talked a little bit about the 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 will kind of 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 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 Q2s and Q3, and then certainly in Q4. We also expect, as Aaron mentioned in his discussion, we do expect increased productivity. We had some in-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 400s, so kind of an 8% to 10% improvement in productivity on miles per truck. And I think that, look, we've gone back 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 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, you know, knock on wood that we hope we don't see. So that also provides a little bit of downside support in keeping EBITDA flat this year.
spk02: So maybe just like a follow-up on that. You know, we don't have great data you know, 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, you know, would have been the driver of that? And the only reason I ask is, you know, doing 235 again or something in that range would clearly be a good outcome. But I'm sure there's some, you know, 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 in markets. And so then it comes down to, you know, what happens in the rate side and what happens on productivity. If we're looking at this in 12 months, you know, and you didn't hit those marks and it was a little worse, you know, what are the things that are maybe a little more exposed? Or just, you know, what's your assessment of the risk?
spk06: Yeah, I mean, I think you hit it. It comes down to rate. I mean, I think that's, you know, at the end of the day for markets, for all of us in this industry, I mean, rates the biggest thing out of our control that'll kind of make or break things. Again, we have a lot of these, we mentioned self-help business improvement initiatives that we're gonna 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 see company trucks, which have a much better margin profile. And I think that if the rates continue to stay moderated this year, you know, that trend will only continue. I think a 200 or something certainly below 200 is a pretty draconian pretty draconian assumption or target to suggest we might hit too. I think that the Dasky business model today is, you know, is much, much stronger than it was in the last downturn, the last trough. And so I think that, you know, we're fundamentally, we fundamentally have just a different range of earning profile, operating profile in our business today. I think that if you look at, you know, if you look at where we're at in the cycle, and I know everybody's kind of talked about this, but, you know, we've, These are typically 36 to 48-month cycles, and we had 18 months or so, 18 to 20 months of expansion, really 21 into 2022. And then for the better part of 22, 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 in markets are generating, when you look at the supply destruction, the capacity destruction that's going on today in the industry. I mean, I read something that said net revocations of carrier authorities are 6,000 to 8,000 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's 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, you know, 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, pre-recession peak rates within 12 months. So I think that people underestimate, I can't speak for Flatbed, but I think people underestimate the resiliency of the industry, particularly the diversification of our model. and that it's exclusively industrial facing. So I think, you know, 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're expecting 2024 will be at 2022 peak rates. And really, if you look at cycles and assume that you get some repetition in cycles, 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, you know, the low point, if you had to call it.
spk09: Hey, Bert, I would just add to that that, I mean, look, we can, on a forward-looking statement, we can kind of talk about that, but just to reiterate, we feel very comfortable with our outlook in achieving flat year-over-year results. We've 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 Pete Trough frame put in our current budget that we're putting forth is a reasonable assumption that we can deliver.
spk02: Got it. That's super helpful. Maybe just my last question and a clarification. How should we think about brokerage? Jonathan, I know you made some comments saying you 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, 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.
spk06: 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, I think the model that a number of our peers employ. So it's really that kind of control valve, if you will. I would say 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.
spk02: Got it. Okay, great. Well, thanks again for all the time. I'll pass it over.
spk06: Absolutely. Thanks, Bert.
spk05: Thank you. And one moment for our next question, please.
spk07: And our next question comes from the line of Jason Seidel with Cowan.
spk05: Your line is open. Please go ahead.
spk03: Hey, thank you, operator. Hey, Jonathan and Team Harrows, everyone.
spk06: How are you doing, Jason? How are you? Talk to you.
spk03: 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 length at all?
spk06: In Q1 of 2022, you're saying there was a... No, the most recent quarter here. Oh, yeah. Okay. Okay. Okay. Yeah. That's right. I mean, look, a little bit of it was on the high-security cargo side. Those were shorter length of haul. So on the specialized side, you know, that weighed on some of the kind of average productivity metrics. On the flatbed side, we lost some productivity. as, you know, again, if you remember, we really shifted more to asset-light LP owner-operator moving into 2022, and so we saw some of that fall away. Either owner-operators parking their trucks going, hey, I've done well for this year, and I'm taking myself out of the market right now, or you had LP drivers that, you know, weren't making the same amount of money because the rate environment changed, and they're you know, reevaluating whether or not they exit the industry or ultimately shift over to being a company driver. So, you know, there's some movement around there, which we'll figure out where those drivers land probably in Q1 of this year. You also had, you know, 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 that's, hopefully that answers your question.
spk09: 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.
spk03: And I would imagine you've already probably seen some improvement in that just by some of the seasonality that you mentioned.
spk11: Correct.
spk03: Okay. Uh, next question. Um, the job, I think you, you, you talked about, um, an expected rebound and to sort of be at peak rates and, and, uh, back to peak 22 rates in 24. And I think that you said that you, you said you expect like another, you know, big year for trucking, uh, if you will, in 25, I, I, what's sort of behind those numbers for you guys when you make those forecasts out?
spk06: Yeah, I think we've, we've looked at a number of the past cycles. And as I mentioned, as I mentioned a bird, I mean, we look at these and look at them as really three to four year cycles. And, you know, if we look at, if we try to overlay the cycle that we're currently in, a lot of different things floating around. But, you know, we think it generally is going to track what you, you know, what you saw in 2015, kind of the industrial recession, right? We had, you know, You had about 18 months of kind of uplift, 18 to 24 months of uplift leading into that peak and kind of summer of 2015. 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 the downgrade of U.S. debt. You had kind of the sovereign debt issues around the world, quantitative easing, all that. And people kind of got nervous and things tanked. And they quickly came back and ultimately peaked in 2015. And you had kind of a fall down into that winter of about 10% or so. And then you had your normal seasonality, so you got some of that back. And then the next winter, so going into 2016, you kind of fell down some more. And so 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, 22%. But again, 80, 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 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, you know, 2023. And then you'll have kind of a firming up to where by, you know, by early to mid-2024, you'll be at 2022 peaks again. And you'll have a runway. You're 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 over-tighten. A little bit concerned about some of the takeaways with this last jobs report and how the Fed receives those, interprets those. And again, you had 21 million jobs lost as part of the kind of COVID effects that 15% of our workforce has taken out. And if you look at employment trends adjusted for population growth, we're still three to four million jobs short where we would have otherwise been had that employment trend continued. So I think that when the Fed looks at this and said it's a hot jobs market, everything else, I think we're still way behind. And so I think if they continue to overtighten, 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 in-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 look, we're pretty bullish on things to come.
spk03: 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 truing up now. Can you give us some numbers behind that?
spk06: Yeah, I don't have numbers right now to kind of provide, but, you know, I think that part of this really goes back to, Jason, the customers, like our shippers, are just frankly becoming a lot more sophisticated. And, you know, when they're seeing the spot market fall since January of you know, 2022 and they're looking at their contracted rates, they can't ignore that. And so what we had is October, November, there was some softening, as I mentioned, you know, 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 carriers and you know, on the flat, I'm speaking to the flatbed side, we're going to go to them before, you know, before their softer kind of low points in the year when they're really focused on getting freight, really focused on visibility going into Q3, going into Q4, going into Q1. And we're going to ask them to submit rates and submit pricing for that. And, you know, look, they're going to be hungrier because they want that visibility going into the softer part of the year. And then they've also added an RFQ 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, Q3 is going to be for you, we also want you to kind of bid the freight. So I think that's part of what you saw. So it's 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's what you saw manifest in a little bit of a leg down for us in October on contracted rates.
spk03: Appreciate all that. And last one, 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.
spk06: Yeah, so from a debt standpoint, I think we're looking at debt pretty holistically. There was kind of a stark difference in opinion between the two ratings agencies on whether or not that new preferred should be treated as equity or debt. One said it should be treated as debt. One said it should be treated as equity. We're focused on really how our investors, how our shareholders evaluate that new security. But we're looking at debt 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, start to approach that one and a 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, some duplicative terminals, yards, things like that, that we've 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, you know, 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 They carry 7%, good, very friendly paper, good coupon, good dividend relative to our current interest payment on our terminal debt, so that will likely stay in. But, you know, 13% is a bit onerous, and we're looking for ways to delever the company and improve the free cash flow profile of the company. So that will likely come out as part of our overall balance sheet enhancement through some kind of large pay down here in the near term.
spk03: That makes sense. And in terms of the acquisition market after the debt pay down?
spk06: Yeah, the acquisition market is still interesting. It's been a little bit slower because of this bid-ask spread that inevitably 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 multiple that we're paying and immediately accretive. We also have another few acquisitions that we're 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 creative. 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 of a meaningful even net of 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.
spk03: Jonathan, Aaron, team, appreciate the time as always.
spk09: Thank you. Thank you.
spk05: Thank you. And as a reminder, if you have a question at this time, please press star 11 on your telephone. One moment for our next question. Our next question comes from the line of Greg Gibbous with Northland Capital Markets. Your line is open. Please go ahead.
spk11: Hi. Good morning, Jonathan and Erin. Thanks for taking the questions. If I could follow up on your output. You know, 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 factors have changed the most.
spk06: Yeah, look, I mean, I think it's right. 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 you know, within a, you know, if you had to quantify it within a couple percent probably of where we may have guided, you know, quote unquote guided on the last call, so not meaningfully different, but, you know, flatbed has changed, which I think we've highlighted some of the mitigants to that. Still optimistic we're going to have a good year, but I think that would be the delta where we kind of step back just a little bit on what we talked about in this last quarter.
spk09: Sure.
spk11: And then I guess with regard to your comments on commitment to accelerated deleveraging in 23, you know, 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?
spk06: No, I mean, I think we've been pretty vocal about that. you know, bolstering the strength of our balance sheet for the last couple years now. You know, I think that the market created certain opportunities, namely the, you know, the buyout of Mr. Daskey, which we thought was very opportunistic and very attractive. And so, you know, we kind of staged that as priority one when that opportunity came about. We had previously announced a $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 things now, 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, you know, what do we need to do to get our shareholders more comfortable that, you know, that Dasky is going to be able to weather storms and to take, you know, certain things off the table, certain, I think, adverse things off the table that disadvantage us from kind of a valuation standpoint relative to our peers and leverage continues to be a consistent theme. And so, 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. As we talked to Jason about, we feel like even net of 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 You know, again, think about incremental debt as, look, incremental debt, but still not funding acquisitions with more than that, you know, one and a half to two turns of leverage and with the rest in cash or cash and equity. Let me say cash. I don't want to say equity. I don't 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 and 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 the 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, it's leverage and margins. We think we're going to continue through transformational initiatives, reshifting drivers, from LP to company, that'll 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.
spk11: Great. Very helpful. I'm wondering if you could just discuss kind of the outlook on the supply side of the market and maybe update on the timing of your new equipment purchases.
spk06: Sure. So, you know, look, I Are you referring to our – specifically with respect to our supply or just industry supply? Thoughts on industry supply?
spk11: Industry supply was kind of part of the first question, and then just, you know, the update on the timing, maybe this year of new equipment purchases.
spk06: Yeah, so I'll hit the latter first. So new equipment purchases for us are 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 dry van 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, you know, 60 to 65 in Q1, 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, 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 mentioned it to Bert. We're seeing massive net revocations of carrier authorities. based on FMCSA data, six to 8,000 carriers per week. If you look at some of the data that's out on class eight 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 demand destruction, or I keep saying demand destruction, supply destruction, capacity destruction. We're seeing LP drivers, owner-operator drivers leave the market. We do think 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, or you look at trough kind of off-season peak, I'll say it differently, off-season peak 2019 rates to off-season peak 2022 rates, both of those are up about 35%, okay? If you look at that and say, so it's about a 10% CAGR, so 10% CAGR over those three years in rate increases. Historically, we've seen those rate increases track to CPI, so about 2.5% a year, year in, year out, so you can go, okay, you guys are massively up. I think that the counterpoint to that, the credible counterpoint to that is if inflation adjusts a lot of those rates, we're 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 percent, lubricants, things like that, and you truly adjust rates based on an inflation-adjusted basis so 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.
spk11: Got it. Very helpful. Thanks, Masha.
spk05: Thank you. And one moment for our next question, please. And our next question comes from the line of Ryan Snell with Craig Hallam. Your line is open. Please go ahead.
spk10: Good morning, guys. Just one for me at this point. What do you guys think is the right maintenance CapEx level? Because if I look at kind of DNA the past couple years, 90-ish million CapEx including all finance costs was about $145 million last year and then a little bit more than that this year in 23. So curious kind of 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 in capex?
spk09: 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 – that's net of proceeds. So the right way to think about our CapEx is this year we've got about 8 to 10 million of transformational CapEx where 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's 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 basis. So we're pretty happy with where our overall fleet is. An outlook number on replacement, given our current profile and truck count, is probably 130 to 140 million for an outlook perspective. That's kind of how we think about that piece of it. Is there another piece you want to address?
spk10: Free cash flow. So if you think about, call it $140 million of recurring maintenance capex, then you back out the interest expense, which is going to be higher, tax expense, preferred dividends, et cetera. I guess how confident are you after kind of fully baking everything free cash flow generation this year?
spk09: Yeah, I think, 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 in the cash flow numbers that you mentioned.
spk06: Yeah, Ryan, and we're still, look, we're still, you know, philosophically, we're still looking at kind of a 30%, 70% split, so 70% financed equipment, 30% cash pay on that equipment. 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.
spk10: Great. Thanks, guys. Good luck.
spk06: Thank you.
spk05: Thank you. And I would like to turn the conference back over to Jonathan Shepko for closing remarks.
spk06: Thank you, Michelle. I'd like to close today's call on slide 15 with some final thoughts on our 2022 performance and the DASCI opportunity for 2023 and beyond. As the market-leading servicer to complex industrial end markets, we delivered solid revenue growth in the third consecutive year of record-adjusted EBITDA. Our resilient business model includes a diverse portfolio of more than a dozen industrial end markets that span multiple industry verticals, many with unique, non-correlated drivers that support our resilience and growth. A large and diversified fleet with expansive geographic breadth that serves the unique needs of over 4,000-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 affect an immediately accretive share repurchase, providing increased ownership to our shareholders in the expanding earnings profile of our business. And even in the midst of a challenging backdrop, our current expectations are for 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.
spk05: This concludes today's conference call.
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