Daseke, Inc. (NASDAQ:DSKE) Q2 2022 Earnings Conference Call August 2, 2022 11:00 AM ET
Company Participants
Traci Graham – Vice President of Finance and Investor Relations
Jonathan Shepko – Chief Executive Officer
Jason Bates – Chief Financial Officer
Conference Call Participants
Ryan Sigdahl – Craig-Hallum
Jason Seidl – Cowen
Bert Subin – Stifel
Greg Gibas – Northland Capital Markets
Operator
Good morning, everyone, and thank you for participating in today’s conference call to discuss Daseke’s Financial Results for the Second Quarter ended June 30, 2022 as well as Daseke’s 2022 Full Year Outlook. With us today are Jonathan Shepko, CEO and Board member; Jason Bates, Executive Vice President and CFO; 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 the remarks 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 now 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.
Traci Graham
Thanks, Chris. 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, our 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 could 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’ll start by turning the call over to Daseke’s CEO, Jonathan Shepko who will review our business operations and the progress we’re making as we execute against our key strategic priorities. Jason Bates, Daseke’s CFO will then 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?
Jonathan Shepko
Thank you, Traci. Good morning, everyone. Let me begin on Slide 3, where I will speak briefly to a few of the notable takeaways from our second quarter. Daseke delivered another solid quarter of operational performance as demand across most of our key industrial end markets remain strong. Additionally, disruptions in the global supply chain continue to impact the equipment market, perpetuating the supply demand imbalance, which coupled with the demand strength has only further supported a healthy freight environment.
That said these same disruptions have also created challenges to our productivity, with new truck orders approximating nearly 10% of our company truck fleet remaining unfilled. In response, Daseke continue to leverage our asset right fleet model to adapt to this unprecedented environment. We tapped our expansive asset light networks, specifically our broker services to drive revenue of $481.3 million in the period. In doing so, we met our customers a strong demand for capacity, maintaining our substantial freight capture despite these equipment delays. While continued emphasis on asset light capabilities will likely be necessary to ensure the continued servicing of our customers, we remain poised to supplant this capacity with higher margin company owned equipment, as new truck deliveries are made across the second half of the year.
The last point I’d like to mention before I hand off to Jason for a more detailed review of our financials, is the growth shown in our adjusted operating income of $49.9 million and adjusted EBITDA of $70.8 million. In spite of strong inflationary cost headwinds, a smaller company fleet and a stronger utilization of lower margin asset light capacity, each necessitated by OEM equipment delays, as well as unfavorable claims development realized this quarter, which Jason will speak to later, we were still able to post modest increases to both adjusted operating income and adjusted EBITDA versus very tough comps we posted in Q2 2021. It’s important to note, however, that the fundamental earnings capability of our platform was meaningfully understated this quarter because of these extraordinary events.
With that I will now turn the call over to Jason Bates to review our financial performance for the second quarter of 2022, Jason?
Jason Bates
Thank you, Jonathan and good morning all. Please turn with me to Slide 4 for a high level review of our consolidated results for the quarter. As Jonathan highlighted, Daseke’s diverse portfolio of industrial facing end markets, coupled with our asset light strategy, help optimize our freight and rate capture once again this quarter. We’ve proven our ability to strategically leverage this model and outperform traditional trends, seasonal and otherwise versus out of the broader market. Despite the current inflationary environment, we are pleased to report another quarter of year-over-year adjusted EBITDA improvement upon strong growth to our top line. As discussed last quarter, we see healthy demand persisting in our construction, manufacturing, steel and high security cargo end markets.
Robust demand across our key end markets coupled with limited supply continues to support a strong rate backdrop. In the quarter, Daseke delivered revenues of $481.3 million, up 19.1% compared to revenues of $404 million in last year’s second quarter. Although somewhat aided by expansion and fuel surcharges, this notable top line performance also reflects the flexibility of our business model, and was primarily achieved as we leveraged our brokerage service offering to capture revenue growth.
Even as our fleet size decreased slightly year-over-year due to continued equipment delays, we delivered adjusted net income of $30 million or $0.42 per diluted share in the quarter, adjusted EBITDA of $70.8 million grew by 2.2% compared to the second quarter of 2021. As a result of top line expansion, strong demand trends driving freight rates and the strategic deployment of our asset portfolio, this strengthened rates was partially offset by cost pressures and driver pay, operations and maintenance and insurance and claims expense.
Our results for the quarter were impacted by a couple of claims from prior periods, which have adversely developed in the quarter. Given the ongoing discussions and sensitive nature of insurance claims, we’re unable to discuss specifics. But we do view the development on these claims as unusual and would not expect the same level of claims development in the back half of next year — in the back half of this year. Next, I would like to touch on our approach to the current labor market. Here at Daseke, we continue to retain our driving professionals at a much better rate than the industry average.
Having said that, we continually monitor our driver compensation and work life balance. We have been and will continue to respond to the inflationary environment with pay increases in line with the industry. Notably, while driver pay has increased on an absolute basis, the strong rate environment helps offset these costs and driver pay as a percentage of rate per mile remain flat in the quarter. Daseke remains firmly committed to providing a positive working environment for our skilled and trusted drivers. And we will continue to keep a close watch on the labor market. Before we take a look at the segment level results, a final note on corporate overhead expenses. Corporate adjusted EBITDA in the quarter decreased by $2 million year-over-year, which was primarily related to the aforementioned insurance headwinds.
On Slide 5, we present a detailed view of our results at the operating segment level starting with our Specialized segment results. Specialized revenues were $268.6 million, up 18.8% versus the prior-year with this solid top line growth driven by heightened demand in our high security, cargo, construction and manufacturing verticals where we continue to realize strong market rates. This combination of rates and demand, coupled with our unique and market portfolio approach helps offset the reduction of high margin wind energy revenue captured in the year-ago period.
As mentioned last quarter, aerospace which was previously a slower end market continued to generate incremental improvement in the quarter as demand for aerospace volume further expands. Our Specialized segment’s adjusted EBITDA was up 3% to $44.1 million while adjusted EBITDA margins decreased 250 basis points versus the prior-year’s period. The margin compression in the quarter was primarily associated with the change in the mix of business. Specifically the decrease in high margin wind revenue, and the growth in our asset light service offerings when compared to the strong results in the second quarter of 2021.
Adjusted EBITDA growth on an absolute basis was supported by a rate per mile for the segment of $3.59, which increased by 15.1% compared to $3.12 in the second quarter of 2021. Our specialized segment has experienced consistent rate expansion across our portfolio of end markets driving the year-over-year growth. This has demonstrated by the segment’s revenue per tractor results of 75,500, which was up meaningfully versus 66,700 in last year’s second quarter.
On Slide 6, we outline our Flatbed segment results for the quarter. Our Flatbed segment delivered revenue in the second quarter of $216 million, an increase of 19.4% from a $180.9 million in the prior year quarter. Healthy demand across our construction, manufacturing and steel verticals continue to support the strong rate environment. We were able to leverage our brokerage service offering to drive revenue growth, despite the year-over-year impact of equipment delays on our fleet size.
While margins were slightly impacted by the shift towards asset light, we are confident that as equipment delays ease, we can leverage our flexible business model to push the higher margin freight back to our company assets and continue to leverage our asset light network to capture incremental freight. In the quarter we realized a 9.6% increase year-over-year in our rate per mile metric. This increase in rate per mile was further displayed in revenue of 57,300 per tractor, which increased from 55,500 in the same period the previous year.
The segments adjusted EBITDA results of $34.2 million grew by 6.9% compared to the results of $32 million in last year second quarter. As the market backdrop continues to encourage a strong rate environment, helping mitigate cost pressures. Our adjusted EBITDA margin decline by 190 basis points with margins for the quarter coming in at 15.8% primarily due to the aforementioned inflationary environment and a mix shift away from company owned assets toward our asset light solutions.
The segment’s operating ratio increased 130 basis points to 88.6% with the adjusted operating ratio coming in at 88.1%. As we have mentioned here today and throughout prior quarters Daseke has the unique advantage of having a diversified portfolio business model spending multiple end markets in industry verticals. We believe this fact combined with our strong asset fleet composition positions us to play our strengths in both the specialized and flatbed markets. If you look to the bottom right hand of Slide 6, you will see a chart detailing Daseke’s rate performance versus that of the broader flatbed trucking market. While the market continues to enjoy the strong rate environment, this chart serves as proof of Daseke success, leveraging our asset right model and our ability to most efficiently and effectively capture attractive freight opportunities at strong margins.
Turning to Slide 7, I’ll take a moment to discuss our cash flow performance. Daseke generated $51.9 million in cash from operating activities. Cash CapEx was $25.2 million and we collected cash proceeds from the sale of equipment of $20.4 million. This resulted in free cash flow generation of $47.1 million year-to-date. CapEx financed with debt or capital leases totaled $41.3 million bringing in net after financing to $5.8 million. In terms of our capital sources and balance sheet we continue to maintain healthy liquidity of over $277 million with our cash balance supported by the strong fleet free cash flowing nature of the model and significant undrawn availability on a revolving credit facility.
Looking to Slide 8, I will conclude with our outlook for the full-year 2022. We continue to see strength in freight rates. And I’ve also flexed our asset light service offering to capture additional freight. And as such, we are raising our full-year 2022 revenue outlook. We now expect consolidated revenue to increase between 12% and 15% year-over-year. However, given the various inflationary cost pressures, and the increase in our asset light business, which carries inherently lower margins, we are reaffirming our previously provided adjusted EBITDA guidance a 5% to 10% year-over-year improvement. While we have experienced significant equipment delays in the first half of 2022, we expect that a majority of our equipment will be delivered in the second half of the year and are therefore reaffirming our full-year 2022 net cap net capital expenditure outlook of 145 million, 255 million.
We will continue to keep a close watch on the labor market, inflationary pressures, the rate environment, and equipment availability as we progress into the second half of the year with the goal of providing further updates as additional information becomes available. We remain confident in our market outperforming driver retention rate and long standing customer relationships at key differentiating factors that will help support Daseke through market cycles. We are excited about what is to come in the second half of the year as we continue to focus on our transformational initiatives. Daseke is well prepared to excel through macro uncertainty. And as we have proven over the last several quarters, we continue to prioritize driving strong results remaining a quality employer for our driving professionals and returning value to our shareholders.
And with that, I’ll hand the call back over to Jonathan to offer a few final remarks, Jonathan?
Jonathan Shepko
Thank you, Jason. If you will please turn with me to Slide 9. I’d like to touch on Daseke’s commitment to value creation for our shareholders. As mentioned throughout our call this morning, we faced a myriad of headwinds in the last several months, each pressuring our margin profile and bottom-line growth. Our ability to perform well in spite of these challenges, however, whether referencing EPS return on equity, or operating income as a proxy for success is a testament to the fundamental shift in the way we think about our business. The way we prioritize initiatives and the way we measure success.
While we have made significant progress as a result of a better delineated division for the company, along with a few early wins from some of our initial tactical initiatives, we acknowledge that there’s still substantial work to be done over the next several quarters during this transformation phase to position this company to average an ideal or across market cycles. That said, our company is aligned and focused on meeting this challenge.
Moving to Slide 10. I’d like to conclude today’s prepared remarks by highlighting certain attributes that we expect will continue to position us for outperformance through this next cycle. First is our ability to generate positive free cash flow across cycles. As of the second quarter ending, our free cash flow yield, which is defined as trailing 12 months free cash flow as of June 30, 2022, divided by our market capitalization on the same date stood at a noteworthy 32%.
As mentioned on our last call, even with a 2008 recessionary type occurrence, which we do believe to be an outlier event based on current facts and circumstances, we still believe our company would be in a position to generate modest free cash flow. And with no term debt maturities until 2028, a covenant light term loan and almost 280 million of current available liquidity. We believe Daseke is well positioned to be nimble and opportunistic irrespective of the prevailing macroeconomic backdrop.
Next, I’d like to acknowledge continued progress on the transformational initiatives we announced last quarter. Approximately one half of our operating company integrations are now underway. As we continue to consolidate our operations, and move to a more harmonized platform, our ability to strategically deploy resources and drive further efficiencies through cross functional coordination within our operations will be substantial, creating avenues for even further growth and optimization in the future.
Again, alongside our efforts to consolidate and streamline our operations, we’re also making investments in technology aimed to streamline back office processes through a common accounting platform. And also to support more data driven decisions, among other things. We continue to reaffirm our expectations that these transformation initiatives will yield 20 to 25 million of annualized benefit on a run rate basis by the end of 2023. And we will provide more updates on our progress over the coming quarters.
Next, I’d like to continue to emphasize the unique diversity of the end markets and customer base that we serve, particularly relative to most of our consumer retail focused publicly traded peers. Our pure play bed on the industrial facing economy underpinned by the wherewithal and purpose of a notable top 10 customer list. Our category list containing of Department of Defense along with eight fortune 500 companies within each of our specialized and flatbed segments. We have a broad base of industrial sub verticals that we can strategically deploy our assets against, to opportunistically capitalize on the strength in particular end markets, as pockets of demand present themselves across cycles is our continued prioritization to create an all-weather portfolio granted in this diversification by end market customer with the flexibility and fleet strategy and SRA utilization that is the foundation of our resilience.
Equally important or well-constructed portfolio of industrial end markets and shippers is our ability to service these customers surgically executing across market cycles in order to maximize freight capture, while optimizing margins. This quarter as we’ve discussed, we had to rely more on our asset-light capabilities because of the OEM equipment delays. While these asset-light strategies pull through revenues at a lower contribution margin, straining both EBITDA margins and/or the search capacity, it provides allowed us — allows us to increase our freight capture.
Our teams once again were able to exceed the average benchmark each of the flatbed and specialized segments for the respective market indexes. It was this experienced execution that is the ability to toggle between company asset and asset-light capabilities while also ensuring the highest margin freight is booked to our fleet strategies with the lowest loaded costs that ensures optimal levels of freight capture across freight environments.
As the market eventually necessitates a more defensive posture and the freight market softens, we will reduce our use of asset-light capabilities and although, it is likely in that scenario, that we may experience an overall reduction in total freight capture, we would prioritize seeding and loading higher margin company-owned assets, reducing use of lower margin asset-light capabilities thereby dramatically increasing our margin per load.
The resulting more profitable mix shift coupled with our highly variable cost structure and largely contracted rate book of business provides us tremendous hand in defending margin — margins and software environments. Finally, I’d like to spend a few moments discussing the current M&A environment. Before doing so, a quick update on the hazmat tuck-in we announced last quarter, the acquisition is performing well and tracking tightly to our post-acquisition plan by any measure, a very successful transaction.
Now, with respect to the current landscape, over the last few months, as we’ve seen more volatility in the capital markets spurred by macroeconomic concerns and geopolitical fears, we’ve seen a marked increase in deal flow, a noticeable capitulation by sellers in both their posture towards selling and valuation expectations.
We believe that current headwinds are disproportionately impacting the small and micro carriers, and this will lead to continued softening and valuations for under — for the undercapitalized family owned carrier. As mentioned our previous calls, although we do review materials for marketed processes, the preponderance of our M&A pipeline is comprised largely of so source negotiated opportunities.
And I’d like to reemphasize that we are committed to our meaningfully overhauled disciplined approach to M&A focusing on tuck-in opportunities that complement our existing operations with a clear path to providing full cycle earnings and free cash flow accretion.
We would expect that much of the capital we deploy into M&A will continue to support our shift to targeting niche, defensible, industrial facing end markets where our specialized knowledge and experience are valued the most, providing an opportunity to pursue such targets that appropriately complement our portfolio of industrial sub-verticals. Conditions are largely conducive to more active consolidation in our industry and we continue to see M&A as an important component of our long-term growth strategy and a sound long-term value creation opportunity as we consider the spectrum of options competing for our capital.
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. Chris?
Question-and-Answer Session
Operator
Thank you, sir. [Operator Instructions] It looks like our first question will come from Ryan Sigdahl of Craig-Hallum. Your line is open.
Ryan Sigdahl
Good morning, guys.
Jonathan Shepko
Hey, Ryan.
Ryan Sigdahl
Curious, you talked a little bit about the truck supply. Sounds like it’s worsened — Daseke but hopefully going to improve in the second half, how much visibility do you have that from the OEMs on getting those trucks in the second half of this year? And then secondly, how do you feel your supply is relative to your competitors?
Jonathan Shepko
Yes, good question. I mean we — listen, we do appreciate the partnerships that we have. We don’t want to sound like ungrateful partners here. We know that that they’re doing everything they can to get us the equipment. We have regular conversations with them, real time updates and they’re looping us in on some of the things, the components and things like that that are leading to some of these backlogs and we are working together to get this through.
Having said that, it doesn’t change the fact that, we have — we are behind to the tune of almost 10% behind the numbers that we would’ve expected to have received at this point. And so that, obviously has a lot of flow through kind of challenges that we deal with, but I would say I — we are not the only ones that are experiencing this and while I don’t want to imply that we’re getting any kind of preferential treatment, I do think that especially as one of the larger players out there.
My suspicion is that it’s probably we’re on the front end of receiving things when it comes in. I don’t know that that would be materially different than the other large public guys, but I think when you compare us to the majority of the industry that are the smaller or family owned. I think we’re getting things as quickly as the OEMs can get them to us.
And so I don’t think that we’re behind vis-à-vis our competition in terms of large public players, but it doesn’t change the fact that it is definitely a headwind for us and something that we’re all battling right now.
Jason Bates
Yes. I think Ryan just kind of — sorry, Ryan, go ahead. Go ahead.
Ryan Sigdahl
No, I was just going to ask a follow. Is it just the tractors or is it trailers and all kinds of equipment where you’re having issues? And then can you remind us how changeable because a lot of the public players are drive in and other parts of trucking? But are you — for the same type of allocations or is it a different piece here in heavy hall just to be aware of?
Jonathan Shepko
It’s mostly the tractors, mostly the tractors Ryan. And look, most of the feedback we get, from our suppliers, it’s — whether it’s them directly or one of their Tier 1 suppliers, I mean, a lot of this goes back to just the chip shortage which everything we’re reading, just kind of anecdotally seems to suggest there. Some of those kind of misalignments are starting to debate.
There were a couple of the semis we reported this quarter who said they see kind of supply demand equalizing and some of the pressures going away by this next quarter. So I think if you look at that plus couple that with the feedback we’re getting from the OEMs we work with, we’re pretty confident that by the end of the year, we’ll generally be kind of on track relative to our target.
Our target fleet size, we had expected the onset of the year. Now look as we get those that, that kind of impacts how quickly we can turn those around, get them kind of loaded on the road. If we get kind of a glut of those at one time, it’s — it is difficult to kind of process those, get them kind of road ready, get the decals on, get the drivers back with the old truck that we’re replacing, get them seated, get them back out there.
So there could be some inefficiencies we see there, but look, generally we feel we’ll be back on track by the end of the year, but again, 250 trucks, company trucks, higher margin company trucks, light going into the year, we think we fared very well this quarter.
Ryan Sigdahl
Then you mentioned — yes, go ahead.
Rick Williams
Yes, sorry, Ryan. Before you hit the insurance, which we’re happy to talk about. The — you asked the question about kind of transferability of the different assets on the truck side, there is more transferability. The trailer side, which we are a little behind on trailers too side. I — well, Jonathan’s right, we’re fueling it more on the tractor side. There — I didn’t want to point out that we are behind on some trailers well, and some of those aren’t as transferable across different platforms and end markets. So just as an FYI, and then I’ll let you ask the question just to make sure I hit it the right way, but I think I know where you’re going. Go ahead.
Ryan Sigdahl
You could ask your own question for me and apologize for cutting you guys off. You mentioned unusual claims on favorable — quarter. I don’t believe you quantified it. Can you — and then can you elaborate a little bit more on what you can say there?
Rick Williams
Yes. So obviously claims are sensitive in nature. And so we don’t want to go into the details. We want to talk about specifics inherently claims develop overtime. And so we had a couple of prior period claims that, that, that have developed here in this year in the first half of the year, which led to reserve increases. I will tell you, I mean you’ll see this when it comes out in the queue tonight that you’re going to note roughly a little over $7.5 million year-over-year of incremental claims and insurance and claims headwind.
Again, we don’t add that back because claims in and of itself is a part of business, right. But we do view it as unusual. And we don’t expect that same level of development to occur. Now that doesn’t mean that there couldn’t be an accident that happens tomorrow. I’m knocking on wood, right. Heaven forbid, but it can always happen. But with some of the changes that we made last year with the creation of the risk retention group and taking a slightly higher self-retention level inherently with that, you introduce a little bit more volatility.
We’re working with our third-party actuaries to develop kind of IBNR accruals and things like that to help kind of streamline that process. So we don’t experience the same level of volatility in the future. But that is what transpired here this quarter. And so we do view that as unusual. We do not expect that same level of claims development in future periods. But we did want to kind of highlight that as a headwind in the quarter, and something that we would deem to be abnormal.
Ryan Sigdahl
And was that full $7.5 million recognized in Q2? And then what were you expecting, in your previous assumptions on a year-over-year basis? I presume there’s probably some increase year-over-year, but how much was incremental?
Jonathan Shepko
Yes, so that number is what was recognized in the second quarter. And that is the year-over-year change. I would tell you that, if you asked me how it compares to what we were budgeting for the year, I don’t want to give exact numbers. But I’ll tell you, it’s millions and millions of dollars more than we were anticipating from a budgetary perspective. Now, if you’re asking me based on where I was sitting in kind of the April timeframe where we were working through these claims and mediations and things like that, I would have told you, I expected something. So I don’t want to imply that we didn’t see this coming back in, Q1, early Q2 timeframe, but vis-à-vis the budget, that would have been not quite a full $7 million, but several million dollars of headwind vis-à-vis what we were planning.
Ryan Sigdahl
Good, last one for me, mentioned or reiterated the $20 million, $25 million of annualized earnings improvement by 2023 that you laid out last or earlier than, how much have you achieved on that? And then I guess, any change in confidence, or I guess talk through the puts and takes on that since you’ve announced that?
Jonathan Shepko
Yes, Ryan I mean, we’re as we kind of mentioned, we’re underway various stages, with really kind of the first phase of some of these integrations, we will certainly provide more detail as we get a little further along, but still very, feel very good about the quantum of kind of operating income uplift, I would actually kind of tell you like, as you’d suspect, I mean, these are big lists for the OpCos that are in play. It’s a really big change management exercise. There’s a big human component, big social component. We’re certainly trying to do everything the right way for our drivers and our customers, and our non-driver employees, but it’s a big lift and a platform, platform OpCo is working double duty here.
So it’s absolutely, absolutely look in my opinion, kind of more of a headwind, this particular quarter, kind of indirect costs associated with some of those initiatives. I think, as we mentioned on the last call, we think that the kind of direct costs are going to offset any direct games this year, and we expect to really see some kind of fruits of the labor, if you will, next year. But I think things are going as planned, we feel very confident with the number. And I think we’re very close to the kind of this first phase of integrations, very close to turning a corner to where we’re actually going to start to see some real progress. So that’s kind of what I can tell you today.
Ryan Sigdahl
Thanks. Good luck guys.
Jonathan Shepko
Thank you.
Jason Bates
Thanks, Ryan.
Operator
Thank you. One moment please for our next question. Our next question will come from Jason Seidl of Cowen. Your line is open.
Jason Seidl
Thanks, operator. Good morning, gentlemen.
Operator
Next question will come from Jason Seidl of Cowen. Your line is open.
Jason Seidl
Thanks, operator. Good morning, gentlemen. If we did just focus a little bit on the Flatbed side of things. You have that nice chart in there about the outperformance which is great, but I have noticed that the evidence that the performance has been shrinking as we move here through the quarters, I guess that one question, why has it shrunk and to do you guys remain confident that you’ll continue to be able to outperform the market in the coming quarters?
Jason Bates
Yes, so I’ll hit that first and let Jonathan tack on as well. So I think as you well know, Jason and we’ve been trying to highlight, there was a healthy degree of transformative work that needed to be done here in our organization. And for the first for sure, I would say most of 2020 and even early 2021, there was a lot of tough decisions that were being made about exiting certain pieces of business, and even certain customers and redeploying assets. And so, some of the outperformance that we experienced was just a shift in mix, right.
We were electing to pursue higher margin better longer-term, strategic partnerships, et cetera. As we continue to progress down that transformation path, some of the lower hanging fruit that you see, like when you look at the outperformance on that lower, if you’re looking at Slide 6 in that lower right hand quadrant, that gap in Q2 of ’21, and Q3 of ’21, you’ll see that the gap between us and the peers shrink as we move forward. That was expected.
The point though, is that we still believe that our ability to outperform the market exists because of our ability to flex in and out of different end markets. And we’ve shown an ability to do that even in a normal environment, not walking away from different customers, but just shifting assets to higher margin business or business where there’s higher demand. And so we’ve done that. And so we do believe that that level of outperformance will continue to be there. But we never expected that it would continue to be a quantum of prior levels about 1,000 basis point differential, yes.
Jonathan Shepko
Yes, also Jason just to point out to you, that’s kind of a it’s a rate of chain, kind of rate of change chart. So, we as Jason said, we kind of started with a higher watermark, because I think we were a lot more efficient than kind of are the other, the other kind of peers in the Flatbed index or the specialized index, depending on which one you’re referencing. But, as we continue to outperform, and you’re looking at it kind of incremental rate of change in outperformance, it gets harder and harder, more difficult, more difficult to kind of beat the kind of prior month, prior quarter comp.
Jason Seidl
Makes sense, why I have you here let’s talk a little bit about some M&A. You talked about going after sort of those niche end markets, could you give us a little more color like so, what are the end markets that you’re sort of targeting that you might not have a lot of exposure or any exposure till now?
Jonathan Shepko
Yes, I mean look I think, look the shift and we kind of referenced this a couple quarters, and it’s really been kind of sprinkling out, that the shift and mindset, but I mean, the shift here is really to kind of focus move away from trailer centric, just kind of being industry agnostic and really focused on trailer type to shift more to end market verticals, end market industry sub verticals. And really, midway through last year, we identified a dozen plus industry verticals that that really all kind of possess common attributes.
And they were largely non-correlated with kind of the macro economic backdrop. They required specialized truck trailer configurations, specialized trailer equipment, specialized driver credentials, very niche end markets, where you could actually build a strategically relevant leadership position in that respective end market. And with and most of those situations, the margin profile was end markets, because of the specialized nature of those end markets was a lot more attractive.
And so that’s where we said, look, that’s what we want to be when we grew up here at Daseke is really kind of an end market, end market focus player, identifying those end markets, focusing kind of resource allocation, in support of those end markets. And getting to a point where we comprise a good majority of strategically relevant position within those end markets, and you get all the things that come with it, when you engage with customers, right. And some of those end markets, most of those end markets, we plan at some level today and have played at some level through much of Daseke’s life.
There are a couple new end markets that like life sciences and pharma, probably the only non-industrial facing end market that will actively pursue, but it possesses a lot of those same attributes that I just outlined. And so there are things like that, we did the first acquisition we did last quarter, the hazardous material, hazardous waste acquisition that that introduced tankers into our fleet. Right, we historically hadn’t done anything with tanker. So it’s not an open deck trailer, but a tanker. So we’re thinking about look is there a path to kind of building out a meaningful position, meaningful foothold, that in market, really generating higher margins, better return on capital, better kind of full cycle kind of free cash flow performances in those end markets.
And that’s the lens that we’re looking for, Flatbed which I think, people generally view is a little bit more commodity in nature. It’s not as commodity for us, given really our scale, and our ability to execute very efficiently and effectively in that space, there have been a number of larger carriers that come in and kind of have the scale have the half, they haven’t been able to figure it out, we’ve been able to demonstrate that our Flatbed segment can be profitable, maintain its margin profile, across most trade environments.
So we’ll continue to do that. But that’s a very, it’s a very different game than specialized end market focus. That’s one that requires a lot more focus on scale, and absorbing scale the right way. Focusing on things like line densification, and things like that, that you can’t get as much when you have is diversified as a trailer pool that you do on this Specialized segment of the business. So that’s really kind of how we’re thinking about that dichotomy between looking at M&A, between Specialized and Flatbed, if that answers your question.
Jason Seidl
No, it does. It’s some great color. And it sounds like the markets are helping you out in terms of potentially getting another partner.
Jonathan Shepko
Yes, absolutely.
Jason Seidl
One last one. And I’ll turn it over to somebody else, earlier today, and they’re called was talking about maybe potential in positive impacts coming later this year? And definitely next year from the infrastructure bill that passed, wanted to know what some of the feedback you’ve been getting from customers? And how should we think about forward for 2023?
Jason Bates
No, we’ve obviously been watching this very closely, and Rick and our COO and a lot of the teams in the field are in regular communication with our customers, trying to understand exactly what their needs are going to be as we’ve talked about a lot on this call, truck capacity has been constrained. And it’s important for us to understand what kind of things are coming down the pipeline that especially for some of our larger strategic customers, like Cat and others. And so yes, it is something that we are in constant communication with our customers on and are trying to kind of resource plan accordingly. I hesitate to overuse this word, but cautiously optimistic about the things that are what we’re hearing and what we’re seeing from our customers.
Now, on the one hand, I say cautiously optimistic, but also kind of freaking out a little bit given what it might mean in terms of demand, especially when you look at the tractor situation. And so we want to make sure and that’s why we’ve, you heard us referenced several times, I mean, our brokerage revenues were up 35%, 37% in the quarter year-over-year that that is intentional, that’s by design, that is strategic, we want to go out there and capture as much freight and be the best partner we can to our strategic customers. And so that if and when things do slow down, which doesn’t look like it’s happening, especially when you talk about this infrastructure bill, but if and when it does, we can shift that that business that with additional freight capture that we realized back to our company assets and keep them profitably running and moving.
So obviously, an infrastructure bill is going to push out that into the future. But the brokerage relationships that we’re developing are going to help us continue to support our strategic customers, as we move down this path of infrastructure.
Jason Seidl
And thanks for the color Jason and gentlemen. Appreciate the time as always.
Jason Bates
Thank you, Jason.
Operator
Thank you. One moment, please for our next question. Next, we have Bert Subin of Stifel. Your line is open.
Bert Subin
Hey good morning, Jonathan, Jason.
Jonathan Shepko
Good morning, Bert.
Bert Subin
So if I look at ’22 guidance, 5% to 10% EBITDA growth that implies margins were moderate, sequentially with 4Q likely sort of bearing the brunt, what incremental inflationary events we’d be looking at, just in terms of I’m trying to parse together, it sounds like a really good demand environment, perhaps shorts and trucks and moving more into brokerage. But it would seem like you have good pricing power in that backdrop, can you just help us understand why maybe that’s not the case?
Jason Bates
Yes, go ahead, Jonathan.
Jonathan Shepko
Yes, I think look, I’ll let Jason kind of dig into more some of those specific line items, Bert, but I mean, look, I think you’re focused on the right things, I think when you look at our — look at the margin profile of our business, and you certainly understand it, I don’t know that all of our investors kind of appreciate the impact of mix shift on margins, but when you’re down 250 trucks, and your company truck fleet is 2,500 or so trucks, and those the margin profile of those company trucks is 250% to 300% that of what you’re seeing, if you’re brokering those same loads, it’s a big impact, you’ll also have fuel surcharge running through our revenues.
And as some our peers peg their EBITDA to net revenues, as opposed to gross revenue. So you’ve got some, you’ve got some noise there. But I think the big thing that Jason mentioned, when he was speaking with Ryan a bit ago is look, you’ve got nearly 8 million of unfavorable claims, claims development that had that not been there, we probably would have been able to take up EBITDA guidance 3%, 4% this year, and then there’s some things on the margin that kind of dampen that a little bit further. But I do think that you’re right, we’re seeing tremendous depth in demand. I mean, Jason mentioned Cat, I mean, there’s a number of those types of customers that, they’re not having discussions with us about hey, can you drop rates are having discussions, just getting comfortable that we can provide capacity into 2023.
So we think, look, in contrast to kind of our dry van brethren who saw seven consecutive quarters of rate improved, kind of rate increases with kind of the COVID demand pull through finally had an inflection, inflection this last quarter, we didn’t see that I mean, with the lag in our demand was a little bit more noteworthy. And I think that there’s a lot of, there’s a lot of pent-up demand, supply chain issues seemed to be easing a little bit. But there’s a lot of depth here. And when you look at our end markets, construction, manufacturing, very, very kind of consistent with the PMI press yesterday that the industrial complex is holding together well, look we’re excited about the prospect of continuing to help our customers out through this, but rates are going to be there, inflationary costs to date have kept par or lagged slightly with the rate improvements we’ve seen.
So we do think on an kind of more “normalized basis”, we’d be able to defend the margin profile, but there were some unusual items this quarter that add a little bit of noise to the picture. I don’t know if Jason?
Jason Bates
Yes, no, I think you did a great job hitting the key points there. I did want to reiterate your comments about fuel surcharges, a lot of people and we listen, we’ve been talking about it internally, and we make shifts to kind of look at things on a percentage of net revenue, just because it does, it does skew the metrics, especially the margin metrics, when you’ve got fuel that I mean, our fuel surcharge revenues last year were $60 million through June 30. And they’re $115 million this year. I mean, that’s a dramatic change. And there’s not a lot of margin there, obviously.
So you saw fuel expense also rise between fuel expense and fuel reimbursements, owner operators also rise by roughly a commensurate flow through it. So I think that’s a big piece of it. But what I don’t want is for people to think that that means that there’s some kind of a structural issue in terms of our margin generating capabilities, because when you neutralize for that, absent the what as Jonathan alluded to, kind of unusual things that we realized this year, with regard to insurance and claims specifically outside of that and some of the delays on kind of equipment. Otherwise, the rates are doing a really good job of helping overcome some of the inflationary headwinds. I mean, just to give you a few quick data points, like if you look at like driver pay, we’re looking at almost double-digit percent increases. If you look at often maintenance, you’re looking at almost double-digit percent increases, salaries and wages for non-driving professionals, you’re looking at mid-single-digits. And then when you look at the fuel, as we already talked about being up 60%, 70%, 80%, right. And then finally, insurance and claims that we’ve talked about a lot already.
So there’s just a lot of those things. But again, I think the takeaway is, absent some of the unusual items on insurance, and some of the delays we’ve been experiencing on the equipment in the commensurate flow through. We feel really good about the business, and we feel really good about back to your point, demand is looking good rates should be strong. And we’re excited about what the back half of the year will look like.
And even early ’23, we’re already having conversations with customers about kind of demand pull through into 2023. So yes, I think we feel pretty good about that. Absent some of the puts and takes that we just discussed.
Bert Subin
Maybe a follow-up, but. Yes, go ahead Jon.
Jonathan Shepko
Yes, no, sorry about that, Bert. No, I look, I think some of our other peers have mentioned this, too. I mean to the extent you do see isolated pressure on rates, we don’t think that’s a function of kind of underlying demand. We think, look, the fact is that the smaller carrier, the micro carriers, they’re being as we mentioned, in our script, I mean they’re being disproportionately hammered by this environment, and they don’t have the scale, they don’t have the breadth to absorb a lot of these things. And there was kind of a stark, there was this kind of a stark movement in the number of kind of motor carrier authority non-renewals.
So, you’re losing, I think you’re losing carriers, you’ve got a lot of carriers that kind of came into this, and that’s that your marginal capacity in this industry is a smaller carriers, they hopped into this market environment at a time where used truck prices were 2x to 3x what they what they historically would have been, they have much lower, much, much higher basis, and so these guys are, these guys are struggling to survive, they’re dropping rate. And they’re really living kind of paycheck to paycheck, just to keep their business afloat. And that, look, that wave is going to crash at some point.
And so I think, in the very near term, we could lose a lot more capacity. And again, the demand side, Jason, I spoke to the demand side is absolutely there. So I think I think it’s going to continue to prop rates for the foreseeable future.
Bert Subin
Yes, thanks for the answer to both of you. My follow up to that would be, it seems like, obviously, like you guys have noted a couple of times now demand is strong. Can you highlight maybe rough percentage of your business? That’s on the books for the second half? Because I would imagine the business that you have not contracted for you would do so at higher rates to pass business inflation. Is that an opportunity?
Jason Bates
Yes, so that’s absolutely the way our team is going about this. Listen, we try not to be, bad partners. But at the same time, we’ve got to make sure that, that we’re able to take care of our employees, our shareholders, and we’re having those conversations with our customers. And we’re looking very hard at what kind of rates we’re locking in, and for what duration. And listen, we talked about this in the past. And this is not unique to Daseke, I’ve been in the industry for 20 plus years, and that has been on the driving outside as well.
A lot of times, you have to go back when fundamentals in the market shift and change, and you have to revisit conversations on price. It’s just it is what it is. And so those are conversations that we’re having. But again, we’re trying to be partners here and not take advantage of situations. But as I just alluded to, I mean, we’ve got several line items that are going up double-digit in terms of percentage increases. And we can’t just not pay the drivers, right. We need to take care of the drivers. Otherwise, we’ve got other issues with regard to servicing customers and taking care of customer. So there’s no question that those are dialogues that we’re having with customers, and we’re trying to manage those dialogues the right way, in more of a partnership, as opposed to taking advantage of the situation. But and so far, it’s been well received, and I think we’ve gone about it the right way.
Bert Subin
Okay, that makes sense. I’ll just ask one more, and I’ll pass it back. Jason, I imagine you’ve, you’ve already sort of alluded to early ’23 thoughts. I imagine you’ve thought through a peak to trough analysis for your business, several of your drive and peers have sort of quantified that in terms of earnings. I know the industrial cycle tends to be on a little bit of a lag. So perhaps ’23 doesn’t ultimately end up being a trough here on the industrial side, and then you have infrastructure that can further prolong the cycle. But if we were to make the assumption that ’23 were a trough year, can you provide any color around what that peak to trough would look like in your business? It sounds like you have up to 25 million of cost savings. And I know you’ve historically talked about the band of OR, from good to bad times being pretty narrow. Can you provide any thoughts maybe in terms of what it could mean for EBITDA or whatever metric you think is most applicable?
Jason Bates
Yes, I’ll try to tiptoe this, this trapeze here. We haven’t given any ’23 guidance. And it’s our intent to do that right now. But I understand the nature of your question, and I’ll try to give you a few data points. We’ve talked a lot in the past, we’ve done a lot of rate analysis here as an organization over the last year, and we’ve gone back 30 plus years, and have kind of identified that if you look at like the two or three or four kind of big, I’m using air quotes, here recessionary type environments that we’ve experienced during that timeframe. Typically, they last between 12 and 18 months, I think the biggest one was 24 months. And that was kind of ’09. And, and the peak to trough kind of rate inflection that we’ve experienced during those times is, it’s right around 10%. And but you, but you fully recover by the end of that 18 month cycle, and you’re back to peak again.
So peak to trough the peak is, is we’re literally talking on the smaller recession times, or slowdowns 12 months and on the biggest one 24 months. And so we’ve done to your point, burn a lot of sensitivity modeling around that. And what would happen? And what would it mean? And what kind of things would we need to do on the cost side? And so there’s been a lot of work done, we’ve got my SB&A team, wants to jump out the window, on certain days when we say, Hey, can we run this sensitivity? Can we run this sensitivity? Or if we do this with race? Or if we do with this with trucks? What are we? So we’ve done a lot of that work? What I can tell you is, we don’t know exactly what ’23 is going to look like. But it’s looking more and more as we get here into the back half of ’22. That 2023 is probably not going to be that trough year.
Now Will things start slowing down in ’23? At some point? Yeah, potentially. But I don’t know that that’s, we still see pretty decent demand, especially when we talk about, as was alluded on the previous question about the infrastructure bill and some of these other things coming down the pipeline. And then you couple that with I think you alluded to, we still have some Daseke self-help opportunity here, and I just don’t want that to get lost in the messaging, that we aren’t just a, we’re going to ebb and flow with the market. And if the market goes down 5% or 7%, or 10%, we’re going to go down 10%.
We have a lot of self-help opportunities here. And then when you look at some of the strategic M&A things that Jonathan alluded to, in our unique, diverse, and market portfolio, that we can shift assets in and out of different verticals like we did during COVID. Like we did when the construction boom happened, like we did when wind energy was strong, or when it slowed down, or when the [indiscernible]. There’s a lot of things we can do to kind of preserve margin and minimize negative impacts through a downturn. So we haven’t given definitive, we’re not going to give definitive guidance right now on 2023. But what I can tell you is that our internal expectations for 2023 is that they will be better than 2022. And I’m pretty comfortable stating that. And that’s assuming that things start to slow down a little bit in 2023. Jonathan, anything you would add to that?
Jonathan Shepko
Yes, I mean, I like — yes, the things at 85% 88% or so our businesses is contract. We don’t have the same volatility as some of the more kind of spot oriented carriers. And again, 70%, depending on the quarters, 70% to 75% of our cost structure is variable. So we’ve got a lot of, we’ve got a lot of levers to pull to kind of defend margins.
Bert Subin
Very helpful. Thank you both.
Jonathan Shepko
Thank you.
Jason Bates
Thank you, Bert.
Operator
Thank you. One moment for our next question. Our next question will call from Greg Gibas of Northland Capital Markets. Your line is open.
Greg Gibas
Hey, good morning. Thanks for taking the questions. Do you have an idea of how much of a margin impact there was from the shift to the more asset light business model in the quarter?
Jonathan Shepko
Yes, we do. So, I mean, what I can tell you is, is we did disclose that, we were up 37%. And I would tell you, probably a good way to think about it is that our trucking business typically we’ll run in the mid to high 80s operating ratio. And our brokerage business is typically going to be in the kind of mid it can be low 90s. But it’s that that is definitely a dilutive impact. When you look at that, as much as five, six, seven, 800 basis point differential.
Now, the return on invested capital is obviously better on the brokerage business, so you can afford, but it is absolutely dilutive to the margins. And so you can kind of run some of those numbers through your model, and I think it’ll get you the answer that you’re looking for.
Greg Gibas
Great. Yes, that’s helpful. Awesome. And then in terms of kind of the leading sources of cost inflation in the business, is it right to think about those being kind of what you’ve talked about this quarter, your driver pay maintenance costs and kind of insurance premiums? Or what would you kind of factor as the leading sources of inflation?
Jonathan Shepko
Yes, I mean, you hit, right. So I think driver pay almost double-digit offs and maintenance almost double-digit. And in fact, embedded in inside of that, if you look at like, tire costs, and some of these other ones, they’re out, even more than, you know, 10%, they’re up in closer to 20% range. So, I mean, there’s some big inflationary items there. We talked about non-driving salaries and wages, being up mid-single-digits. And then obviously, fuel is up substantially. But you’ve got the fuel surcharge revenue that kind of makes you whole there.
And then the last one, which isn’t something that I would necessarily characterize as inflationary, but the insurance, the way that that develops, it’s not that the premiums were up dramatically. I just want to be clear, because I think you referenced premium. It’s that the, the actual claims reserves that we took, were up, yes, we had certain we had a couple of claims prior very claims that developed materially, and therefore we took big reserves there, which is not something we would expect to recur, but also not something we would say couldn’t happen again in the future. So we just have to be cautious on that.
Greg Gibas
Great, helpful. I guess, just last one, I wanted to follow-up on your comments on the operational and back office improvements. How much of an impact do you maybe expect to realize of that in the second half of this year?
Jason Bates
Yes, Greg, I think what we’re, kind of the party line right now is, is that costs will offset any games this year. I think we mentioned that on our last call. And I think you should really, really, really think about 2023 is, as kind of the turning point where we really start to make some gains as a result of those initiatives. There’s just again, as you can suspect, I mean, there’s, there’s a lot of a lot of moving pieces, I think the team still feels like, net-net. It’s a bit of a headwind this year, and will be a bit of a headwind this year. But again, very optimistic about what we’re seeing in each of those, each of those initial kind of phased integrations, and continue to be excited about what Daseke is going to look like, once those are done.
Greg Gibas
Okay, great. Thank you.
Jason Bates
Sure. Thank you.
Operator
Thank you. And that ends the Q&A session for today’s conference, I would now like to turn the conference back to Jonathan Shepko for closing remarks.
Jonathan Shepko
Thank you, Chris. I’d like to thank everyone for your time today. We look forward to continuing 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 facing us today into more profitable returns and consistent growth for our stakeholders. Thank you.
Jason Bates
Thanks, everyone.
Operator
This conclude today’s conference call. Thank you all for participating. You may now disconnect and have a pleasant day.
Be the first to comment