Covenant Logistics Group - Q4 2023
January 24, 2024
Transcript
Operator (participant)
Welcome to today's Covenant Logistics Group fourth quarter earnings release conference call. Our host for today's call is Tripp Grant. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. I'll now turn the call over to your host. Mr. Grant, you may begin.
Tripp Grant (EVP and CFO)
Good morning, everyone, and welcome to the Covenant Logistics Group's fourth quarter 2023 conference call. As a reminder, this call will contain forward-looking statements under the Private Securities Litigation Reform Act, which are subject to risks and uncertainties that would cause actual results to differ materially. Please review our SEC filings and most recent risk factors. We undertake no obligation to publicly update or revise any forward-looking statements. A copy of the prepared comments or any additional financial information is available on our website at www.covenantlogistics.com/investors. I'm joined on the call today by David Parker and Paul Bunn. Before we address the fourth quarter's results, I'd like to take a moment to reflect on the year as a whole. As challenging as it was, 2023 was a pivotal year for Covenant.
We were able to demonstrate the durability of our improved business model by achieving the second-best adjusted earnings per share in company history, while setting the stage for future growth and improvement through the accretive acquisitions of Lew Thompson & Son Trucking and Sims Transport. These achievements would not have been possible without the commitment from our talented people and many years of planning, execution, and collaborative teamwork. As we enter 2024, we do so with a resolved commitment to forward progress in our strategic long-term plan, improving upon and improving upon these results in the future. Focusing now on the quarter. We were pleased with our first fourth quarter's results, despite the lingering weakness in the overall freight environment.
Compared to a year ago, consolidated freight revenue was down approximately $15.3 million, or 6%, primarily as a result of year-over-year tractor count and rate declines in our asset-based truckload businesses, combined with little to no overflow freight handled by our asset-light Managed Freight segment, partially offset by improved utilization of our assets. Adjusted operating income declined approximately $4.9 million, or 22% compared to the prior year quarter, primarily resulting from a $6.1 million decrease in our Managed Freight segment, partially offset by a $1.2 million improvement to the profitability of our Warehousing segment while the combined truckload operations were essentially flat. Adjusted net income decreased 24% to $14.8 million, and Adjusted Earnings Per Share decreased 22% to $1.07 per share compared to the year-ago quarter.
Weighted average diluted shares decreased approximately 3.5% because of our share repurchase program. Key highlights include: despite a 9% rate decline and 4% average tractor count reductions, our combined truckload operations generated roughly the same adjusted operating income in the fourth quarter of 2023 as they did in 2022. The Lew Thompson and Son Trucking operation continues to perform well, with near-term opportunities to meaningfully grow the business in the first quarter of 2024. Our net capital investment for revenue-producing equipment was approximately $91 million for the quarter, consisting of approximately $48 million in normal 2023 replacement CapEx, $13 million in specialized equipment CapEx for poultry-related growth, and $30 million in pull forward of normal replacement CapEx, originally scheduled for 2024.
The average age of our fleet at December 31st improved to 19 months, compared to 26 months in the prior year and 23 months at September 30th, 2023. Within our combined truckload segments, compared to the prior year, operations and maintenance-related expenses declined by $0.11 per total mile, or 38%, and fixed equipment-related costs, including leased revenue, equipment expenses, depreciation, and gains on sale, only increased $0.04 per total mile. Gain on sale of revenue equipment was $0.2 million in the quarter, compared to $1 million in the prior year. Declining fuel prices and lagging fuel surcharge recovery rates created a TELwind for our combined truckload, truckload operations, which helped us overcome the negative impact of a cyber event with a major customer and the United Auto Workers strike in the quarter.
Our TEL Leasing Company investment produced $0.25 per diluted share, compared to $0.21 per diluted share versus the year ago period. Our net indebtedness as of December 31 was $248.3 million, yielding an adjusted leverage ratio of approximately 2x and debt-to-capital ratio of 38.1%. On an adjusted basis, return on invested capital was 8.9% for the current quarter versus 17.7% in the prior year. The decline is attributable to reduced year-over-year operating income, particularly from our asset-light Managed Freight segment, and the increase in the average invested capital base associated with acquisitions, growth CapEx, and pulling equipment purchases forward. Now, Paul will provide a little more color on the items affecting the individual business segments.
Paul Bunn (President and COO)
Thanks, Tripp. Expedited outperformed our expectations during the fourth quarter, yielding a 91.4 Adjusted Operating Ratio. The negative impact of the cyber attack on a major customer in the quarter was largely offset by the benefits of fuel recovery, lagging at a declining DOE price.... In this segment, rates have declined by approximately 12%, but utilization has improved approximately 5%. The improvement in utilization was principally attributable to more engineered routes and the newer equipment in the fleet with less downtime. Dedicated reflected another success story, yielding a 91.4 Adjusted Operating Ratio, also representing our best quarterly results for this segment in company history. Similar to Expedited, our Dedicated operations saw a positive impact to profitability as a result of declining fuel prices, offsetting the negative impact of the United Auto Workers strike in the quarter.
Over the past three years, we have worked hard to improve the profitability within this segment by exiting unprofitable business and adding more profitable business. This Weed and Feed approach has been clunky at times, but has served us well in deploying capital towards opportunities that meet our profitability and return requirements. We are pleased with the year-over-year improvement to adjusted margin and expect to continue to improve upon this segment's size and profitability over the long term. Managed Freight experienced a 15% reduction in total freight revenue and a 69% reduction of consolidated adjusted operating profit. The significant reduction in revenue and operating profit was primarily the product of little to no high-margin overflow freight from our asset-based truckload segments.
Nevertheless, the asset-light nature of the business still generates an acceptable return on invested capital at a 95.8 adjusted operating ratio, which was achieved in the fourth quarter. The brokerage environment remains highly competitive, with numerous brokers aggressively competing for volumes at the expense of margin. We anticipate continued margin pressure in this environment. Our warehouse segment saw a 16% increase in freight revenue and a 428% increase in adjusted operating profit compared to the prior year, as a result of the combination of new customer startups and rate increases with existing customers over the last 12 months. Although we are pleased with the improved profitability within this segment, we will continue to focus on improving the profitability through improved labor utilization and rate increases with existing customers.
Our minority investment in TEL contributed pre-tax income of $4.7 million for the quarter, compared to $3.9 million in the prior year period. The increase is largely due to suppressed 2022 earnings, resulting from increased depreciation in 2022, taken on certain high-mileage tractors that were being prepared to sell. TEL's revenue in the quarter declined 14%, and pre-tax income increased by approximately 20% versus the fourth quarter of 2022. TEL decreased its truck fleet in the quarter versus a year ago by 106 trucks to 2,131, and reduced its trailer fleet by 339 to 6,810. Due to the business model, gains and losses on the sale of equipment are a normal part of the business and can cause earnings to fluctuate from quarter to quarter.
Our investment in TEL is included in other assets in our consolidated balance sheet and has grown to $66.3 million at December 31, 2023, from the original investment of $4.9 million. In 2022, we received $14.7 million of cash dividends from TEL, and we received $9.8 million in 2023. Regarding our outlook for the future, 2023 provided as challenging a freight environment as we experienced in years, but we were extremely pleased with the performance of the model and the team. This is a different team and a different model than the Covenant of 5-10 years ago.
As it relates to 2024, we see no immediate macroeconomic or industry catalysts, but believe continuing to execute on our strategic plan and capacity attritions from the market will result in incremental improvements to operating conditions throughout 2024. As a result, we believe we can surpass our 2023 results with higher Adjusted Earnings Per Share and greater free cash flow that allow us to reduce our indebtedness and/or exercise other capital allocation alternatives. Thank you for your time. We will now open up the call for questions.
Operator (participant)
If you would like to ask a question, please press star one on your telephone keypad now. You'll be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, to ask a question, please press star one on your phone now. Our first question comes from Jason Seidl from TD Cowen. Please state your question.
Jason Seidl (Managing Director)
Thank you, operator. David, Paul, Tripp, good morning, guys.
Paul Bunn (President and COO)
Morning, Jason.
Jason Seidl (Managing Director)
Wanted to touch a little bit on Lew Thompson there. You know, sort of two questions. One, was there any startup costs related to that new business you guys are gearing up for in 4Q?
Paul Bunn (President and COO)
There was. I mean, you know, there was some inefficiencies, Jason, and then we capitalized, you know, the stuff that could be capitalized in accordance with GAAP. So, you know, a little bit of inefficiency hit in Q4, and then, you know, we were able to capitalize what the accounting rules allowed us to capitalize over the term of the contract.
Jason Seidl (Managing Director)
All right, that makes sense. And, and did I hear you right saying that there's opportunities as, as early as, as 1Q? I thought they were gonna be flowing more in the back half of the year.
Paul Bunn (President and COO)
Yeah, I would say that, yeah, there's definitely. We'll probably add 100, probably on average, 100 trucks for the first quarter into that space, and then there's additional startups in the second half. So I would just say, based on some customer movement, that's probably moved to, you know, most of the startup activity getting going in the first half of the year. It'll be on plane, you know, it'll take it some time to plane out, and you probably won't see the full effect until the second half. And similar to, you know, the question you just asked on the fourth quarter, you know, there'll be a balance of some inefficiencies that are expensed and other items that we're able to capitalize over the contract term.
Jason Seidl (Managing Director)
... So given that outlook and all other things being equal, it looks like the back half of the year should be stronger for you guys without any help from the overall truckload marketplace.
Tripp Grant (EVP and CFO)
Yeah, I would agree with that, Jason. I think we're excited about the momentum we have in Lew Thompson. Both the legacy Lew Thompson team and some of the team that we've committed from Legacy Covenant to go out there and help grow that business in a manner that Lew Thompson has not done in the past. He's grown his business pretty much organically in his region, and you know, we're offering the capital and the people to help grow outside of that region. And you know, it it's been nothing short of a blessing for sure to be able to grow it at this clip. But again, all eyes are on it. Management is completely focused. This is one of the biggest you know, initiatives we have this year, is to ensure these things are successful.
Jason Seidl (Managing Director)
Oh, that makes sense. Let me switch to Dedicated real quick. Looks like a good quarter from Dedicated, especially given the environment. Can you talk a little bit about what your customers are telling you in terms of demand?
Paul Bunn (President and COO)
Yeah, you know, I would say, Jason, it, it's kind of flattened out. You know, new business pipeline, we've got some good pipeline, but it moves slow. And, you know, I think most of the capacity reductions... I mean, we've still got a few in the first quarter that are trickling in, but by and far, most of the, you know, capacity reductions were, "Hey, I had 20 trucks, now I only need 15," or, "I had 35, and I only need 27." We've seen most of that come to an end. Yeah, there's pressure with the one-way market out there. And so here's what I'd tell you. As soon as the one-way market firms up, it, it will help Dedicated across our industry.
Jason Seidl (Managing Director)
That makes sense. And you talked a little bit about the cyber issues that Estes had. Are you now seeing a business come back to them for the Estes movements?
Paul Bunn (President and COO)
Yeah, no, I mean, there was a period of a few weeks there where, you know, we had some reduced volumes. But, yeah, by November, that was back up to where it was pre any issues.
Jason Seidl (Managing Director)
Okay. Makes sense. Last question. Tripp, you know, you pulled forward CapEx into the end of 2023 there. What should we expect in 2024?
Tripp Grant (EVP and CFO)
So you're gonna have a mix. I think the range that we disclosed in our release was $55 million-$65 million of CapEx, of which that includes some growth CapEx. But a lot of our, I would say, the majority of our maintenance CapEx is taken care of, so $55 million-$65 million. And the other thing I would say is, you may see that gated towards the second half of the year. So we may even see some just sales of equipment and things like that. You're not gonna see much net CapEx in the first two quarters of 2024, other than a little bit of growth CapEx. And then I think all of the maintenance stuff will start kicking in in the second half of the year, Q3 and Q4.
Jason Seidl (Managing Director)
Oh, that makes sense. Well, well, listen, gentlemen, impressive quarter in difficult times. I appreciate the time, as always. Congratulations.
Paul Bunn (President and COO)
Thank you, Jason.
Operator (participant)
Our next question comes from Scott Group from Wolfe Research. Please state your question.
Scott Group (Managing Director and Senior Analyst)
Hey, thanks. Morning, guys. So-
Paul Bunn (President and COO)
Thanks, Scott.
Tripp Grant (EVP and CFO)
Morning.
Scott Group (Managing Director and Senior Analyst)
You just made a comment about... Last question, once the one-way market firms. So where do you think we are in that? Have we hit sort of the bottom of the one-way market? What are, what are you seeing and with respect to pricing, as we're getting into the early days of 2024 bid season?
Paul Bunn (President and COO)
You know, Scott, a couple things. I think, yes, I think we are bouncing along the bottom and, and hopefully, you know, we're about to bounce up off the bottom. Customers, where you're creating value for them, there's low single digit rate increases to be had. We've signed multiple, you know, a good number of those. But then the folks that are in really commoditized environments are really still, you know, they're trying to squeeze the last amount of blood out of the turnip kind of deal. And, and so it's kind of a mix of what we're seeing out there right now. Commoditized stuff, people are trying to get the last amount out before, you know, things go the other direction.
You know, longer term partner-type accounts where, you know, you're really key to their network, you're really key to servicing their customer base, you know, a lot of customer-facing type stuff, there's some low single digit rate increases to be had, and those conversations really have not been that hard. You know, the harder ones are, you know, some people coming in here wanting, you know, they start throwing out numbers, "I want another 10% off," and it's, there's not another 10% to give. So, I think you're gonna start seeing, you know, small truckers, medium-sized truckers, big truckers, people start throwing those numbers around, it, it...
They're gonna take it and reprice it as soon as they can, or, or they're just not gonna take it, and folks will sit some trucks against the fence. So I think we're at the bottom, and, you know, I think the real partnership shippers, the real sophisticated folks know, "Hey, if I can get this thing for, you know, break even to 1%-2%, then they're not gonna come in here and reprice me, and we'll have another pricing discussion this time next year." And they just wanna move on with business.
Scott Group (Managing Director and Senior Analyst)
Okay. But it sounds like some of, like, the vanilla, dry van stuff is still seeing some downward pressure?
Paul Bunn (President and COO)
... It is. Yeah, the really, really commoditized stuff is still seeing a little bit of downward pressure.
Scott Group (Managing Director and Senior Analyst)
Right. Okay.
Paul Bunn (President and COO)
But that's not, as you know, Scott, that's not a lot of our business. But in the pieces of it we have, yes.
Scott Group (Managing Director and Senior Analyst)
Right. Right, right, right. Your comment about earnings lower in Q1, was that a year-over-year comment, a sequential comment? I just wanna make sure I'm understanding.
Paul Bunn (President and COO)
It was a sequential comment. I mean, no doubt they're gonna be lower than Q4. You know, I think analyst consensus right now is lower than prior year quarter. And I think where we fall out in Q1, quite frankly, is gonna be a function of weather. You know, if we have any more, a bunch more of what we had last week, it's gonna put some pressure on it, and then really, how much inefficiencies are in these startups. Because, you know, I mean, we're starting up 100-150 trucks, you know, depending on if some of them get accelerated, could be more than that in the first quarter on dedicated. You know, you won't see all those in the truck count because it's kind of weighted.
You know, some of those are February, March startups. But how much inefficiency do we have, especially in a winter season, getting the pump primed and getting those things running out there? With our low share count, as you know, it doesn't take much to make it pop, you know, to make it go up, but it doesn't take much to pull it back. So, you know, I think once we get through this quarter and get those startups digested and get them on plane, we'll have a lot better feel of where we're gonna be. But, you know, here's the thing, we're excited about first quarter. I mean, it, there, there's nobody around here hanging their head, right? I think we're gonna be excited.
Scott Group (Managing Director and Senior Analyst)
Okay. And then just overall, when you... I know it's early, but when you think about the full year, do you think you're likely to grow earnings or not this year? And then maybe when you think about the different segments, which ones are best positioned to grow earnings and where maybe do you see another step back in earnings, if anywhere?
Paul Bunn (President and COO)
Yeah. I mean, I think expedited earnings probably be, you know, about the same, maybe backwards a hair, depending on the governmental business. Some of that governmental business took a step back in the fourth quarter. And that's a volatile piece of business. So we'll see how that goes. But I'd say expedited back maybe a little, but it's all dependent on the governmental. Dedicated forward, 'cause that's, you know, we talked about a lot of the growth that we've already got in the pipeline and starting up. Managed Freight, again, as you know, that's our exposure to the one-way market. Managed Freight's probably moving back a little bit, and Warehousing is moving forward.
Tripp Grant (EVP and CFO)
I think Managed Freight could improve. You know, we'll have a full year effect of the Sims acquisition.
Paul Bunn (President and COO)
That's true.
Tripp Grant (EVP and CFO)
We took a couple of hits, big hits, that we've kind of had to absorb in Q1. We didn't call it out as a GAAP to non-GAAP adjustment or anything like that, 'cause it's part of the game, but it was a material hit in Q1, I would say, with some theft. And what I would say is I think that the team and the combination of the team and the acquisition and the improvement in the freight market could give us a little bit of an improvement in managed freight year-over-year, 2023 to or 2024 compared to 2023. And then I would also say warehousing, you know, warehousing, as small as it is, has a lot of really positive momentum that we're seeing, and I think that'll continue.
Paul Bunn (President and COO)
Yeah, warehousing's best two months of the last three years were November and December of 2023.
Scott Group (Managing Director and Senior Analyst)
Okay, so hopefully three of the four businesses with some earnings growth?
Paul Bunn (President and COO)
Yep.
Scott Group (Managing Director and Senior Analyst)
Very helpful. Thank you, guys.
Paul Bunn (President and COO)
Thanks, Scott.
Tripp Grant (EVP and CFO)
Thanks, Scott.
Operator (participant)
Our next question comes from Jack Atkins from Stephens. Please state your question.
Jack Atkins (Financial Analyst)
Okay, great. Good morning, guys, and thanks for the time. So I guess maybe kind of taking a step back, and you know, Paul, I think your comments around just, you know, I guess the position shippers are taking going through bid season is really kind of interesting. I mean, do you think that that's because they're anticipating, you know, a change in market dynamics as we move through this year? I would just be kind of curious to get your, you know, the just to take it, you know, that you guys might have on, on, you know, how close we are to maybe, you know, starting to see fundamentals begin to improve.
Do you think enough capacity's come out to maybe set the stage for that, or is there more that needs to sort of exit here over the next six months?
Paul Bunn (President and COO)
I mean, I think more exits are gonna help, and they're continuing to happen. And again, Jack, I'll just reiterate, the folks who want a 12-month deal, and they don't want to be monkeying with this thing, you know, and a bunch of back and forth, because they're focused on running their business. It's a pretty easy discussion, you know, with in the low single digits right now. Folks that are, you know, big commoditized shippers that are just, you know, trying to squeeze every penny out of it and do a bunch of mini bids and all that kind of stuff, you know, they're the ones that are still pushing for lower.
And so I think what you're saying is, yeah, you can read something into that, is that I think the fundamentals are starting to slightly change, but nobody's getting crazy with it.
Jack Atkins (Financial Analyst)
Yeah, got it. But I mean, you know, would you say that you're starting to see some indications that the market's, you know, getting close to being back in balance? I mean, whether it's because capacity's activating. I mean, are you—as you look at the tea leaves, you know, in your business, are you starting to, you know, see some of those signs that, you know, we're at a point where things could change quickly if we get a little bit of help on the demand side?
Tripp Grant (EVP and CFO)
... Yeah, yeah, I think that they are. I mean, I think, you know, Paul's comments about maybe some of the conversations we're having with customers on rate expectations. I mean, if there wasn't an overall feeling in the environment that it's gonna change in the near future, I think we would be talking about some pretty difficult conversations with customers across the board. I think customers have started kind of accepting the fact that we're kind of on the TEL end of this thing. I mean, if you just think about it logically, and there's a lot of things that are illogical about our business, but, you know, we've continued to watch capacity exit the market.
We keep talking about it. At some point, it's gotta happen, where it's gonna kind of flip the fundamental, and I think we're closer to that than ever. And, you know, our whole business model is based on, you know, creating value for our customers, who create value for us, and we wanna make sure it goes both ways. And, we were fair to customers when, you know, the market was good, and they've been fair to us when the market is bad, and, you know, and when it flips, we're gonna continue. That relationship is gonna continue.
But I do think that we're closer than ever, just based on the tea leaves and based on the conversations we're having and based on the data that we're observing, that I don't think it's gonna be an immediate light switch type of thing, but I think that it's gonna be a dimmer switch, Jack. It's gonna be.
Paul Bunn (President and COO)
Yeah.
Tripp Grant (EVP and CFO)
They're gonna just gradually turn the lights on, so
Paul Bunn (President and COO)
it's gonna be probably U-shaped recovery. And Jack, as we've said before, where you've got specialty drivers, specialty certifications on drivers, specialty equipment, you know, really engineered networks, customer-facing product, is less, is less sensitive to than, you know, stuff that any broker in America could haul. Yeah. And, you know, that's where, that's where the pressure's at, is the broker world, really.
Jack Atkins (Financial Analyst)
Okay. Okay, no, that's helpful. I guess a couple of last questions, and I'll turn it over. But, when we think about your, your TEL joint venture, you know, that's below the operating income line, what's your outlook for that in 2024? You know, there, there's a lot of concern about the used equipment market out there. Just sort of curious, you know, how, how that would impact that piece of your business in 2024.
Tripp Grant (EVP and CFO)
Yeah, I don't see it materially changing. Okay. I don't see it growing from what it achieved in 2023. But, you know, that, that team has worked hard to grow a big, or to grow their business in a quality way with credit quality customers who need those leases in a long-term manner.
And yeah, they, they're just like everybody else, they're impacted by the you know, the equipment market and the freight environment. And but at the same time, they've got a good foundational base business that is poised for growth long term. I do think that they'll, you know, maybe take a step backwards slightly, but I don't think in terms of materiality to Covenant, it's not hugely material. But with increased interest costs and the year-over-year impact of that and the debt that they carry, they're gonna have some kind of, some hits, I think, on that, on that front, and maybe a full year effect of a softer equipment market. But again, it's just, that's part of their business model, and I don't expect them to tank.
And if you look, I like to focus on the long term with them because it's a nice, you know, graph upwards in how they've performed. You know, there is some year-over-year volatility, but I think we're just as excited today about the long-term at prospects of Tel than we've ever been.
Paul Bunn (President and COO)
You know, Jack, I'll echo Tripp's comments. They took the big reset this last year, and it was pretty much on gains on sale. You know, they were getting some really big gains on sale and were opportunistic in 2021 and 2022, primarily 2022. And we know that, you know, just like a lot of the truckers took a rate reset in 2023, they took a gain on sale reset. But to Tripp's point, materially, they're...
I expect 2024 to look a lot like 2023 from an earnings standpoint. And they have done a lot from a people standpoint, from a sales standpoint, from a succession standpoint. I mean, it's they're looking to the future and looking to continue to grow and invest, not get to where they were the last two years and just sit there.
Jack Atkins (Financial Analyst)
Okay. That's great. And I guess last question is just on cash flow and your use of cash. I mean, you know, you guys pulled forward some CapEx into the fourth quarter opportunistically. You know, you should have some pretty strong free cash flow in 2024 based on the CapEx numbers you guys just outlined.
You know, I guess, the priority for that use of cash for that cash flow, is it gonna be for paying down debt, or just given where the stock is trading here at a substantial discount to peers, I mean, would you look to accelerate the repurchase program?
Tripp Grant (EVP and CFO)
Yeah, I completely agree with your point about, we're gonna have some pretty nice free cash flow in 2024. If you look at our 2022 capital plan, it is, in 2023, it is without a doubt, clunky is the only word that comes to mind, because we were. We had a strategic plan of converting operating leases in 2022 to owned equipment. We exited that, took a hit on charges to get out of those leases 'cause they were underperforming. We bought new equipment to replace that.
You know, then we're trying to get as equipment has become available, we've been able to bring down the average age of our trucks from, I think it peaked at 29 months. Now we're down to 19 months. And so, you know, we bought, just in 2023 alone, we bought about 1,200 tractors, which is over half of our fleet. And so when we look, what that means for 2024 is, from a maintenance CapEx perspective, you know, you're probably looking at $40 million-$45 million on, and I'll just use round numbers of $140 million of EBITDA, I'll call it. And that's gonna produce some options for us.
You know, right now, we're about two times levered, and you know, we can use that to pay down debt, or it gives us options for other capital allocation opportunities that we've exercised in the past, whether that's stock repurchases or M&A activity or increased dividends or any of those things. We're not committed to one of them or but we may do one or both or all. So, like I said, that's just one of the things. I focus on cash a lot, and I'm excited about kind of watching some of that cash come in next year.
Jack Atkins (Financial Analyst)
Well, it's great to have options. So, that's great to hear.
Tripp Grant (EVP and CFO)
That's right.
Jack Atkins (Financial Analyst)
Thanks very much for the time, guys. Yeah, exactly. Take care, guys. Thank you.
Tripp Grant (EVP and CFO)
Thanks, Jack.
Operator (participant)
Our next question comes from Michael Vermut, from Newland Capital. Please state your question.
Michael Vermut (Managing Member)
Hey, guys, how you doing today?
Tripp Grant (EVP and CFO)
Hey, Mike.
David Parker (Chairman and CEO)
Hey, Mike.
Michael Vermut (Managing Member)
So yeah, I'm kind of building on, on what Jack was just asking. So your stock now is trading at, let's give or take 11, 11 times, right? Significantly below, you know, the group's 20-20 times, you know, that, that the rest of the group's trading at, and no one's come close to what Covenant has done, what you guys have done, the resiliency that we've had this year. You know, you bought back stock at a, at an excellent price last year, and it seems from what you're saying, that the, you know, the cycle we're, we're at the bottom, you know, close to the bottom. I'm not sure how much worse it can get, really.
Can you just walk us through the math, how you're looking at it behind growing the, theLew Thompson poultry business and, you know, the returns we should expect there versus doing a significant buyback here? You know, at 11, at 11 times, I can't see that, you know, and at a trough, at a trough in a cycle, trading at 11 times with the, the performance we've done, it's just absurd. So take us through kind of the math and how you look at those two, and then, you know, building on that, you know, if you, you can remember this, give us a look into how you intend to grow that piece of the business and the, the OR we can think about as you grow it over the next one, two, three, and, you know, four years down the road.
You know, could this become a third of the overall business, right? You know, assuming there's no recovery in the other businesses, how accretive and how we can kinda add on to, to the financials over the next, you know, 2, 3, 4 years, just growing this business alone organically?
David Parker (Chairman and CEO)
Hey, hey, Mike.
Tripp Grant (EVP and CFO)
Go ahead, David.
David Parker (Chairman and CEO)
Yeah, this is David.
Michael Vermut (Managing Member)
Yep.
David Parker (Chairman and CEO)
I'll let Tripp and Paul talk as well there. A couple of comments, because I was looking at this yesterday. You know, you look at, you know, we're trading at 11, and our peers are 18, 19. You know, Hunt's up to 24 or so, but just the rest of them are in that 18, 19 number, we're at 11. And it's just interesting that, you know, we've been on this, we've been on this journey now for whether you want to use the Landair acquisition in 2018 or you want to even go back to 2015 when we got into the logistics business with Delta Air Lines, in 2015. But let's just go back to 2018 when we bought Landair.
That got us into real dedicated and really operating the company and the warehousing business and really operating the company, the dedicated side in the correct fashion. And we've done nothing but grown with that. And then we go into 2020, and we get out of 95% of the OTR business that was not even in our portfolio anymore. And, you know, got out of the refrigerated OTR, got out of 95% of the solo operations that we've got and really concentrating on the expedited with long-term, half of that business being long-term contracts, that have proven out in 2023, that it's bringing value to the customer. Because not one of those accounts asked for any rate decreases in a market that is, just got slaughtered with rate decreases. So it's showing that, you know, that we're bringing true value.
On the dedicated side, rates did not go down. Very few rates went down. It was virtually more adjustment of 30 trucks down to 25 trucks or 50 trucks to 40 trucks and those kind of things, more than it was pressure on the rate side. And the warehousing side has done nothing but improved over the last few years. But again, since July 3rd, will be six years, is when we started down this path, and the company has been transformed tremendously.
In 2022, we buy, you know, we get into the DoD and all the things that Paul was talking about, the difficulty of operating, that you do not have everybody and his brother running into operating in that business because you got to be an expert in it, and it's got to be something that's part of your bloodstream, similar to our expedited side. Everybody's brother just doesn't go in and start getting into teams. Right now, they could, but they don't, because it is difficult and it is hard. And that is okay, and that-...
Lew Thompson, and everybody doesn't get into it because it is hard, and it is tough, and it is something that is not commoditized, and it's something that, you know, those birds have got to get to the farms, even if it, even if it was last week and we had ice and snow all over the United States. And how are you reacting into that? And how are you able to, to deliver those birds, you know, to the, to the plants on time? And that's what the value is. And, you know, the thing that we've heard for many years is that eventually the stock price will follow. Just keep doing it, keep doing it, keep doing what you're doing.
Well, it's been six years of doing this, and I will only say, as the largest shareholder, it's time for the market to respond to what this team is doing. And I couldn't be any more proud of what the team has done in the last couple of years. You know, I went into 2020, into 2023 with our board saying, "You know, this is a great test. It's a great test for our management team. It's a great test for all the new folks that we've had involved in the company since 2018." You know, does anybody wanna go through a deep recession? No. Does anybody wanna go through what trucking has gone through last year? No.
But at the same time, this team has tested, has been tested, and has been proven that they've done great, and I couldn't be any more proud of what they've done. So, you know, we said four or five— again, three or four years ago, as we started buying some of the stock, that somebody's gonna love us. Either Wall Street can love us, or we're gonna love ourself, and, and that has not changed. We haven't bought back any stock in the last, I don't know, six to eight, 10 months or so, that we have, that, you know, that we haven't. But, you know, with the cash flow that projected in 2024, there's a lot of different options out there that, again, somebody's gonna love us, and 11 times is not— Wall Street's not loving us.
And, you know, if that, if that means we need to be buying back some more stocks, then we will. Or if Wall Street starts loving us, then thank the Lord for that, and we'll, and we'll, cherish that. So I will, I will say that that starts the internal conversations that will be leading us in 2024. And, anyway, I'll shut up and let Paul and them talk a little bit about your questions on poultry and stuff.
Michael Vermut (Managing Member)
Excellent. Thank you.
Paul Bunn (President and COO)
Yeah. I like, I agree with everything David said. You know, I'll go back specific to your poultry question. I mean, the Lew Thompson business was about 225 trucks when we bought it in April of last year. It'll be over 500 trucks by the end of this year, based on contracts already signed. And, you know, we've got line of sight, you know, just based on pipeline and other things to grow it, you know, probably another 250 trucks past that. And, you know, and again, it could grow more.
So, you know, if you can triple the volume on something, in three, four years, that's a win, that's a win in our book, especially stuff that is, you know, operates well, has good contracts, you know, good driver base and a really good customer base. So we couldn't be more excited about the prospects for the poultry business.
Michael Vermut (Managing Member)
Can you just walk us through what the margins, you know, what the OR could look like, you know? Let's say we get to that 750,000 trucks, right? Which is, you know, off of our base, is a significant portion of our fleet, right, of what we're running. What two to three years down the road, kind of, OR... I assume it's a better OR than the, than the overall-
Paul Bunn (President and COO)
The 91.4.
Michael Vermut (Managing Member)
Dedicated.
Paul Bunn (President and COO)
Yeah. No, it would. Yeah, I think the combination. Remember, we're still probably 80%-90% the way through that weed and feed. I mean, some of what you saw in the fourth quarter, some of what you saw was poultry, some of what you saw was. You know, there was a couple accounts that we did not have good returns on. We had multi-year deals, and one of those ended in August and one ended in September. So Q4 was addition by subtraction on a couple of those accounts. And so, you know, there's still a few of those accounts left. So the combination of weed and feed in the dedicated space and the poultry business, you know, we've got a target to, I'll say, get the OR, Mike, down to best-in-class industry margins in dedicated.
You know, that's probably somewhere, you know, between 87 and 89.
David Parker (Chairman and CEO)
Over the long term.
Paul Bunn (President and COO)
Yeah.
David Parker (Chairman and CEO)
And that's-
Paul Bunn (President and COO)
Not short term.
David Parker (Chairman and CEO)
-poultry. I just wanna emphasize the fact that that's not just poultry. That's a combination of, of some of the new, you know, really good business that, that we've acquired and that we've maintained and have improved in our legacy operations and, and as well as some of the growth that we've got in poultry as well. It's, it's a combination of a, of a few different things, but I would say meaningful improvement is what we're shooting for, meaningful, continued improvement. I mean, if... And, and I think it's fair to say, like, just continue the chart that we're on or the trajectory we're on today. I look at Dedicated OR in 2023, it was 100. Then you go to 2022, it's a 96.2. All this pre-poultry, we get to 93 in 2023, it's a 93.
Our goal, from a strategic plan standpoint, is to continue that path forward.
Paul Bunn (President and COO)
Yep.
Michael Vermut (Managing Member)
Okay, so the poultry business-
Paul Bunn (President and COO)
Yeah, I agree.
Michael Vermut (Managing Member)
The poultry business is possibly, let's say, a mid-80s kind of OR when all is said and done, we can add all the trucks in there? Or-
Paul Bunn (President and COO)
Yeah, there-
Michael Vermut (Managing Member)
Eight-
Paul Bunn (President and COO)
Yeah, I think that's fair.
Michael Vermut (Managing Member)
mid-80s, upper 80s, somewhere around it. But it's that. My point is-
Paul Bunn (President and COO)
I would call it. Yeah, it operates more of where we're heading. But I agree with, you know, Tripp. It—we started this thing dedicated—when we started this thing 3.5 years ago, dedicated was, you know, 3.5 years ago, was over 100. Then we got it down to 100, and then 96, then 93, now 91. We're just gonna keep, you know, again, keep pushing it. And again, a lot of it's—some of it's weed and feed, some of it's poultry, some of it's customer mix, you know, some of it's cost control. So there, there's a lot of things that are gonna go into continuing to try to improve that margin.
You know, it's gonna take, you know, it's gonna be a multi-year effort to get there.
David Parker (Chairman and CEO)
I'd say a couple more things on that. Yes, the poultry is a good operating, and it should be for what's required. We've got great partnerships with our customers out there, but the demand is unbelievable from a standpoint of what you gotta, the service demand that you gotta perform. So yes, it is absolutely gonna help us. And keep in mind, we didn't buy it until April of last year, and predominantly what we've done then is just grow it. So there's a lot of startup costs that's involved in that growth since we got into the poultry business, and it's definitely gonna help us in the next few years.
But what we have seen on the dedicated side, and of getting it down on, on those numbers that Paul and Tripp are talking about, from 100 down to 91 ORs, the poultry has helped, but it's not been the major reason. It will be in the future, because it is operating better than 91 ORs and does operate in the 80s, and we're very happy. But we think the whole dedicated will operate in the 80s, because that's what's best in class.
Michael Vermut (Managing Member)
Excellent. All right. Well, look, for the stability you guys have created in this, you know, in the earnings, I, you know, I would assume you should be trading at the higher end of the peers than the lowest one out there. So, yeah, phenomenal job, guys.
Paul Bunn (President and COO)
Thank you, Mike.
Operator (participant)
Our next question comes from Barry Haimes from Sage Asset Management. Please state your question.
Barry Haimes (Managing Partner)
Thanks very much. Good year, guys. I had a few. First, quick one, there's a little bit of a discussion on used truck prices. Could you give a feel for how much lower they are now versus say, a quarter ago?
Paul Bunn (President and COO)
You know, Barry, here's what I'd tell you. It all depends on mileage band. Above 500,000 miles, you're-- it's not good, because there's just so much old equipment that, you know, miles got ran up during the pandemic. There's a lot of that equipment coming out, and so those are trading at really big discounts right now. There's a lot of 400,000-500,000 mile trucks hitting the market, and I think those are trading, you know, I would say, compared to last quarter, you know, it's hard to say, but I don't know if they've gone down any, but they're, they're really-- the over 500,000, it's hard to move them. Four to five hundred, you know, pricing is, is what I would call at, at, at a pretty weak spot.
And then, you know, 300-400, there are still buyers out there, but they're price shopping them pretty hard. So, you know, I'd say used equ- it's more of can you get rid of it than what can you get for it? But, you know, they're not totally in the tank, unless you're over 500,000 miles.
Barry Haimes (Managing Partner)
Got it, thanks. That, that's a good call. And then my second question had to do with what you're hearing from customers around destock. So we know that there was a lot of destocking going on last year. And do you have any idea, just anecdotally, talking to customers, you know, what inning we're in? You know, are a lot of them have inventories in line now, or there's more to go, maybe in the first half of this year? We'd love to hear any... And then, to the extent, again, do you have any feel from customers, you know, what percent bounce might you get in freight when the destock is over? So assuming the economy just stayed the same, but there's no more destock, any feel for, you know, is it 5%, 10%?
So, we'd love any, any color around that. Thank you.
Paul Bunn (President and COO)
Yeah, couple things. I'll go back to, you know, last year's, instead of destock, I'll just call it restock. You know, they, because of coming out of the pandemic, folks just didn't have, you know, they had the wrong stuff in the wrong season, and, and so that created a major destocking. You know, when you had Christmas trees, you know, in January and February and patio furniture coming in, in, in, October. And so that just created a lot of, you know, mix issues. Then, Barry, they went, you know, went into the destocking. I think most customers' inventory levels, between destocking, and then they're really focused on them with rising interest rates, I think they kinda are where they are.
Then, you know, there'll probably be some restocking as we get into the warmer weather, you know, kind of seasonal upticks in, you know, April, May. I don't see it being anything super material for us. You know, again, it will... a little bit, though, in the one-way market can go a long way to help, you know, our brokerage freight and other, you know, other verticals. And so I don't know if there's gonna be a direct impact to us with some of the, you know, hopefully, seasonal uptick when it gets warm, but there'll be some indirect benefits for us.
Barry Haimes (Managing Partner)
Got it. And then my last question, a little more of a strategic one. You know, you talked about managed freight and how competitive it is, and obviously, there's some very large competitors in this space. So could you talk a little bit about where you see your competitive advantage there, you know, and/or sort of why you ought to be in that business versus, you know, some of the other businesses you're in, where maybe the ROI might be better? Thank you.
Paul Bunn (President and COO)
So just think about, Barry, our managed freight is a lot of it's an extension of our asset-based businesses. If I've looked at our top customers in that space, we also have asset relationships with them. And so what having that business allows us to do is provide overflow, flex capacity. You know, if we get out of balance in markets, we can use the managed freight business to kind of rebalance the markets. And so that business that we internally call Solutions was started back in 2006 to really benefit our customers and augment our asset-based businesses. I would say it is still that today. They do have a number of their own customers as well, you know, that we've grown over time.
So, you know, but it was started to basically help be an asset overflow and augment the asset-based businesses. It still does that to a large degree, and you know, once we capture freight internally, hopefully, we can run it on one of the two segments versus giving it back and letting a competitor run it. And then again, they've really done a good job growing some of their own business in that space as well. You know, I will tell you, you know, we've got a saying internally in our managed freight: We're here to stay, we're not here to sail. It would be hard to unpack our managed freight business because it is so intertwined with our asset operations.
And so we're not chasing business just to add top line volume, like a lot of brokerages, because a lot of these, you know, small to mid, and even large brokerages, they're just trying to chase top line revenue and, you know, margin, top line margin, even if they operate, you know, in the red at a loss, for the whole goal of selling to somebody and getting bought up. Well, our goal is not to sell it. We probably couldn't sell it. It's rolled up within our asset operations, just how tightly they're wired. And so what that does, it allows us to... We try to say yes, if we can make money off of it. If we're gonna lose money, somebody else can have it.
Barry Haimes (Managing Partner)
Got it. Thank you very much. Appreciate that.
Operator (participant)
Our next question comes from Jeffrey Kauffman, from Vertical Research Partners. Please state your question.
Jeffrey Kauffman (Partner and Transportation and Logistics Equity Research Analyst)
Thank you very much, and thanks for squeezing me here at the end. You know, a lot of my questions have been asked, but I wanted to circle back on, on two items. I'm gonna start with the, the CapEx. I think, David, you mentioned about $40 million-$50 million of maintenance CapEx based on where the fleet is right now, and, and the budget's kind of $55 million-$65 million net. Could you give me an idea of kind of where that implies the net fleet is on the tractor side, at the end of the year? And, and maybe differentiate the dedicated side of that versus expedited. And then the, the kind of the follow-up to that is, you know, let's say we're wrong about U-shape, and let's say some good things happen in the second half and, and we start to see freight rebound.
With the excess free cash, how much flex is there to go back out and say, "Okay, well, we may need to add to the fleet." How much, how much wiggle room do we have in terms of where the net fleet might be 12 months from now?
Tripp Grant (EVP and CFO)
I can answer that, Jeff. So, you know, part of the $55 million-$65 million of total CapEx that we disclosed in our expectations for 2024 included about $20 million of growth CapEx, which, you know, implies just call it $35 million-$45 million of maintenance CapEx. And you gotta remember, so 30 of that was brought into 2023, kind of in the last month of the year, to take advantage of some tax benefits, tax incentives that weren't or are not available in 2024. So we brought some of those purchases in-house or in earlier strategically, which is about $30 million, which, yeah, that means your maintenance CapEx for us on a kind of just an ongoing basis is somewhere in the neighborhood of $65 million-$70 million, I would say, conservatively.
I think, we are gonna generate some free cash flow, for sure. And I think that, you know, to the second part of your question, if we do need, additional, you know, CapEx or additional funds for growth, we'll have plenty of availability, whether that's on the equipment side or the M&A side or, you know, whatever. And we've done both of those in the last, couple of years, and, we like our strategy of capital allocation. And just because our debt ticked up towards the end of the year, it wasn't kind of unplanned, if you will. It was just a matter of kind of gating. So we do think, you know, absent, you know, significant growth CapEx, and the clunkiness that goes with that and, and it...
Or some other M&A opportunity, we do see some sequential declines in our net debt number going into 2024.
Jeffrey Kauffman (Partner and Transportation and Logistics Equity Research Analyst)
Okay, and just one other follow-up, if I can. In the management commentary, you were talking about how the effects of the cyberattack and the UAW impact were net-net offset by, you know, fuel surcharge minus fuel expense, and it looks like that was about a $500,000 positive impact on the net fuel side. So I would have thought that the cyberattack and UAW impact would have been a little bit more than that. Can you talk a little bit about how those affected your business? And is a $500,000 bad guy net of those two events, the right way to think about it, if fuel offset it?
Tripp Grant (EVP and CFO)
One, I would say, are you talking about year-over-year?
Jeffrey Kauffman (Partner and Transportation and Logistics Equity Research Analyst)
Yeah, I'm looking year-over-year.
Tripp Grant (EVP and CFO)
Yeah. Yeah. I think if you look sequentially, kind of how we look at fuel and the comments of kind of what we're thinking about or how we were thinking about both the impact of the UAW strike, as well as the cybersecurity strike or cybersecurity incident. You know, we were talking about sequential, you know, what to expect. We were reporting on Q3 and what to expect in Q4, and we knew that Q4 was gonna be a little suppressed to Q3. So it was, those comments were more sequential. And, you know, if you look at our fuel, I do think it's a, I don't wanna really put a defined number on it, but I would say it's well over double what, maybe triple what you were kind of, what you were thinking earlier.
Jeffrey Kauffman (Partner and Transportation and Logistics Equity Research Analyst)
Okay. That would make more sense to me, so thank you. That's all I have. Congratulations.
Tripp Grant (EVP and CFO)
Thanks, Jeff.
Operator (participant)
At this time, we have no further questions.
Tripp Grant (EVP and CFO)
All right. Well, thank you everyone, for the for attending the call, and we certainly appreciate the questions, and we look forward to next quarter's call. Have a great week. Thank you.
Operator (participant)
This concludes today's conference call. Thank you for attending. The host has ended this call. Goodbye.