Covenant Logistics Group, Inc. (NASDAQ:CVLG) Q4 2023 Earnings Conference Call January 24, 2024 9:00 AM ET

Company Participants

Tripp Grant - Executive Vice President & Chief Financial Officer

Paul Bunn - President & Chief Operating Officer

David Parker - Founder & Chief Executive Officer

Conference Call Participants

Jason Seidl - TD Cowen

Scott Group - Wolfe Research

Jack Atkins - Stephens

Michael Vermut - Newland Capital

Barry Haimes - Sage Asset Management

Jeffrey Kauffman - Vertical Research Partners

Operator

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.

Tripp Grant

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 resolved 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 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 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 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.

Paul Bunn

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 decline 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 down time.

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 to 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 a15% reduction of total freight revenue and a 69% reduction of 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 of 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 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 sale of equipment is 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 "the Covenant" of five to 10 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.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jason Seidl from TD Cowen. Please state your question.

Jason Seidl

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

David Parker

Hi, Jason.

Jason Seidl

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

David Parker

There was. I mean there was some inefficiencies, Jason, and then 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.

Jason Seidl

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?

David Parker

Yes, I would say that – yes, there's definitely -- we'll probably add a 100, probably on average, 100 trucks for the first quarter into that space, and then there's additional startups in the second half. So I would just say based on some customer movement, that's probably moved to most of the start-up activity getting going in the first half of the year. It will be on plan. It will take us some time to plan out and probably won't see the full effect until the second half. And similar to the question you just asked on the fourth quarter, there'll be a balance of some inefficiencies that are expensed and other items that we're able to capitalize over the contract term.

Q – Jason Seidl

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.

David Parker

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.

Q – Jason Seidl

That makes sense. Let me switch to Dedicated real quick -- looks like a good quarter from Dedicated, especially given the environment. Can you talk a little bit about what your customers are telling you in terms of demand?

David Parker

Yes. I would say, Jason, it's kind of flattened out. 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 far, most of the capacity reductions were, hey, I had 20 trucks, not 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.

Q – Jason Seidl

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 STs movements?

David Parker

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.

Q – Jason Seidl

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

Tripp Grant

So you're going to have a mix. I think the range that we disclosed in our release was $55 million to $65 million of CapEx, of which that includes some growth CapEx, but a lot of our -- I would say, the majority of our maintenance CapEx is taken care of. So $55 million to $65 million. And the other thing I would say is you may see that gating towards the second half of the year. So we may even see some sales of equipment and things like that. You're not going to see much net CapEx in the first two quarters of 2024 other than a little bit of growth CapEx. And then I think all of the maintenance stuff will start kicking in, in the second half of the year, Q3 and Q4.

Q – Jason Seidl

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

David Parker

Thank you, Jason.

Operator

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

Q – Scott Group

Hey, thanks. Good morning guys.

David Parker

Hi, Scott. Good morning.

Scott Group

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?

David Parker

Scott, a couple of things. I think -- yes, I think we are bouncing along the bottom. And hopefully, we're about to bounce off the bottom. Customers where you're creating value for them, they're single-digit -- low single-digit rate increases to be had. We've signed multiple, a good number of those. But then the folks that are in really commoditized environments are really still -- they're trying to squeeze the last amount of blood out of the turn up kind of deal.

And so it's kind of a mix of what we're seeing out there right now, commoditized stuff, people are trying to get the last amount out before things go the other direction and longer term partner type accounts for you're really key to their network, you're really key to servicing their customer base, a lot of customer facing type stuff.

There's some low single-digit rate increases to be had, and those conversations really have not been that hard. The harder ones are some people coming in here wanting, they start throwing out numbers. I want another 10% off, and there's not another 10% to give. And so I think you're going to start seeing small truckers, medium-sized truckers, big truckers, people start pulling those numbers around. They're going to take it and reprice it as soon as they can, or there is not going to take it and folks will sit some trucks against the fence.

So I think we're at the bottom. And I think the real partner shippers, the real sophisticated folks know, hey, if I can get this thing for breakeven to 1% or 2%, then they're not going to come in here and reprice me, and we'll have another pricing discussion this time next year. And they just want to move on with business.

Scott Group

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

Tripp Grant

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.

Scott Group

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?

David Parker

It was a sequential comment. I mean, no doubt they're going to be lower than Q4. I think analyst consensus right now is lower than prior year quarter. And I think where we fall out in Q1, quite frankly, is going to be a function of weather. And if we have any more -- a bunch more what we had last week, it's going to put some pressure on it. And then really how much inefficiencies are in these startups, because I mean we're starting up 100 to 150 trucks, dependent on someone get accelerated, it could be more than that in the first quarter on Dedicated, and you won't see all those in the truck count because it's kind of weighted. Some of those are February, March start-ups, but how much inefficiency do we have, especially in a winter season getting the pump primed and getting those things running out there.

With our low share count, as you know, it doesn't take much to make it go up, but it doesn't take much to pull it back. So, I think, once we get through this quarter and get those start-ups digested and get them on plane, we'll have a lot better feel of where we're going to be. But here a thing -- we're excited about first quarter. I mean, there's nobody here hanging their head, but I think we're going to be excited.

Scott Group

Okay. And then just overall, when you -- I know it's early, but when you think about the full year, do you think you're likely to grow earnings or not this year? And then maybe when you think about the different segments, which ones are best positioned to grow earnings? And where maybe do you see another step back in earnings, if anywhere?

Tripp Grant

Yes. I mean, I think, expedited -- I think, expedited earnings is probably about the same, maybe backwards or higher depending on the governmental business. Some of that governmental business took a step back in the fourth quarter and that’s a volatile piece of business. So we'll see how that goes. But I see expedited back maybe a little, but it's all dependent on the governmental dedicated forward because that's -- we talked about a lot of the growth that we've already got in the pipeline and starting up managed freight. Again, as you know, that's our exposure to the one-way market. Managed freight is probably moving back a little bit and warehousing is moving forward.

David Parker

I think managed freight could improve. We'll have a full year effect of the Sam’s [ph] acquisition.

Tripp Grant

That’s true.

David Parker

We took a couple of big hits that we've kind of had to absorb in Q1. We didn't call it out as a GAAP to non-GAAP adjustment or anything like that because it's part of the game, but they were a material hit in Q1, I would say, with some theft. And what I would say is I think that the team and the combination of the team and the acquisition and the improvement in the freight market could give us a little bit of an improvement and managed freight year-over-year 23 -- or 2024 compared to 2023. And then I would also say warehousing -- warehousing as small as it is, has a lot of really positive momentum that we're seeing, and I think that will continue.

Tripp Grant

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

Scott Group

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

Tripp Grant

Yes.

Scott Group

Very helpful. Thank you, guys.

Tripp Grant

Thanks.

David Parker

Thanks, Scott.

Operator

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

Jack Atkins

Okay. Great. Good morning, guys and thanks for the time. So I guess maybe kind of taking a step back and Paul, I think your comments around just -- I guess the position shippers are taking going through bid season is really kind of interesting. I mean do you think that that's because that they're anticipating a change in market dynamics as we move through this year. I would just be kind of curious to get just to take -- that you guys might have on how close we are to maybe starting to see fundamentals begin to improve. Do you think enough capacity has come out to maybe set the stage for that, or is there more than needs to sort of exit here over the next six months?

Paul Bunn

I mean I think more exits are going to help, and they're continuing to happen. And again, Jack, I'll just reiterate the folks who want a 12-month deal and they don't want to be monkeying with this thing and a bunch of back and forth because they're focused on running their business. They're -- it's a pretty easy discussion in the low single digits right now.

Folks that are big commoditized shippers that are just trying to squeeze every penny out of it and do a bunch of mini bids and all that kind of stuff. You know, they're the ones that are still pushing for lower. And so I think what you're saying is, yes, you can read something into that is that I think the fundamentals are starting to slightly change, but nobody is getting crazy with it.

Jack Atkins

Yes. Got it. But I mean, would you say that you're starting to see some indications that the markets getting close to being back in balance, I mean, whether it's because capacity is active. Are you -- as you look at the tea leaves in your business, are you starting to see some of those signs that we're at a point where things could change quickly if we get a little bit of help on the demand side?

Tripp Grant

Yes. Yes. I think that they are. I mean, I think Paul's comments about maybe some of the conversations we're having with customers on rate expectations. I mean, if there wasn't an overall feeling in the environment that it's going to change in the near future. I think, we would be talking about some pretty difficult conversations with customers across the board. And I think customers have started kind of accepting the fact that we're kind of on the tail end of this thing. I mean if you just think about it logically, and I -- there's a lot of things that are illogical about our business.

But we've continued to watch capacity exit the market. We keep talking about it in at some point, it's got to happen where it's going to kind of flip the fundamental. And I think we're closer to that than ever. And -- our whole business model is based on creating value for our customers who create value for us, and we want to make sure it goes both ways. And we were fair to customers when the market was good, and they've been fair to us when the market is bad. And when it flips, we're going to continue that relationship is going to continue. But I do think that we're closer to ever just based on the tea leaves and based on the conversations we're having and based on the data that we're observing that I don't think it's going to be an immediate light switch type of thing, but I think that it's going to be a dimmer switch, Jack. It's going to be -- they're going to just gradually turn the lights on, so…

Jack Atkins

Okay.

Paul Bunn

It's going to be probably a U-shape 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.

Jack Atkins

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?

Tripp Grant

Yes. I don't see it materially changing. I don't see it growing from what it achieved in 2023. But that team has worked hard to grow a big or to grow their business in a quality way with credit quality customers who need those leases in a long-term manner. And yes, they're -- just like everybody else, they're impacted by the equipment market and the freight environment. And -- but at the same time, they've got a good foundational base business that is poised for growth long-term. I do think that they'll maybe take a step backwards slightly. But I don't think in terms of materiality to covenant, it's not hugely material, but with increased interest costs and the year-over-year impact of that and the debt that they carry, they're going to have some kind of -- some hits, I think, on that front and maybe a full year effect of a softer equipment market. But again, it's just -- that's part of their business model, and I don't expect them to tank. And if you look -- I like to focus on the long term with them because it's a nice graph upwards and how they performed, there is some year-over-year volatility, but I think we're just as excited today about the long-term prospects of tail than we've ever been.

David Parke

Jack, I'll echo Tripp's comments. They took the big reset this last year, and it was pretty much on gains on sale. They were getting some really big gains on sale, and we're opportunistic in '21 and '22 -- primarily '22. And we know that -- just like a lot of the truckers took a rate reset in '23, they took a gain on sale reset. But to Tripp's point materially there, I expect '24 to look a lot like '23 from an earnings standpoint. And they have done a lot from a people standpoint, from a sales standpoint, from a succession standpoint. I mean it's -- they're looking to the future and looking to continue to grow and invest, not get to where they were the last two years and just sit there.

Jack Atkins

Okay. That's great. And then I guess last question just on cash flow, your use of cash. I mean you guys pulled forward some CapEx into the fourth quarter opportunistically. You should have some pretty strong free cash flow in 2024 based on the CapEx numbers you guys just outlined. I guess, is the priority for that -- for that cash flow is going to be for paying down debt or just given where the stock is trading here at a substantial discount to peers, I mean, would you look to accelerate the repurchase program?

Tripp Grant

Yes. I completely agree with your point about, we're going to have some pretty nice free cash flow in 2024. If you look at our 2022 capital plan, we -- it is in 2023, it is, without a doubt clunky is the only word that comes to mind because we were -- we had a strategic plan of converting operating leases in 2022 to owned equipment. We exited that, took a hit on charges to get out of those leases because they were underperforming. We bought new equipment to replace that, then we're trying to get the -- as equipment has become available, we've been able to bring down the average age of our trucks from -- I think it peaked at 29 months. Now we're down to 19 months. And so, we bought just in 2023 alone, we bought about 1,200 tractors, which is over half of our fleet. And so when we -- look, what that means for 2024 is from a maintenance CapEx perspective, you're probably looking at $40 million to $45 million and I'll just use round numbers of $140 million of EBITDA, I'll call it. And that's going to produce some options for us. Right now, we're about two times levered, and we can use that to pay down debt or it gives us options for other capital allocation opportunities that we've exercised in the past, whether that's stock repurchases or M&A activity or increased dividends or any of those things. We're not committed to one of them or -- but we may do one or both or all. So like I said, that's just one of the things I focus on cash a lot, and I'm excited about kind of watching some of that cash come in next year.

Jack Atkins

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.

David Parker

Thanks Jack.

Operator

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

Michael Vermut

Hey guys, how are you doing today?

Tripp Grant

Hey Mike.

David Parker

Hey Mike.

Michael Vermut

So, I'm kind of building on what Jack was just asking. So, your stock now is trading at, give or take, 11 times, right, significantly below the group's 20 times that the rest of the group is trading at. No one has come close to what Covenant has done -- what you guys have done, the resiliency that we've had this year.

You bought back stock at an excellent price last year. And it seems from what you're saying that the cycle we're at the bottom, close to the bottom, not sure how much worse it can get really.

Can you just walk us through the math how you're looking at it behind growing the Lew Thompson Poultry business and the returns we should expect there versus doing a significant buyback here? At 11 times, I can't see that -- and at a trough in the cycle, trading at 11 times with the performance that we've done, it's just absurd. So, take us through kind of the math and how you look at those two.

And then building on that, if you can remember this -- give us a look into how you intend to grow that piece of the business. And the OR we can think about as you grow it over the next one, two, three and four years down the road? And could this become a third of the overall business, right?

Assuming there's no recovery in the other businesses, how accretive and how we can kind of add on to the financials over the next two, three, four years, just growing this business alone organically?

David Parker

Hey Mike…

Tripp Grant

Let me. Go ahead, Dave.

David Parker

Yes, this is David. I'll let Trip and Paul talk as well there. A couple of comments because I was looking at this yesterday. You look at -- we're trading at 11 and our peers are 18, 19, hunts up to 24 or so, but just the rest of them are in that 18, 19 number, we're at 11.

And it's just interesting that we've been on this journey now for whether you want to use the Landair acquisition in 2018 or you want to even go back to 2015 when we got into the logistics business with Delta Airlines in 2015. But let's just go back to 2018 when we bought Landair there that got us into real dedicated and really operating the company and the warehousing business and really operating the company, the dedicated side in the correct fashion. And we've done nothing but grow that.

And then we go into 2020 and we get out of 95% of the OTR business that was not even in our portfolio anymore. And got to have refrigerated OTR -- got out of 95% of the solo [ph] operations that we've got and really concentrating on the expedited with long-term -- half of that business being long-term contracts that have proven out in 2023 that is bringing value to the customer because not one of those accounts asked for any rate decreases in a market that has got slaughtered with rate decreases.

So, it's showing that that we're bringing true value. On the dedicated side, rates did not go down, very few rates went down. It was virtually more adjustment of 30 trucks down to 25 trucks or 50 trucks to 40 trucks and those kind of things, more than it was pressure on the rate side. And the warehousing side has done nothing but improved. And over the last few years, but again since July 3rd will be six years, it's when we started down this path. And the company has been transformed tremendously. In 2022, we buy the -- get into the DoD and all the things that Paul was talking about, the difficulty of operating that. You do not have everybody's brother running into operating in that business because you've got to be an expert in it.

And it's got to be something that's part of your bloodstream, similar to our expedited side. Everybody's brother just doesn't go in and start getting into teams. Right now they could, but they don't because it is difficult and it is hard. And that is okay and that is good. And then last year buying the poultry in the Lew Thompson. And everybody doesn't get into it because it is hard and it is tough. And it is something that is not commoditized. And it's something that those birds have got to get to the farms even if it was last week and we had ice and snow all over the United States and how are you reacting into that? How are you able to deliver those birds to the plants on time?

And that's what the value is. And the thing that we've seen for -- heard for many years is that eventually the stock price will follow. Just keep doing it, keep doing it, keep doing what you're doing. Well, it's been six years of doing this and I will only say as the largest shareholder it's time for the market to respond to what this team is doing. And I couldn't be any more proud of what the team has done in the last couple of years.

I went into 2023 with our Board saying, this is a great test. It's a great test for our management team. It's a great test for all the new folks that we've had involved in the company since 2018. Does anybody want to go through a deep recession? No. Does anybody want to go through what trucking has gone through last year? No. But at the same time, this team has tested, has been tested, and has been proven that they've done great and I couldn't be any more proud of what they've done.

So, we said four or five, again, three or four years ago as we started buying some of the stock that somebody's going to love us. Either Wall Street can love us or we're going to love ourselves. And that has not changed. We haven't bought back any stock in the last, I don't know, six, eight, 10 months or so that we haven't. But with the cash flow that projected in 2024, there's a lot of different options out there that, again, somebody's going to love us. And 11 times, it's not --Wall Street's not loving us.

And if that means we need to be buying back some more stocks, then we will. Or if Wall Street starts loving us, then ain't the Lord for that. And we'll cherish that. So I will say that that starts the internal conversations that will be leading us in 2024. And anyway, I'll shut up and let Paul and them talk a little bit about your questions on poultry and stuff.

Michael Vermut

Excellent. Thank you, David.

Paul Bunn

Yeah. Like I agree with everything David said. I'll go back specific to your poultry question. I mean the Lew Thompson business is about 225 trucks when we bought it in April of last year. It'll be over 500 trucks by the end of this year based on contracts already signed. And, we've got a lot of site, just based on pipeline and other things to grow it, probably another 250 trucks past that and -- and again, it could grow more. So if you can triple the volume on something in three, four years, that's a -- that's a win. That's a win in our book, especially stuff that is, operates well, has good contracts, good driver base, and a really good customer base. So we couldn't be more excited about the prospects for the poultry business.

Michael Vermut

Can you just walk us through what the margins, what the OR could look like? Let's say we get to that $750,000 right which is the off of our bases a significant portion of our fleet rate of what we're running -- what two, three years down the road kind of OR I assumes it's a better OR than the than the overall –

David Parker

Yeah. No, It would, I think the combination you remember we're -- we're still -- we're probably 80%, 90% the way through that weed and feed. I mean, some of what you saw in the fourth quarter, some of what you saw was poultry, some of what you saw was, there was a couple of accounts that we did not have good returns on. We had multi-year deals, and one of those ended in August and one ended in September.

So Q4 was addition not subtraction on a couple of those accounts. And so, there's still a few of those accounts left. So the combination of weed and feed in the dedicated space and the poultry business, we've got a target to, I'll say, get the OR down to best-in-class industry margins in dedicated. And that's probably somewhere between an 87% and an 89% over the long term -- and that's not short-term

Tripp Grant

And that's -- poultry. I just want to emphasize the fact that that's not just poultry. That's a combination of some of the new, really good business that we've acquired and that we've maintained and have improved in our legacy operations and as well as some of the growth that we've got in poultry as well. It's a combination of a few different things, but I would say meaningful improvement is what we're shooting for, meaningful continued improvement. I mean, and I think it's fair to say, like, just continue the chart that we're on or the trajectory we're on today. I look at dedicated OR in 2023, it was $100 million. And go to 2022, it's a 96.2% all this pre poultry. We get to 93% or 2023, it's 93%. So our goal from a strategic plan standpoint is to continue that path forward.

Michael Vermut

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.

David Parker

Yes, I think that’s fair.

Michael Vermut

Mids 80, somewhere around it. But it's better. My point is better --

David Parker

I would call it, yeah. It operates more of where we're heading. But I agree with Tripp. We started this thing -- when we started this thing 3.5 years ago, dedicated was 3.5 years ago, it was over 100, then we got it down to 1005, and then 96%, then 93%, now 91%. We're just going to again keep pushing it. And again, a lot of it's -- some of it's weed and feed, some of it's poultry, some of it's customer mix. Some of it is cost control. So there's a lot of things that are going to go into continuing to try to improve that margin. And it's going to take -- it's going to be a multiyear effort to get there.

Tripp Grant

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 stand 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.

Michael Vermut

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.

Tripp Grant

Thank you, Mike.

Operator

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

Barry Haimes

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?

Tripp Grant

Barry, here's what I'd tell you. It all depends on mileage band. Above 500,000 miles, you it's not good, because there are just so much old equipment that miles got ran up during the pandemic. There's a lot of that equipment coming out. And so, those are trading at really big discounts right now. There's a lot of 400,000 to 500,000 mile trucks hitting the market. And I think those are trading, I would say, compared to last quarter, it's hard to say. But I don't know if they've gone down any, but they're really -- over 500, it's hard to move them. 400 to 500 pricing is what I would call at a pretty weak spot. And then, 300 to 400, there are still buyers out there but they're probably shopping them pretty hard. So I'd say used to -- it's more of can you get rid of it then what can you get for it? And -- but they're not totally in the tank unless you're over 500,000 miles.

Barry Haimes

Got it. Thanks. That's good color. And then my second question had to do with what you're hearing from customers around destock. So we know that there was a lot of destocking going on last year, and do you have any idea just anecdotally talking to customers, what inning we're in? Are a lot of them have inventories in line now or there's more to go maybe in the first half of this year. Would love to hear any?

And then to the extent, again, you have any feel from customers, what percent balance might you get in freight when the destock is over? So assuming the economy just stayed the same, but there's no more destock. Any feel for -- is it 5%, 10%, so we love any color around that. Thank you.

Tripp Grant

A couple of things. I'll go back to last year's instead of destock, I'll just call it restock, they -- because of coming out of the pandemic, folks just didn't have -- they had the wrong stuff and the wrong season, and so that created a major destocking. When you had Christmas trees in January and February and patio furniture coming in, in October and so that just created a lot of mix issues then Barry, they went into the destocking.

I think most customers' inventory levels between destocking and then they're really focused on them with rising interest rates. I think they kind of are where they are. And then there'll probably be some restocking as we get into the warmer weather, seasonal upticks in in April, May. I don't see it being anything super material for us.

Again, it will -- a little bit though in the one-way market can go a long way to help our brokerage freight and other verticals. And so I don't know if there's going to be a direct impact to us with some of the, hopefully, seasonal uptick when it gets warm, but there'll be some indirect benefits for us.

Barry Haimes

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.

David Parker

Just think about, Barry, our managed freight is -- a lot of is an extension of our asset-based businesses. If I looked at our top customers in that space, we also have asset relationships with them. And so what having that business allows us to do is provide overflow, flex capacity. If we get out of balance in markets, we can use the managed freight business to rebalance the markets.

And so that business that we internally called solutions was started back in 2006 to really benefit our customers and augment our asset-based businesses. I would say it is still that today. They do have a number of their own customers as well that we've grown over time. And so but it was started to basically help be an asset overflow and augment the asset-based businesses, it still does that to a large degree. And once we capture freight internally, hopefully, we can run it on one of the two segments versus giving it back and letting a competitor run it. And then again, they've really -- they've done a good job growing some of their own business in that space as well.

I will tell you we've got to saying internally on our -- in our managed freight. We're here to stay. We're not here to sell. It would be hard to unpack our managed freight business, because it is so intertwined with our asset operations. And so we're not chasing business just to add top line volume, like, a lot of brokerages because a lot of these small to mid and even large brokerages, they're just trying to chase top line revenue and margin, top line margin, even if they operate in the red and a loss for the whole goal of selling to somebody and getting bought up.

Our goal is not to sell it. We probably couldn't sell it. It's rolled up within our asset operations, just how tightly they're wired. And so what that does, it allows us to -- we try to say, yes, if we can make money off of that. We're going to lose money, somebody else can have it.

Barry Haimes

Got it. Thank you very much. Appreciate that.

Operator

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

Jeffrey Kauffman

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?

David Parker

I can answer that, Jeff. So part of the $55 million to $65 million of total CapEx that we disclosed in our expectations for 2024, included about $20 million of growth CapEx, which implies just call it, $35 million to $45 million of maintenance CapEx. And you got to remember, so 30 of that was brought into 2023 kind of in the last month of the year to take advantage of some tax benefits, tax incentives that are not available in 2024. So we brought some of those purchases in-house or in earlier strategically, which is about $30 million, which – that means your maintenance CapEx for us on a kind of just an ongoing basis is somewhere in the neighborhood of $65 million to $70 million, I would say, conservatively.

I think we are going to generate some free cash flow for sure. And I think that to the second part of your question, if we do need additional CapEx or additional funds for growth, we'll have plenty of availability, whether that's on the equipment side or the M&A side or whatever. And we've done both of those in the last couple of years. And we like our strategy of capital allocation. And just because our debt ticked up towards the end of the year, it wasn't kind of unplanned, if you will. It was just a matter of kind of gating, so we do think absent significant growth CapEx and the clunkiness that goes with that and -- or some other M&A opportunity, we do see some sequential declines in our net debt number going into 2024.

Jeffrey Kauffman

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?

David Parker

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

Jeffrey Kauffman

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

David Parker

Yes, yes. I think if you look sequentially, kind of, how we look at fuel and the comments of kind of what we're thinking about or how we were thinking about both the impact of the UAW strike as well as a cybersecurity strike or cybersecurity incident. We were talking about sequential -- what to expect -- we were reporting on Q3 and what we expect in Q4, and we knew that Q4 was going to be a little suppressed to Q3. So it was -- those comments were more sequential. You know, if you look at our fuel, I do think it's a -- I don't want to really put a defined number on it, but I would say it's well over double what -- maybe triple what you were kind of -- what you were taking earlier.

Jeffrey Kauffman

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

David Parker

Thanks, Jeff.

Operator

At this time, we have no further questions.

David Parker

All right. Well, thank you, everyone, for the -- for attending the call, and we certainly appreciate the questions, and we look forward to next quarter's call. Have a great week. Thank you.

Operator

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