Welcome to today's Covenant Logistics Group Q3 2022 earnings release and investor conference call. Our host for today's call is Joey Hogan. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. I will now like to turn the call over to your host. Mr. Hogan, you may begin.
Thanks, Ross. Welcome everyone to the Covenant Logistics Group third quarter conference call. As a reminder to everyone, this conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. Please review our disclosures and filings with the SEC, including without limitation, the Risk Factors section in our most recent Form 10-K and our current Form 10-Qs. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances. A copy of our prepared comments and additional financial information is now available on our website at www.covenantlogistics.com in the Investor section. I'm joined on the call this morning by David Parker, Paul Bunn, and Tripp Grant.
Kind of an opening for the call. Despite the challenges of a negative GDP growth, overstocked inventories and industry-wide overcapacity that have increased over recent months, combined with major inflationary pressures, we remain grateful to our teammates for producing record adjusted earnings per share for any third quarter in our history. On a consolidated basis, adjusted net income was up 31% and adjusted earnings per share was up 49% on the strength of revenue growth, flat adjusted operating margin, growing contribution from TEL, and a 12% reduction in diluted share count resulting from our ongoing share repurchases. Return on capital for the trailing four quarters was 23%, compared with 12% for the trailing four quarters of 2021.
On the truck side, we were pleased with how our utilization and rates held sequentially from the second quarter, but the impact of delayed deliveries of new equipment and escalating costs of parts, maintenance, and other line items compressed our margins in the quarter. Our managed freight group did a great job in holding margin despite reductions in overflow freight from the truck side, and our warehouse team withstood cost headwinds associated with new customer business and investments in additional warehouse capacity for future growth. The contributions of the AAT Carriers acquisition, which operates in a less economically sensitive market, tailwinds, dedicated and stock repurchases, provided most of the improved earnings per share despite a weaker market compared to the historically strong market a year ago.
In summary, the key highlights of the quarter were. Our freight revenue grew 6.5% to $267 million compared to the 2021 quarter. Adjusted earnings per share increased 49% to $1.52 per share compared to the year-ago quarter. Our asset-based truckloads freight revenue grew 15% versus the third quarter of 2021 with 53 fewer trucks. Our asset-light Managed Freight and Warehousing segments combined freight revenue shrank by 5% compared to the third quarter of 2021. On the safety side, our DOT accident rate was the lowest third quarter on record, 11% lower than the third quarter of last year, but development of a small number of prior period claims contributed to almost 3 cents per mile increase in insurance expense.
Gain on sale was only $200,000 compared to $900,000 in the year ago quarter. Our TEL leasing company investment produced another record quarter, contributing 38 cents per share, or an additional 24 cents per share versus the year ago quarter. We purchased another million shares during the quarter, bringing the total of three million shares through September 30 for this year. Due to the strong cash flow in the quarter and the sale of the California terminal, our net indebtedness decreased by almost $29 million after utilizing $27.5 million of cash on share repurchases. We finished the quarter with leverage ratio of 0.23x , debt-to-equity ratio of 7.8%, and again, a return on invested capital of 23.3%. Now Paul will provide a little bit more color on the items affecting the business units.
Thanks, Joey. For the quarter, our asset-light businesses, Managed Freight and Warehousing, were 38% of total freight revenue and 41% of consolidated adjusted operating profit. In the Managed Transportation side of the business, while we believe revenue has stabilized, we expect margin compression into a softening environment. Our warehouse revenue stream has accelerated due to the impact of three startups for the year, receiving the full revenue impact in the third quarter. We expect startup costs and unoccupied lease costs to decline in the fourth quarter, improving our margins. The asset-light group remains a priority for growth, focusing on talent acquisition and technology enhancements. The expedited division was 34% of consolidated freight revenue and 48% of adjusted operating profit in the quarter.
It grew its revenue 26% versus the year-ago quarter due to strong revenue per truck per week improvements and growth of 80 trucks, with the first quarter acquisition contributing to revenue growth nicely. Increased salaries and wages, equipment and maintenance costs and insurance costs continue to be a major headwind in the year. Sequential operations and maintenance costs were significant in the quarter, but we feel third quarter was our peak from a cost perspective on equipment and maintenance costs due to an aggressive replacement plan between now and the end of 2023. Driver pay remains stable at the present time. The dedicated division was 28% of consolidated freight revenue and 11% of adjusted operating profit in the quarter.
Revenue per truck growth was 14% versus the year ago quarter, while cost increases in salaries and wages, equipment and maintenance eroded some of our progress on margin improvement. We missed our sequential OR improvement goal for the quarter, mainly due to the increased cost during the quarter. We continue to work diligently to improve margins through fleet reductions, a reduction of approximately 60 trucks in the quarter, equipment upgrades and asset allocation to more profitable accounts. Our minority investment in TEL continues to produce strong and positive results. TEL's revenue in the quarter grew 45% and pre-tax operating profit increased by 125%, both versus the third quarter of 2021.
TEL increased its truck fleet in the quarter versus year ago by 279 trucks to 22,153, and grew its trailer fleet by 492 to 6,860. After receiving more than a $7 million distribution during the quarter, our investment in TEL , which is included in other assets in our consolidated balance sheet, remained at $58 million. As a reminder, TEL focuses on managing lease purchase programs for its clients, leasing trucks and trailers to small fleets and shippers, and aiding clients in the procurement and disposition of their equipment through a robust equipment buy, sell and management program. TEL contributed a total of $0.38 per share to our overall results, or an additional $0.24 versus the year ago quarter.
Due to the business model, gains and losses on the sale of equipment are a normal part of the business and can cause earnings to fluctuate quarter to quarter. Turn the call back to Joey.
Regarding our outlook for the future, as we said in our release, we expect the remainder of the year to include continued moderating freight demand, greater driver availability and continuing cost inflation. Although, we do expect our fourth quarter adjusted earnings per share to be similar to the third quarter, bringing the full year to approximately $6 per share. For 2023, we believe there will be market headwinds from a softer market during contract renewals, as well as continued inflationary pressures. However, based on company specific factors, the investments we've made in our sales team, the small acquisition, share repurchases, the equipment upgrade plan, and reduced insurance casualty costs resulting from our improved safety results, we expect less earnings volatility than in prior years of economic weakness.
Over the last five years, our customer base has been strategically shifted to less cyclical industries through our full service logistics focus. We predicted last quarter that 2023 will be a breakout year for Covenant, and we remain confident in that plan. Even with a heavy equipment investment year, we expect our cash generation, low leverage and available liquidity to provide the full range of capital allocation opportunities to benefit our shareholders. Lastly, I've been honored and humbled to serve Covenant for 25 years, and I'm excited about the leadership team that we've been able to assemble, the best we've ever had. Over the last five years, the model has been retooled under David's leadership, and Paul will do an outstanding job leading the company in his new role. I'll still be around to assist the team in whatever I can do to help.
It's just time to hand the reins to the next generation and let them go. Ross, we're done with our prepared comments. We'll now open it up for questions.
If you would like to ask a question, please press star one on your telephone keypad now, and you will be placed in the queue in the order received. Please be prepared to ask your question when prompted. Once again, if you would like to ask a question, please press star one on your phone now. Our first question comes from Jason Seidl from Cowen. Please go ahead, Jason.
Hey, everyone. Good morning. Thank you, operator, and congratulations to Paul for the promotion. Guys, impressive quarter. Wanted to talk a little bit about some of the commentary around 2023. Can you know, maybe put some parameters around that less volatility comments? You know, you're obviously above $6 this year. Is less volatility, you know, above $4? Is it above $5? Can you put that into numbers for us?
You know, Jason, as we look at it, and this will be probably the second or third quarter in a row we've said it, and I know some of our peers have said the same thing, we think peak to trough's probably a 25%-30% reduction. You know, depending on where peak is and where trough is, you know, I guess we'll look back at some point and know that, but we still feel confident in that, you know, that range of a 25%-30% reduction, peak to trough. You could-
Go ahead.
If you think you know where the peak is, you can adjust it for that, and I think that's a good spot.
Okay. Sounds fair. Wanted to talk a little bit more about the Dedicated segment. Obviously, over the last 12-18 months, you guys have made a lot of changes there, you know, getting the business up to more traditional, more profitable type business. What percent is sort of left to touch here that you guys would like to either change out or improve the pricing on?
You know, I would say of the 1,400, 1,500 trucks that are in there, Jason, there's a couple hundred trucks that are left in there that we're actively working on. I think we've got a plan for those trucks, and we'll continue the steady process.
Okay. Most of the heavy lifting done, but there's still a couple hundred trucks which will help you offset some of that.
Yeah.
Just going forward.
Two things I would say, and I'll give a little more color to one of the things in the comments. The effect of the equipment and maintenance issues on all of our trucking operations really diluted a lot of the progress that we've made. As we get this newer age fleet in here, and maintenance costs start coming down, and we're not having to carry a lot of excess equipment, I think you'll start seeing some of the fruits of that. It's a combination of that and some continued wait and see.
Yeah. That was gonna be.
Yeah.
Sort of my next question too, guys, in terms of when you look at your average age of your tractors, I think it's 2.4 years now, that's you know, versus about two a year ago. Where do you think you're gonna be able to bring that down in 2023 too? And then how should we think about CapEx in 2023?
Hey, hey, Jason. We're trying to get the average age of the fleet down to about 21 months by the end of next year. I think starting in Q4, you're gonna see that number, the 29 months or 2.4 years start to come down. We said this last quarter in the call. We're really being aggressive with this replacement plan. We've got about 800 trucks scheduled to be replaced this year and almost 900 trucks scheduled to be replaced next year. That gets it down to about 21 months, but you'll see that kind of sequentially decline each quarter next year. In terms of CapEx, net CapEx, I would say next year, we're probably gonna be in the realm of $80 million-$90 million of net CapEx just on the replacement equipment.
The one thing I'll say is, this year, we're being aggressive, but we're also turning in a lot of operating leased assets. We've been doing that throughout the year. We'll continue to do that throughout this year. It'll tail into 2023 a little bit, but the majority of what we're gonna be replacing is gonna be owned equipment. We'll get a little bit of a better bang for our buck as we're turning in owned equipment and getting the sales proceeds on those.
Gains on sale next year, we should be modeling up.
Yes.
Okay. Perfect. Well, congrats on the quarter and I'll turn it over to the next person.
Thank you, Jason.
Our next question comes from Scott Group from Wolfe Research. Please go ahead, Scott.
Hey, thanks. Good morning, guys. I'm just curious.
Good morning, Scott.
How are you thinking about pricing into next year? What's a realistic drop in rate per mile next year?
Oh, Scott, I think we'll have all these answers in the next six months, don't you? With that said, I think there's gonna be pressure on pricing. I will also tell you that I think that we have done a great job in the last year and a half in being in the right buckets as it pertains to expedited and dedicated and, you know, because let's take dedicated first. You know, the thing that we see there is not necessarily so far pressure on rates, as much as it is, I don't need your 25 trucks now because I don't have the freight. I need you to re-engineer it, and I need 22. You know, so that's where I think the pressure on the dedicated side will come from is the pipeline with existing new.
Not existing, with new business, be strong enough to take care of some re-engineering that neither you both knows where the customer is gonna come from. We have. It's not like the dedicated accounts are saying, "I need you to take 5% off." I don't really see that coming unless we get into near depression kind of numbers. I'm not as concerned there. On the expedited side, you know, we've only had one customer that has came to us and said, "We would like to have a rate decrease." That one customer is one that we did not have long-term agreements with. Keep in mind, over the last couple of years, we've been with about 60% of our business, we've entered into long-term agreements with our expedited customers.
Again, it started back when we, in 2020 when we said, "Mr. Customer, do you really need teams?" When we let SRT go, and we downsized the solo side, we took 400 or 500 trucks out of the expedited side of the model. We really had blunt conversations with customers. Do you really need these? Because they cost more to operate, and we want you to enter into a long-term agreement with us that we are here in 2020 and 2021 when you can't find trucks, and we want you to be here for us in 2022, 2023, whatever that's gonna be. So that said, I think there's gonna be pressure, but I don't think it's gonna be the magnitude of what it possibly could have been.
Years ago when we went into a recession. I know I didn't give you a percentage because I don't know what that percentage is, because I'm here to tell you, I could say negative 2% as good as I could say a negative 5%, and because that's how much confidence I've got in our customer base, the relationships we got with our customers.
You think maybe your Expedited is gonna hold up better than maybe the broader van market?
I do, yes. I do. Because I think our customers really need. Again, I think our pressure is gonna be both dedicated and expedited. Whoever you are, you know, I don't have 10 loads. It's air freight. I don't have 10 loads. My freight is down. I need 7 of them, but Covenant, you're getting all seven of them. I'm not gonna split it between X, Y, and Z and you. You're getting your 7. I think that's where we're at, and we'll have that pressure to replace those three extra loads, and that may come through cheaper rates right there. I don't think our existing business is gonna be hurt tremendously.
Hey, Scott, one thing I would add, just to, for perspective, is when you look at Covenant historically, what you see today as expedited is different than what you've seen in the past as, quote, Covenant Transport, or Highway Services. We had chapters where we had Covenant Transport for years, that was a mixture of team and solo and some dedicated. We had the Highway Services chapter, which was some team and a lot of solos. Now expedited is just team. That volatility in the past, albeit very much understood, and we understand the questions, what we're trying to say, and as David brought, the next six to eight, nine months will answer the question for sure, is it's not an apples-to-apples if you as you look at us historically.
I wanna make sure that people try to understand that what is expedited today is different than what you've seen in the past, and we feel much better about its position and its pricing.
Okay, very helpful. Just maybe similar question then. When I look at, like, the equity earnings from TEL, right, you know, $4 million, $3 million, $4 million, $7 million, $7 million, $4 million, and now we're at, like, $28 million. Other than just the market being a lot different, what's changed about that business, that earnings stream that's gonna be more durable going forward?
I think it's several things, Scott. A, I think the leadership team, Doug and his. He's done a phenomenal job the last five or six years, similar to Covenant, of assembling an outstanding leadership team, number one. Number two, he's done a lot of work in solidifying the business units within overall TEL. Number three, they've done a lot of re-engineering on the systems side, which is really helping them dial in not only costs, but pricing and collaboration across the businesses. It's very similar to what's happened on the Covenant side the last five years, is all that's coming together, and you know, producing what you're seeing is just some outstanding results.
Let me add to what Joey said, Scott. I think it's two other things. If you kinda go back to, you kinda take the. Joey talked about chapters. You got the where we are today, then I'm gonna call it, you got the COVID times chapter, and you have right before COVID chapter. In the right before COVID chapter, they were digesting a transaction that ate up a lot of earnings. They were making really good money, but they made a decision, collectively, we made a decision that had some negative earnings and some tail to it to get out of it on a transaction.
Once that transaction, I'm gonna call it during the COVID times, gets fully out of their system, and the way equipment, I'm gonna call it, has been rationed the last few years, that they had been on just a massive growth spree in buying trucks and trailers. The way all these OEMs have worked is, you know, basically, it's an average of how many you bought the last three years, two years, five years. They were able to add significant amounts of trucks and trailers 18 months ago, 12 months ago, three weeks ago, and into next year with these orders. It's allowed them to place a lot. It's allowed them to continue to grow. Their equipment counts keep growing when everybody else's are flat to going down.
You put all that in the hopper, that's the other part of the recipe that is just catapulting them. We all know it costs more to buy a truck, lease a truck, buy a trailer, lease a trailer, and them having a supply of equipment in such a tight market has really played into their hand of customer upgrades and pricing upgrades and all that kind of stuff.
So, so maybe just to-
Yeah.
Oh, go ahead, sorry.
I would just add, Scott, I mean, they do have headwinds also, I mean, obviously, with rising interest rates. How strong is the team in being able to pass through or the pricing structures to be able to pass through the increased capital costs? Because they do have a lot of leverage. It's a leveraged model. Are they able to do that as interest rates are rising? Thus far, they're able to do that. Their credit quality is unbelievable. In a recessionary time, and they've had some of these in the past, the group's done a really good job of who they pick and choose to do business with to minimize that. Are they able to pass through?
You know, additional increased capital costs. I would say that's a headwind, depending on their customer base. B, you know, what's the view of the used equipment market? 'Cause there's no question, that's a very, very important part of their model, both for their own accounts as well as in and out of the market. You know, two headwinds. We're confident they can power through that, but nevertheless, those are two things they've got to work through. They have a lot of equipment coming in. Pretty much most of it's all spoken for already for the next several quarters.
A lot of equipment they're putting on the books this year is in the second half of this year, so we won't see the full year effect of that EBITDA until first quarter. EBITDA from ongoing business is gonna continue to grow. It's just what do gain on sales do as they move into the market and are they on existing business are able to pass through additional interest costs.
I guess maybe just to wrap it up. Like, relative to that comment of earnings down 25%, maybe 30% peak-to-trough, like, how much do you think these equity earnings would drop from, you know, upper $20 million this year? Where do you think that could go?
Yeah, I think it'll be less than the 20%-30%. I'd put them in that probably you know, 10%-20% range.
Thank you, guys. Appreciate the time.
Thanks.
Congrats.
Thanks, Scott.
Our next question comes from Jack Atkins from Stephens. Please go ahead, Jack.
Okay, great. Good morning, and congrats to Paul and to Joey as well. Joey, I just wanna say, you know, the fact that the company's on such a strong footing today as we head into a freight recession, you know, I think that's just a testament to your leadership and just, you know, all the best as you sort of, you know, move on into the next phase of your career. Congratulations.
Thanks, Jack.
I guess maybe kinda picking up where you know Scott left off, you know kinda one more question on TEL. As we kinda think about the mix of that book of business, how do you kinda think about large fleets versus owner-operators? You know, we're seeing some early signs of some exiting capacity. I mean, do you kind of worry that you know there may be a little bit of increased bad debt there or just some equipment that gets maybe turned back to TEL, given we've kinda coming off some really good times?
Here's what I would say to it, Jack. No, not significantly. I mean, here's one thing to remember. When we say owner-operators in the TEL model, they're leasing to a lot of captive owner-operators, a lot of fleets that have captive owner-operator programs, and so they're not leasing to a bunch of mom and pops. They, as I said a minute ago, they upgraded their credit quality during this last downturn. So with the fleets that they do business with, I mean, those are one-off owner-operators, but there's structures with those fleets that protect TEL. On that, no concerns. On the smaller fleet side of things, that's where they've upgraded their credit quality.
I mean, yeah, I'm sure they'll take a few back here and there, but there's a list of people ready to lease that equipment if they turn it back in. I don't think we see a lot of major concerns there.
Okay. No, that's great. Maybe shifting gears here for a minute. You know, Tripp, I'd love to get you to chime in on this if you'd like. How are you guys thinking about some of the inflationary cost pressures as we head into next year? You know, you got drivers on one end, and then you've also got, you know, back office support staff, as well. Then, you know, you've got issues with equipment inflation, parts service inflation. You know, I guess how are you weighing all of that? It feels like you've got some opportunity to improve some of the operational costs with regard to sort of how you're managing your fleet as well.
I'd love to kinda let you run with that question, but how are you guys thinking about cost per mile as we kinda go into 2023?
Yeah, Jack, there's no doubt that we're seeing a lot of inflationary cost headwinds. What I think you've seen in Q2 and Q3 are kind of exaggerated in terms of, you know, I think of two major things, insurance and ops and maintenance, if you will. I believe, you know, going back to Joey's opening comments, and I think this is consistent with what we said in Q2, we've had consecutive quarters, multiple consecutive quarters of really good safety numbers. So from an insurance perspective, there's this tail. You know, you would think insurance costs would kind of correlate with, you know, self-insurance costs. Unfortunately, we haven't started to see that correlation as well as we'd liked. To Joey's point, you know, a lot of those things are related to, you know, prior period claims.
We look at the things that we can control, and there's a lot of things in the broader macroeconomic market that we can't control. What we're trying to do on the insurance side is position ourselves, you know, as best as we can in terms of tying up and being aggressive on mediations and doing it the right way. You know, insurance costs have continued to be a headwind for two consecutive quarters now. Going into the fourth quarter of this year, we're gonna continue to pressure that and try to get some of those things cleaned up. Hopefully as we turn the corner into 2023, we're gonna start seeing a better correlation between those costs and our safety numbers.
You know, on the ops and maintenance side, that's another piece that's really stuck out as a big operational headwind. You know, as we mentioned before, we're focusing on the things that we can control. We attribute a large part of that to the average age of our fleet and downed equipment and, you know, fleets that require 15 trucks are now requiring 20 trucks because five off those trucks are in maintenance or long-term down status. It's creating a really just a strong headwind across all of the fleets, whether that's expedited and dedicated. You know, one of those controllable things that we've talked about is being aggressive on trying to lean in and get more tractors than we originally planned.
I think when we opened, I can't remember which quarter it was, but you know, our goal or what we were allotted and
We were gonna get, you know, 525 to 550 new trucks. Well, now we're above that for 2023, and, you know, we're gonna be, you know, next year looking at close to 900 new tractors. We're doing everything that we can to get ahead of that and, you know, focusing on the older equipment first to try to bring those costs down and, you know, doing everything that we can to start off 2023 in the best foot possible. Recognizing it's gonna be a softer freight environment, but focusing on the things that we can control or get our hands around and improve. We're operating as efficiently as possible from an equipment standpoint, in a very, you know, what we think will be a tough freight environment.
Okay. Okay, great. And then I guess maybe last question, I'll hand it over. You know, you guys are going into a, you know, more challenging operating environment in 2023 for a lot of folks with the strongest balance sheet, you know, you've had in an awfully long time. The AAT acquisition, you know, has been a great success. I guess, as you sort of think about allocating capital moving forward, the stock's trading at a pretty low level, but there could be opportunities consolidating M&A. Like what how do you think about capital allocation between those two items? Then, you know, what are you looking for on the M&A front, you know, over the next 12 months? I would just love to get your thoughts on that.
Yeah, Jack, I would tell you on the M&A front, I would say I would use the word niche-y.
Okay.
If there's anything niche-y out there, it could be niche-y expedited or niche-y dedicated, or niche-y warehousing. I mean, I think I just use the word niche-y. You know, non-commoditized type businesses that are stable with a good long-term track record, niche-y. I think we would entertain looking at anything like that. You know, I think the share repurchase plan that's out there has still got dry powder in it, and so we'll just let that thing keep working and see what it does. I think that's probably how to answer your question.
No, that makes sense. I like to hear you're looking at non-commoditized businesses, so I think that's great. Thanks again for the time, guys. Really appreciate it.
Thanks, Jack.
Our next question comes from Bert Subin from Stifel. Please go ahead, Bert.
Yeah, thanks, good morning, everyone. Congrats to Joey and to Paul. Paul, I know Tripp's not in the room, but he's nearby, so I gotta say, go Dawgs. Big game coming up.
Say it while we can, brother.
That's right. You know, I think you guys have answered a lot of the sort of high level questions so far. I'd be interested to get your opinion on this. I think a lot of people were looking for sort of when freight would soften, and now we've seen that. I think the focus is gonna turn to how long this lasts. I'm just curious if you have any thoughts about, you know, is this gonna be more extended than what we saw in 2019? Is it a scenario where inventory's drawn down and we start to see some improvement in the first half, and so by second half, you're starting to see sequential, you know, improvement in your EPS?
I'm just curious, you've put out some markers for the 25%-30%, but how are you thinking about that in the context of how long this may last?
Well, Bert, I tell you know, we believe that 23 is gonna be a slowdown in freight. We believe that 8, 9 months of some difficulties that I think that we're personally experiencing today, that will continue. I think there's a couple of ways in which we look at it. One is the economy could get worse than it is today, and I personally expect it to do that. At the same time, the trucking industry has got a couple of things that are some tailwinds. That is, you know. As we all know, nobody's restocking inventory. I mean, there's no restocking that is happening. What we're sensing today.
You know, I told the board a couple of weeks ago, and, you know, that give me for 2023 the way I feel right now, and I'll take it. I'll sign up for it. We're not sitting here every day saying, "How am I gonna load, you know, 500 loads or 200 loads?" I mean, we may have to load 50 loads, and we load them by the end of the day. That's the way in which we feel today. Eventually, whether it is in March or whether it's in September next year.
Restocking of inventory will start back, and I think that that's gonna be a nice tailwind for the truckers. Another one that I think that we're sensing today is that none of us know how many. I personally think it was hundreds of thousands, 200,000-500,000 trucks that came into the marketplace, quote, "spot market" over a two-year period of time when they were hauling freight for $4.50 and those kind of things. Those trucks are leaving as fast as they came. I think some of the things that we're sensing today is that capacity has been coming out of the industry that is helping us, you know, with the current freight environment. Those would be the three points.
I think the economy can get slower than it is today, but restocking will start eventually one day in the next few months. Capacity is leaving the market, and so that also will help us truckers.
Thanks for that, David. Maybe just to go a little deeper there as it pertains to your business. You guys have provided some commentary on the expedited side, and it sounds like AAT is certainly helping, you know, at least diversify that revenue stream. It sounds like your LTL line haul business is holding in there. Perhaps that does better, you know, certainly better than it has in the past. Dedicated, you know, sounds like it's just improving. You know, you may have some volume headwinds, but you expect pretty good yield there. That really makes Managed Freight probably the odd one out. You know, 3Q, we saw sales pretty similar to 2Q. It's op margin in the double-digit range.
When do you think that starts to break and you start to see some of the impact of the overflow issues?
Yeah, you know, Bert, I'll take that. I think you'll see margins go down in Q4 from Q3 on Managed Freight, and I think Q1 will be lower than Q4. There's no doubt that that is where probably the spot cyclical slowing freight economy is gonna probably erode our margins the most. I don't think it's gonna drop like a rock, but I think you're gonna see that thing start trending back more towards normal over the next two to three quarters.
Thanks, Paul. Just the last question from me, and I'll turn it back over. You guys have highlighted inflation a couple times in this call, and it's been a theme across other calls. Do you think that I know it's still early in the mid-season, but the theme that I think is showing up is people or truckers think that, you know, inflation is gonna limit the, you know, ability for shippers to claw back as much contract rate as they have in the past, particularly if you use 2019 as a comparison, just because, you know, your costs keep going up, so your ability to scale that back is challenged. Do you agree with that? Do you have any take on how inflation's gonna continue to hit your business?
I know Tripp put some commentary around insurance and operations costs, but just in regards to what it could do to rates.
Yeah. I think that's dead on, kind of lines with what David said earlier. I think that's another kind of buffer, that you know, I mean, we've met with a lot of customers this week. Between David and I, we've met with three or four large customers this week, and I would say they're echoing that theme. None of them are ringing the bell saying, you know, "You just gotta drop, drop." I mean, I would say a couple of them, we're gonna get rate increases out of next year. Now they're, you know, they're gonna be small rate increases to cover what you just said, inflation.
As what Joey said or David said earlier, you know, some of them are asking for, "Hey, help me rightsize my fleet a little bit, and let's find ways to get more efficient." But they're not coming in here asking for you know, on the transportation side, monster rate decreases. I agree with you. The inflation's gonna. It's another buffer to rates going down. When you're in a business and working with a customer where you're providing a value, then I think that's where you're gonna be. If you're commoditized, I think it could be a little dicier than that.
Yep.
Again, that's what we've tried to do, is get in businesses where we're providing more value back to that kind of full service logistics offering. I mean, we're trying to get out of commoditized as fast as we can.
Thanks, Paul.
Our next question comes from Barry Haimes from Sage Asset Management. Please go ahead, Barry.
Thanks so much, everyone, and good quarter. I had a question. We haven't talked too much about peak season. Could you know, from other quarters, you know, we've heard it's much more on the muted side, if not nonexistent. Just wondering what you guys are seeing, and maybe just a reminder, you know, how much of your trucking business typically, you know, is coming in from the West Coast going inland. Do you typically in fourth quarters, you know, run any project business or get surcharges or anything like that, you know, you might have gotten last year that you may not get this year? Just an update on peak. Thanks.
Yeah. Barry, here's what I'd say. If you know, I'm gonna go way back. Joey's talking three chapters. I have to go back 10 or 15 chapters back in the book. If you go way back in the book, you know, I'm gonna talk 11, 12, 13, you know, especially 13, 14, 15, peak was a huge portion of the business. I mean, fourth quarter, we made the year, didn't make the year based off peak. I think we've been very intentional starting in about 2016 to really try to run the business for 52 weeks a year, not 6 or 8 weeks a year. We've purposefully downsized our exposure to peak. Shippers have done a lot of things to help themselves for peak.
To your point, the economy ain't gonna have much peak this year. Are we gonna have a little bit of peak freight? Yes. Are we gonna get paid well on the freight we do for the three or four customers that we're doing surge peak freight on? Yes, we are. Is it gonna be similar to last year and the year before as far as the pricing we get on that? Yes, it's good margin business. There's just not gonna be a lot of it. David, you wanna add anything?
No, that's right. I remember years ago, Barry, we would do $50 million at peak in about a four-week period of time, and that number now is less than $10 million.
On a $160 million quarter.
On a $160 million quarter.
Yeah.
Yes, I mean, it's, you know, it's there with some of our old peak customers, but it's down to two or three customers. You know, we're very happy with that, and that's just where it's at.
Great. Thanks. That was a great update. Appreciate it.
Good.
At this time, there are no further questions.
Well, Ross, thank you for hosting us. Thanks, everybody, for joining the call. Look forward to updating everybody in January. Y'all have a good day.
This concludes today's conference call. Thank you for attending.