Show-me-Story Daseke expects to be successful even in the downturn

Management of flatbed truckload provider Daseke said in a call Wednesday to discuss third-quarter results with analysts that “capacity is solidly booked.”

More than a quarter of the freight transported by the carrier in its specialty segment was described as “non-cyclical”. CEO Jonathan Shepko said calls are coming in from customers to confirm “capacity availability” for infrastructure-related projects and that the initial 2023 outlook for manufacturing, construction and agriculture markets remains constructive.

Daseke also has the ability to shift agent loads to company-owned trucks on off-peak days, which stabilizes equipment utilization.

Shepko noted a recent slowdown in shipments of steel, lumber and building materials, but said only 5% to 6% of the company’s total revenue is tied to housing construction, where activity has slowed as interest rates have risen.

Daseke (NASDAQ: DSKE) reported adjusted earnings per share of 34 cents for the third quarter, a cent above the consensus estimate but 9 cents down year-on-year (y/y). The quarter was negatively impacted by $4 million due to “an unusually large, single event insurance claim.”

Consolidated revenue rose 9% year-on-year to $463 million, but adjusted earnings before interest, taxes, depreciation and amortization fell 5% year-on-year to $65 million due to increased claims activity. Higher fuel surcharges and a 4% increase in brokerage revenue drove revenue growth. Excluding fuel, revenue for the quarter was up 2% year over year.

An adjusted operating rate of 90.8% deteriorated 210 basis points year over year. Taking fuel revenue out of the equation, the OR was 160 basis points worse at 89.3%.

Table: Daseke’s key performance indicators

Freight revenue per mile increased 7% year over year in specialty segment and 1% in general flatbed.

No outlook on rates was given, but Shepko said flatbed capacity is leaving the market as small carriers are unable to meet the rates needed to withstand rising cost pressures.

“A lot of these smaller airlines were undercapitalized or thinly capitalized when entering this market and are really living month to month,” Shepko said.

Shepko estimates that around 90% of the market consists of fleets that operate only a few trucks.

“They’re the incremental provider of capacity in the space,” he said. “They have to lower interest rates to fund that week’s debt and driver pay. This wave is about to peak.”

Between 80% and 85% of Daseke’s business is contractually bound, which insulates it to some degree from short-term fluctuations in spot rates. Across the flatbed industry, bid rejections have slowed to about 15%. While that’s down from the 25% rejection rate a year ago, it’s a much firmer level than the sub-5% mark that the dry truck market currently maintains.

Shepko said recent price talks with customers have been “balanced.”

“If you don’t want to pay a fair market price, really build a relationship with us, then we’re just not interested,” he said.

Chart: (SONAR: FOTRI.USA) A proxy for truck capacity, the Flatbed Outbound Tender Reject Index shows the number of loads rejected by carriers. The index has fallen to 15% compared to a year ago when fleets rejected 25% of contracted loads. To learn more about FreightWave’s SONAR, click here.

The company reiterated full-year 2022 guidance of a 12% to 15% year-over-year increase in revenue on a 5% to 10% increase in Adjusted EBITDA.

Shepko said Daseke should exit 2023 and post annual EBITDA of at least $25 million above the $235 million for the trailing 12 months through Sept. 30. Operating companies on the same technology platform are the catalysts.

When asked about the low valuation multiples for the company’s shares, Shepko said investors would probably want to see Daseke “going through some kind of tougher phase” to take comfort that the trend reversal and other initiatives worked. He believes companies with perceived high levels of debt will be penalized in a “low-risk” market.

To counter the low stock price, Daseke recently conducted a $40 million share buyback after an activist investor took an interest in it. Last year, the company repurchased just over $20 million worth of stock.

Daseke had $188 million in cash and $312 million in total cash at quarter-end. Net debt of $450 million was 1.9 times trailing EBITDA.

As of 2:01 p.m. EST Wednesday, shares of DSKE were up 5.9% from the S&P 500, which was down 1.6%.

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