Daseke Inc (DSKE) 2022 Q3 法說會逐字稿

Good morning, and thank you for participating in today's conference to discuss Daseke's financial results for the third quarter ended September 30, 2022, as well as Daseke's 2022 full year outlook. With us today are Jonathan Shepko, Chief Executive Officer and Board member, Aaron Coley, Executive Vice President and Chief Financial Officer; and Traci Graham, Vice President of Finance and Investor Relations. After their prepared remarks, the management team will take your questions.

As a reminder, you may now download a PDF of the presentation slides that will accompany remarks made on today's conference call as indicated in the press release issued earlier today. You may access these slides in the Investor Relations section of our website. Before we go further, I would like to turn the call over to Traci Graham, Vice President of Finance and Investor Relations, who will read the company's safe harbor statement that provides important cautions regarding forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Ms. Traci, please go ahead.

Thanks, Norma. Please turn to Slide 2 for a review of our safe harbor and non-GAAP statements. Today's presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Projected financial information, including our guidance outlook, are forward-looking statements. Forward-looking statements, including those with respect to revenues, earnings, performance, strategies, prospects and other aspects of Daseke's business are based on management's current estimates, projections and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. I encourage you to read our filings with the Securities and Exchange Commission for a discussion of the risks that can affect our business and to not place undue reliance on any forward-looking statements.

We undertake no obligation to revise our forward-looking statements to reflect events or circumstances occurring after today, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. During the call, there will also be a discussion of some items that do not conform to U.S. generally accepted accounting principles or GAAP, including, but not limited to, adjusted EBITDA, adjusted operating ratio, adjusted operating income, adjusted net income or loss, free cash flow and net debt. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the appendix to the investor presentation and press release issued this morning, both of which are available in the Investors tab of the Daseke website, www.daseke.com.

In terms of the structure of our call today, we will start by turning the call over to Daseke's CEO, Jonathan Shepko, who will review our business operations and the progress we are making as we execute against our key strategic priorities. Then we will provide a financial review of the quarter and speak briefly about our 2022 outlook, at which point Jonathan will wrap up our remarks with a few closing comments before we open the line for your questions. With that, I will hand the call over to Mr. Jonathan Shepko. Jonathan?

Thank you, Tracy. Good morning, everyone. I'd like to start the call today by welcoming Aaron Coley to the Daseke executive team. His experience as a transformational CFO is ideally suited relative to where Daseke is today and will be invaluable in supporting our efforts in achieving our long-term strategic vision. We look forward to you all getting to know Aaron better over the coming quarters.

Thanks, Jonathan, and good morning, everyone. It's great to be here with the Daseke team.

Now moving on to Slide 4. I'll speak briefly to a few key takeaways on our performance this quarter. I'm excited to report another strong quarter of performance with $64.8 million of adjusted EBITDA and revenue improvement of 9% year-over-year to $462.8 million. We've talked at length about the effectiveness of our unique business model to respond favorably across cycles and this quarter's performance is continuing evidence of this strength. While we begin to see some softness in a few of our flatbed end markets this quarter, this was offset by strong demand within several of our key other flatbed and specialized end markets, specifically high-security cargo, aerospace and agriculture. Exposure to several end markets and numerous sub-verticals across the industrial complex, some high beta and others with strong non-cyclical tendencies, provides us with a highly diversified portfolio of revenue contribution by customer. Our third quarter adjusted operating ratio, excluding fuel surcharge of 89.3%, was one of the best in the company's history, representative of our continued business transformation efforts and decisive execution by our seasoned operating teams.

As we maintain focus on improving the quality of our earnings and cash flow profiles, we continue to post strong adjusted operating income and free cash flow, $42.7 million and [$34.2] million, respectively, fueling our liquidity and allowing us to further deleverage. As we look to 2023, the macroeconomic and geopolitical uncertainty is a heavy consideration as we evaluate capital allocation priorities. That said, we are well positioned to both be defensive and opportunistic with our current liquidity and balance sheet. We have quarterly liquidity of $311.7 million, markedly higher than any of our peers as a percentage of market capitalization. We have a covenant-light term loan with no near-term maturities and a net leverage profile of 1.9x, and we have a stock that despite several consecutive quarters of consistently positive performance is trading unfathomably at nearly a 50% discount to our peer group.

Against the backdrop of a stock that is dramatically undervalued on both a relative and an absolute basis, our ongoing commitment to our shareholders is to find a prudent balance between continuing to build a fortress balance sheet with a focus on total funded leverage while also being thoughtful about ways to drive long-term shareholder value. With that, I will now turn the call over to Tracy Graham to review our financial performance for the third quarter of 2022. Traci?

Thank you, Jonathan, and good morning, everyone. Please turn with me to Slide 5 for a high-level review of our consolidated results for the quarter. Once again, Daseke's resilient model based on a diverse portfolio of industrial-facing end markets continued to support our strong financial performance. We saw demand strength in high-security cargo, construction, agriculture and manufacturing end-markets against a softer market rate backdrop. In the quarter, Daseke delivered revenues of $462.8 million, up 9% compared to revenues of $424.6 million in last year's third quarter. Fuel surcharge drove a majority of the increase as our fuel surcharge program is working as designed. We delivered adjusted net income of $24.1 million or $0.34 per diluted share in the quarter. Adjusted EBITDA of $64.8 million declined by 5.3% compared to the third quarter of 2021 due to increasing costs in driver pay, operations and maintenance and insurance claims.

Corporate adjusted EBITDA in the quarter decreased by $3 million year-over-year, which was primarily due to an increase in insurance and claims and compensation expense. On Slide 6, we present a detailed view of our results at the operating segment level, starting with our specialized segment results. Specialized revenues were $270.4 million, up 10.8% versus the prior year, with growth driven by demand in our high security cargo, aerospace and agricultural verticals where we continue to realize strong rates.

As mentioned last quarter, aerospace continues to generate incremental improvement for us after having been a slower end market for some time as demand from aerospace was again strong. This combination of rates and demand that we maximize through our unique end market portfolio approach continues to help offset the reduction of high-margin wind energy revenues versus the year ago period. Our specialized segment's adjusted EBITDA was up 6.6% to $47 million, while adjusted EBITDA margins were just 70 basis points below the prior year's period. The margin compression in this quarter was primarily driven by the change in mix from the prior year, specifically the reduction in high-margin wind revenue. These results against a very strong prior year period comp speak to the strength of our end market portfolio approach and the resilience of our margins through cycles.

Adjusted EBITDA growth on an absolute basis was supported by a rate per mile for the segment of $3.66, which increased by 7.3% compared to the $3.41 in the third quarter of 2021. Our specialized segment continues to experience rate expansion across end marks, driving year-over-year growth. This was again demonstrated by the segment's revenue per tractor results of $74,000, which was noticeably higher than the $70,300 recorded in last year's third quarter.

On Slide 7, we outlined our flatbed segment results for the quarter. Our Flatbed segment delivered revenue in the third quarter of $194.7 million, an increase of 5.8% from the $184 million in the prior year quarter. Healthy demand across our construction and manufacturing customer base more than offset a decline in steel, resulting in overall revenue growth. In the quarter, we saw a modest 1.2% increase year-over-year in rate per mile as we continue to earn a premium to prevailing market rates. However, revenue per tractor decreased to $51,500 from $56,000 in the third quarter of 2021 due to lower miles driven. The segment's adjusted EBITDA results of $27.2 million was 11.4% lower than $30.7 million generated in last year's third quarter. Our adjusted EBITDA margin also declined by 270 basis points and margins for the quarter were 14%, mainly due to an increase in driver pay, which caught up with previously realized rate increases.

As a result, the segment's operating ratio increased 260 basis points to 91.1%, and adjusted operating ratio was 90.8%. We continue to believe strongly that our unique business model based on a diversified portfolio that spans multiple end markets and industry verticals, combined with our strong fleet composition, positions us to maximize our strengths in both the specialized and flatbed markets.

The bottom right hand of Slide 7 updates Daseke's rate performance versus that of the broader flatbed trucking market. This quarter, the wider flatbed market saw a year-over-year rate deterioration for the first time in 9 quarters, but Daseke was again able to garner a premium rate compared to the market based on our service and execution for customers, leveraging our asset-right model to capture attractive freight opportunities at strong margins and are predominantly contract-based rates. [Turning] to Slide 8, we thought it would be useful devoting a single slide to providing some adjusted figures for 2 noteworthy callouts that are creating some noise in our normalized adjusted numbers, one for fuel surcharge and the other for an unusually large single event insurance claim.

First, with respect to fuel surcharge, we have provided a quick summary of our operating ratio adjusted for the removal of fuel surcharge, which results in revenues net of fuel surcharge. This net revenue figure is widely used in the industry as it presents a more accurate gauge of overall performance because the modest cost plus fuel surcharge does not pull through at the same margin profile as the core operating business. So it provides a drag on margins, which can be magnified in high-priced fuel environments.

As you can see, excluding fuel surcharge, our operating ratio at 89.3% this quarter is on trend with the improvements we have delivered across the past several years. Looking to the bottom portion of the slide, we have provided a Q3 and year-to-date add-back adjustment to neutralize the effect of an unusually high insurance claim amount for a single event that was settled this quarter. Net to Daseke's interest, our total exposure on this claim was $10 million, with $4 million hitting this quarter's numbers and the other $6 million being reserved for in the first quarter of the year. This table at the bottom of the slide then provides third-quarter and year-to-date figures pro forma for these adjustments. The takeaway here is that with these adjustments, which we would contend provide a better perspective of the normalized potential of our business, our results are meeting and, in some cases, exceeding consensus expectations on a year-to-date basis. When we look at how Daseke were suites performance container enhanced cash flow generation, deleveraging momentum and the flexibility to thoughtfully allocate capital to drive shareholder value.

Turning to Slide 9, I'll briefly discuss our cash flow performance. The company continued to generate strong free cash flow with $54.8 million in cash from operating activities during the third quarter driven from improvements in net working capital and $106.7 million in net cash from operating activities year-to-date. Cash CapEx year-to-date was $33.4 million, and we collected cash proceeds of $28 million from equipment sales, resulting in free cash flow of $101.3 million on a year-to-date basis. [Daseke ‘s] (technical difficulty) net after financing to $7.6 million.

During the first half of the year, we experienced delays receiving equipment due to global supply chain disruptions. However, we have started to receive more of our equipment and anticipate we'll receive a majority of our planned equipment by year-end. Moving to capital sources and the balance sheet. We continue to maintain healthy liquidity of over $311 million, with our cash balance supported by the strong free cash flow of the business and our revolving credit facility where we continue to have over $123 million of undrawn availability. Looking to Slide 10, I will conclude with our outlook for the full year 2022.

(technical difficulty) While there continues to be a within the frame, we remain confident in our ability to earn premium rates, our unique portfolio approach and asset-right model, which enables us to maximize our earnings from defensible revenue streams and our ongoing transformation initiatives. With that backdrop, we are reaffirming our full-year 2022 revenue outlook of 12% to 15% year-over-year improvement. We also expect our adjusted EBITDA to improve by the previously provided range of 5% to 10% year-over-year, albeit towards the lower end of the range as inflationary cost pressures persist. We are also reaffirming our net capital expenditure outlook of $145 million to $155 million for the full year 2022.

Moving to the bottom of the slide. While we are still preparing our formal 2023 outlook, we did want to offer a preliminary perspective on 2023. Directionally, though we do expect continued softness in some of our end markets and continued inflationary pressures to drive additional operating cost creep, we expect that a few of our key specialized segments will remain strong, providing counterbalance.

Additionally, we expect to see an inflection in our transformation process such that we will begin to see a net positive impact from our transformation initiatives in 2023 with an estimated annualized 2023 exit run rate EBITDA uplift from these efforts in the $20 million to $25 million range. We would expect these efforts to provide the additional support to mute any inflation or rate environment headwinds such that we are highly confident we will be able to show a modest improvement to both revenue and adjusted EBITDA in 2023. More to come on this on our call in early February. And with that, I'll hand the call back over to Jonathan to offer a few final remarks. Jonathan?

Thank you, Tracy. On Slide 11, before we get to Q&A this morning, I'd like to spend some time discussing our leverage. As we enter 2020, after our operational pivot in 2019, the company reprioritized the importance of a strong balance sheet. As business transformation initiatives executed in mid-late 2019 began to take root and operations began to improve, the improvement trend line in our company's free cash flow generation began to build. As our adjusted EBITDA reflated, our leverage profile began to organically decline and in early 2021, we replaced our $484 million term loan with a $400 million covenant light term loan, net of a one-time debt repayment of $84 million. The chart on the top right quadrant on this slide nicely illustrates the meaningful progress the company has made over the last few years, reducing net leverage by approximately 40% and increasing adjusted EBITDA by nearly 54%.

On this trend, our net leverage could be 0 within 2 to 3 years. The chart in the bottom left quadrant summarizes uses of capital as a percentage of cash flow from operations for several of our peers. Notice that approximately 50% of our cash flow from operations from 2020 through the third quarter of 2022 has been used to repay debt, bolstering our balance sheet. As we approach the leverage profile that is closer to industry convention, which we would expect could occur in the next 24 to 36 months, this capital currently being used to support our leverage reduction priority as well as the cash interest expense savings will be funneled to activities more likely to drive further shareholder enhancements such as M&A, more consistent share repurchase programs and possibly even an annual dividend program. I direct you to a quick summary of our credit profile on the bottom right quadrant before moving to the next slide.

Moody's and S&P have both upgraded our ratings within the last few months, and each has also described the outlook for our company is stable, even in consideration of the macro geopolitical ambiguity. Our $150 million revolving credit facility remains largely untapped with the exception of roughly $22 million of outstanding letters of credit with $123.4 million of availability under revolver and total cash balance of $188.3 million, our total liquidity as of September 30 stood at $311.7 million versus our term loan balance of $394 million.

Also, as mentioned previously, extremely germane to our profile is the fact that our term loan has no financial maintenance covenants, only 1% annual amortization with no other material maturities for nearly 5.5 years in March 2028. We would hope that your takeaways that our debt burden is manageable, our liquidity is ample and our confidence in our ability to generate positive free cash flow across cycles will continue to support the further strengthening of our balance sheet. Next slide, please. This is a slide we showed a few quarters back with several updates. Although I think it's one of the most compelling slides in the deck, I won't spend too much time on it because I'd hope the takeaways -- I hope the takeaway is fairly self-explanatory.

Since 2019, Daseke has shown consistent improvement, rationalizing our fleet, improving operating ratio as well as virtually all of our financial metrics and as discussed on the last slide, meaningfully enhancing the credit profile of our company. Yet the discount at which we trade relative to our peer group has somehow continued to widen to 46% with our multiple of enterprise value to TTM adjusted EBITDA as of September 30, 2022, and languishing around 3.6x, an implied enterprise value that is even less than that of the fair value of our assets.

Our team believes this company is still must understood and still mispriced, and we commit to each of our shareholders our resolve to continue to execute and drive long-term equity appreciation. Next slide, please. I'd like to close with big-picture drivers of value in support of what we believe to be a differentiated thesis within the value investing arena. First is our market position as the leader in industrial end markets, wherein our unrivaled scale and differentiated capabilities allow us to organically increase freight capture, improving market share with our blue-chip shipper base in tight freight markets, which provides a buffer in softer times.

While being the premier carrier to diversified pool of industrial-facing end markets is the foundation of our portfolio approach, -- the second driver is our ability to opportunistically shift capacity across these end markets, the highest and best use, while also maintaining the ability to flex capacity by toggling our asset-light fleets up or down, providing a matrix of diversification that positions us for resilience across freight cycles. And with approximately 80% to 85% of our business being contract-based, we simply do not have the same volatility as many of our spot-based peers. Number three, an established trend of improved performance. The change our business has undertaken over the last few years is real. It's lasting. And we remain confident in our ability to generate positive free cash flow irrespective of the prevailing macro environment.

Moving on to #4. We continue to be excited about our ongoing transformation plan and OpCo consolidation strategy. Though at the beginning of these processes, headwinds are typically encountered, this plan is critical to laying the groundwork for our future strategic ambitions as we surgically rationalize the people, processes and systems in preparation for our next phase of optimization, these business transformation and operational improvement initiatives are fundamentally and incrementally changing how we -- how our business will operate in the future. And we remain confident in our $25 million target and exit run rate uplift by the end of 2023. Beyond our transformation, speaking to #5, we have a number of highly actionable, highly impactful growth opportunities, which we plan to begin executing against in 2024 once the transformation phase is complete.

From organic growth into new and adjacent markets and further refinement and optimization of our core business to expansion of our capabilities through organic and strategic vertical integration that will align with our industrial end market-focused strategy. Lastly, our current share price, we do strongly believe that we are in deep value territory and the balance decidedly favors return over risk given our current multiple relative to forward proposition of our earnings potential. And to underscore this conviction, we announced a $40 million share repurchase program on September 30 of this year. While these last 2 slides were intended to provide the high-level contours of our valuation thesis, we would encourage you all to spend some time evaluating our story and our wins over the last several quarters. With that, I'd like to conclude our prepared remarks for this morning, and we'll turn the call over to our operator for your questions. Norma?

(Operator Instructions). Our first question comes from Bert Subin with Stifel.

Jonathan, first question for you. You highlighted some interesting things in the prepared remarks and you noted your valuation versus the peer group and how that compares to the fair value of the company. What do you think close that gap over time? And would divestitures be on the table as a way to simplify the business and perhaps unlock value? Or do you not think that's the right strategic direction?

Yes. I think that -- look, I think that particularly in this environment where the market sentiment is generally risk off, I think levered names are being hit disproportionately more. I think that right or wrong, the market views us as a lever name. We mentioned the cov-lite nature of our term loan, our strong balance sheet, no near-term maturities to robust that. But I think that's one of the concerns. And then, look, we can't -- to be perfectly honest, we can't ignore some of the noise. The company endured a couple of years back. And so we're -- we've been consistently performing for the last few years now. But I think that the market is going to have to see us go through potentially 2023, go through some tougher period.

Some growth recession or whatever 2023 brings. -- and ensure that this is truly a different team, a different company, and come out on the other side of that in good form, which we're prepared to do. So I think when you have that and we can go look, we've executed successfully across the pandemic. We took advantage executing decisively in a healthy rate environment over the last 18 months. And we kept the ship straight and improved revenue, improved EBITDA through growth recession. I think that's a pretty compelling story and supports our portfolio diversification, all-weather strategy approach. So I would hope that does it.

Okay. No, that's helpful. And you just highlighted your expectations for [23 EBITDA], which was very helpful. And you guys think that it could rise year-over-year with sales which would clearly be a positive outcome as to what we're hearing across the industry. I know it's early days, but can you talk about what gives you confidence in that and how we should think about the durability of your various end markets and the slowdown? Clearly, aerospace, high security, potentially wind energy could be tailwinds. But do you think that those are sufficient tailwinds to offset what you're seeing on construction, manufacturing and steel?

Yes. I think that, look, completely fair question. So we're going to obviously provide more transparent visibility into guidance for 2023 on the next call. But I think we have a handful of things going for us. Again, we talked about and you mentioned our specialized end markets, 20 – depending on the quarter, 25% to 30% of those are non-cyclical anti-recessionary type market. So those irrespective of what happens next year within reason, are going to continue to move along. The flatbed markets that we service, there's puts and takes across that arena. Some of them are actually softening. Some of them are showing signs, some green shoots where they were actually improving, strengthening. We are -- just anecdotally, we are getting calls from customers. And again, our business is largely contracts. So we don't have the volatility of the spot-based business. We are getting calls from customers, whether it's infrastructure-driven or inflation reduction act driven, really asking us to confirm capacity availability. And when we look ahead, even currently, load count year-over-year is steady.

Our brokerage is up 26% on the flatbed side, focused on flatbed for a second, year-over-year. So we actually -- our capacity is booked solid. So to the extent the rate environment moderates more, we have the ability to take from brokerage, shift the company trucks, take capacity from LPs, shift the company trucks, higher-margin trucks. If you think about our margin profile of our different fleet strategies, brokerage, it goes from brokerage, owner-operator, LP and highest margin strategy as company trucks. So we've got a lot of excess freight now that we're capturing, but we're relying on our flex capacity or asset-light capacity to really take advantage of that. If the market softens a bit, we'll shrink those lower-margin offerings and shift that freight to our higher-margin company trucks. So I think there's a lot of -- then we've got the -- and then I think, look, we've got the transformation efforts, which it's going to be both a big fixed cost move as well as refinements to our variable cost structure.

Again, 75% of our business is variable cost structure. And when you think about things like maintenance, when you're doing 500 million miles a year, $0.01, $0.02 improvement in maintenance cost per mile adds to a big number. What we think, look, again, the resiliency in our end markets, particularly in the specialized and certain markets like manufacturing, construction and agriculture. We've had a lot of conversations with those respective customers, who are predicting a good 2023. And then the additional counterbalance of our transformation initiatives are going to help us toe the line here in 2023.

Okay. Thanks for the color there. Just final question for me. We've consistently heard from some of your van peers. -- there's an expectation for small carrier exits to start to accelerate just in this backdrop where spot rate environment has been challenged and inflation has been a headwind. Can you give us some commentary on how you're thinking about the supply side for industrial, transportation and if you think there's a similar story there?

Yes. I think it's absolutely the same narrative. If you look at a lot of those -- and we're actually already seeing that. Particularly in our space, 90 – depending on what you read, I mean, 90% plus of the capacity in flatbed open deck is small carriers. And if you look at the cost creep, if you look at the wage inflation, the cost of fuel, the working capital suck that all those drivers really necessitates now. Those -- a lot of those smaller carriers were undercapitalized or were thinly capitalized going into this market. And really do live month-to-month. And so when you have all those costs all of a sudden hit your business, you're going paycheck to paycheck. And they're the incremental provider of capacity in the space. So they're having to drop rate to fund the given weeks of payables and driver pay. And so I think that [was about to crest]. The other thing that you saw, Daseke has been very fortunate to have some extremely strong relationships with the OEMs.

If you look at the equipment both last year and this year, we're particularly the small carriers, but even some of the larger carriers were cut back 30% to 35% of their orders, their truck orders. We're probably going to get this year and the year with probably something that feels like 99% of what we ordered this year. So we've been actually to maintain the age of our fleet. Our company truck fleet is probably now less than 2 years. We took advantage of the opportunity and of our relationships with our OEMs to also reduce our LP, the fleet of our OP fleet. And so when you think about all those things, those are the relationships that the small carriers don't have. So they went into COVID conserving CapEx, not knowing what that was going to really play out to be. And then you get to the next year to 2021 and you have supply chain issues, the OEMs can't deliver trucks and you get to 2022 now, same story.

So a lot of those smaller carriers in addition to the fixed cost creep and the variable cost creep now have the problem of going, look, these trucks that we wanted to cycle out after 5 years are going on 7, 8 years old. And so I think there's going to be a big reckoning with the smaller carriers. So I think it's absolutely a phenomenon. We talked to a fuel vendor a couple of weeks ago, just anecdotally, the fuel vendor said that if they look at charge-offs, fuel charge-offs last year, the entire year of 2021, all the charge-offs they took, they actually had the same number of charge-offs in a single month this year. So things are absolutely -- and if you're not paying your fuel vendor, then I think you've got bigger problems. But -- so I think things are absolutely going to change, and I think it's absolutely going to strip capacity out of the market.

Our next question comes from Jason Seidl with Cowen.

I wanted to talk about a few things. Number one, you teased about $20 million to $25 million in your transformational initiatives. Could you break that down a little bit in terms of what are some of the bigger buckets?

I think, Jason, one of the biggest is going to be our fixed cost reduction that we've alluded to. And through a lot of the transformation initiatives, we've been able to start seeing some of that just very high level. And so we really expect it to pick up next year. And there is some opportunity within our variable cost model as well where we can find some squeeze a little bit out of that. But those are probably the biggest, and we have some potential optimization on the revenue front as well in terms of asset utilization and pushing the top line. So those are probably the 3 biggest buckets. But again, that's all going to be underpinned by the technological advances that we're implementing as well in terms of a unified back office, a more uniform systems across our operating companies as well as a data lake to try and help drive some of that as well.

And are there any key dates for when you guys plan to have these things done?

We're -- Jason, we're focused on completion of this phase by the end of 2023. And then we'll move into which we haven't provided a lot of -- we've referenced, but then we'll move into what we're calling optimization, which will be another layer of incremental layer of value edge. But again, I think -- and I noticed we mentioned the $20 million, $25 million range in the script. I think in my script, I referred to 25. I think at this point, we feel very comfortable with 25 plus of incremental value based on an exit annualized run rate at the end of 2023.

I like this. You guys 20 to 25, not 25 plus, I'll keep you talking, we'll get the 30. I appreciate all the color on that. Let's talk a little bit about flatbed. I think, Jonathan, you said in your remarks, you've seen some softening and some strengthening. Can you talk about some of the key end markets that are softening in some of the key and are markets that might be strengthening in [profit]?

Yes. On the flatbed side, agriculture and manufacturing are still very strong. On the markets that we're seeing some softening in steel, lumber, building materials, [a lot] you would expect. When you think about -- we've gotten this question before, when you think about building materials, that's probably about 30% of our flatbed business. And then within building materials, about 20% of that 30% is residential facing. So about 5% to 6% of our overall revenue is residential housing [facing]. So not a big part of that. But I don't know, any other questions around that?

No, I think that's good. I guess my last one here is really going to be just allocation of capital. You guys just announced a buyback like you stated. You had a nice action in the stock today, but still it's an easy argument that you're still trading at a tremendous discount to your peers. Any reason right now that you're not going to be really being aggressive with this buyback at these levels?

Yes. Look, I think we're trying to evaluate everything. As I said, we're trying to find the right balance here. Again, it's what we can do to maximize value. We have the $40 million out there. We certainly think that we're drastically undervalued. So we're absolutely buyers of our stock in this price range. I think that there are certain -- we're trying to strike the right balance of our investor group, our shareholder base. And I think everybody that we've talked to agrees that the stock is undervalued. That's why they're buyers. That's why they're holders. But I think you also have some people that said, "Look, we like your leverage to look and feel like some of your peers." And we've gone back and forth on that. So I would expect that come 2023, we think about leverage and whether or not there's another one-time paydown because I think that some people focus on that leverage, some people focus on gross leverage or total funded leverage.

So we certainly have the liquidity to do that. And again, high, high conviction in our ability to generate strong free cash flow in 2023. So -- and as we [delever], we talked about it just the unlevered cash flow, free cash flow capability of this business as we continue to pay debt down. We have more free cash flow do some fun things with. So we're going to strike a good balance. But if the stock stays in this range and doesn't respond, we're absolutely going to be prudent, and we're going to be supportive of making sure that we do something about it.

Okay. Fair enough. And speaking of leveraging, you teased the potential dividend at some point. What does your leverage have to look like for you to initiate a dividend?

Yes. I think it depends on a number of things. I think -- look, how do we think about best uses of cash and where we're going to get the best response from -- broadly from shareholders. But I would think that funded leverage would have to be something very manageable, something in the 1.5x range before we do that. And I think that we have to have good line of sight that we're able to continue to fund M&A, which right now, we're being extremely, extremely, as you might imagine, extremely, extremely vigilant about what if any M&A we do. We do have -- we do -- I want to get to you off topic here.

We do have a small nonbinding LOI signed with somebody that we'll probably close on in February if all goes well. But I think we still want to continue to go back to the M&A trough and really provide a story where we've got organic growth plus a layer of strategic growth and really, we're a value-oriented growth story within the space. So I think that we'll be thoughtful about that. But I think we'll try to match the dividend rate and a payment that we think that we can support across rate environments.

But right now, our free cash flow profile, we're optimistic. 2023 should be good if we go out even to 2024, and I think the team may swap me for saying this, but we would hope that whatever the Fed is doing starts to unwind by then, and these higher beta names, particularly transportation logistics stocks, truckload stocks outperformed coming out of a recession. So we think that things will go extremely well. We think that wind based on conversations with our wind customers who are thinking that far out, wind's going to start to pick up a big way in 2024. So we do think that if you want to call it a low point, this is probably a low point for us.

I just knocked on wood for you after you said that. So real is follow-up. Exactly. You mentioned acquisitions. You said you have a small letter of intent there. Really tuck-ins is really all we should be looking for from you guys at least in the near term, correct?

That's right. I think a year ago when we started talking about acquisitions, we said opportunistic and we were looking at some larger acquisitions. I think that with everything going on now, just the uncertainty in the world and frankly, the success we're having the transformation and some of the ensuing value-add initiatives that will follow on with that. We're going to be focused on tuck-in. I do think also the key point that I want to make sure people appreciate is, look, we're certainly a trucking company today, but we do want to think about the end market strategy and over time, and this is certainly not going to happen overnight.

But over time, think about how to vertically integrate and not just provide trucking capacity, but warehousing, freight forwarding, things like that pre-transport, post transport capabilities, maybe even get into multimodal services. And that's a bit further out. So we're not going to say and we're going to do that tomorrow. But I think that we're thinking about the strategy and how we can do more than just provide trucking where we have a pretty captive relationship with some of those customers and some of those end markets.

Our next question comes from Ryan Sigdahl with Craig Hallum.

Jonathan, and welcome, Aaron. Just 2 for us. I covered a lot of ground here. But curious on your contract negotiations as you look into next year, what you're hearing from your customers, how they're feeling willingness to lock in contracts. I presume certainly a lot of puts and takes, but I'd imagine they'd want to lock in capacity with a strong carrier like yourself versus risking a lot of those things you mentioned on the smaller carrier side. But just any qualitative commentary there?

Yes. Those are --look, those are ongoing. And I think every shipper approach is at different times. And you're right, a lot of them are trying to lock in capacity. There have been a few that try to point to spot rates and going, "Hey, look, this is where this is trending." We're not -- look, generally, we're not interested in those types of relationships. We truly view our customers and really starting to view our customers or shippers as truly strategic partners. We mentioned that about a year ago when the rate environment was even more frothy than it was today, that look, we are probably leaving a little bit of money on the table, but we think about these relationships as long-term. So customers that come to us and try to get a look. The spot rates doing this. I know our contract rate says this, "We just say, look, guys, we're -- our capacity is completely booked we're increasing freight capture through brokerage. And if you're not wanting to pay a fair market rate, really build a relationship with us, then we're just not interested."

So again, we are having some of those conversations, but most of them right now, the large part of those are, "Hey, look, we appreciate where things are at. It's too early to say that the hand has shifted in the relationship." And a lot of people are still going -- there could be some pressure and tightening from a capacity side given some of the things we mentioned to Bert. And so I think they've been pretty balanced conversations and discussions so far.

Great. Then just on the outlook for this year. Nice to see you guys to reaffirm that despite the challenges out there. Any bias towards the higher or lower end of that given the incremental puts takes over the last couple of months?

Yes. I think just since we've seen a little bit of the softening that Jonathan alluded to on the flatbed side, while we're seeing other end markets remain strong and offset some of that. I think we're thinking more towards the bottom end of that, the lower range of the guide, but still within the guide is where we're seeing that today.

I will tell you, Ryan, that October was a good month for us. So for whatever that's worth.

And at this time, I'd like to hand the conference back to Mr. Jonathan Shepko for closing comments.

Thank you, Norma. I'd like to thank everyone for your time today. We look forward to building upon the momentum we've generated alongside our broader transformation. We thank you for your commitment and confidence, and we look forward to translating the market opportunities we are presented with today into profitable returns and consistent growth for our stakeholders. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.