Daseke, Inc. (NASDAQ:DSKE) Q4 2022 Earnings Call Transcript
Daseke, Inc. (NASDAQ:DSKE) Q4 2022 Earnings Call Transcript February 6, 2023
Operator: Good morning everyone and thank you for joining today's conference call to discuss Daseke's Financial Results for the Fourth Quarter and Full Year Ended December 31, 2022. With us today are Jonathan Shepko, CEO and Board member; Aaron Coley, EVP and CFO; Adrianne Griffin, VP of Investor Relations and Treasurer; and Traci Graham, VP of FP&A and Business Analytics. After their prepared remarks, the management team will take your questions. As a reminder, you may now download the PDF of the presentation slides that will accompany the remarks made on today's conference call as indicated in the press release issued earlier today. You may access these slides in the Investor Relations section of Daseke's website. I would like to turn the call over to Adrianne Griffin, who will read the Company's Safe Harbor Statement that provides important cautions regarding forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Adrianne, please go ahead.
Adrianne D. Griffin: Thank you Michelle and good morning everyone. Please turn to Slide 2 for a review of our Safe Harbor and non-GAAP statements. Today's presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Projected financial information, including our guidance outlook, are forward-looking statements. Forward-looking statements, including those with respect to revenues, earnings, performance, strategies, prospects and other aspects of Daseke's business are based on management's current estimates, projections, and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.
I would also like to highlight our decision to update our reporting segment results. Previously the company had disclosed a corporate segment which is not an operating segment and included acquisition transaction expenses, corporate salaries, interest expense, and other corporate administrative expenses and intersegment eliminations. Beginning with the fourth quarter of 2022 we began eliminating intersegment revenue and expenses at the segment level and allocating corporate costs to our two reportable segments based upon respective segment revenue. All financial information discussed and included in our materials aligns with the new allocations and eliminations. I encourage you to read our filings with the Securities and Exchange Commission for a discussion of the risks that can affect our business and not to place any undue reliance on any forward-looking statements.
We undertake no obligation to revise our forward-looking statements to reflect events or circumstances occurring after today, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. During the call, there will also be a discussion of some items that do not conform to the U.S. generally accepted accounting principles or GAAP, including and not limited to adjusted EBITDA, adjusted operating ratio, adjusted operating income, adjusted net income or loss, free cash flow and net debt. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the appendix of the investor presentation and press release issued this morning, both of which are available in the Investors tab of the Daseke website, www.daseke.com.
In terms of the structure of our call today, I will start by turning the call over to Jonathan, who will review our business operations and the progress we are making as we execute against our strategic priorities and then Aaron who will provide a financial review of the fourth quarter and full year 2022. And Jonathan will then speak about our 2023 outlook and wrap up our remarks with a few closing comments before we open the line for your questions. With that, I'll turn the call over. Jonathan.
Jonathan Shepko: Thank you. Good morning, everyone. I'd like to start the call today by welcoming Adrianne to the team. She joins us as the Vice President of Investor Relations and Treasurer. And we are pleased to have her focus on further elevating our IR and Treasury functions. I would also like to thank each of the Daseke team members and especially acknowledge the disciplined commitment of our professional driver community. It's due to the collective effort of Team Daseke that we will today report our company's third consecutive year of record adjusted EBITDA. I'd like to spend just a moment on this Slide 3, whether you are a long time holder of Daseke or new to our story, given the amount of change we have successfully affected over the last years, we thought it made sense to provide a snapshot slide to help everyone appreciate who we are today.
As mentioned, 2022 was yet another record year for our company, both in total revenue and adjusted EBITDA. This performance is a noteworthy our progress and highlights the continued earnings potential of our business as demonstrated by comparing this past year's record adjusted EBITDA of 234.9 million, which was generated during the peak rate environment of the current cycle to the last cycle of peak rates since 2018, where an EBITDA was approximately $60 million less at 174.3 million. This is a peak to peak improvement of nearly 35% and was generated by a 2022 fleet that was 16% leaner than our 2018 fleet before we began to work on an issue to prove our asset utilization. With that as your backdrop, I'd like to move this slide forward where I will share some of our 2022 accomplishments that set the stage for our 2023 outlook.
In 2022 we delivered solid revenue growth and posted our third consecutive year of record adjusted EBITDA. We executed a meaningful, transformational share repurchase from our founder, which was accretive and removed -- the perceived overhang on our stock given the percentage of the company the founders ownership represented. We affirmed our ongoing commitment to enhance the strength of our balance sheet through accelerated deleveraging. We have been vocal about the resiliency of our operating model one that is unquestionably different from any other publicly traded transportation and logistics peer. A blend of asset light asset based capabilities exclusively serving the industrial economy with strong diversification by end market and sub vertical.
And through a combination of transformation initiatives and strengthening macro environment, we believe we are well positioned to outperform when the cycle doesn't flex. If you will turn with me to Slide 5, I'd like to discuss our fourth quarter 2022 share repurchases. On September 30th, we announced the $40 million share repurchase plan, alternately purchasing over 803,000 shares under this plan at a weighted average price of $6.05. Before starting this plan with the announcement of a founder share repurchase on November 14th. We subsequently closed on the founder share repurchase repurchasing all shares then held by Daseke's founder through negotiated terms very favorable to our company and common shareholders. In total we purchased nearly 30% of our then issued and outstanding common shares funded with 45 million of cash on hand and the issuance of Series B perpetual redeemable preferred stock.
I'll note that the Series B preferred already is our sole option in whole or in part for 67.6 million plus any accrued and unpaid dividend. If Series B preferred are not convertible and have no affirmative or native comments. As is outlined in this slide, these transactions were immediately and significantly accretive based upon adjusted Pro Forma EPS of $1.52 for full year 2022. Simply put, this repurchase will provide one of the most profound uplifts for our shareholders in the coming years, providing exponential growth opportunity as our consistent performance and strategic execution gives rise to a more aptly valued share price. And while the allocation of capital and support of this buyback fits squarely within our shareholder value creation framework, with our focus now on delevering, the company has no intention to repurchase any additional stock in the foreseeable future.
With that, I will now hand the call over to Aaron who will provide a more detailed walkthrough of our fourth quarter and full year. Aaron.
Aaron Coley: Thank you, Jonathan and good morning everyone. I would like to start with Slide 6, which represents a high level review of our consolidated results for the quarter. Once again, our resilient business model facilitated growth as we delivered quarterly revenue of 408.2 million, up 3.5% or 13.9 million compared to revenue of 394.3 million in the fourth quarter of 2021. This included demand strength on high security cargo and the agriculture end markets, which were partially offset by declines primarily in the steel end market and renewable energy vertical, plus contributions from a tuck-in acquisition completed early in 2022. Compared to the fourth quarter of 2021, our adjusted operating ratio declined as inflation increased our total expenses faster than revenue.
The cost increases came primarily from salaries, wages and benefits and operations and maintenance expense. And while we achieved year-over-year improvement in our rate per mile, we also realized a reduction in miles per tractor. That said, we're very focused on consistently improving operating ratio by driving operational excellence and strategic execution. In the quarter, we delivered adjusted EBITDA of 49.6 million equal to the fourth quarter of 2021. Now turning to Slide 7. Specialized solutions revenues were 242.9 million, up 10.9% versus the prior year as our team performed very well in shifting asset capacity to end markets with strength including high security cargo, agriculture, and aerospace, which was more than offset by moderating demand in construction end markets and the renewable energy vertical.
Furthermore, segment rate per mile was strong at $3.50, an improvement over the prior year as our teams capitalized on demand growth with our asset-light fleet mix delivering a 2% increase in company miles. Specialized functions adjusted operating ratio improved 110 basis points to 91.8%. All adjusted EBITDA improved 19.1% to 32.4 million. Productivity in the quarter was impacted by shorter length of haul loads in high security cargo and a soft decline in total miles per tractor per day that was magnified by the recent receipt of new tractors near the end of the year. We expect a rebound in our miles per tractor per day productivity as seasonality and new equipment deliveries normalize. On Slide 8, we outlined Flatbed Solutions segment results.
Photo by Yassine Khalfalli on Unsplash
Despite the first year-over-year decrease in flatbed market rates since the pandemic, Daseke was still able to garner a premium rate compared to the market. As shown in the top right chart on the slide, declining rates and cooling demand entered the steel end market, partially offset demand growth in manufacturing, construction, and the agriculture end markets resulted in a revenue decline of 5.7% to 165.3 million. The use of our asset right model in this segment enabled us to focus on company asset utilization which traded lower loading, higher margin freight on the company assets from brokerage revenues which decreased. Lower revenue and cost inflation, primarily in operations and maintenance resulted in this segments adjusted operating ratio increasing to 95.9% from 91.8% in the prior year and adjusted EBITDA of 17.2 million which was 23.2% lower than the prior year period.
Now moving to Slide 9, in 2022 we achieved a consolidated record revenue of 1.8 billion representing a 13.9% improvement over the prior year, driven particularly by strength in our high security cargo end market which grew at nearly 50% over 2021. As well as growth in agriculture, manufacturing, construction, and aerospace, partially offset by declines in the renewable energy vertical and the steel end market. We also achieved increases of 10.5% in the rate per mile and 5.4% in revenue per tractor over 2021. In 2022, we reported income from operations of 98.4 million compared with 112.8 million in 2022. However, in 2022 we had incremental insurance and claims expense of 15.4 million, a 9.4 million non-cash impairment expense resulting from integration and elimination of trade names, 3.8 million in acquisition related expenses, and 2.1 million restructuring expenses as compared to fiscal year 2021.
Adjusting for all of these expenses, income from operations would have exceeded 2021. The adjusted operating ratio was 91.6% in 2022, an increase from the 90.9% in 2021. Though we continue to experience inflationary pressures that built across the year primarily in salaries, wages and benefits, as well as operations and maintenance, we're able to offset some of these headwinds on our operating ratio by shifting rate to higher margin company assets and redirecting assets to the most profitable lines. The Daseke team delivered commercial execution in our flexible asset light strategy to deliver value to our shareholders and we set an adjusted EBITDA record of 234.9 million suppressing the previous record of 223.1 million set last year. We're very proud of the entire Daseke team for achieving this record as it shows the agility and resiliency of our team and our operating model.
Let's look now at the segments on a full year basis starting with specialized solutions on Slide 10. Segment revenue grew 15.9% to just $1 billion and accounted for nearly 65% of the company's total revenue growth. This success was based on strong demand in high security cargo, agriculture, manufacturing, and construction end markets. Robust commercial execution using all aspects of our asset light strategy to deliver profitable growth and contributions from tuck in acquisition modestly offset by demanding degradation in the renewable energy vertical. We're pleased to report 12.1% increase in the rate per mile and an 8.4% increase in revenue per tractor versus full year 2021, essentially flat company miles compared to 2021. Furthermore, adjusted operating ratio improved by 30 basis points to 90.8 versus full year 2022 and adjusted EBITDA increased 11.5% to 141.2 million versus the prior year due to strong revenue growth.
Wrapping up the segment discussion on a full year basis, we look at Slide 11 for Flatbed Solutions for full year 2022. Flatbed Solutions year was predicated on their ability to capture attractive rate in strong end markets and from softer end markets and pivoting from softer end markets to company owned assets which when circumstances necessitated. Segment revenue was up 11.4% year-over-year to 769 million as gains primarily in construction, manufacturing, and agriculture end markets outpaced the decline in the steel end market. Compared to 2021 second rate per mile increased 7.5% though total miles declined to 8.5% and overall revenue per tractor grew 1.2%. Adjusted OR of 92.7% worsened from 90.8% in 2021, primarily due to cost inflation pressures such as market rate driver compensation, operations and maintenance, and insurance claims more than offsetting revenue growth.
Adjusted EBITDA of 93.7 million and adjusted EBITDA margins of 12.2% both declined modestly from 2021 for full year results. Despite cost inflation and sequential decline in market rates over the second half of 2022. In terms of cash flow on Slide 12, you will see our ability to generate significant free cash flow as well as our robust liquidity position. In 2022 free cash flow was 135.8 million with cash purchases and proceeds from the sale of equipment, property and equipment nearly offsetting for the second year in a row. We continue to maintain robust liquidity over 264 million with our cash balance created from strong cash flow from operations, plus our revolving credit facility where we had over 110 million of undrawn availability at year end.
I'll note our cash balances give effect to the $45 million of cash repurchases in the fourth quarter that Jonathan discussed and the 19.1 million to fund a tuck in acquisition. Without these two uses of cash, our year end liquidity could have been in excess of 325 million. On Slide 13, we provide a strategic update on our balance sheet. With another yet record year of our results we have established a trend of improved performance. The change our business has taken undertaking over the last few years is real, it's lasting, and we remain confident in our ability to generate significant positive free cash flow regardless of the prevailing macroeconomic environment. Given this confidence, we're committed to directing free cash flow to reduce our leverage and are establishing a long term gross leverage target range of one and a half to two times for normalized ongoing operations.
We do note that given the seasonality of the business and the front end loaded capital expenditure plan, our leverage will increase slightly in Q1 before declining to the upper end of the range of the target range in the fourth quarter of 2023. We're proactively evaluating options to expedite our progress towards this goal. We believe this commitment to fortifying our balance sheet provides another example of our focus to de-risk the business and deliver value to our shareholders. I'll now turn the call back to Jonathan for an update on our 2023 outlook. Jonathan.
Jonathan Shepko: Thank you, Aaron. Before we turn the call over and take questions, I'd like to provide some perspective on the market environment in 2023 and our outlook for the business in that context on Slide 14. As 2023 unfolds we expect an improvement in operational productivity, improvements in driver availability which should allow for the seeding of additional higher margin company tractors, and ultimately improvements in demand for freight haul services by mid-year when our business is seasonally on trend. We believe in the cross cycle strength of more than a dozen industrial facing end markets we serve, some of which are set for continued growth given their limited correlation to consumer spending or the prevailing macro backdrop.
We expect that all of this will translate into flat to low single digit revenue and net revenue growth compared with 2022. Though in the near term, we do readily acknowledge the ongoing rate environment challenges that began in the second half of 2022 and inflationary cost pressures that continue to work through -- work their way through the markets. However, as stated on our last quarterly call, we continue to feel conviction in the ability of our ongoing transformation initiatives to largely offset these collective headwinds and to provide additional upside to our earnings profile during the expansionary leg of the next impending cycle. Given our view of the current macro environment, our specific end market exposure, and the levers we have available in each of our variable operating model and transformation initiatives, we see full year 2023 adjusted EBITDA approximately in line with our record 2022 to print.
In sizing our 2023 net capital expenditures outlook, we view our reinvestment in the fleet as a strategic opportunity, one that positions Daseke to maintain the age of our fleet, drive margin improvement, continue to attract and retain drivers, and preserve our favored standing with our valued OEM partners. Our expectation is for 145 million to 155 million in net CAPEX expenditures for 2023, with most of the capital spend expected to occur in the first half of 2023. We are very pleased with this 2023 outlook, especially building upon record results in 2021 and 2022. Now we will turn the call back to the operator and take your questions.
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