Covenant Logistics Group Inc. (NASDAQ:CVLG) Q3 2022 Earnings Conference Call October 21, 2022 9:00 AM ET
Company Participants
David Parker – Chief Executive Officer
Joey Hogan – President
Paul Bunn – Senior Executive Vice President, Chief Operating Officer
Tripp Grant – Executive Vice President, Chief Financial Officer
Conference Call Participants
Jason Seidl – Cowen
Scott Group – Wolfe Research
Jack Atkins – Stephens
Bert Subin – Stifel
Barry Haimes – Sage Asset Management
Operator
Welcome to today’s Covenant Logistics Group Q3 2022 earnings release and investor conference call. Our host for today’s call is Joey Hogan.
At this time, all participants will be in a listen-only mode. Later, we will conduct a question and answer session.
I would now like to turn the call over to your host. Mr. Hogan, you may begin.
Joey Hogan
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 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.
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 four quarters was 23% compared with 12% for the trailing four quarters in 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 from the year ago quarter; our asset-based truckload’s freight revenue grew 15% versus the third quarter of 2021 with 53 fewer trucks; our asset-light managed freight and warehouse segments combined freight revenue shrank by 5% compared to the third quarter of 2021.
On the safety side, our DOT accident rate was the lowest third quarter on record, 11% lower than 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 million shares during the quarter, bringing the total to 3 million 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 0.23 times, 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.
Paul Bunn
Thanks Joey.
For the quarter, our asset-light businesses, comprised of 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 three startups for the year, receiving the full revenue impact in the third quarter. We expect startup 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 costs 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 year ago by 279 trucks to 2,153 and grew its trailer fleet by 492 to 6,860. After receiving more than a $7 million distribution during the quarter, our investment in TEL, which is included in other assets in 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 or shippers, and aiding clients in the procurement and disposition of their equipment through a robust equipment buy, sell 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 sale of equipment is a normal part of the business and can cause earnings to fluctuate from quarter to quarter.
Now I’ll turn the call back to Joey.
Joey Hogan
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 $6.00 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 have 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 periods of economic weakness.
Over the last five 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 humbled 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 five years, the model has been retooled under David’s leadership, and Paul will do a great job leading the company in his new role. I’ll still be around to assist the team in whatever I can do to help. It’s just time to hand the reins to the next generation and let them go.
Ross, we’re done with our prepared comments. We’ll now open it up for questions.
Question-and-Answer Session
Operator
[Operator instructions]
Our first question comes from Jason Seidl from Cowen. Please go ahead, Jason.
Jason Seidl
Hey everyone, good morning. Thank you Operator. [Indiscernible]
Guys, impressive quarter. Wanted to talk a little bit about some of the commentary around ’23. Can you maybe put some barriers around that less volatility comment? Obviously you bumped $6 this year. Is less volatility above 4, is it above 5? Can you put that in numbers for us?
Joey Hogan
You know, 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 if you think you know where the peak is, you can adjust it for that. I think that’s a good spot.
Jason Seidl
Okay, sounds fair. 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 left to touch here that you guys would like to either change out or improve the pricing on?
Joey Hogan
I would say of the 1,400, 1,500 trucks that are in there, Jason, there’s a couple 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.
Jason Seidl
Okay, so most of the heavy lifting done, but there’s still a couple hundred trucks which will help you offset some of the [indiscernible] going forward?
Joey Hogan
Two things I would say, and I’ll give a little bit 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 weed-and-feed.
Jason Seidl
Yes, and that was going to be my next question too, guys, in terms of when you look at your average age of your tractors, I think it’s 2.4 years now versus about two a year ago. Where you do think you’re going to be able to bring that down in ’23 to, and then how should we think about capex in ’23?
Tripp Grant
Hey Jason, 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, 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 sequentially decline each quarter next year.
In terms of capex, net capex, I would say next year we’re probably going to be 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 lease 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 getting the sales proceeds on those.
Jason Seidl
So gains on sale next year, we should be modeling up?
Tripp Grant
Yes.
Jason Seidl
Okay, perfect. Well, congrats on the quarter and I’ll turn it over to the next person.
Joey Hogan
Thank you Jason.
Operator
Our next question comes from Scott Group from Wolfe Research. Please go ahead, Scott.
Scott Group
Hey, thanks. Good morning guys.
I’m just curious, how are you thinking about pricing into next year? What’s a realistic drop in rate per mile next year?
David Parker
Scott, I think we’ll have all these answers in the next six 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, year and a half in being in the right buckets as it pertains to expedited and dedicated, and because–you know, let’s take dedicated 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. 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, be strong enough to take care of some reengineering that me and you both know is where the customer is going to come from. But it’s not like 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. I’m not as concerned there.
Then on the expedited side, we’ve only had one customer that has come 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, with about 60% of our business we’ve entered into long term agreements with our expedited customers. Again, it started back in 2020 when we said Mr. Customer, do you really need teams? If you don’t, when we let SRT go and we downsized the solo side, we took 400 or 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 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. So far, that has worked out extremely well.
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 were 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%, because that’s how much confidence I’ve got in our customer base, the relationships we’ve got with our customers.
Scott Group
So you think maybe your expedited is going to hold up better than maybe the broader van market?
David Parker
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 seven of them, but Covenant, you’re getting all seven of them. I’m not going to split it between X,Y,Z and you. You’re getting your seven. I think that’s where we’re at, and we’ll have that pressure to replace those three 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.
Joey Hogan
Hey Scott, one thing I would add just for 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, quote, Covenant transport or highway services. We had chapters where 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 David’s right – for the next six, eight, nine months will 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.
Scott Group
Okay, very helpful. Then just maybe similar question, then, when I look at the equity earnings from TEL – you know, $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?
Joey Hogan
I think it’s several things, Scott. A, I think the leadership team, Doug and his–he’s done a phenomenal job the last five or six 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 systems side, which has really helped them dial in not only costs but pricing and collaboration across the businesses. It’s very similar to what’s happened on the Covenant side the last five years, is all that’s coming together and producing what you’re seeing. It’s just some outstanding results.
Paul Bunn
Let me add to what Joey said, Scott. I think it’s two other things. If you kind of go back to–you kind of take–Joey talked about chapters, you’ve got the where we are today, then of course you’ve 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 tail to it to get out of it on a transaction, and then once that transaction, caught 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, you know, basically it’s an average of how many you bought the last three years, two years, five years, and so they were able to add significant amounts of trucks and trailers 18 months ago, 12 months ago, three 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 accounts keep growing when everybody’s 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.
We all know it costs more to buy a truck, lease a truck, buy a trailer, lease a trailer, and them 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.
Scott Group
So maybe just to–oh, go ahead. Sorry.
Joey Hogan
I would just add, Scott, they do have headwinds also, obviously with rising interest rates, so how strong is the team in being able to pass through, or the pricing structures to be able to pass through their increased capital costs, because they do have a lot of leverage – it’s 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 they’ve had some of these in the past, the group’s 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 I would say that’s a headwind depending on their customer base.
Then B, 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. So you know, those two things are what I would call in a softening environment two headwinds. We’re confident they can power through that, but nevertheless those are two things they’ve got to work through, but they have a lot of equipment coming in. Pretty much most of it is 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. EBITDA from ongoing business is going to continue to grow, it’s just what did gain on sales do as they move into the market, and are they on existing business able to pass through additional interest costs.
Scott Group
I guess maybe just to wrap up, relative to that comment of earnings down 25%, maybe 30% peak-to-trough, how much do you think these equity earnings would drop from upper $20 million this year? Where do you think that could go?
Joey Hogan
Yes, I think it will be less than the 20% to 30%. I’d put them in probably that 10% to 20% range.
Scott Group
Thank you guys, appreciate the time.
Joey Hogan
Thanks Scott.
Operator
Our next question comes from Jack Atkins from Stephens. Please go ahead, Jack.
Jack Atkins
Okay, great. Good morning and congrats to Paul and to Joey as well. Joey, I just want to say that the fact the company is such a strong footing today as we head into a freight recession, I think that’s just a testament to your leadership, and all the best as you sort of move on into the next phase of your career, so congratulations.
Joey Hogan
Thanks Jack.
Jack Atkins
I guess maybe kind of picking up where Scott left off, 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? We’re seeing some early signs of some exiting capacity. Do you worry that there may be a little bit of increased bad debt there or just some equipment that you have to maybe turn back to TEL, given we’re kind of coming off some really, really good times?
Joey Hogan
Here’s what I would say to it, Jack – no, not significantly. Here’s one thing to remember – when we say owner-operators in the TEL model, they’re leasing to a lot of captive owner-operators, a lot of fleets that have captive owner-operator programs, and so they’re not leasing to a bunch of mom and pops. 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 tail, and so on that, no concerns.
On the smaller fleet side of things, that’s where they’ve upgraded their credit quality. Yes, I’m sure they’ll take a few back here and there, but 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 concern here.
Jack Atkins
Okay, that’s great. That’s great.
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’ve got 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 inflation. How are you weighing all of that, and it feels like you’ve got some maybe opportunity to improve some operational costs with regard to how you’re managing your fleet as well, so love to kind of let you run with that question. How are you guys thinking about cost per mile as we go into 2023?
Tripp Grant
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–you know, I think of two major things, insurance and ops and maintenance, if you will. 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 tail. You know, 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 would like. 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 is position 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 two consecutive quarters now, and going into the fourth quarter of this year, we’re going to continue to pressure that and try to get some of those things cleaned up. Hopefully as we turn the corner into 2023, we’re going to start seeing a better correlation 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 downed equipment. Fleets that require 15 trucks are now requiring 20 trucks because five of those trucks are in maintenance or long-term down status, so it’s creating really just a strong headwind across all of the fleets, whether that’s expedited or dedicated, 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 allotted, we were going to 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, focusing on the older equipment first to try to bring those costs down, and doing everything that we can to start off 2023 on 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, so we’re operating as efficiently as possible from an equipment standpoint in what we think will be a tough freight environment.
Jack Atkins
Okay, great. Then I guess maybe last question and I’ll hand it over, 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 think about allocating capital moving forward, the stock’s trading at a pretty low level but there could be opportunities for consolidating M&A, so how do you think about capital allocation between those two items, and then what are you looking for on the M&A front over the next 12 months? I’d just love to get your thoughts on that.
Joey Hogan
Yes Jack, I would tell you on the M&A front, I would say I would use the word niche-y. If there’s anything niche-y out there, it could be niche-y expedited or niche-y dedicated, or niche-y warehousing. I think I would just use the word niche-y – you know, non-commoditized type businesses that are stable with a good long term track record. Niche-y. I think we would entertain looking at anything like that, and I think the share repurchase plan that’s still out there has still got dry powder in it, and so we’ll just let that thing keep working and see what it does. I think that’s how I’d answer your question.
Jack Atkins
That makes sense. I like to hear you’re looking at non-commoditized businesses, so I think that’s great.
Thanks again for the time, guys. Really appreciate it.
Joey Hogan
Thanks Jack.
Operator
Our next question comes from Bert Subin from Stifel. Please go ahead, Bert.
Bert Subin
Yes, thanks, and good morning everyone. Congrats to Joey and to Paul. Paul, I know Tripp’s not in the room but he’s nearby, so I’ve got to say, Go Dogs, big game coming up.
Tripp Grant
Say it while we can, brother!
Bert Subin
That’s right, that’s right.
So you know, I think you guys have answered a lot of the high level questions so far, and I think one, I’d 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. I think the focus is going to turn to how long this lasts. 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’ve put out some markers for the 25% to 30%, but how you are thinking about that in the context of how long this may last?
David Parker
Well Bert, I’d tell you that we believe that ’23 is going to be a slowdown in freight. We believe that eight, nine months of some difficulties that I think 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–you know, as we all know, nobody is restocking inventory. There is 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 up 500 loads or 200 loads? I mean, we may have to load 50 loads, and we load them by the end of the day, and so that’s the way in which we feel 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’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 it was hundreds of thousands, 200,000 to 500,000 trucks that came into the marketplace, quote spot market, over a two-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 came, 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.
Those would be the three 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, so that also would help us truckers.
Bert Subin
Thanks for that, David. 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 line haul 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, we saw 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?
Paul Bunn
Yes Bert, I’ll take that. I think you will see margins go down in Q4 from Q3 on managed freight, and I think Q1 will be lower than Q4. There’s no doubt that that is where probably the spot cyclical slowing freight economy is going to probably erode our margins the most, 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 two to three quarters.
Bert Subin
Thanks Paul, and just a last question from me and I’ll turn it back over, you guys have highlighted inflation a couple 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 the theme that I think is showing up is people or truckers think that inflation is going to limit the ability for shippers to claw 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.
Paul Bunn
Yes, I think that’s dead on, kind of lines of what David said earlier. I think that’s another buffer, is that–I mean, we’ve met with a lot of customers this week. Between David and I, we’ve met with three or four large customers this week, and I would say they’re echoing that theme. None of them are ringing the bell, saying you’ve just got to drop-drop-drop. I would say a couple of them, we’re going to get rate increases out of next year. Now they’re going to be small, 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 right-size my fleet a little bit and let’s find ways to get more efficient, but they’re not coming in here asking for, you know, on the transportation side monster rate decreases. So I agree with you that inflation is going to–it’s another buffer to rates going down.
When you’re in a business and working with a customer where 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. We’re trying to get out of commoditized as fast as we can.
Bert Subin
Thanks Paul.
Operator
Our next question comes from Barry Haimes from Sage Asset Management. Please go ahead, Barry.
Barry Haimes
Thanks so much everyone, and good quarter.
I had a question. We haven’t talked too much about peak season, and from other quarters, we’ve heard it’s much more on the muted side, if not non-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 quarter 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? Just an update on peak, thanks.
Paul Bunn
Yes, so Barry, here’s what I’ tell you. I’m going to go way back. Joey’s talking three chapters – I have to go back 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. Fourth quarter, we made the year or didn’t make the year based off peak, and I think we’ve been very intentional starting in about ’16 to really try to run the business for 52 weeks a year, not six or eight weeks a year.
We’ve 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 to have 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 three or four 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.
David, you want to add anything?
David Parker
That’s right. I remember years ago, Barry, we would do $50 million of peak in about a four-week period of time, and that number now is less than $10 million–
Tripp Grant
On a $160 million quarter.
David Parker
On a $160 million quarter.
Tripp Grant
Yes.
David Parker
And so yes, it’s there, it’s there with some of our old peak customers, but it’s down to two or three customers and we’re very happy with that. That’s just where it’s at.
Barry Haimes
Great, thanks. That was a great update. Appreciate it.
Operator
At this time, there are no further questions.
Joey Hogan
Well Ross, thank you for hosting us. Thanks everybody for joining the call. I look forward to updating everybody in January. You all have a good day.
Operator
This concludes today’s conference call. Thank you for attending.
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