Welcome to today's Covenant Logistics Group Fourth Quarter Earnings Release Conference Call. Our host for today's call is Tripp Grant. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. I would now like to turn the call over to your host. Mr. Grant, you may begin.

Good morning, everyone, and welcome to the Covenant Logistics Group's fourth quarter 2023 conference call. As a reminder, this call will contain forward-looking statements under the Private Securities Litigation Reform Act, which are subject to risks and uncertainties that could cause actual results to differ materially. Please review our SEC filings and most recent risk factors. We undertake no obligation to publicly update or revise any forward-looking statements. A copy of the prepared comments or additional financial information is available on our website at www.covenantlogistics.com/investors. I'm joined on the call today by David Parker and Paul Bunn. Before we address the fourth quarter's results, I'd like to take a moment to reflect on the year as a whole. As challenging as it was, 2023 was a pivotal year for Covenant. We were able to demonstrate the durability of our improved business model by achieving the second-best adjusted earnings per share in company history while setting the stage for future growth and improvement through the accretive acquisitions of Lew Thompson and Son Trucking and Sims Transport. These achievements would not have been possible without the commitment from our talented people and many years of planning, execution, and collaborative teamwork. As we enter 2024, we do so with a resolute commitment to forward progress on our strategic long-term plan and improving upon these results in the future. Focusing now on the quarter, we were pleased with our fourth quarter's results despite the lingering weakness in the overall freight environment. Compared to a year ago, consolidated freight revenue was down approximately $15.3 million or 6%, primarily as a result of year-over-year tractor count and rate declines in our asset-based truckload businesses, combined with little to no overflow freight handled by our asset-light Managed Freight segment, partially offset by improved utilization of our assets. Adjusted operating income declined approximately $4.9 million or 22% compared to the prior year quarter, primarily resulting from a $6.1 million decrease in our Managed Freight segment, partially offset by a $1.2 million improvement to the profitability of our Warehousing segment, while the combined truckload operations were essentially flat. Adjusted net income decreased 24% to $14.8 million and adjusted earnings per share decreased 22% to $1.07 per share compared to the year-ago quarter. Weighted average diluted shares decreased approximately 3.5% because of our share repurchase program. Key highlights include, despite 9% rate declines and 4% average tractor count reductions, our combined truckload operations generated roughly the same adjusted operating income in the fourth quarter of 2023 as they did in 2022. The Lew Thompson and Son Trucking operation continues to perform well with near-term opportunities to meaningfully grow the business in the first quarter of 2024. Our net capital investment for revenue-producing equipment was approximately $91 million for the quarter, consisting of approximately $48 million in normal 2023 replacement CapEx, $13 million in specialized equipment CapEx for poultry-related growth, and $30 million in the pull forward of normal replacement CapEx originally scheduled for 2024. The average age of our fleet at December 31st improved to 19 months compared to 26 months in the prior year and 23 months at September 30, 2023. Within our combined truckload segments, compared to the prior year, operations and maintenance-related expenses declined by $0.11 per total mile or 38% and fixed equipment-related costs, including leased revenue equipment expenses, depreciation, and gains on sale only increased $0.04 per total mile. Gain on the sale of revenue equipment was $0.2 million in the quarter, compared to $1 million in the prior year. Declining fuel prices and lagging fuel surcharge recovery rates created a tailwind for our combined truckload operations, which helped us overcome the negative impact of a cyber event with a major customer and the United Auto Workers strike in the quarter. Our TEL leasing company investment produced $0.25 per diluted share, compared to $0.21 per diluted share versus the year-ago period. Our net indebtedness as of December 31st was $248.3 million, yielding an adjusted leverage ratio of approximately 2 times and a debt-to-capital ratio of 38.1%. On an adjusted basis, return on invested capital was 8.9% for the current quarter versus 17.7% in the prior year. The decline is attributable to reduced year-over-year operating income, particularly from our asset-light Managed Freight segment and the increase in the average invested capital base associated with acquisitions, growth CapEx, and pulling equipment purchases forward. Now, Paul will provide a little more color on the items affecting the individual business segments.

Thanks, Tripp. Expedited outperformed our expectations during the fourth quarter, yielding a 91.4% adjusted operating ratio. The negative impact of a cyber attack on a major customer in the quarter was largely offset by the benefits of fuel recovery lagging a declining DOE price. In this segment, rates have declined by approximately 12%, but utilization has improved approximately 5%. The improvement in utilization was principally attributable to more engineered routes and newer equipment in the fleet with less downtime. Dedicated reflected another success story, yielding a 91.4% adjusted operating ratio also representing our best quarterly results for this segment in company history. Similar to Expedited, our Dedicated operations saw a positive impact on profitability as a result of declining fuel prices, offsetting the negative impact of the United Auto Workers strike in the quarter. Over the past three years, we have worked hard to improve the profitability within this segment by exiting unprofitable business and adding more profitable business. This weed and feed approach has been clunky at times, but has served us well in deploying capital towards opportunities that meet our profitability and return requirements. We are pleased with the year-over-year improvement to adjusted margin and expect to continue to improve upon this segment’s size and profitability over the long term. Managed Freight experienced a 15% reduction in total freight revenue and a 69% reduction in consolidated adjusted operating profit. The significant reduction in revenue and operating profit was primarily the product of little to no high-margin overflow freight from our asset-based Truckload segments. Nevertheless, the asset-light nature of the business still generates an acceptable return on invested capital at the 95.8% adjusted operating ratio which was achieved in the fourth quarter. The brokerage environment remains highly competitive with numerous brokers aggressively competing for volumes at the expense of margin. We anticipate continued margin pressure in this environment. Our Warehouse segment saw a 16% increase in freight revenue and a 428% increase in adjusted operating profit compared to the prior year, as a result of the combination of new customer startups and rate increases with existing customers over the last 12 months. Although we were pleased with the improved profitability within this segment, we will continue to focus on improving profitability through improved labor utilization and rate increases with existing customers. Our minority investment in TEL contributed pre-tax net income of $4.7 million for the quarter, compared to $3.9 million in the prior year period. The increase was largely due to suppressed 2022 earnings resulting from increased depreciation in 2022 taken on certain high-mileage tractors that were being prepared to sell. TEL’s revenue in the quarter declined 14% and pre-tax income increased by approximately 20% versus the fourth quarter of 2022. TEL decreased its truck fleet in the quarter versus the year ago by 106 trucks to 2,131 and reduced its trailer fleet by 339 to 6,810. Due to the business model, gains and losses on the sale of equipment are a normal part of the business and can cause earnings to fluctuate from quarter to quarter. Our investment in TEL, included in Other Assets on our consolidated balance sheet, has grown to $66.3 million as of December 31, 2023, from our original investment of $4.9 million. In 2022, we received $14.7 million in cash dividends from TEL and we received $9.8 million in 2023. Regarding our outlook for the future: 2023 provided as challenging of a freight environment as we have experienced in years, but we were extremely pleased with the performance of the model and team. This is a different team and a different model than Covenant of five to ten years ago. As it relates to 2024, we see no immediate macroeconomic or industry catalyst, but believe continuing to execute on our strategic plan and capacity attritions from the market will result in incremental improvements to operating conditions throughout 2024. As a result, we believe we can surpass our 2023 results with higher adjusted earnings per share and greater free cash flow that will allow us to reduce our net indebtedness and/or exercise other capital allocation alternatives. Thank you for your time. We will now open up the call for questions.

Our first question comes from Jason Seidl from TD Cowen. Please state your question.

Thank you, operator. David, Paul, Trip, good morning, guys.

Hi, Jason.

I wanted to touch a little bit on Lew Thompson there. Sort of two questions. One, was there any startup costs related to that new business you guys are gearing up for in 4Q?

There was. I mean, there were some inefficiencies, Jason. We capitalized the stuff that could be capitalized in accordance with GAAP. So a little bit of inefficiency hit in Q4, and then we were able to capitalize what the accounting rules allowed us to capitalize over the term of the contract.

All right. That makes sense. And did I hear you right saying that there's opportunities as early as 1Q? I thought they were going to be flowing more in the back half of the year?

Yes, I would say that we will likely add around 100 trucks for the first quarter, and there will be additional startups in the second half of the year. Based on some customer activity, most of the startup efforts will start in the first half of the year. This is in line with our plans, but it will take some time to fully realize the impact, which we probably won't see until the second half. Similar to the previous question about the fourth quarter, there will be a mixture of some inefficiencies that will be expensed and other items we can capitalize over the contract term.

So given that outlook and all of the things being equal, it looks like the back half of the year should be stronger for you guys without any help from the overall truckload marketplace.

Yes, I would agree with that, Jason. I think we're excited about the momentum we have in Lew Thompson, both the legacy Lew Thompson team and some of the team that we've committed from legacy Covenant to go out there and help grow that business in a manner that Lew Thompson has not done in the past. He's grown his business pretty much organically and his region, and we're offering the capital and the people to help grow outside of that region. And it's been nothing short of a blessing for sure to be able to grow it at this clip. But again, all eyes are on it. Management is completely focused. It's one of the biggest initiatives we have this year is to ensure these things are successful.

That makes sense. Let me switch to Dedicated real quick. It seems like Dedicated had a strong quarter, especially considering the current environment. Can you share what your customers are saying about demand?

Yes. I would say, Jason, it's kind of flattened out. The new business pipeline, we've got some good top line, but it moves slow. And I think most of the capacity reductions, I mean, we've still got a few in the first quarter that are trickling in. But by and large, most of the capacity reductions were, hey, I had 20 trucks, I now only need 15 or had 35 and only need 27, we've seen most of that come to an end. There's pressure with the one-way market out there. And so, here's what I'd tell you. As soon as the one-way market firms up, it will help Dedicated across our industry.

That makes sense. And you talked a little bit about the cyber issues that ST's had. Are you now seeing business come back to them for the ST's movements?

Yes. No, I mean, there was a period of a few weeks there where we had some reduced volumes. But by November, that was back up to where it was pre any issues.

Okay. Makes sense. Last question, Tripp, you pulled forward CapEx into the end of 2023 there. What should we expect in 2024?

You can expect a combination of different factors. We disclosed a range of $55 million to $65 million for capital expenditures, which includes some growth CapEx. Most of our maintenance CapEx has already been addressed. Therefore, the range remains $55 million to $65 million. Additionally, you might notice that spending may shift towards the second half of the year, and there could be some sales of equipment as well. In the first two quarters of 2024, net CapEx will be minimal aside from some growth CapEx. The maintenance activities will begin to ramp up in the latter half of the year, specifically in the third and fourth quarters.

That makes sense. Well, listen, gentlemen, impressive quarter in difficult times. I appreciate the time, as always. Congratulations.

Thank you, Jason.

Our next question comes from Scott Group from Wolfe Research. Please state your question.

Hey, thanks. Good morning, guys.

Hi, Scott. Good morning.

So you just made a comment about last question, once the one-way market firms. So where do you think we are in that? Have we hit the bottom of the one-way market? What are you seeing with respect to pricing as we're getting into the early days of 2024 bid season?

Yes, I believe we are at the bottom, and hopefully we will soon see an upward trend. For customers where we provide significant value, there are some low single-digit rate increases available, and we have successfully signed several of those accounts. However, those in highly commoditized sectors are trying to extract the last bit of value possible. Currently, we observe a mix of situations; the commoditized sectors are looking to maximize their returns before the market shifts, while longer-term partnerships that are crucial for servicing their clients are experiencing some modest rate increases, and those discussions have generally been smooth. The challenging conversations arise with clients asking for substantial discounts, which simply aren't feasible. I anticipate that small, medium, and large trucking companies will start adjusting their pricing soon, or they may end up with unused trucks. I genuinely think we've reached the bottom, and the more sophisticated shippers realize that if they can secure a deal close to breakeven or with a slight margin, they won't push for a reprice this year, allowing them to focus on their operations.

Okay. But it sounds like some of the vanilla dry van stuff is still seeing some downward pressure.

It is. The really, really commoditized stuff is still seeing a little bit of downward pressure. As you know, Scott, that's not a lot of our business. But in the pieces of it, we have, yes.

Right, right. Your comment about earnings lower in Q1. Was that a year-over-year comment, a sequential comment? I just want to make sure I'm understanding?

It was a sequential comment. I mean, there’s no doubt they will be lower than Q4. I think the analyst consensus right now is lower than the same quarter last year. Where we end up in Q1, quite frankly, will depend on the weather. If we have more severe conditions like we had last week, it will put some pressure on us. Additionally, we need to consider the inefficiencies in these startups, as we are starting up between 100 and 150 trucks, possibly more in the first quarter for Dedicated, but you won’t see all of those in the truck count because they are staggered; some will start in February and March. We need to assess how much inefficiency we have, particularly in winter, as we work to get everything moving. With our low share count, even small changes can have a significant impact, both positive and negative. Once we get through this quarter, digest those start-ups, and get them on track, we will have a clearer idea of where we are headed. That said, we are excited about the first quarter. There’s no negativity here, and I think we will maintain that excitement.

Okay. Overall, I know it's early, but when you think about the full year, do you expect earnings to grow this year? Additionally, which segments do you believe are best positioned for earnings growth, and which ones might experience a decline in earnings, if any?

Yes, I believe expedited earnings will likely remain the same or potentially increase depending on the governmental business. We did see a slight decline in that area in the fourth quarter, which tends to be inconsistent. We'll have to monitor its progress. I anticipate a slight decrease in expedited services, but it largely hinges on the future of government contracts. We've discussed the growth already in the pipeline and the initiation of managed freight. As you know, this area exposes us to the one-way market, and it seems managed freight may be declining slightly, while warehousing is showing improvement.

I believe managed freight could see improvements. We will experience the full-year impact of the Sam’s acquisition. We faced significant challenges in the first quarter that we had to manage. We didn't classify these as a GAAP to non-GAAP adjustment, as they are just part of the business, but they were material setbacks in the first quarter, particularly related to theft. I expect that the team's synergy with the acquisition and enhancements in the freight market may lead to a year-over-year improvement in managed freight in 2024 compared to 2023. Additionally, although warehousing is small, it is showing strong positive momentum that I anticipate will persist.

Warehousing's best two months of the last three years are November and December of 2023.

Okay. So hopefully, three of the four businesses with some earnings growth?

Yes.

Very helpful. Thank you, guys.

Thanks.

Thanks, Scott.

Our next question comes from Jack Atkins from Stephens. Please state your question.

Good morning, everyone, and thank you for your time. I find it interesting to consider the position shippers are taking as we go through bid season. Do you think this reflects their anticipation of a change in market dynamics as we progress through the year? I'm curious to hear your thoughts on how close we are to seeing an improvement in fundamentals. Has enough capacity been removed to potentially set the stage for this, or is there still more that needs to exit in the coming months?

I believe that more exits will be beneficial, and they are indeed continuing. To reiterate, those who prefer a 12-month deal and wish to avoid complications and back-and-forth negotiations are primarily focused on managing their business. For them, it's an easy conversation in the low single digits currently. On the other hand, larger commoditized shippers looking to cut costs and engage in numerous mini bids are the ones still pushing for lower prices. What you're observing indicates that while there are slight changes in fundamentals, no one is making drastic moves yet.

Yes, I understand. However, do you believe you're beginning to see signs that the market is nearing a balanced state, perhaps due to active capacity? As you observe the trends in your business, are you detecting indications that we might be at a turning point where conditions could shift rapidly with a bit of support on the demand side?

Yes, I think they are. Paul's comments reflect our discussions with customers about rate expectations. If there wasn't a general sense that things will change soon, we would have much tougher conversations with customers. Customers seem to be realizing that we are nearing the end of this situation. Logically speaking, despite the complexities of our business, we have seen capacity continue to leave the market. We keep discussing this, and eventually, it has to lead to a shift in fundamentals. I believe we are closer to that moment than ever. Our entire business model is built on creating mutual value with our customers, and we've been fair to them during good times and they have been fair to us during the tough times. When the situation reverses, that relationship will continue. Based on our insights, conversations, and observed data, I don't think the change will be sudden, but rather gradual, like a dimmer switch slowly turning the lights on.

Okay.

It's going to be probably a U-shaped recovery. And Jack, as we've said before, where you've got specialty drivers, specialty certifications on drivers, specialty equipment, really engineered networks, customer-facing product is less sensitive than stuff that any broker in America could haul. And that's where the pressure is at is the broker world, really.

Okay. Okay. No, that's helpful. I guess a couple of last questions, and I'll turn it over. But when we think about your TEL joint venture that's below the operating income line, what's your outlook for that in 2024? There's a lot of concern about the used equipment market out there. Just sort of curious how that would impact that piece of your business?

Yes, I don’t anticipate any significant changes. I don't expect it to grow beyond what it reached in 2023. The team has made considerable efforts to develop their business in a quality manner, focusing on creditworthy customers who require long-term leases. However, like everyone else, they’re feeling the effects of the equipment market and the freight environment. That said, they have a solid foundational business that is prepared for long-term growth. I do believe they may experience a slight setback, but in terms of material impact to their covenants, it is not substantial. With rising interest costs and the yearly implications of that along with the debt they carry, they will likely face some challenges, potentially influenced by a weaker equipment market. Nonetheless, that’s part of their business model, and I don’t expect them to fail. I prefer to focus on the long-term outlook for them, as it shows consistent upward performance. There is some year-over-year volatility, but we remain just as enthusiastic today about the long-term possibilities of TEL as we have ever been.

Jack, I want to support Tripp's comments. They experienced a significant reset this past year, mostly due to gains on sale. They achieved substantial gains on sale, particularly in 2022. Similar to many truckers who adjusted their rates in 2023, they also underwent a reset in their gains on sale. However, I agree with Tripp that I anticipate 2024 will resemble 2023 in terms of earnings. They have made considerable improvements in their workforce, sales, and succession planning. They are focused on the future, aiming to grow and invest rather than just maintaining their position from the last two years.

Okay, that's great. For my last question on cash flow and your cash utilization, I see you have brought some capital expenditures into the fourth quarter strategically. It looks like you will have strong free cash flow in 2024 based on the capital expenditure figures you mentioned. I wonder if the priority for that cash flow will be paying down debt, or considering the stock is currently trading at a significant discount to peers, are you planning to accelerate the stock repurchase program?

Yes, I completely agree with your point about the expectation of strong free cash flow in 2024. If you look at our 2022 capital plan, the situation in 2023 has been somewhat clumsy because we had a strategic goal to convert operating leases in 2022 to owned equipment. We moved away from that, incurring charges to exit those underperforming leases, and subsequently purchased new equipment to replace them. As equipment has become available, we have managed to reduce the average age of our trucks from a peak of 29 months down to 19 months. In 2023 alone, we acquired around 1,200 tractors, which represents over half of our fleet. Looking ahead to 2024, from a maintenance CapEx standpoint, we anticipate around $40 million to $45 million, and I estimate about $140 million of EBITDA. This will provide us with various options. Currently, we are about two times leveraged, and we can use the cash to pay down debt or explore other capital allocation opportunities we have pursued in the past, such as stock repurchases, M&A activities, or increased dividends. We are not committed to any single option, but we may pursue one, both, or all. I focus heavily on cash, and I am excited about the cash inflow expected next year.

Well, it's great to have options. So, that's great to hear. Thanks very much for the time guys. Take care guys. Thank you.

Thanks, Jack.

Our next question comes from Michael Vermut from Newland Capital. Please state your question.

Hey guys, how are you doing today?

Hey Mike.

Hey Mike.

I'm building on what Jack just asked. Your stock is currently trading at around 11 times, which is significantly lower than the group's average of 20 times. No one has matched what Covenant has achieved this year in terms of resilience. You repurchased stock at a great price last year. From what you're indicating, it seems like we're close to the bottom of the cycle, though it's unclear how much worse it can get. Can you explain your approach to growing the Lew Thompson Poultry business and the expected returns compared to a significant buyback? At 11 times, it seems unreasonable considering our performance at this trough in the cycle. Please walk us through the numbers regarding those two strategies. Additionally, could you share how you plan to expand this business segment over the next few years? Is it possible for this to become a third of the overall business, assuming there’s no recovery in the other sectors? How beneficial would it be for our financials to focus on growing this business organically over the next few years?

Hey Mike…

Let me. Go ahead, Dave.

Yes, this is David. I'll let Trip and Paul share their thoughts as well. I was reflecting on our current trading value of 11, while our peers are valued around 18 or 19, with some even reaching 24. It’s noteworthy that we've been on this journey since the Landair acquisition in 2018 or even back to 2015 when we entered the logistics business with Delta Airlines. Focusing on 2018, acquiring Landair positioned us strongly in the dedicated and warehousing sectors. We've seen consistent growth since then. In 2020, we exited 95% of the OTR business that was outside our core focus and concentrated instead on expedited services, with a significant portion now being long-term contracts. In 2023, this strategy has proven beneficial as none of our accounts requested rate reductions, even in a challenging market characterized by such requests. On the dedicated side, rate declines were minimal, mostly reflecting adjustments in our fleet size. The warehousing aspect has also shown continuous improvement. Since we embarked on this transformation six years ago, the company has evolved significantly. In 2022, we entered the DoD space, which, as Paul noted, requires specialized expertise. Similarly, the poultry acquisition last year demonstrated our capacity to navigate complex operational challenges, such as ensuring timely deliveries during adverse weather conditions. We've often heard that the stock price will eventually align with our efforts. After six years of dedication, as the largest shareholder, I believe it's time for the market to acknowledge our progress. I'm incredibly proud of our team and their achievements, particularly as we face the rigorous tests of 2023. We anticipated someone would value us, whether that’s Wall Street or ourselves, and that belief hasn’t wavered. While we haven’t repurchased shares in recent months, with the projected cash flow for 2024, we'll consider various strategies moving forward. Currently, the market doesn’t seem to see our true value at this 11 times multiple. If that necessitates buying back shares, we’ll proceed accordingly. If Wall Street's perception changes, that would be welcomed, and we'd appreciate that recognition. These discussions will shape our strategy for 2024. Now, I’ll let Paul and the others address any questions regarding poultry and other topics.

I completely agree with everything David mentioned. To address your poultry question specifically, when we acquired the Lew Thompson business in April of last year, it had about 225 trucks. By the end of this year, we expect that number to exceed 500 trucks due to contracts that have already been signed. We also see potential for further growth, likely adding another 250 trucks or more, depending on our pipeline and other factors. Being able to triple the volume of an operation in three to four years is a significant achievement for us, especially for a business that runs efficiently with strong contracts, a solid driver base, and a very good customer base. We are thrilled about the future of the poultry business.

Can you explain what the margins and the operating ratio might look like? Assuming we reach that $750,000, which is a significant part of our fleet rate, what kind of operating ratio should we expect two to three years down the line, considering it’s better than the overall?

Yes, I believe we are about 80% to 90% through our weed and feed process. In the fourth quarter, some of what you observed included poultry activity and a few accounts where our returns were not strong. We had multi-year agreements, with one ending in August and another in September, so Q4 saw some additions rather than subtractions in those accounts. There are still a few remaining accounts. Our goal is to achieve best-in-class industry margins in the dedicated space, targeting an operating ratio of around 87% to 89% in the long term, which is not for the short term.

And that's poultry. I just want to emphasize that this is not just poultry. It's a combination of some of the new, really good business that we've acquired, along with improvements in our legacy operations, and some growth in poultry as well. It's a mix of different factors, but I would say we're aiming for meaningful improvement and continued progress. I think it's fair to say we should maintain the current trajectory. Looking at dedicated operational revenue in 2023, it reached $100 million, compared to 2022, which was 96.2%, all before poultry. In 2023, it's at 93%. Our goal from a strategic planning perspective is to keep moving forward on this path.

Okay. So the poultry business is possibly, let's say, a mid-80s kind of OR when all said and done, we can add all the trucks in there.

Yes, I think that’s fair.

Mids 80, somewhere around that. But it's an improvement. My main point is that it’s better.

I would say that it reflects our direction. However, I agree with Tripp. When we started this journey 3.5 years ago, our dedicated operations were over 100. We managed to bring it down to 100.5, then 96%, followed by 93%, and now 91%. We will continue to push for improvements. Several factors contribute to this, including some areas of weed and feed, poultry operations, customer mix, and cost control. There are many elements influencing our efforts to enhance that margin, and achieving our goals will be a multiyear endeavor.

And I'd say a couple of more things on that is that, yes, the poultry is a good operating and then it should be from what's required. We got great partnerships with our customers out there, but the demand is unbelievable from a standpoint what you got, the service demand that you've got to perform. So yes, it is all going to help us and keep in mind, we didn't buy until April of last year and predominantly what we've done then is just growing. So there's a lot of start-up costs that's involved in that growth since we got into the poultry business, and it's definitely going to help us in the next few years. But what we have seen on the dedicated side and of getting it down on those numbers that Paul and Tripp are talked about from 100 down to 91 ORs, the poultry has helped, but it's not been the major reason. It will be in the future because it is operating better than 91 ORs that does operate in the 80s, and we're very happy, but we think the whole Dedicated will operate in the 80s because that's what best-in-class.

Excellent. All right. Well, look, for the stability you guys have created in the earnings, I would assume you should be trading at the higher end of the peers than the lowest one out there. So, a phenomenal job, guys.

Thank you, Mike.

Our next question comes from Barry Haimes from Sage Asset Management. Please state your question.

Thanks very much. Good year, guys. I had a few. First quick one. There's a little bit of a discussion on used truck prices. Could you give a feel for how much lower they are now versus, say, a quarter ago?

Barry, here's what I would like to share. It really depends on the mileage band. Trucks with over 500,000 miles are not in good shape because there is a lot of old equipment that racked up miles during the pandemic. This equipment is now being sold at significant discounts. There are many trucks with 400,000 to 500,000 miles entering the market, and I would say their prices compared to last quarter are hard to determine, but I'm not sure if they've decreased. However, moving trucks with over 500,000 miles is quite challenging. The pricing for those with 400,000 to 500,000 miles is in a fairly weak position. For trucks with 300,000 to 400,000 miles, there are still buyers, but they're likely negotiating aggressively. So, it seems more about whether you can sell the truck rather than what price you can get for it, but trucks with over 500,000 miles are definitely struggling.

Got it. Thanks for the information. My second question is about what you're hearing from customers regarding destocking. We know that a lot of destocking occurred last year. Do you have any insights from conversations with customers about how much further we have to go? Are many of them getting their inventories in line now, or is there still more to address, possibly in the first half of this year? I'd appreciate any insights you can share. Additionally, if you have any sense from customers about what percentage of balance you might regain in freight once destocking is complete, assuming the economy remains stable and there's no more destocking, what might that be? Is it around 5%, 10%? Any insights on that would be great. Thank you.

There are a few points I'd like to address. Looking back at last year, rather than calling it a destock, I would prefer to refer to it as a restock. Coming out of the pandemic, many customers had the wrong products for the wrong season, which led to a significant reduction in stock levels. For example, having Christmas trees in January and February and patio furniture arriving in October caused a lot of mix-up in inventory. As a result, customers moved into destocking. Currently, most customers' inventory levels are where they are due to this destocking combined with the pressures of rising interest rates. I anticipate that we might see some restocking as warmer weather approaches, particularly with seasonal increases in April and May, but I don't expect it to be substantial for us. However, even a slight uptick in the market could benefit our brokerage freight and other areas. While I’m not certain there will be a direct impact from this seasonal increase, we could see some indirect advantages.

Got it. And then my last question, a little more of a strategic one. You talked about managed freight and how competitive it is. And, obviously, there's some very large competitors in the space. So could you talk a little bit about where you see your competitive advantage there and/or why you ought to be in that business versus some of the other businesses you're in where maybe they might be better? Thank you.

Our managed freight largely extends from our asset-based businesses. When I review our top customers in that area, we also maintain asset relationships with them. This setup enables us to provide overflow and flexible capacity. If market conditions become unbalanced, we can utilize our managed freight operations to restore equilibrium. This division, which we refer to as solutions, was established in 2006 to enhance our customers' experience and support our asset-based operations. It remains focused on those objectives today. They also have a number of their own clients that we have nurtured over time. The business was initiated primarily to serve as an asset overflow and to support our asset operations, which it continues to do effectively. Once we secure freight internally, our aim is to run it within one of our segments rather than relinquishing it to competitors. Moreover, they have successfully expanded their own business within this space. Internally, we have a saying: we're here to stay, not to sell. Disentangling our managed freight operations would be a complex task due to their close integration with our asset operations. Our focus isn't merely on seeking additional business for volume's sake, unlike many brokerages that aim for top-line growth and margin at any cost, sometimes even at a loss, with the hope of being acquired. Our intention is not to sell; we likely couldn't sell it due to how embedded it is within our asset operations. Ultimately, this approach allows us to ensure profitability. If we can't make money from it, someone else can take it.

Got it. Thank you very much. Appreciate that.

Our next question comes from Jeffrey Kauffman from Vertical Research Partners. Please state your question.

Thank you very much and thanks for squeezing me here at the end. A lot of my questions have been asked, but I wanted to circle back on two items. I'm going to start with the CapEx. I think David, you mentioned about $40 million to $50 million of maintenance CapEx based on where the fleet is right now and the budget is kind of $55 million to $65 million net. Could you give me an idea of kind of where that implies the net fleet is on the tractor side at the end of the year and maybe differentiate the dedicated side of that versus expedited? And then the kind of the follow-up to that is, let's say we're wrong about you shape and let's say some good things happen in the second half, and we start to see freight rebound. With the excess free cash, how much flex is there to go back out and say, okay, well, we may need to add to the fleet? How much wiggle room do we have in terms of where the net fleet might be 12 months from now?

I can address that, Jeff. Among the $55 million to $65 million we projected for total CapEx in 2024, approximately $20 million is designated for growth CapEx, leaving us with around $35 million to $45 million for maintenance CapEx. It's worth noting that $30 million of that was brought into 2023, specifically in the last month, to capitalize on certain tax benefits that won’t be available in 2024. We made some strategic early purchases amounting to about $30 million, which suggests that our ongoing maintenance CapEx is likely in the range of $65 million to $70 million, conservatively speaking. I believe we will definitely produce some free cash flow. To answer the second part of your question, if we require additional CapEx or funds for growth, we will have ample resources available, whether it be for equipment or M&A, as we've successfully navigated both in recent years. We are satisfied with our capital allocation strategy. Although our debt increased toward the end of the year, this was a planned move. Therefore, we anticipate some sequential reductions in our net debt as we head into 2024, barring any significant growth CapEx or new M&A opportunities.

Okay. And just one other follow-up, if I can. In the management commentary, you were talking about how the effects of the cyber-attack and the UAW impact were net-net offset by fuel surcharge minus fuel expense. And it looks like that was about a $0.5 million positive impact on the net fuel side. So I would have thought that the cyber-attack and UAW impact would have been a little bit more than that. Can you talk a little bit about how those affected your business? And as a $0.5 million bad guy net of those two events, the right way to think about it, if you'll offset it?

One, I would say, are you talking about year-over-year?

Yes, I'm looking year-over-year.

Yes, I believe if you look at our fuel costs, it’s significantly higher than before – perhaps more than double or even triple what it was.

Okay. That would make more sense to me. So thank you. That's all I have. Congratulations.

Thanks, Jeff.

At this time, we have no further questions.

Thank you, everyone, for attending the call. We appreciate the questions and look forward to next quarter's call. Have a great week. Thank you.

This concludes today's conference call. Thank you for attending.