Daseke, Inc. (NASDAQ:DSKE) Q2 2023 Earnings Call Transcript
Daseke, Inc. (NASDAQ:DSKE) Q2 2023 Earnings Call Transcript August 5, 2023
Operator: Good morning, everyone. And thank you for joining today’s conference call to discuss Daseke’s Financial and Operational Results for the Quarter Ended June 30, 2023. With us today are Jonathan Shepko, Chief Executive Officer and Board Member; Aaron Coley, Executive Vice President and Chief Financial Officer; and Adrianne Griffin, Vice President of Investor Relations and Treasurer. I would like to now turn the call over to Adrianne Griffin. Adrianne, please go ahead.
Adrianne Griffin: Thank you, Steven. As indicated in the press release issued earlier today, participants may now download the second quarter 2023 presentation that will accompany the remarks made on today’s call. You may access this presentation on Daseke’s website www.daseke.com and in the Events and Presentations portion within the Investor Relations section. Slide two of today’s presentation contains our Safe Harbor and non-GAAP statements. Today’s presentation also contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Projected financial information, including our guidance outlook, are forward-looking statements. Forward-looking statements, including those with respect to revenues, earnings, performance, strategies, prospects and other aspects of Daseke’s business are based on management’s current estimates, projections and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.
I 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 today, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws. During the call, there will also be a discussion of some items that do not conform to U.S. Generally Accepted Accounting Principles or GAAP, including and not limited to, adjusted EBITDA, adjusted EBITDA margin, adjusted operating ratio, adjusted operating income, adjusted net income or loss and free cash flow.
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. In terms of the structure of our call today, I will first turn the call over to Jonathan Shepko, who will review our business operations and the progress we are making as we execute our key strategic priorities. Aaron Coley will then provide an update on our second quarter results. Jonathan will conclude our prepared remarks with an updated 2023 outlook before we open the line for your questions. With that, I will turn the call over to Jonathan. Jonathan?
Jonathan Shepko: Good morning, everyone, and thank you for joining our call today. Since the second quarter of 2022, when we delivered our company’s highest ever quarterly adjusted EBITDA, our industry has faced multiple consecutive quarters of challenges in both the freight rate side of the ledger as well as the cost side. While many agreed at the bottom is here, our industry continues its optimism in support of a forthcoming inflection and we remain watchful for consistent key data points to signal the inflection is eminent. Whether such recovery ultimately occurs in the back half of this year or at some later point, our team has approached the current environment as an opportunity to reinvent and reposition Daseke. Given our solid Q2 2023 performance as a small cap public company with a business model and end market exposure truly unmatched by any of our publicly traded peers, any company that is successfully executing a fundamental rebuilding and continuing repositioning of our organization, we believe it’s misplaced to discretely evaluate our performance and our progress on a quarter-by-quarter basis, particularly when comparative periods include the record breaking industry cycle peak of 2022 versus the current cycle trough.
As such, today, in addition to providing more context around the second quarter’s performance, I would like to provide a recap of our profound progress to-date and our momentum as we approach the next up cycle. To that after Aaron provides this quarterly financial update, I will offer a summary of our transformation progress, spend some time on capital allocation and close with the comparison of our performance in the current environment to that of legacy Daseke’s performance in the pre-COVID freight recession of 2019. This comparison illustrates the significant improvement affected over the last few years and the resulting strength of an organization on better footing for tomorrow. Before moving forward, though, I would like to take a moment to thank the entire Daseke team across North America, who continues to prioritize our legacy of strong employee relationships, including those with our committed drivers.
Their contributions toward our company’s success, as well as the success of our customers are critical throughout this difficult and important time. With that, I will now turn the call over to Aaron for an update on our financials.
Aaron Coley: Thank you, Jonathan, and good morning, everyone. As illustrated on slide six, during the second quarter, we continued to strengthen our balance sheet as we made a discretionary payment with cash on hand to reduce our term loan debt balance by $50 million, which reduced our interest expense. In addition, we also used $20 million of cash on hand to redeem the entire class of Series B-1 preferred shares that were receiving a 13% cash dividend, thus eliminating $2.6 million of annual dividend payments. These actions improved free cash flow performance for the remainder of the year and beyond. At the end of the second quarter, we maintained a very healthy level of available liquidity at $198 million, including a cash balance of $94 million and $104 million available under our undrawn revolving credit facility.
We continue to evaluate opportunities for additional repayments to reduce gross debt, further improving the risk adjusted return for current and prospective shareholders. Turning to slide seven. I would like to review our second quarter financial performance. Notably, our more typical seasonal second quarter uplift was largely absent this year and that’s the second quarter consolidated revenue of $407 million was 15% lower than the same quarter last year. However, the intentional shift to load higher margin company-owned assets and improved utilization of our entire company-owned fleet allowed us to capture additional $3 million of company freight revenue, with better margin pull-through and partially offsetting lower owner-operator and brokerage revenue.
Demand strength in agriculture and mining end markets was more than offset by a decrease in construction end market due primarily to the underperformance in our Northwest Flatbed operations. And in response to this lower than expected financial performance during the second quarter, we reorganized an underperforming operating company into another operating segment. This type of decisive action is foundational to One Daseke, our series of strategic transformational initiatives, which Jonathan will expound on in his closing remarks. Despite the challenging freight environment, the company reported a 92% adjusted OR in the current period and while lower than the prior year period was 100 basis points better than on a sequential basis, second quarter compared to first quarter.
In fact, on a sequential basis, the rate per mile increased 2%, revenue per tractor increased 5%, net revenue increased 4% and adjusted EBITDA margin increased 110 basis points, nascent indicators of the stabilization in the freight market. Finally, we generated cash flow from operations of $28 million, an impressive 23% increase over the prior year quarter, while cash flow from investing activities, which reflects net purchases and sales of revenue generating equipment, consumed $2 million. We continue to primarily fund new equipment purchases through equipment financing, which reduces our weighted average cost of capital. Similarly, for the six months ended June 30, 2023, we generated $58.9 million in cash flow from operations, which was $7 million better than the prior year period.
These results compare favorably against the peak cycle in the year ago period and showed a strong cash flow generation capability of the business even in down portions of the cycle. Turning now to slide eight. Our Specialized Solutions segment reported revenue of $239.4 million, a 10% decline versus the prior year, while revenue net of fuel surcharge declined by only 6%. The Specialized Solutions segment recorded a nearly 5% increase in miles, offset by a 6% decline in rate per mile. Notably, we have continued to capture rates in our Specialized Solutions segment that are a significant premium to the Flatbed market. As compared to the prior year quarter, our team continued to prioritize loading high margin company-owned assets, resulting in nearly flat company freight revenue, while asset-light revenue in the segment declined.
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Demand strength in agriculture and energy end markets was more than offset by lower construction and high security cargo revenue versus a stronger year ago period, which included the first full quarter of high security focused acquisition. Adjusted OR was 90.4% in the current year quarter and 88% in the cycle peak of the second quarter of last year. This current quarter 90% OR is very favorable in light of the freight environment. Adjusted EBITDA and adjusted EBITDA margin were $33.4 million and 15.4%, respectively. Despite the difference in the market conditions from a year ago, we are encouraged by the Specialized increasing both rate per mile and revenue per tractor on a sequential basis. Now turning to slide nine. During the second quarter of 2023, Flatbed Solutions segment rates remained 13% lower than the second quarter of 2022.
Despite the rate decline, Flatbed Solutions continued its pursuit of operational excellence and increased total miles driven by 5%, an average length of haul by 7%, improved head by 0.5% and added 4% more trucks to the fleet, all while maintaining nearly flat unseated trucks. The team was once again able to increase company freight by more than 10%, while brokerage revenue declined by more than 50% versus the prior year period. The net result of these dynamics was segment revenue of $168 million, which was $47 million lower than the prior year quarter, primarily due to $25 million decline in brokerage. Adjusted EBITDA and adjusted EBITDA margin was $19.1 million and 13.1%, respectively. Within the industrial end markets that we serve, strength in manufacturing end markets was more than offset by declines in steel and construction end markets, most notably in the Pacific Northwest.
These results demonstrate the success of our asset right operating model and we will continue to focus on productivity. I will now turn the call back to Jonathan for an update on our 2023 outlook. Jonathan?
Jonathan Shepko: Thank you, Aaron. Before I share our perspective on freight conditions and the outlook for the rest of the year, I want to provide more insight on One Daseke, our ongoing transformation, which is defining and expanding the business strategies that will guide us throughout many economic cycles to come. We have begun laying the groundwork to meaningfully shift the high low watermarks of our financial performance, delivering a higher baseline, while navigating this trough and more peak cycle upside regardless of when the market turns. Looking now at slide 13. One Daseke comprises three distinct and complementary phases, integration, finance and optimization, with a time line that includes our achievements to-date and our goal is to reach a target adjusted EBITDA run rate of $30 million as we exit 2024.
Advancing the first two phases in tandem, we intend to finish the integration phase, bringing together many of the Daseke operating companies, consolidating teams and operations and setting a structure for future success by the end of 2024. Along the way, we will work towards specific objectives, key among them operating ratio, where our target will remain 90%. This is our magnetic north as we follow our transformation roadmap and I was very pleased to see our Specialized Solutions segment already around this mark through this cycle trough. Drilling into the finance phase on slide 14, we present the virtuous cycle of efficiently deploying our strong cash flow to lower our weighted average cost of capital by allowing burdensome revenue equipment leases to expire maturity and reducing our term loan B balance to deliver additional earnings per share.
These actions will generate a flywheel effect on free cash flow and will be supplemented with accretive M&A that targets industrial end markets and Specialized service offerings and incremental growth in the next up cycle. With balance sheet strength as a top priority, our capital structure already looks remarkably better than it did in the last cycle with lower gross leverage, higher liquidity, lower share count and hence lower risk. The finance phase of One Daseke will further with -- will further enhance our capital and balance sheet profiles, while also giving shareholders more ownership of our growing earnings. On these next two slides, I’d like to tack back to my opening comment, proposing Daseke’s trending performance to be used to evaluate the attractiveness of our value proposition rather than a quarter-by-quarter view, particularly at this point in the cycle.
On slide 15, I’d like to walk through an interesting case study comparing Daseke’s current performance in this freight recession to the last freight recession, our industry experienced just before COVID in 2019. Industry data suggests this current downturn exhibits similar contours to that of the prior cycle’s trough, though, I would say, our current recessionary environment is more pronounced and the cost inflation has made things even more challenging. If you look at 2019, Daseke’s fleet of approximately 5,700 trucks generated $1.7 billion in revenue with an adjusted EBITDA margin of 11% and an adjusted OR of 96%. Comparatively, in the first half of 2023, we operated a smaller fleet with 4,863 trucks and delivered enhanced profitability with a 14% adjusted EBITDA margin and adjusted operating ratio of 93%.
So what you see today in just 48 months, Daseke is a company with a more effective operating model and improved margin profile and a stronger balance sheet, all of which we have channeled to create a step change in the expected low watermark adjusted EBITDA, the trough-to-trough adjusted EBITDA of our company, if you will, from $156 million to something in the low $200s, dramatic improvement to date, but even more to come for our investors. On slide 16, we demonstrate the last trough to peak cycle, beginning with the last freight recession in 2019, which I will talk to you on the last slide. While there will always be different catalysts that play to ignite recovery, in 2020, there was COVID-related stimulus. During the three-year recovery that is 2020, 2021 and 2022, we generated approximately $170 million of cumulative incremental adjusted EBITDA, ultimately generating a high watermark of $235 million in the 2022 cycle peak.
With the three phases of our One Daseke transformation, including integration and finance phases, followed by optimization, at the peak of this impending cycle, we would ultimately expect to largely eclipse not only the cumulative incremental adjusted EBITDA generated during the last up cycle, but dramatically shift the high water performance mark of our business beyond our record setting 2022 adjusted EBITDA print. In addition to the 2019 versus 2023 case study I reviewed, which compared the resiliency of our continuously improving organization in a recessionary environment to that of Daseke only a few years ago. I’d also like to spend just a moment on our Q2 operating ratios. With all of the talk this quarter about tough comps or freight recession, it’s easy to lose focus, but our entire team is encouraged when we look at the absolute performance of Daseke, specifically referencing our second quarter adjusted operating ratio, excluding fuel charge of 92.3%.
As an investor interested in the transportation space, if you compare our adjusted operating ratio to that of our peer group for this quarter, we are right in the middle of the pack, relying on our asset right and end market-focused strategies to perform well even in this environment and yet we trade at a material discount to these same peers. Our model is working. Our Specialized segment, which comprises 55% to 60% of our company has achieved our stated cross-cycle OR target of 90%. Within our Flatbed segment, we have seen a surprising level of resiliency in this challenged environment with our Southeast Flatbed companies performing in the low 90s OR. While integration noise and trouble building materials in lumber markets plagued our smaller Northwest fleet and contributed to the softer 95.1 adjusted OR print for the overall Flatbed segment in this quarter.
Before we open to questions, I’d like to close our prepared remarks with an update on our 2023 guidance. Today Daseke’s updated outlook now assumes no improvement in current freight market conditions in the second half of the year. The supply-demand relationship remains in balance with demand elusive and carriers exiting the industry at a much more sluggish pace than they entered the market in 2021 and 2022. That said, we anticipate the second half 2023 adjusted EBITDA will be within a range between 100% and 110% of that of first half 2023, which would imply full year 2023 adjusted EBITDA of $200 million to $210 million. And while we have had puts and takes across various end markets and operating assumptions that have impacted our projections, this revision is primarily linked to a shift in the resurgence of wind demand back -- from the back half of 2023 to now 2024 and continued degradation in the building materials complex in the Pacific Northwest.
Notwithstanding Wind and Northwest Flatbed, absent a wave of economic uncertainty like we saw at the end of last year, we expect load availability for the coming months to otherwise remain reasonably stable until giving way to a more typical gradual decline in the fourth quarter. I will also note that our capital expenditure outlook for the full year 2023 is unchanged at $135 million to $145 million, given planned organic investments in company tractors to support the asset-light strategy and maintain a low average age of fleet, thereby reducing maintenance costs. Experience suggests that market repays longer troughs with steeper rebounds and we intend to continue to control costs, improve operations and bolster our balance sheet, all of which will position us for outsized performance as we enter the next up cycle.
Now we will turn the call back to the operator and take your questions. Steven?
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