Daseke is seeing higher flatbed rates even as dry van numbers are coming down, a significant issue on the heels of a ratings agency’s review of the company and its view of the company’s figures.
The flatbed rates that Daseke is seeing are stable to higher, according to CEO Jonathan Shepko, who spoke to FreightWaves in response to questions about a recent report by the Moody’s debt rating agency.
Moody’s recently said the outlook for Daseke (NASDAQ: DSKE) was “stable.” The opinion does not impact the company’s debt rating of B2, which is considered noninvestment grade and is the fifth step down on the noninvestment table.
The stable outlook, according to Moody’s, “reflects our expectation that Daseke will grow its revenue primarily through rate growth as opposed to volume during the next 12-18 months.”
That statement was issued as broad indices of truck rates are falling. However, the decline in dry van rates is far more than that of flatbed, which has seen a relatively small decline after several weeks of higher rates, according to the Truckstop.com seven-day flatbed rate per mile in the TSTOPFRPM.USA data series in SONAR.
Shepko challenged interpreting the Moody’s statement on the company’s dependence on higher rates as suggesting a possible risk or dependency.
The CEO’s interpretation of the Moody’s statement on the link between Daseke’s future and higher rates was that the agency believes “future organic growth (at Daseke) will be driven by rate improvement.” Shepko added, “That is different from (suggesting) financial conditions are predicated on improving rates.”
An email sent to Moody’s analysts was not returned.
The decline in truckload rates, Shepko said, is not being seen in flatbed. “It’s been disproportionately borne by those who have exposure to spot rates,” he said. “We are mostly flatbed.”
Comparisons that are “month to month, week to week and even sequentially over the last week or few weeks, we’ve actually gotten price increases from shippers,” Shepko added.
Between 60% and 65% of Daseke’s business is in what he called “specialized” freight, such as hazardous materials. Shepko added that those businesses are “anti-recessionary.”
Daseke recorded an operating ratio of 95.2% in the fourth quarter of 2021 and 92.8% for the year.
Moody’s said its own estimate of Daseke’s margin saw it declining to the mid-6% range over the next 12-18 months “unless prospects for U.S. industrial production and construction activities materially weaken from current levels.” It estimated a margin of 6.9% in 2021, which is roughly in line with the difference between 100% and the full-year OR the company reported for last year.
That margin was “notably higher than the 2% to 5% in the prior three years,” the Moody’s report said.
The report acknowledges that Daseke will face “several inflationary headwinds relating to driver pay, salaries, recruiting and operating costs [that] are unlikely to abate in the near-term.” But it said “much” of that can be offset with pricing growth, “albeit it less so in 2022 than … in 2021.”
A review by Moody’s is focused on a company’s ability to pay debt; it does not forecast earnings, the way a Wall Street analyst would.
Daseke’s publicly traded debt is atypical in the trucking sector; a search of the websites of both Moody’s and S&P Global finds few other long-haul trucking companies with a public debt rating. J.B. Hunt carries a Moody’s rating of Baa1, which is investment grade and is seven notches above Daseke’s.
Several LTL carriers, such as XPO Logistics, also have publicly traded debt. Shepko said there are other trucking companies with traded debt in secondary markets, which he said are less liquid than the public markets where Daseke debt trades, which brings them a rating from agencies such as Moody’s or S&P Global.
S&P Global this week affirmed its rating of Daseke debt at B, which is roughly equivalent to a B2 rating at Moody’s.
With the focus on debt, the key number for a company such as Moody’s is debt to earnings before interest, taxes, depreciation and amortization. According to the Moody’s review, that stood at 3X for Daseke at the end of December, down significantly from 4.1X at the close of 2020.
Without being too explicit, Shepko appeared to be somewhat critical or disappointed that Daseke’s debt rating stayed steady. He said he believed part of it was concern over macroeconomic conditions, such as a possible recession or the Russia-Ukraine war, rather than any issues with Daseke’s operations.
He said the debt-to-EBITDA multiples at Daseke are in line with industry standards. The company does not have any near-term debt maturations, has no covenants that it might breach and has more than adequate liquidity.
Many of Daseke’s costs are variable, “and even if there is a decline in the rate environment, the cost structure would flex down with that,” Shepko said.
“This improvement will provide Daseke with greater financial flexibility as it contemplates potential acquisitions,” Moody’s said, noting that it expects the company to return to a more aggressive acquisition strategy this year. Shepko said on the company’s fourth-quarter earnings call that “the team would be pretty disappointed if we did not do at least a few … acquisitions this year.”
Moody’s said it expected Daseke acquisition activity to be limited to about $100 million this year, “although its existing credit metrics could accommodate larger opportunities.”
In its 10-K filing to the Securities and Exchange Commission for 2021, Daseke said that since its inception in 2008 through 2018, the company had acquired 20 flatbed companies. In the last two years of that buying spree, it spent $412 million on acquisitions. But as Moody’s, said, Daseke “has been quiet since that point, in favor of improving operating performance.”
Ratings agencies are now also viewing companies through an environmental, social and governance (ESG) lens. Daseke, as a company with extensive control by former Chairman Don Daseke, who the 10-K says controls roughly 29% of the company’s voting stock, will always be under particular focus on the “G” prong of ESG.
Moody’s gave recent changes at the company, including the appointment of Shepko as CEO last year, a thumbs-up. “The company’s new management team, with its CEO, CFO and COO all joining in 2021-2021, has quickly established a credible track record as it’s overseen noticeable operating improvements,” Moody’s said in its section under “ESG Considerations.” “The company’s financial policy is focused on increasing free cash flow, balanced against requisite fleet investments, and maintaining moderate financial leverage.”
Although Daseke’s corporate family rating is staying at B2, the Moody’s report said on a forward-looking basis, it would be higher, at Ba3. The difference, the report said, “reflects the high capital investment that limits prospects for positive free cash flow, the cyclicality and competitive nature of the flatbed trucking industry, and management’s public indications that the firm will look to resume acquisition activity in 2022.”
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The FREIGHTWAVES TOP 500 For-Hire Carriers list includes J.B. Hunt (No. 4), XPO Logistics (No. 8) and Daseke (No. 21).