Covenant Logistics Group Inc (CVLG) 2022 Q3 法說會逐字稿

Welcome to today's Covenant Logistics Group Q3 '22 Earnings Release and Investor Conference Call. Our host for today's call is Joey Hogan. (Operator Instructions)

I would now like to turn the call over to your host. Mr. Hogan, you may begin.

Thanks, Ross. Welcome, everyone, to the Covenant Logistics Group third quarter conference call.

As a reminder to everyone, this conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. Please review our disclosures and filings with the SEC, including, without limitation, the Risk Factors section in our most recent Form 10-K and our current Form 10-Q.

We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances. A copy of our prepared comments and additional financial information is now available on our website at www.covenantlogistics.com in the Investors section.

I'm joined on the call this morning by David Parker, Paul Bunn and Tripp Grant.

Kind of an opening for the call. Despite the challenges of negative GDP growth, overstocked inventories and industry-wide overcapacity, that have increased over recent months, combined with major inflationary pressures, we remain grateful to our teammates for producing record adjusted earnings per share for any third quarter in our history.

On a consolidated basis, adjusted net income was up 31% and adjusted earnings per share was up 49% on the strength of revenue growth, flat adjusted operating margin, growing contribution from TEL, and a 12% reduction in diluted share count, resulting from our ongoing share repurchases. Return on capital for the trailing 4 quarters was 23% compared with 12% for the trailing 4 quarters of 2021.

On the truck side, we were pleased with how our utilization and rates held sequentially from the second quarter, but the impact of delayed deliveries of new equipment and escalating costs of parts, maintenance and other line items, compressed our margins in the quarter.

Our Managed Freight group did a great job in holding margin, despite reductions in overflow freight from the truck side, and our warehouse team withstood cost headwinds associated with new customer business and investments in additional warehouse capacity for future growth. The contributions of the AAT acquisition, which operates in a less economically sensitive market, TEL, Dedicated and stock repurchases, provided most of the improved earnings per share, despite a weaker market compared to the historically strong market a year ago.

In summary, the key highlights of the quarter were, our freight revenue grew 6.5% to $267 million compared to the 2021 quarter. Adjusted earnings per share increased 49% to $1.52 per share compared to the year ago quarter. Our asset-based truckloads freight revenue grew 15% versus the third quarter of '21 with 53 fewer trucks. Our asset-light Managed Freight and Warehouse segment's combined freight revenue shrank by 5% compared to the third quarter of '21.

On the safety side, our DOT accident rate was the lowest third quarter on record, 11% lower than the third quarter of last year, but development of a small number of prior period claims contributed to almost $0.03 per mile increase in insurance expense. Gain on sale was only $200,000 compared to $900,000 in the year ago quarter. Our TEL leasing company investment produced another record quarter, contributing $0.38 per share or an additional $0.24 per share versus the year ago quarter. We purchased another 1 million shares during the quarter, bringing the total of 3 million shares through September 30 for this year.

Due to the strong cash flow in the quarter and the sale of the California terminal, our net indebtedness decreased by almost $29 million after utilizing $27.5 million of cash on share repurchases. We finished the quarter with a leverage ratio of 0.23x, debt-to-equity ratio of 7.8%, and again, a return on invested capital of 23.3%.

Now Paul will provide a little bit more color on the items affecting the business units.

Thanks, Joey. For the quarter, our asset-light businesses [deposit], Managed Freight and Warehousing were 38% of total freight revenue and 41% of consolidated adjusted operating profit. In the managed trans side of the business, while we believe revenue has stabilized, we expect margin compression into a softening environment. Our warehouse revenue stream has accelerated due to the impact of 3 start-ups for the year, receiving the full revenue impact in the third quarter. We expect the startups and -- we expect start-up costs and unoccupied lease costs to decline in the [fourth] quarter, improving our margins. The asset-light group remains a priority for growth, focusing on talent acquisition and technology enhancements.

The Expedited division was 34% of consolidated freight revenue and 48% of adjusted operating profit in the quarter. It grew its revenue 26% versus the year ago quarter, due to strong revenue per truck per week improvements and growth of 80 trucks, with the first quarter acquisition contributing to revenue growth nicely. Increased salaries and wages, equipment and maintenance costs and insurance costs, continue to be a major headwind in the year. Sequential operations and maintenance costs were significant in the quarter, but we feel third quarter was our peak from a cost perspective on equipment and maintenance costs, due to an aggressive replacement plan between now and the end of 2023. Driver pay remains stable at the present time.

The Dedicated division was 28% of consolidated freight revenue and 11% of adjusted operating profit in the quarter. Revenue per truck growth was 14% versus the year ago quarter, while cost increases in salaries and wages, equipment and maintenance eroded some of our progress on margin improvement. We missed our sequential OR improvement goal for the quarter, mainly due to the increased cost during the quarter. We continue to work diligently to improve margins through fleet reductions, a reduction of approximately 60 trucks in the quarter, equipment upgrades, and asset allocation to more profitable accounts.

Our minority investment in TEL continues to produce strong and positive results. TEL's revenue in the quarter grew 45% and pre-tax operating profit increased by 125% both versus the third quarter of 2021. TEL increased its truck fleet in the quarter versus a year ago by 279 trucks to 22,153, and group's trailer fleet by 492,000 to 6,860. After receiving more than a $7 million distribution during the quarter, our investment in TEL, which is included in other assets and our consolidated balance sheet, remained at $58 million.

As a reminder, TEL focuses on managing lease purchase programs for its clients, leasing trucks and trailers to small fleets and shippers, and aiding clients in the procurement and disposition of their equipment through a robust equipment by sale and management program. TEL contributed a total of $0.38 per share to our overall results, or an additional $0.24 versus the year ago quarter. 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.

I'll turn the call back to Joey.

Regarding our outlook for the future, as we said in our release, we expect the remainder of the year to include continued moderating freight demand, greater driver availability, and continuing cost inflation. Although, we do expect our fourth quarter adjusted earnings per share to be similar to the third quarter, bringing the full year to approximately $6 per share. For 2023, we believe there will be market headwinds from a softer market during contract renewals, as well as continued inflationary pressures. However, based on company-specific factors, the investments we've made in our sales team, the small acquisition, share repurchases, the equipment upgrade plan and reduced insurance casualty costs resulting from our improved safety results, we expect less earnings volatility than in prior years of economic weakness.

Over the last 5 years, our customer base has been strategically shifted to less cyclical industries through our full-service logistics focus. We predicted last quarter that 2023 will be a breakout year for Covenant, and we remain confident in that plan. Even with a heavy equipment investment year, we expect our cash generation, low leverage, and available liquidity, to provide the full range of capital allocation opportunities to benefit our shareholders.

Lastly, I've been honored and [humble] to serve Covenant for 25 years, and I'm excited about the leadership team that we've been able to assemble, the best we've ever had. Over the last 5 years, the model has been retooled under David's leadership, and Paul will do an outstanding job leading the company in his new role. I'll still be around to assist the team, and whatever I can do to help. It's just time to hand the lands to the next generation and let them go.

Ross, we're done with our prepared comments. We'll now open it up for questions.

(Operator Instructions) Our first question comes from Jason Seidl from Cowen.

You guys have impressive quarter. I wanted to talk a little bit about some of the commentary around '23. Can you maybe put some barriers around that less volatility comments? You're obviously above $6 this year, is less volatility above 4%? Is it above 5%? Can you put that in the numbers for us?

Jason, as we look at it -- and this will be probably the second or third quarter in a row, we've said it, and I know some of our peers have said the same thing. We think peak to trough is probably a 25% to 30% reduction. And depending on where peak is and where trough is -- and I guess we'll look back at some point and know that, but we still feel confident in that range of a 25% to 30% reduction peak to trough. And so, you could think where the peak is, you can adjust it for that, and I think that's a good spot.

I wanted to talk a little bit more about the Dedicated segment. Obviously, over the last 12 to 18 months, you guys have made a lot of changes there, getting the business up to more traditional, more profitable type business. What percent is sort of left to touch here that you guys would like to either change out or improve the pricing on?

I would say, of the 1,400, 1,500 trucks that are in there, Jason, there are a couple of hundred trucks that are left in there that we're actively working on. And so, I think we've got a plan for those trucks, and we'll continue the steady process.

Okay. So most of the heavy lifting done, but there's still a couple of hundred trucks, which will help you offset some of that…

Yes.

Going forward?

Two things I would say, and I'll give a little more color to one of the things in the comments. The effect of the equipment and maintenance issues on all of our trucking operations really diluted a lot of the progress that we've made. And so, as we get this newer age fleet in here and maintenance costs start coming down, and we're not having to carry a lot of excess equipment. I think you'll start seeing some of the fruits of that. So it's a combination of that and some continued waiting feed.

And that was going to be my next question to you guys in terms of, when you look at your average age of your tractors, I think it's 2.4 years now. That's versus about 2 a year ago. Where do you think you're going to be able to bring that down in '23 to? And then how should we think about CapEx in '23?

We're trying to get the average age of the fleet down to about 21 months by the end of next year. So I think starting in Q4, you're going to see that number in the 29 months, or 2.4 years, start to come down. We're really -- we said this last quarter in the call, we're really being aggressive with this replacement plan. We've got about 800 trucks scheduled to be replaced this year, and almost 900 trucks scheduled to be replaced next year. So that gets it down to about 21 months, but you'll see that kind of sequentially decline each quarter next year.

In terms of CapEx -- net CapEx, I would say, next year, we're probably going to be in the realm of $80 million to $90 million of net CapEx just on the replacement equipment. The one thing I'll say is, this year, we're being aggressive, but we're also turning in a lot of operating leased assets, and we've been doing that throughout the year. We'll continue to do that throughout this year. And it will tail into 2023 a little bit, but the majority of what we're going to be replacing is going to be owned equipment. So we'll get a little bit of a better [bang] for our buck as we're turning in owned equipment and the sales proceeds on those.

So gains on sale next year, we should be modeling up?

Yes.

Our next question comes from Scott Group from Wolfe Research.

I'm just curious, how are you thinking about pricing into next year? What's a realistic drop in rate per mile next year?

Scott, I think we'll have all these answers in the next 6 months, don't you? But that said, I think there's going to be pressure on pricing. I will also tell you that, I think that we have done a great job in the last year, 1.5 years, and being in the right buckets as it pertains to Expedited and Dedicated, and because -- Let's take Dedicated first. The first -- the thing that we see there is not necessarily so far pressure on rates as much as it is, I don't need your 25 trucks now because I don't have the freight, I need you to reengineer it, and I need 22. So that's where I think the pressure on the Dedicated side will come from, is the pipeline with existing new -- not existing, but with new business, being strong enough to take care of some reengineering, that mean you both [knows] where the customers are going to come from. But we have not had the Dedicated accounts are saying, I need you to take 5% off. And I don't really see that coming unless we get into near depression kind of numbers, but I'm not as concerned there.

Then on the Expedited side, we've only had one customer that has came to us and said, we would like to have a rate decrease, and that one customer is one that we did not have long-term agreements with. Keep in mind, over the last couple of years, we've been -- with about 60% of our business, we've entered into long-term agreements with our expedited customers.

Again, it started back when we -- in 2020 when we said, Mr. customer, do you really need teams. If you don't -- when we led SRT go, we downsized the solo side. We took 400, 500 trucks out of the Expedited side of the model. We really had blunt conversations with customers. Do you really need these, because they cost more to operate, and we want you to enter into a long-term agreement with us, that we are here in '20 and '21 when you can't find trucks, and we want you to be here for us in '22, '23, whatever that's going to be. And so far, that has worked out extremely well. And -- so that said, I think there's going to be pressure, but I don't think it's going to be the magnitude of what it possibly could have been years ago when we went into a recession. I know I didn't give you a percentage because I don't know what that percentage is, because I'm here to tell you -- I could say negative 2% -- as good as I could say, a negative 5% and -- because that's how much confidence I've got in our customer base, the relationships we've got with our customers.

So using maybe your Expedited is going to hold up better than maybe the broader van market?

I do, yes. I do. Because I think our customers really need -- again, I think our pressure is going to be both Dedicated and Expedited -- Oh, whoever you are, I don't have 10 loads. It's air freight. I don't have 10 loads. My freight is down. I need 7 of them, but Covenant, you're getting all 7 of them. I'm not going to split it between X, Y and Z and you. You're getting your 7. I think that's where we're at. And we'll have that pressure to replace those 3 extra loads, and that may come through cheaper rates right there. But I don't think our existing business is going to be hurt tremendously.

Scott, one thing I would add, just for a perspective, is when you look at Covenant historically. What you see today as Expedited is different than what you've seen in the past as Covenant Transport or highway services. We had chapters. We had Covenant Transport for years. That was a mixture of team and solo and some Dedicated. Then we had the highway services chapter, which was some team and a lot of solos. And now, Expedited is just team. And so, that volatility in the past, albeit very much understood, and we understand the questions, what we're trying to say -- and as David dropped for the next 6 to 8, 9 months, we'll answer the question for sure, is it's not an apples-to-apples as you look at us historically. So I want to make sure that people try to understand that what is Expedited today is different than what you've seen in the past, and we feel much better about its position and its pricing.

And then just maybe a similar question then. When I look at like the equity earnings from TEL, right, $4 million, $3 million, $4 million, $7 million, $7 million, $4 million, and now we're at like $28 million. So what is -- other than just the market being a lot different, what's changed about that business, that earnings stream, that's going to be more durable going forward?

I think it's several things, Scott. A, I think the leadership team, Doug, and he's done a phenomenal job the last 5 or 6 years, similar to Covenant, of assembling an outstanding leadership team, number one. Number two, he's done a lot of work in solidifying the business units within overall TEL. Number three, they've done a lot of reengineering on the system side, which has really helped them dial in not only cost but pricing and collaboration across the businesses. So it's very similar to what's happened on the Covenant side the last 5 years, as all of that's coming together and producing what you're seeing in systems just some outstanding results.

Let me add to what Joey said, Scott. I think it's 2 other things. If you kind of go back to -- you kind of take -- Joey talked about chapters. You got the where we are today, then (inaudible) you got the COVID times chapter, and you have right before COVID chapter. In the right before COVID chapter, they were digesting a transaction that ate up a lot of earnings. And so, they were making really good money, but they made a decision -- Collectively, we made a decision that had some negative earnings and some TEL to it to get out of it on a transaction. And then once that transaction, I'm going to call it during the COVID times, gets fully out of their system, and the way equipment, I'm going to call it, has been rationed the last few years, but they had been on just a massive growth spree in buying trucks and trailers.

And the way all these OEMs have worked is -- basically, it's an average of how many bought in the last 3 years, 2 years, 5 years. And so, they were able to add significant amounts of trucks and trailers 18 months ago, 12 months ago, 3 weeks ago, and into next year with these orders. So it's allowed them to place a lot -- it's allowed them to continue to grow. Their equipment counts keep growing when everybody else's are flat to going down. And so, you put all that in the hopper. That's the other part of the recipe that is just catapulting them. And we all know it costs more to buy a truck, lease a truck, by trailer, lease trailer, and then having a supply of equipment in such a tight market has really played into their hand of customer upgrades and pricing upgrades and all that kind of stuff.

So maybe just…

Go ahead, sorry.

And I would just add, Scott, I mean they do have headwinds also. I mean, obviously, with rising interest rates. So how strong is the team and be able to pass through, or the pricing structures to be able to pass through the increased capital cost, because they do have a lot of leverage as that model. It's a leveraged model. So are they able to do that as interest rates are rising. Thus far they're able to do that. Credit quality. Their credit quality is unbelievable. And so, in a recessionary time -- and I've had some of these in the past, the group has done a really good job of who they pick and choose to do business with, to minimize that. But A, are they able to pass through additional increased capital costs. So that's -- I would say that's a headwind, depending on their customer base.

And then B, does the -- what's the view of the used equipment market? Because there's no question, that's a very, very important part of their model, both for their own accounts as well as in and out of the market. And so, those 2 things are what I would call in a softening environment to headwinds. We're confident they can power through that. But nevertheless, those are 2 things they've got to work through. B

ut they have a lot of equipment coming in. Pretty much most of it's all spoken for already for the next several quarters. A lot of equipment they're putting on the books this year is in the second half of this year. So we won't see the full year effect of that EBITDA until first quarter. And so, EBITDA from ongoing business is going to continue to grow. It's just what the godown sales do as they move into the market, and are they on existing business, are able to pass through additional interest costs.

So I guess maybe just to wrap it up, like, relative to that comment of earnings down 25%, maybe 30% peak to traffic, how much do you think these equity earnings would drop from upper $20 million this year? Where do you think that could go?

Yes. I think it will be less than the 20% to 30%. I'd put them in probably that 10% to 20% range.

Our next question comes from Jack Atkins from Stephens.

And Joe, I just want to say, the fact that the company has on such a strong footing today as we head into a freight recession, I think that's just a testament to your leadership, and just all the best as you sort of move on into the next phase of your career. So congratulations.

Thanks, Jack.

So I guess maybe kind of picking up where Scott left off. I just would kind of one more question on TEL. As we kind of think about the mix of that book of business, how do you kind of think about large fleets versus owner-operators? And we're seeing some early signs of some exiting capacity. I mean how do you -- do you kind of worry that there may be a little bit of increased bad debt there or just some equipment that gets maybe turned back to TEL, given we're kind of coming off some really, really good times?

Here's what I would say to it, Jack. No, not significantly. I mean here's one thing to remember, when we say owner-operators in the TEL model, they're leasing a lot of captive -- a lot of fleets that have captive owner operator programs. And so, they're not leasing to a bunch of mom and pops. And they -- as I said a minute ago, they upgraded their credit quality during this last downturn. And so, with the fleets that they do business with, I mean, those are one-off owner operators, but there's structures with those fleets that protect TEL. And so, on that, no concerns. On the smaller fleet side of things, that's where they've upgraded their credit quality. I mean, yes, I'm sure they'll take a few back here and there, but there's ready -- there's a list of people ready to lease that equipment if they turn it back in. And so, I don't think we see a lot of major concerns in it.

Maybe shifting gears here for a minute. And Tripp, I'd love to get you to chime in on this, if you'd like. But how are you guys thinking about some of the inflationary cost pressures as we head into next year? You had drivers on one end and then you've also got back office support staff as well. And then, you've got issues with equipment inflation, parts, service and inflation. I guess, how are you weighing all of that? And it feels like you've got some maybe opportunity to improve some of the -- some operational costs with regard to sort of how you're managing your fleet as well. So I'd love to kind of let you run with that question, but how are you guys thinking about cost per mile as we kind of go into 2023?

Yes, Jack. There's no doubt that we're seeing a lot of inflationary cost headwinds. What I think you've seen in Q2 and Q3 are kind of exaggerated in terms of -- I think, of 2 major things: insurance and ops and maintenance, if you will. And I believe -- going back to Joey's opening comments, and I think this is consistent with what we said in Q2, we've had consecutive quarters -- multiple consecutive quarters of really good safety numbers. And so, from an insurance perspective, there's this TEL -- you would think insurance costs would kind of correlate with self-insurance costs. And unfortunately, we haven't started to see that correlation as well as we have liked.

And to Joey's point, a lot of those things are related to prior period claims. And so, we look at the things that we can control and there's a lot of things in the broader macroeconomic market that we can't control. But what we're trying to do on the insurance side has positioned ourselves as best as we can in terms of tying up and being aggressive on mediations and doing it the right way. But insurance costs have continued to be a headwind for 2 consecutive quarters now. And going into fourth, we're going to -- the fourth quarter of this year, we're going to continue to pressure that and try to get some of those things cleaned up. And hopefully, as we turn the corner into 2023, we're going to see -- start seeing a better correlation before -- between those costs and our safety numbers.

On the ops and maintenance side, that's another piece that's really stuck out as a big operational headwind. As we mentioned before, we're focusing on the things that we can control. We attribute a large part of that to the average age of our fleet and down equipment. And fleets that require 15 trucks are now requiring 20 trucks because 5 of those trucks are in maintenance or long-term down status. And so, it's creating a -- really just a strong headwind across all of the fleets, whether that's Expedited and Dedicated.

And so, one of those controllable things that we've talked about is being aggressive on trying to lean in and get more tractors than we originally planned. I think when we opened -- I can't remember which quarter it was, but our goal or what we were allowed, and we were going to get 525 to 550 new trucks. Well, now we're above that for 2023, and we're going to be next year, looking at close to 900 new tractors. And so, we're doing everything that we can to get ahead of that and focusing on the older equipment first, to try to bring those costs down and doing everything that we can to start off 2023 in the best foot possible, recognizing it's going to be a softer freight environment, but focusing on the things that we can control or get our hands around and improve. And so, we're operating as efficiently as possible from an equipment standpoint in a very -- what we think will be a tough freight environment.

And then I guess maybe last question and I'll hand it over. But you guys are going into a more challenging operating environment in '23 for a lot of folks, with the strongest balance sheet you've had in an awfully long time. The AAT acquisition has been a great success. I guess, as you sort of think about allocating capital moving forward, the stock is trading at a pretty low level, but there could be opportunities consolidating M&A. So like how do you think about capital allocation between those 2 items? And then, what are you looking for on the M&A front over the next 12 months? I would just love to get your thoughts on that.

Yes. Jack, I would tell you -- on the M&A front, I would say I would use the word niche. And so, if there's anything niche out there, it could be niche Expedited or niche Dedicated or niche Warehousing. I mean I think I'll just use the word niche -- non-commoditized type businesses that are stable with a good long-term track record, niche. I think we would entertain looking at anything like that. And then I think we -- the share repurchase plan that's out there has still got dry powder in it. And so, we'll just let that thing keep parking and see what it does. And I think that's probably how to answer your question.

No, that makes sense. I'd like to hear you looking at non-commoditized businesses.

Our next question comes from Bert Subin from Stifel. Yes.

I think you guys have answered a lot of the sort of the high-level questions so far. And I think, one, just be interested to get your opinion on this is, I think a lot of people were looking for sort of when freight would soften, and now we've seen that. And I think the focus is going to turn to how long this lasts. I don't -- I'm just curious if you have any thoughts about is this going to be more extended than what we saw in 2019? Is it a scenario where inventories draw down and we start to see some improvement in the first half? And so by second half, you're starting to see sequential improvement in your EPS? I'm just curious -- you put out some markers for the 25% to 30%, but how are you thinking about that in the context of how long this may last?

Bert, I'll tell you, we believe that 23% is going to be a slowdown in freight. We believe that 8, 9 months of some difficulties that I think that we're personally experiencing today, that will continue. And I think there's a couple of ways in which we look at it. One is, the economy could get worse than it is today, and I personally expect it to do that. At the same time, the trucking industry has got a couple of things that are some tailwinds. And that is -- as we all know, nobody is restocking inventory.

I mean, there's no restocking that is happening. And so, what we are sensing today -- I told the Board a couple of weeks ago that give me for 2023, the way I feel right now, and I'll take it, I'll sign up for it. We're not sitting here every day saying, how am I going to load 500 loads or 200 loads. I mean we may have about 50 loads and we load them by the end of the day, -- and so that's the way in which we bill today. So eventually, whether it is in March or whether it's in September next year, restocking of inventory will start back. And I think that, that's going to be a nice tailwind for the truckers.

Another one that I think that we're sensing today is that none of us know how many -- I personally think of it was hundreds of thousands -- 200,000 to 500,000 trucks that came into the marketplace, spot market, over a 2-year period of time when they were hauling freight for $4.50 and those kind of things. Those trucks are leaving as fast as they can. And so, I think some of the things that we're sensing today is that capacity has been coming out of the industry that is helping us with the current freight environment. So those would be the 3 points.

I think the economy can get slower than it is today. but restocking will start eventually one day in the next few months, and then capacity is leaving the market. And so, that also will help us truckers.

Maybe just to go a little deeper there as it pertains to your business. You guys have provided some commentary on the Expedited side, and it sounds like AAT is certainly helping at least diversify that revenue stream. And it sounds like your LTL linehaul business is holding in there. And so, perhaps that does better -- certainly better than it has in the past. Dedicated, it sounds like it's improving. You may have some volume headwinds, but you expect pretty good yield there. So that really makes Managed Freight probably the odd one out. 3Q, we saw sales pretty similar to 2Q, so margin in the double-digit range. When do you think that starts to break and you start to see some of the impact of the overflow issues?

I think you'll see margins go down in Q4 from Q3 on Managed Freight, and I think Q1 will be lower than Q4. And so, there's no doubt that that is where probably the spot, cyclical slowing freight economy is going to probably erode our margins the most. And so I don't think it's going to drop like a rock, but I think you're going to see that thing start trending back more towards normal over the next 2 to 3 quarters.

And just a last question for me, and I'll turn it back over. You guys have highlighted inflation a couple of times in this call, and it's been a theme across other calls. Do you think that, that -- I know it's still early in the bid season, but what were sort of the theme that I think is showing up is people or truckers think that inflation is going to limit the ability for shippers to fall back as much contract rate as they have in the past, particularly if you use 2019 as a comparison. Just because your costs keep going up, so your ability to scale that back is challenged. Do you agree with that? Do you have any take on how inflation is going to continue to hit your business? I know Tripp put some commentary around insurance and operations costs. But just in regards to what it could do to rates?

Yes. I think that's dead on kind of lines to what David said earlier. I think that's -- another kind of buffer is that -- I mean, we've met with a lot of customers this week. Between David and I, we've met with 3 or 4 large customers this week, and I would say they're echoing that theme. None of them are ringing the bell saying, you just got to do drop, drop, drop. I mean I would say a couple of them were going to get rate increases out of next year. They're going to be small rate increases to cover what you just said, inflation.

And as what Joey said or David said earlier, some of them are asking for, hey, help me rightsize my fleet a little bit, and let's find ways to get more efficient. But they're not coming in here asking for -- on the transportation side, monster rate decreases. So I agree with you, the inflation is going to -- it's another buffer to rates going down.

When you're in a business and working with a customer, you're providing a value, then I think that's where you're going to be. If you're commoditized, I think it could be a little dicier than that. And again, that's what we've tried to do, is get in businesses where we're providing more value back to that kind of full-service logistics offering. I mean we're trying to get out of commoditized as fast as we can.

Our next question comes from Barry Haimes from Sage Asset Management.

I had a question. We haven't talked too much about peak season. Could you -- and from other quarters, we've heard it's much more on the muted side, if not existent. So just wondering what you guys are seeing? And maybe just a reminder, how much of your trucking business typically is coming in from the West Coast going inland? And do you typically in fourth quarters run any project business or get surcharges or anything like that, that you might have gotten last year that you may not get this year. So just an update on peak.

Yes. So Barry, here's what I'd tell you. I'm going to go way back. Joey's talking 3 chapters. I have to go about 10 or 15 chapters back in the book. But if you go way back in the book, I'm going to talk '11,'12, 13, especially '13, '14, '15. Peak was a huge portion of the business. I mean, fourth quarter, we made the year didn't make the year based off peak. And I think we've been very intentional starting about 16 to really try to run the business for 52 weeks a year, not 6 or 8 weeks a year. And so, we purposefully downsized our exposure to peak. Shippers have done a lot of things to help themselves for peak.

And then, to your point, the economy ain't going how much peak this year. And so, are we going to have a little bit of peak freight? Yes. Are we going to get paid well on the freight we do for the 3 or 4 customers that we're doing surge peak freight on? Yes, we are. Is it going to be similar to last year and the year before as far as the pricing we get on that? Yes. It's good margin business. It's just not -- there's just not going to be a lot of it. So David, do you want to add anything?

That's right. I remember years ago, Barry, we would do $50 million a peak in about a 4-week period of time. And that number now is less than $10 million

on the $160 million quarter.

On $160 million a quarter. And so yes, I mean, it's there with some of our old peak customers, but it's down to 2 or 3 customers. And we're very happy with that, and that's just where it's at.

And at this time, there are no further questions.

Well, Ross, thank you for hosting us. Thanks, everybody, for joining the call. I look forward to updating everybody in January.

All have a good day.

This concludes today's conference call. Thank you for attending.