U.S. Xpress Enterprises, Inc. (NYSE:USX) Q3 2022 Earnings Conference Call November 3, 2022 5:00 PM ET
Company Participants
Matt Garvie – Vice President, Investor Relations
Eric Fuller – President and Chief Executive Officer
Eric Peterson – Chief Financial Officer
Conference Call Participants
Ken Hoexter – Bank of America
Brian Ossenbeck – JPMorgan
Scott Group – Wolfe Research
Ravi Shanker – Morgan Stanley
Operator
Good afternoon. My name is Devin, and I will be your conference operator today. At this time, I would like to welcome everyone to the U.S. Xpress Enterprises, Inc. Third Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]
Matt Garvie, you may begin your conference.
Matt Garvie
Thank you, operator, and good afternoon, everyone. Welcome to the U.S. Xpress third quarter 2022 earnings call. Eric Fuller, U.S. Xpress’ President and CEO, will lead our call today; joined by Eric Peterson, our CFO, who will discuss our financial results.
Our discussion today includes forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties and that can cause actual results to differ materially. These risk factors are described in U.S. Xpress’ most recent Form 10-K filed with the SEC. We undertake no duty or obligation to update our forward-looking statements.
During today’s call, we will discuss certain non-GAAP measures, which we believe can be helpful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release.
As a reminder, a replay of this call will be available on the Investors section of our website. We have also posted an updated supplemental presentation to accompany today’s discussion on our website at investor.usxpress.com. We will be referencing portions of this supplement as part of today’s call.
And with that, I would like to turn the call over to Eric Fuller.
Eric Fuller
Thank you, Matt, and good afternoon, everyone. Today, I’d like to provide an update on our realignment plan, discuss high-level results across our business, and following Eric Peterson’s financial commentary on the quarter, I’ll provide our outlook for the fourth quarter.
Last month, we announced a significant realignment plan designed to improve operating profitability and cash flow, as well as reduce balance sheet leverage. At that time, we also announced an estimated $25 million in annualized cost reductions. We’ve already taken the actions to drive those costs out of the company, and we’ll begin to see the benefit to our earnings in the fourth quarter.
Since that time, we’ve identified an additional $3 million in annualized costs that we will begin taking out of the business in the fourth quarter. Eric Peterson will provide more detail on those costs shortly.
Our realignment plan has allowed us to take significant costs out of our business. It was really designed to allow us to get back to the basics of trucking, focusing on blocking and tackling and delivering freight for our customers at a high service level and in a cost-effective manner.
During the quarter, we hosted more than 100 people, including key customers at our partnership Customer Summit here in Chattanooga. It was great to spend time in person with our customers, understanding their evolving needs and updating them on the value proposition of U.S. Xpress. Feedback from the summit was positive, and we look forward to deepening our customer relationships over the coming quarters.
Since we have announced our realignment plan, we have had constructive conversations with several of our top customers who are excited about the direction of the company. Their sentiment is high and our back-to-basics message is resonating well. As a reminder, our customer mix is heavily focused on industry leading companies in defensive segments of the economy, including discount retail, consumer non-durables and retail grocery, which positions us well in the current market.
These our top customers have been with us for 10 years or more and use more than one of our service offerings. Our business development team has proactively added new logos to our customer base throughout the year, and we’re excited to successfully support these new customers and demonstrate the value of partnering with U.S. Xpress.
Turning to our Truckload segment, we generated truckload revenue net of fuel of $402 million, an increase of 11% year-over-year. The increase in revenue is from a combination of an increase in total truckload rate per mile and 715 additional tractors compared to the third quarter of 2021. The tractor growth was primarily in our OTR fleet. We also saw growth in our Dedicated business. In the past, we spoke about the importance of growing our overall fleet size to improve our financial performance. However, with more than 700 additional tractors, combined with our recent realignment announcement and associated cost takeout initiatives, we will be focused on improving the mix and profitability at our current fleet size.
Turning to our OTR division. As a reminder, during the third quarter, we realigned our entire OTR operations along with our brokerage business under Justin Harness into our newly created Highway Services division. Justin was instrumental in turning around the financial performance of our Dedicated division over the previous 18 months and has hit the ground running in his new role focused on getting back to the basics of trucking and improving overall utilization, which is the key to improve truckload operating results.
In the third quarter, we made progress driving more accountability within our OTR fleet, which included improving overall driver availability, lowering our percentage of empty miles, increasing our service levels for our customers and retaining the higher performing drivers. Our ability to source qualified professional OTR drivers has improved, and combined with our plans to hold our fleet size steady, we expect to improve the overall quality of our OTR professional drivers in the coming quarters. Finally, with increased driver availability, we need to book more freight to see further improvements in utilization.
In terms of mix, we were successful in adding more contracted loads to our network in the quarter. However, not at a fast enough pace to keep up with their truck count growth in the quarter. Therefore, our mix has fought, the contract freight was consistent with the second quarter of 2022, and overall OTR revenue per mile declined 2.7% sequentially. Our back-to-basics approach has been well received by our customers and is crucial to winning more contracted business, which we expect to make continued sequential progress in the coming quarters.
Turning to Dedicated, our Dedicated division continued its strong execution in the quarter with exceptionally high service levels for our customers. Interest in our dedicated offerings continue to grow, and we are staying close with our customers to identify additional opportunities where we can service them at a high level while maintaining our current margin profile and providing attractive careers for our professional drivers. We continue to see opportunities to modestly add tractor count in Dedicated, which would be accretive to our overall truckload earnings. We see incremental opportunity to improve margins in dedicated to responsible growth, modest improvement in utilization and lower driver turnover.
Turning to brokerage. Our Brokerage segment generated revenue of $75 million a decrease of 17% compared to the third quarter of 2021. The decline in revenue was due to lower overall load count year-over-year primarily due to prioritizing freight allocation to our asset-based fleet, and consequently broker out less freight. However, this segment once again benefited from lower capacity acquisition costs due to the soft market conditions, which contributed to a second consecutive quarter of 20% plus gross margins.
Given that we are targeting flat sequential fleet growth, if we continue to add more volume to our overall network, it will be accretive to the top line in brokerage. We want to grow our brokerage segment. However, we are only going to do that in a profitable manner, and we continue to target a mid-90s OR in this business in the quarters ahead.
And with that, I will turn the call over to Eric Peterson.
Eric Peterson
Thank you, Eric, and good afternoon, everyone. This afternoon, I would like to discuss our financial performance in the third quarter as well as capital allocation priorities and provide some financial guidance before turning the call back to Eric to provide our market outlook.
Turning to our performance in the third quarter. We generated revenue, excluding fuel surcharge of $477.4 million, an increase of 5.7% year-over-year. Increased truckload revenues of $40.9 million were partially offset by a decrease in brokerage segment revenue of $15.3 million.
Turning to adjusted operating loss. Total adjusted operating loss was $21.5 million, a decrease of $28.1 million from the third quarter of 2021 and a decrease of $24 million sequentially from the second quarter. We’ve stated on prior calls, the importance of sequential improvement and with our recently announced realignment plan, I will once again focus my commentary on sequential comparisons.
Overshadowing all the progress that we made in the quarter was a record high claims expense, which was primarily due to recent unexpected and adverse developments in two large claims from accidents, which occurred in prior years. In addition, claim settlements have accelerated in the backlog of cases which were delayed during the pandemic have started to clear. Over the previous eight quarters, our insurance premiums and claims expense has averaged $23.1 million per quarter. In the third quarter, insurance and claims expense was $43.9 million, an increase of $20.8 million compared to that eight-quarter average.
Despite these unexpected and adverse developments, our safety record continues to improve across our fleet as our preventable accidents in 2022 are still over 30% lower than our 2019 levels. In general, the remainder of our operating expenses on a per mile basis in the third quarter were consistent with the second quarter of 2022. Positive sequential contributions from our Truckload segment to overall adjusted operating income included overall fleet growth and increased dedicated rates. While the OTR division made progress adding contracted loads and modestly improving utilization, this progress could not offset the decline in overall OTR revenue per mile sequentially in equipment and maintenance-related inflation.
Partially offsetting these positive contributions were the continued decline of spot market rates, which declined approximately $0.50 from the first to the second quarter and approximately $0.20 from the second to the third quarter for a total of $0.70 per mile. As a reminder, due to our spot market exposure in a rising fuel environment, this also has an adverse impact on our net fuel expense as the vast majority of the spot loads we service don’t have a fuel surcharge mechanism associated with it.
We also incurred miscellaneous unusual expenses, including $1.8 million in charges related to our realignment plan, which included $1.2 million to terminate our lease in Atlanta and $600,000 in severance-related expenses. We also incurred an additional $377,000 in severance from workforce reductions related initiatives in prior quarters. And a $1 million write-off of a bankrupt customer receivable, which we no longer expect to collect. In total, these certain expenses negatively impacted adjusted operating expenses by $3.2 million in the third quarter.
As Eric mentioned earlier, we have already taken action to pull $28 million in annualized costs out of the business. These costs are divided into three main buckets: salary and wage related of $22 million, real estate related of $2 million and general and other, which are primarily vendor-related expenses of $4 million. Consistent with what we said on our realignment plan call in early September, we did not experience a material contribution from our cost reduction initiatives in the third quarter but continue to expect to see a more meaningful impact beginning in the fourth quarter.
As part of getting back to the basics, as Eric said earlier, we must restore utilization of previous levels to drive materially better levels of operating income and cash flow. We will continue to allocate capital in a disciplined manner, targeting projects that will drive the company forward.
In previous quarters, we spoke about the importance of growing back into our infrastructure to demonstrate the operating leverage in our business model. With our recently announced realignment plan, we have made a good start in rightsizing our cost structure to anticipated revenue and volumes by taking fixed costs out of the business.
Turning to capital expenditures, year-to-date, net capital expenditures which relate primarily to tractors and trailers, were $113.8 million compared to $71.1 million for the same period of 2021. The year-over-year increase in net CapEx was primarily due to lower net proceeds from the sale of used equipment compared to the same period of 2021. As we stated in our realignment plan call in September, we are expecting net CapEx of less than $100 million in 2023.
The year-over-year reduction is mainly predicated on the following: number one, execution of our more conservative trade cycle initiative in 2023; and two, little to no unexpected delays in anticipated equipment deliveries for the fourth quarter. In addition, we have already reduced our IT development costs by $10 million on an annualized basis as part of our realignment plan. Incremental net CapEx reductions are possible through divestitures of noncore real estate holdings.
Our average age of the tractor fleet was approximately two years at the end of the third quarter, which was consistent with the end of the third quarter of 2021. The combination of our young fleet and strong preventative maintenance program will allow us to execute a more conservative trade cycle program without materially impacting our maintenance cost on a per mile basis and allowing our average age of the fleet to remain under 2.5 years as we exit 2023.
Additionally, keep in mind that the per mile cost increase in new equipment costs are significantly higher than the incremental per mile maintenance cost of aging our fleet in a disciplined manner. As we have stated in the past, we use a combination of loan financing agreements and leases to fund our tractor and trailer acquisitions.
In terms of capital allocation going forward, we are focused on allocating capital to projects that will drive the business forward in the coming quarters and deprioritizing other projects which no longer have adequate return timeframes by either delaying or canceling the respective project.
Turning to net debt, at the end of the third quarter, net debt, which we define as long-term debt, including current maturities less cash balances, was $461.1 million compared to $369.8 million at the end of 2021. Over the next year, we expect our leverage to decrease from improving our overall earnings, a disciplined capital allocation approach and divestitures of non-core assets.
Turning to liquidity, at the end of the third quarter, liquidity, which we define as cash plus availability under the company’s revolving credit facility was $131.1 million, and we generated cash flow from operations of $25.4 million for the first nine months of the year. In 2023, we expect cash flow and liquidity to improve from lower IT-related CapEx and proceeds from the divestitures of non-core assets.
Our overall liquidity position entering the fourth quarter remains strong, providing us with ample liquidity to fund our business and execute on our current initiatives. As a reminder, we use cash generated from operations, together with our revolver, to fund our day-to-day operations while using separate loan financing agreements and lease arrangements to fund our fleet acquisitions.
Turning to guidance, to assist with your models, we expect the following: For the full year 2022, a low double-digit percent blended increase in truckload average rate per mile, with OTR contract rates up approximately 15% for the full year and spot rates down approximately 10% for the full year. We expect dedicated rates to increase approximately 15% year-over-year. Flat sequential overall truck count as we focus on improving our truckload segment profitability. Modest sequential improvement in utilization in the fourth quarter as we continue to gain benefits from the additional structure and discipline that has been instituted with the recent creation of our Highway Services division.
In addition, for the full year, we expect the following: an effective tax rate between 23% and 26% before any discrete items; interest expense of approximately $18 million; and net capital expenditures of approximately $150 million.
Finally, with respect to cost savings from our realignment plan, we are currently targeting a sequential decline in office wages of approximately $5 million in the fourth quarter as compared to the third quarter. Keep in mind that overall salaries, wages and benefits expense may increase sequentially as driver wages, which comprise the majority of that P&L line item are mileage-based.
With that, I will turn the call back to Eric Fuller for our outlook.
Eric Fuller
Thank you, Eric. In terms of the overall market, we are experiencing a non-existent peak season compared to the last two years as overall end market demand continues to moderate and excess capacity remains in the market despite a combination of fewer spot opportunities and an increasing cost structure, especially for small carriers.
In terms of capacity, we haven’t seen evidence in the spot rate, but we continue to expect smaller carriers to exit the market in the coming quarters as spot market opportunities are less profitable, not only as a result of declining rates, but also due to increased delivery related costs, including higher fuel equipment, maintenance and insurance costs.
In addition, these market headwinds will likely discourage new carriers from entering the market. To the extent this dynamic plays out in the market, we would anticipate used equipment prices to decline as well, which is already happening. Finally, we continue to have an easier time sourcing qualified professional drivers in the market.
As for U.S. Xpress, we are focused on what we can control to drive continued sequential improvement in our financial results, namely getting back to the basics, serving our customers at a high level, continued cost reduction initiatives to improve our profitability and executing on our disciplined capital allocation program prioritizing projects which we believe will drive the business forward. Our focus efforts in these areas are key to demonstrating the operating leverage potential of our business model. However, the key to improved operating results remains increasing utilization in our OTR fleet.
And with that, operator, we are ready to take questions.
Question-and-Answer Session
Operator
Our first question comes from Ken Hoexter with Bank of America.
Ken Hoexter
Hey, great. Good afternoon. I just want to clarify, did you say you expect dedicated rates to be up 15% while spot was down 10%? Is that a factor of something going on with contract negotiations that you’re expecting such a difference? I just want to make sure I got the numbers right there.
Eric Peterson
Yes. Most of that number is based, Ken, this is Eric Peterson. Those are year-over-year. So basically, we’re saying that the dedicated rate for 2022 is going to be approximately 15% higher than 2021. So three quarters of that rate is baked and basically saying we’ll see consistency in the fourth quarter and dedicated compared to what we saw in the third.
Eric Fuller
Yes. We wouldn’t see a lot of sequential increase in dedicated from here.
Ken Hoexter
So I guess my question then, thanks for clarifying that, so I guess, the goalpost post-IPO was obviously to delever. You’ve increased that $100 million in the past year. You’re obviously now talking about focus on cash flow, no more rapidly expanding the fleet. Obviously, these unknown legal cases that turn into the loss. Maybe thoughts on what else you can do. I think you threw in there, there are some non-core assets you can sell. Maybe you could talk a bit about those. Just obviously, the rates are going up, so obviously, it gets more expensive to keep increasing amounts of debt and we’ve got spot rates coming in. So I just want to see what actions can be taken in that deteriorating environment you’re working on.
Eric Fuller
Yes, Ken. I think we’ve got a lot of opportunities. One, our equipment is in really good shape from an age perspective. And so I think there’s some real opportunities there to look at lowering some of our CapEx as we go forward. I think we also have some opportunities in real estate. We have some real estate opportunities that we’re looking at and that can help us to lower our debt as well. And so I think there’s a number of actions that can be taken and will be taken to help lower that overall net debt number.
Ken Hoexter
Was there something specific when you threw out the non-core? Were you addressing anything specifically in the business that we should look to in less of variance versus core U.S. Xpress? Is there other systems to shut down? I just want to understand what opportunities you’ve got behind that.
Eric Fuller
Yes, we have a – specifically, we have some property in a building that we are looking to divest of. And it has a decent amount of value on it. And so that would – that’s what that is referencing specifically.
Ken Hoexter
And then lastly for me, just your macro view, you mentioned kind of no peak. Maybe a little thoughts on that as you stretch into next year. Is there – you want to expand on how things are shaping up as you enter bid season?
Eric Fuller
Yes, I mean, I think we think right now the market is weak. We’ve seen spot rates at kind of an all-time low. I do think that contract rates are holding up decently, and I think that, that is really a mechanism of the cost environment that we’ve been over the last two years. So we’ve seen significant inflation in a number of cost items, whether it be driver pay or equipment and parts and tires and everything really, went up over the last two years.
And so the cost basis is significantly different than what it was previously. And we believe that leads to a fairly quick correction in the market. I think we’re probably – we probably have another slow two quarters to go or so. But as we start to get into a little bit later into next year, maybe the midpoint of next year, I think we start to see the market start to turn with some firmness with – mainly with supply coming out of the market.
Ken Hoexter
Great. Great. Thanks for the time Eric and Eric. Appreciate it.
Eric Fuller
Thank you.
Operator
Our next question comes from Brian Ossenbeck with JPMorgan.
Brian Ossenbeck
Hey, guys. Thanks for taking the question. Just to go back to the insurance claims for a second. Eric Peterson, can you give us the kind of the eight-quarter average. This is a decent amount higher, but I thought there was another period of time where you had another claim that popped up. So maybe you can just give us some context of these kind of ongoing instances that we should expect to continue? And maybe just part of the cost doing business, especially as you mentioned some of that backlog gets cleared and a lot more of these come down the pipe. And so I guess you’re expecting more of these and what should we make of that going forward.
Eric Peterson
Yes. I would say from a severity standpoint, over the last four-plus years, we’ve been very fortunate. If you go back and you line up our insurance and claims expense, quarter-by-quarter, you’re right, you have these spikes. And that’s the nature, I think, of our industry with where we put our retention limits and our deductibles. Is that a good quarter or bad quarter, can it be the difference of one or two incidents that happen on the over 100,000 of loads that you deliver on a monthly basis. And so – we put a lot of effort into our safety program. Our safety record has improved by an incredible amount over the last three years. Our preventable accidents are down over 30%. But that doesn’t mean you can’t have a bad one. And so we don’t anticipate having those bad ones, but they do happen when they do. And that’s not really predictable. But I think if you look at our track record, when you’ve seen the spikes, this quarter is definitely an anomaly.
Brian Ossenbeck
And has this affected – do you think it will affect your premiums and kind of go-forward run rate costs when it comes to insurance?
Eric Peterson
Yes, I think if you look at the premiums, it’s truly an overall deductible of $3 million. So we’re really on the hook for the majority of our claims up to $3 million. So that would not anticipate – we have this quarter having a significant impact on our future premiums.
Brian Ossenbeck
All right. Then just one for Eric Fuller, talking about increasing utilization is the clear path to get to your goals to get margins improving, especially on the OTR fleet. So can that get a little bit difficult in a softer market? It sounds like you got better availability of drivers, so maybe that helps a little bit. But it seems like you’re going to be chasing volume into a weaker environment by a couple of different measures. So want to see what confidence you had in being able to get that, especially if you’ve had some service challenges lately. And is there a chance to – or thought maybe just to pivot to dedicated more because it seems like there’ll be some decent sized growth there as well. So how are you expecting to grow here? And what cost does it come at? And can you pivot to Dedicated?
Eric Fuller
Yes. So on the market, it is softer and growing your utility in a market like this is difficult. And so I think we are very cognizant of that. I would expect slow incremental sequential growth, but an improvement, but I don’t expect some heroic improvement. One of the things that we identified when we – when Eric and I got down to Atlanta back in December of last year was that we were not managing our driver availability to the level that we needed to. And so the front end of how you manage utility was not being managed, right?
We got our arms around it and change the metric that we look at by over 1,000 basis points in a matter of a couple of months. And so the point there is that we now have more drivers available to run revenue miles. The problem with that is I don’t have the freight to take advantage of it. And so we’re going to make incremental improvements, and it will be slow, small incremental improvements in utility until the market starts to firm a little bit. As the market term we’re able to get more opportunities in the contract side of the business, we’ll be able to significantly change our utility. But it is going to require some level of market turn to make a significant improvement.
Switching to your comment about Dedicated, we are – we really are kind of prioritizing dedicated growth. At this point, we’re keeping our overall total truck count flat. We think we’re at a level that makes sense for our infrastructure as we continue to grow in dedicated we would probably continue to bring down our over-the-road fleet to the same degree. I think the issue is we don’t need to go chase dedicated opportunities. And in this market margins are coming down and dedicated opportunities we are seeing, there’s a little bit more competitiveness in the dedicated opportunities that are available today.
And so we need to stay disciplined and not chase opportunities. But if we see opportunities to grow. And we do see some opportunities to grow, we will continue to grow Dedicated. And I anticipate growth of Dedicated through the next year or two. I mean actually, I think we’ll continue to see growth, but it’s an area that we think is important to grow in, but it’s – we want to do it on our terms with the margins that we need to make sense for the business.
Brian Ossenbeck
And if things were to get softer, would you consider cutting back on the One-Way fleet? Where do you think you’re at the size now where you kind of need it based on the footprint that you have?
Eric Fuller
Yes, I think it’s tough. We would like to trade trucks and dedicated for over the road. So if we could move Over the Road Equipment into Dedicated, then that’s how we would bring our over-the-road fleet down. But if we look at our infrastructure and our footprint, we think that our current truck count is the truck count that we need to continue to maintain going forward.
Brian Ossenbeck
Okay, understood. Thank you for the time.
Eric Fuller
Thank you.
Operator
Our next question comes from Scott Group with Wolfe Research.
Scott Group
Hey, thanks. Good afternoon, guys
Eric Fuller
Good afternoon.
Scott Group
So if I add back the two costs that you’ve talked about, truckload would have been profitable in the third quarter. I guess, my question is do you think truckload is profitable in the fourth quarter?
Eric Fuller
No, I think we’ve got I think that’s a tricky answer. One, I don’t think we’ll see costs like we saw in third quarter. You’re right, those were special unique situations that I don’t think will repeat themselves. However, we are continuing to see some downward pressure in our over-the-road rates. And if we can maintain our over-the-road rates while maintaining the volume we’re getting from our customers. I think we can be near that breakeven point. But if we continue to see a little bit further deterioration in the rate environment, that’s where – that becomes a little bit harder to do.
Scott Group
What’s your best guess or best range for how to think about truckload rates next year over the road truckload rates?
Eric Fuller
I mean I would say rates for next year is anybody’s guess. And any guess you make is going to be wrong, right? I mean, I think it’s tough. I think that right now, I think there’s going to be a little bit of some downward pressure on the contract side in the front part of next year, but I think it’s really important to note that the costs have significantly changed over the last two years. And so the inflation in just about every line item has gone up. And I don’t think there’s a lot rate to give. And so I think there’s – you’ll see a little bit of a probably downward pressure and reduction on the contract side. But I think that because of that dynamic from a cost perspective, you’ll see a fair amount of supply come out of the market in short order, and that will help to kind of flip the market as we get into kind of halfway through next year.
Scott Group
It’s interesting. We hear that from – not to see, we – I think we hear that from everybody that the costs are up, so it prevents the rates from falling. I guess, how come that’s not preventing the spot rates from falling. Like the spot rates you just said are they’ve never been lower, right? How come that cost inflation is not providing a floor for the spot?
Eric Fuller
Yes, I mean I think it comes down to the broker market. If you look at brokers that have now gotten a larger part of the pie than they ever have, they really have created this true dynamic of true supply and demand that creates the volatility that we see in the spot market. And you can just see it over the last five or six years, the volatility like nothing we’ve ever seen before. And I think that volatility, at least for a period of time is here to stay. And I think the emergence of a lot of big brokers is creating that. At the end of the day, the brokers are just looking for what they can buy capacity at, not necessarily worried about what something costs on the front – on the back end from an equipment standpoint.
So – the problem with that is, there’s a lot of small carriers that a, may not understand their cost basis or b, think they just have to keep running revenue, and we’ll do so at almost any price to kind of stay generating cash, and that’s a losing proposition for a lot of these small guys. So I think that you’ve got – and you’ve got a lot of unsophisticated carriers in the market, newer carriers in the market that I think will continue to struggle. And those carriers are probably going to go out of business. And I think at the end of the day, I think it’s the broker market that creates that environment and pushes those guys out even quicker. They almost kind of kill their own capacity.
Scott Group
Yes, that makes sense. And then maybe just for Eric Peterson, just remind us about just any covenants we need to just be aware of, any minimum liquidity things we should just keep in mind.
Eric Peterson
Thanks for the question, Scott. Yes, that’s one thing we have in place right now. It’s a very sustainable capital structure. We do have a facility in place that has a springing covenant, if our liquidity drops below 10% of the overall availability. And so our liquidity drops below $25 million, I have a springing fixed charge of one. Right now, at the end of the quarter, our liquidity is $130 million. And we don’t use that facility for purchasing of CapEx. We have great relationships with OEM captive financing that we’re able to do that with. So we do not have line of sight to our liquidity dropping below $25 million with that covenant would ever be tested. So that’s something that obviously does not keep me up at night from a covenant perspective.
Scott Group
And do you think net CapEx below $100 million?
Eric Peterson
Yes, next year, we’re very confident that our net CapEx will be below $100 million next year.
Scott Group
Last thing real quick, sorry. Were there any – were there losses on sales this quarter for you guys?
Eric Peterson
I mean, it’s insignificant gains or losses. I don’t have it right in front of me, but it was not significant. It was kind of a fixed market.
Scott Group
Depreciation went from $15 million last quarter, up to $23 million this quarter. Maybe…
Eric Peterson
I think we had – I think some of our – Scott, some of our write-offs that we had in the onetime special fees that would have gone through the loss. Those losses weren’t necessarily on the sale of equipment driving that up, but more on some of the special charges.
Scott Group
So what do you think we should model for depreciation going forward?
Eric Peterson
I would say, if you look at our fleet, we’re probably going to have consistent own versus lease. I don’t have it right in front of me, Scott. So I can get you. Maybe just have Matt follow up with us. Yes, I would say our run rate, if you were to look back and look at the average, our average depreciation, what we’ve had by quarter for a second and third quarter – and if you look at our CapEx below $100 million, I am going to have inflation on the cap on the tractors coming in versus what’s coming out. And so I think you could see a modest increase in depreciation from the run rate – if you go back to our cash flows and just strip out the gains and losses from the depreciation on the face of it then take a modest, call it, in the neighborhood of 5% or so up. That will get you pretty close.
Scott Group
Okay. Thank you.
Eric Peterson
Thank you.
Operator
Your next question comes from Ravi Shanker with Morgan Stanley.
Ravi Shanker
Thanks again. So maybe to follow up to one of the previous responses kind of obviously makes sense that you’re taking out these costs now. Do you see them as like structural or responsive to the marketplace, meaning when the cycle does come back? I mean who knows that’s like 2023 or 2024 or whatever. But do you feel like these costs or capacity are taking out now need to come back if volumes do come back?
Eric Fuller
No, I don’t. I mean, I think our philosophy right now we’re getting back to the basics and we’re really focused on performance, and that performance is really – there’s – we’re no longer looking at growth, we’re looking at financial margins and performance. And so that cost has no reason to come back – and we’re going to get this model to a really healthy level overtime and then we can kind of figure out where to go from there, but it’s super important that we focus on margins right now, and we’re not going to deviate from that even if the market returns.
Ravi Shanker
Got it. And so kind of maybe a related question, but just to clarify, what was your asset-heavy spot exposure in the third quarter? And where does that go in 4Q and 2023, do you think?
Eric Fuller
That exposure was right around a little – right around that 20% of our overall revenues. We are focused on bringing that down. But I don’t want to be naïve. We are in a really tough market. And so getting – trying to get new business at the contract level and do so that doesn’t greatly deteriorate your rate is a little bit of a balancing act. And so that’s the – that’s what we’re trying to navigate through. So I would say that we’ll – we can bring it down slowly and sequentially, but probably not heroic until the market turns. Or starts to turn, anyway.
Ravi Shanker
And just maybe lastly, longer-term question or a thematic question, can you remind us again what your exposure to owner-operator truck drivers is like what do you think of 85? And kind of there’s some speculation that this becomes somewhat of a national rule with the Department of Labor kind of recommendations kind of how does that impact you guys if that does go through?
Eric Fuller
Yes, we have a pretty small exposure. I mean, our overall owner operators are less than 15% of our total fleet. And we’re not overly concerned about that. I mean, obviously, we’re concerned from an industry perspective, and it’s something we’re watching, but it isn’t a model that we’re very heavily invested in. And so it’s not one that would have a major detrimental effect to ourselves. I think it’s a big negative for the industry. And I think that it could have some long-term ramifications to the amount of drivers that want to be in the market. There’s a lot of drivers that want to be their own bosses. And so if you take that opportunity away, does that significantly change the capacity of the market, and I think that’s a real concern. But I don’t think it would negatively impact us as a company.
Ravi Shanker
Got it. Thank you.
Eric Fuller
Thank you.
Operator
[Operator Instructions] There are no further questions at this time. Mr. Eric Fuller, I turn the call back over to you.
Eric Fuller
Great, thank you for your time today. And I just know that we are absolutely focused on getting this model turned around and operating at a high margin, high profitability. We think that we’re on the right path. This quarter was a little bit of a quarter where we had to kind of do some things to take some cost out and really focus on what I would say is kind of a cleanup quarter. But as we get through this quarter and into subsequent quarters, we should have – we’ve made significant changes with our headcount and other items. We’ve also been significantly focused on cost items as we get through the next couple of quarters. I think we’re going to have a cleaner income statement to work with. And I think that’s going to bear some fruit over the next few quarters. But thank you for your time today.
Operator
This concludes today’s conference. Thank you for attending today’s presentation. You may now disconnect.
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