Covenant Logistics Group Inc
NASDAQ:CVLG
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Covenant Logistics Group Inc
Earnings Call Analysis
Q4-2023 Analysis
Covenant Logistics Group Inc
The company has significantly grown its poultry transportation segment, the Lew Thompson business, from 225 trucks at acquisition in April of the previous year to a projected number of over 500 trucks by the end of the current year, based on already signed contracts. Furthermore, with continued momentum and a solid pipeline, the business anticipates adding another 250 trucks on top of that. This aggressive expansion, potentially tripling its volume in just 3-4 years, represents a win for the company attributable to strong operations, beneficial contracts, committed drivers, and a quality customer base, all of which fuel the excitement for the poultry business's future prospects.
The company is making strides in bettering its Operating Ratio (OR), a key performance indicator measuring expenses as a percentage of revenue. The goal is to bring the OR down to best-in-class industry standards for the Dedicated sector, targeting a range between 87 and 89. Considering a history of improvements from an OR of 100% in 2023 to 91 currently, thanks to better business acquisitions and growth in the poultry division. This trend showcases the company's continuous effort and strategic plan aiming to further decrease the OR, with a belief that both the poultry business individually and the whole Dedicated segment will operate in the mid-80s OR, signaling more efficient operation and higher profitability.
The company anticipates a period of restocking by customers with the onset of warmer weather, which is typical during April and May. However, executives do not foresee this seasonal uptick to be materially significant for the company. Instead, it might offer a modest boost, mainly benefiting the one-way market segment and consequently aiding brokerage freight and other business verticals. The actual direct impact on the company remains uncertain, but it's a factor that is being monitored for potential positive effects.
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Welcome to today's Covenant Logistics Group Fourth Quarter Earnings Release Conference Call. Our host for today's call is Tripp Grant. [Operator Instructions]. I'll now 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 would 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 are 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 in many years of planning, execution and collaborative teamwork. As we enter 2024, we do so with a resolved commitment to forward progress in 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 a 9% rate decline 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 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 repayment CapEx originally scheduled for 2024.
The average age of our fleet at December 31 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 lease 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 storage 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 31 were $248.3 million, yielding an adjusted leverage ratio of approximately 2x 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.
Thanks, Tripp. Expedited outperformed our expectations during the fourth quarter, yielding a 91.4% adjusted operating ratio. The negative impact of the 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 the 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 add, 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 3 years, we have worked hard to improve the profitability within this segment by exiting unprofitable business and adding more profitable business. This wheat 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 size and profitability over the long term.
Managed Freight experienced a 15% reduction in 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 a 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 start-ups and rate increases with existing customers over the last 12 months.
Although we are pleased with the improved profitability within this segment, we will continue to focus on improving the profitability to improved labor utilization and rate increases with existing customers.
Our minority investment in tail contributed pretax 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 '22 taken on certain high mileage tractors that were being prepared to sell.
TEL's revenue in the quarter declined 14% and pretax income increased by approximately 20% versus the fourth quarter of '22. TEL decreased its truck fleet in the quarter versus a year ago by 106 trucks to 2,131 and reduced its trailer fleet by 339 to 6,800 [indiscernible]. Due to the business model, gains and loss on the sale of equipment or a normal part of the business and can cause earnings to fluctuate from quarter-to-quarter.
Our investment in TEL is included in other assets in our consolidated balance sheet and has grown to $66.3 million at December 31, 2023, from the original investment of $4.9 million. In 2022, we received $14.7 million of cash dividends from TEL and received $9.8 million in 2023.
Regarding our outlook for the future. 2023 provided a challenging freight environment as we experienced in years, but we are extremely pleased with the performance of the model and the team. This is a different team and a different model than the Covenant of 5 to 10 years ago. As it relates to 2024, we see no immediate macroeconomic or industry catalysts, but believe continuing to execute on our strategic plan and capacity attritions in 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 allow us to reduce our indebtedness and/or exercise other capital allocation alternatives. Thank you for your time, and we'll now open up the call for questions.
[Operator Instructions] Our first question comes from Jason Seidl from TD Cowen.
Thank you, operator. David, Paul, Tripp. I wanted to touch a little bit on Lew Thompson there. Sort of 2 questions. One was are there any start-up costs related to that new business you guys are gearing up for in 4Q?
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.
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?
I would say that, yes, there's definitely -- we'll probably add 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 playing out and you probably won't see the full effect until the second half.
And similar to the question 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.
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 in 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 is 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. 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?
Yes. I would say Jason, it's kind of flattened out. New business pipeline, we've got some good pipeline, 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, and I 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 [indiscernible] had, are you now seeing business come back to them for the [indiscernible] 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 in the end of '23 there. What should we expect in '24?
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 gated towards the second half of the year. So we may even see some just sales of equipment and things like that. You're not going to see much net CapEx in the first 2 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.
Well, that makes sense. Well, listen, gentlemen, impressive quarter in difficult times. I appreciate the time, as always. Congratulations.
Thank you, Jason.
Next question comes from Scott Group from Wolfe Research.
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 sort of the bottom of the one-way market? What are you seeing with respect to pricing as we're getting into the early days of '24 bid season?
Scott, a couple of things. I think -- yes, I think we are bouncing along the bottom. And hopefully, we're about to bounce up 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 though those numbers around. They're going to take it and reprice it as soon as they can or they're just not going to take it and folks will set some trucks against the fence.
So I think we're at the bottom. And I think the real partnership, 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.
Okay. But it sounds like some of like the vanilla drive in stuff is still seeing some downward pressure.
It is really, really commoditized stuff is still seeing downward -- 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, 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, 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 much more what we had last week, it's going to put some pressure on it.
And then really how much inefficiencies are in the start-ups because I mean we're starting up 100 to 150 trucks depending on if some of them 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 pop -- 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's thing, we're excited about first quarter. I mean there's nobody here hanging their head. I think we're going to be excited.
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?
Yes. I mean I think Expedited -- I think Expedited earnings is probably about the same, maybe backwards are 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'd say 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.
I think Managed Freight could improve. We'll have a full year effect of the Sims acquisition. 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 in Managed Freight year-over-year -- '24 compared to '23.
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...
Warehousing's best 2 months of the last 3 years were November and December of '23.
Okay. So hopefully, 3 of the 4 businesses with some earnings growth.
Yes.
Very helpful.
Our next question comes from Jack Atkins from Stephens.
Okay. Great. 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 your -- 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 6 months?
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.
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. 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.
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 [indiscernible]. I mean 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?
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, 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 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 and can talk -- 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 than 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 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 ...
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.
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 in '24?
Yes, I don't see it materially changing. I don't see it growing from what it achieved in '23, 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, 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 hits, I think, on that front and maybe a full year effect of 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 TEL than we've ever been.
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 2 years and just sit there.
Okay. That's great. And then I guess last question just on cash flow, and 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 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?
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 '22 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 on 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 2x 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.
Well, it's great to have options. So that's great to hear [indiscernible] time guys. Yes, exactly.
Our next question comes from Michael Vermut from Newland Capital.
Guys, how are you doing today? So I'm kind of building on what Jack was just asking. So your stock now is trading at, give or take, 11x, right, significantly below the group's [indiscernible] 20x that the rest of the group is trading at. No one's 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. Here at 11x, I can't see that at a trough in the cycle, trading at 11x 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 2.
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 1, 2, 3 and 4 years down the road? And could this become 1/3 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 2, 3, 4 years, just growing this business alone organically.
Yes, this is David. I'll let Tripp 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 24 or so, but just the rest of them are 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 '18 or you want to even go back to '15 when we got into the logistics business with Delta Airlines in '15. But let's just go back to '18 when we bought Landair that got us into real dedicated and really operating the company in the warehousing business and really operating the company, the Dedicated side in the correct fashion.
And we've done nothing but grown on that. And then we go into 2020 and we get out of 95% of the OTR business was not even in our portfolio anymore and got other refrigerated OTR got around 95% of the solo 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 '23 that is bringing value to the customer because not one of those accounts ask for any rate decreases in a market that's got slaughtered with rate decreases.
So it's showing 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, those kind of things more than it was pressure on the rate side.
And the Warehousing side has done nothing but improved over the last few years. But again, since July 3 will be 6 years, is when we started down this path. And the company has been transformed tremendously. In '22, we buy the -- getting into the DoD and all the things that Paul has talked about the difficulty of operating that you do not have everybody his brother running into operating in that business because you got to be an expert in it.
And it's got to be something that's part of your blood stream, 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 behind the poultry and the Lew Thompson, everybody doesn't get into yet 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 weekend we had [indiscernible] all over the United States and how are you reacting into that? And 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 or 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 6 years of doing this. And I will only say as the largest shareholder is 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 '23 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. Yes. 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 it's been proven that they've done great, and I couldn't be any more proud of what they've done.
So we said 4, 5 again, 3 or 4 years ago, as we started down some of the stock that somebody is going to love us, either Wall Street can love us or we're going to love our sales. And that has not changed. We haven't bought back any stock in the last, I don't know, 6, 8, 10 months or so that we haven't. But with the cash flow that projected in '24, there's a lot of different options out there that again, somebody's going to love us and 11x is not Wall Street is not loving us. And if that means we need to be buying back some more stock than we will or if Wall Street starts love us then take the lone of 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 Bunn talk a little bit about your questions on poultry and stuff.
Mike, 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 will be over 500 trucks by the end of this year based on contracts already signed. And we've got line of sight just based on pipeline and other things to grow it probably another 250 trucks past that.
And again, it could grow more. So if you can triple the volume on something in 3, 4 years, 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.
Can you just walk us through what the margins -- what the OR could look like -- let's say we get to that 750,000 trucks, right? Which is off of our base is a significant portion of our fleet, right, of what we're running. What 2, 3 years down the road kind of OR, I assume it's a better OR than the overall [indiscernible].
Yes. No, it would -- yes, I think the combination -- remember, we're still -- we're probably 80%, 90% of the way through that wait and see. I mean some of what you saw in the fourth quarter, some of what you saw was poultry, some of what you call was there was a couple of accounts that we did not have good returns on.
We had multiyear deals and one of those ended in August and one ended in September. So Q4 was addition by 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 might down to best-in-class industry margins in Dedicated. That's probably somewhere between 87 and 89...
Over the long term and that's not short term 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 if -- 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%. Then you go to 2022, it's a 96.2%. All this pre poultry we get to 2023, it's 93%. So our goal from a strategic plan standpoint is to continue that path forward.
Okay. So the poultry business is possibly, let's say, a mid-80s kind of when all is said and done, we can add all the trucks in there? [indiscernible], 80s operated somewhere around it. But it's better. My point is [indiscernible]?
I would call it, yes. It operates more 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 years ago was over 100. Then we got it down to 100, and then 96, then 93, now 91. We're just going to keep -- again, keep pushing it -- and again, a lot of it's -- some of it's wheat and feed, some of it's poultry, some of it is 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.
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 and demand that you've got to perform. So yes, it is that's really going to help us.
And keep in mind, we didn't buy it 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 we have seen on the Dedicated side and getting it down on those numbers that Paul and Tripp have 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's 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.
Our next question comes from Barry Haimes from Sage Asset Management.
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 much lower than they are now versus, say, a quarter ago?
Barry, here's what I'd tell you. It all depends on mileage band. Above 500,000 miles, 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 [indiscernible] 400,000 to 500,000 mile trucks hitting the market. And I think those are trading, I would say, [indiscernible] 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 price 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.
Got it. 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 love any color around that.
Yes. A couple of things. I'll go back to last year's instead of destock, I'll just call it restock. Because of coming out of the pandemic, folks just didn't have -- they had the wrong stuff in 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 they 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, kind of seasonal upticks 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.
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 sort of why you ought to be in that business versus some of the other businesses you're in where maybe the ROIC might be better.
Yes, just think about it 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 have in 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 kind of rebalance the markets. And so -- that business that we internally call solutions was started back in '06 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 2 segments versus giving it back and letting a competitor run it. And then again, 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 [indiscernible] 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 at 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 it. If we're going to lose money, somebody else can have it.
Our next question comes from Jeffrey Kauffman from Vertical Research Partners.
And thanks for squeezing me here at the end. A lot of my questions have been asked, but I wanted to circle back on 2 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 happened 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 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 million 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.
Okay. And just 1 other follow-up, if I can. In the management commentary, you were talking about how the effects of the cyberattack 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 2 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, 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 the 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 those comments were more sequential and 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 thinking earlier?
Okay. That would make more sense to me. That's all I have. Congratulations.
Thanks.
At this time, we have no further questions.
All right. Well, thank you, everyone, 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.
This concludes today's conference call. Thank you for attending.