Radiant Logistics, Inc.
Q2 2018 Earnings Call Transcript

Published: 9 Feb 2018

[Operator:]

This afternoon, Bohn Crain, Radiant Logistics' Founder and CEO and Radiant's Chief Financial Officer, Todd Macomber, will discuss Financial Results for the Company's Second Fiscal Quarter and Six Months Ended December 31, 2017. Following their comments, we will open the call to questions. This conference is scheduled for 30 minutes. This conference call may include forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The Company has based these forward-looking statements on its current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about the Company that may cause the Company's actual results or achievements to be materially different from the results or achievements expressed or implied by such forward-looking statements. While it is impossible to identify all the factors that may cause the Company's actual results or achievements to differ materially from those set forth in our forward-looking statements, such factors include those that have in the past, and may in the future, be identified in the Company's SEC filings and other public announcements, which are available on the Radiant website at www.radiantdelivers.com. In addition, past results are not necessarily an indication of future performance. Now, I'd like to pass the call over to Radiant's Founder and CEO, Bohn Crain.

[Bohn Crain:]

Thanks Dana. Thank you. Good afternoon, everyone and thank you for joining in on today's call. We're pleased to report improving results for the quarter ended December 31 of '17, led by our Canadian operations and new customer wins in connection with our strategy of bundling value added warehouse solutions with our core transportation service offering. We posted adjusted EBITDA of $7.1 million on revenues of $206.7 million and net revenues of $47.9 million for the quarter. On a sequential quarterly comparison, revenues were $206.7, up $8.7 million or 4.4%. net revenues were $47.9 million up $1.8 million or 3.9%, adjusted net income of $3.6 million was up $0.7 million or 24.1% and our adjusted EBITDA of $7.1 million was up $0.68 or 9.2% over the prior quarter. As we discussed last quarter, margin pressures felt across our industry as a result of extreme capacity and pricing swings over the past 12 months, have led to less favorable year-over-year comparisons. However, we believe we are well positioned and beginning to benefit from a more favorable market environment given the healthy economy, high freight demand and tightening capacity. We're also the beneficiary of the recently enacted Tax Cuts and Jobs Act, the primary impact of which for 2018 is a reduction in our federal statutory rate from 35% to 21.8%, which is the average of our old 35% rate for the first half of the year and the new rate of 21% for the second half of fiscal '18. Given that we've historically been a full cash tax payer, these reduced tax rates will positively impact both our after tax free cash flow as well as our earnings per share. Commencing with the quarter ended September 30 of '18, we will begin to recognize the full benefit of the new federal tax rate of 21%. When we overlay the impact of states and other taxes, we had historically had an all-in effective tax rate of 36%. We are estimating an all-in average effective tax rate of 31% for the year ended June 30, '18 and then an estimated all-in effective tax rate of 25% commencing with the quarter ended September 30, '18. We also continue to make meaningful progress on the technology front and have expanded the pilot of our new SAP-based transportation management system to four of our company-owned operating locations and now we're in Phoenix, Detroit, Los Angeles and Minneapolis. With four of our company-owned locations now providing domestic boarding services using SAP, we are excited to get user feedback and continue to refine the system in anticipation of beginning to roll the system out to our agency locations later this year. As we've previously discussed, we believe our ongoing investment in technology provides us with unique opportunity to deliver state-of-the-art technology to our strategic operating partners and the end customers that we serve. At the same time, our new technology set will enable a number of productivity initiatives to streamline our back-office processes and accelerate the realization of back-office synergies associated with existing and future acquisitions and ultimately, help facilitate revenue synergies across the platform. With that, I'll turn it over to Todd Macomber, our CFO to walk through our detailed financial results and then we can open it up for some Q&A.

[Todd Macomber:]

Thanks Bohn and good afternoon, everyone. Today we will be discussing our financial results, including adjusted net income and adjusted EBITDA for the three and six months ended December 31, 2017. For the three months ended December 31, 2017, we reported net income attributable to common stockholders of $3,330,000 on $206.0 million of revenues or $0.07 per basic and fully diluted share, including $190,000 charge for change in contingent consideration. For the three months ended December 31, 2016, we reported net income attributable to common stockholders of $2,099,000 on $198.9 million of revenues or $0.04 per basic and fully diluted share. This represents an increase of approximately $1,231,000 over the comparable prior year period or 58.6%. For the three months ended December 31, 2017, we reported adjusted net income attributable to common stockholders of $3,555,000. For the three months ended December 31, 2016, we reported adjusted net income attributable to common stockholders of $5,391,000. This represents a decrease of approximately $1,836,000 or approximately 34.1%. We reported adjusted EBITDA of $7,132,000 for the three months ended December 31, 2017, compared to adjusted EBITDA of $8,866,000 for the three months ended December 31, 2016. This represents a decrease of $1,734,000 or approximately 19.6%. Moving along to the six-month numbers. For the six months ended December 31, 2017, we reported net income attributable to common stockholders of $3,646,000 on $404.7 million of revenues or $0.07 per basic and fully diluted share, including a $110,000 gain for change in contingent consideration and $107,000 in transition and lease termination costs. For the six months ended December 31, 2016, we reported net income attributable to common stockholders of $3,449,000 on $394 million of revenues or $0.07 per basic and fully diluted shares. This represents an increase of approximately $197,000 over the comparable prior year period or 5.7%. For the six months ended December 31, 2017, we reported adjusted net income attributable to common stockholders of $6,494,000. For the six months ended December 31, 2016, we reported adjusted net income attributable to common stockholders of $9,774,000 that represents a decrease of approximately $3,280,000 or approximately 33.6%. We reported adjusted EBITDA of $13,616,000 for the six months ended December 31, 2017, compared to adjusted EBITDA of $16,191,000 for the six months ended December 31, 2016, which represents a decrease of $2,575,000 or approximately 15.9%. With that, I will turn the call back over to our moderator to facilitate into Q&A from our callers.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator instructions] Our first question comes from the line of Jason Seidl from Cowen and Company. Please proceed with your question.

[Jason Seidl:]

Thanks operator. Hey Bohn. Hey Tod. How are you guys doing today?

[Bohn Crain:]

We're good. Thanks.

[Jason Seidl:]

So, a couple of quick questions, obviously you called out some strength in the Canadian business, can you give us some more color on the end markets because you guys have more than one type of business up in Canada obviously. You do your model and you do some brokerage operations up there. So, talk to us what's really driving some of that strength and how we should expect this to flow through the model as we move throughout the coming quarters?

[Bohn Crain:]

Sure. Thanks Jason. So, we talked about this a little bit on the last call, but we have -- the initiative has started in Canada, but we hope to ultimately bring it into some of the other U.S. markets as well. But starting in Toronto in our Canadian operations and I guess has a little bit of background for folks. We have a presence in Canada through our acquisition of Wheels when we acquired Wheels, they were doing a number of different things and doing some value-added warehousing. We continue to build out that strategy with our tuck-in acquisition of Lomas Logistics a year or so ago. And then most recently we saw evidence of last quarter, we begun to onboard additional customers where we've been bundling our value-added warehousing with the transportation services and that's one of the reason we had effectively saw quarter or last year in Canada, we had taken on a new facility but we hadn’t fully ramped up and didn't have it fully utilized by the new customers being on boarded. So, we've actually enjoyed a lot of success recently particularly in Canada as we think about this bundling strategy and look into further differentiate ourselves in the marketplace, provide a higher value to the customer, creates a stickier relationship with the customer and so we're excited to continue to explore how we can kind of bring that subject matter expertise in our success into other obvious gateway markets across North America. So, we're going to be turning our attention to Los Angeles as an example and seeing if we can take even some of our existing warehousing customers in Canada that are enjoying the solution that we have and being able to replicate that for them in the Los Angeles marketplace. So, I think ultimately, you're going to see increased focus and narrative around some of our value-added warehousing initiatives and so we'll see continued growth in that area as we move forward and its certainly early days now, but as we looked internally unbundle the margin characteristics of the business, we certainly like the transportation margins associated with our warehousing business as opposed to a more pure play transactional brokerage type relationship.

[Jason Seidl:]

That's great color, Bohn maybe I could ask this I guess a little bit different way, what percent of the business do you think can get bundled you have and compare that to where you are now? It sounds like you're very early days, but just to give us an idea.

[Bohn Crain:]

I think it's hard to express on a percentage basis. Right now, it's a very small piece of our business at the end of the day, but we do think it can be a growth engine for us and I would also say that the incremental customer wins can be chunky if that's the right word to use. These can be multimillion dollar wins as opposed to transactional type business, while at the same time, we would expect as we continue to grow it, we would be adding facilities and have to fill up the facilities and move out over time. But it's certainly fair to say it's a smaller piece of we're doing right now. When we get into the -- I don't think we break it out in the press release per se, but in the detail Q, where we break down our revenues, we isolate value-added services from transportation. So, everybody can get a clean read of our transportation margins and the incremental value-added services that we're providing in and around the core transportation service offering.

[Jason Seidl:]

Okay. That's great color. Guys I appreciate the time.

[Bohn Crain:]

All right. Thank you.

[Operator:]

Our next question comes from the line of Kevin Sterling from Seaport Global Securities. Please proceed with your question.

[Kevin Sterling:]

Hey Bohn and Todd. Good afternoon. How are you doing?

[Bohn Crain:]

Good. Good afternoon.

[Kevin Sterling:]

Good. All right. So, let me just kind of, if I could frame at least what I think the environment is and where you are and maybe tell me from right or wrong if I am thinking about it the right way. So, it seems like you've kind of made it through the storm what I call the excess capacity and sloppy pricing that we saw from the asset guys last year and now you're ready to hit the ground running and get price and improved margins across your business model. Am I thinking about it the right way kind of where we are in an inflection point in the freight markets and where you are as a company that you've weathered this excess pricing environment, the markets really changed and now it's in your favor and you guys are willing to go really kind of, go get price and really have an opportunity to expand margins.

[Bohn Crain:]

We certainly hope so. So, I think you framed it correctly to build out on that picture a little bit more, you used the term, sloppy. So, when the asset-based guys were being sloppy, the underlying shippers took advantage of that environment and lost everybody into a year is worth of firm contract pricing, which we all dutifully signed up for at the time. So, we've been living with that and at the same time, not at the same time, but shortly thereafter, prices swung the other way. So, we and others had trouble or suffered margin compression as a result of kind of that pendulum swing. We caught it coming and going if you will, but all of those legacy one-year contracts are expiring here over the next couple of months and so we'll have an opportunity to reset pricing on our contractual business and then on the transactional side, we're able to move more freely. And then just as a reminder for folks, as we think about our U.S. brokerage operations, we're a lot heavier on the intermodal side no front end intended than the truck brokerage side and so when prices -- when trucking prices began to move up and moved away from intermodal, we didn't necessarily participate, our truck brokerage didn't capture all the business that intermodal lost if that makes sense. But as it's coming back the other way as prices go higher and we all got to participate in the natural push and pull of modality between intermodal and truck brokerage we're expecting a strong lift, coming back the other way to the intermodal side. So, we're expecting our intermodal business to benefit in a strong way relative to all of this rocketing pricing we're seeing for all the reasons I won't repeat for everybody here on the call. But in this pricing environment we think it's going to be very helpful to our intermodal business.

[Kevin Sterling:]

I think so. Your stuff is going to benefit from what we're seeing in the truck market. So, I guess if I heard you correctly, the next couple months you're repricing some of these contracts and then by the second half of this calendar year, we should really begin to see that inflection in your numbers. Is that the right…

[Bohn Crain:]

That's correct. I think pretty much everything recess by June.

[Kevin Sterling:]

And then as we think about this year too Bohn, just remind me, I think by the end of this year, at the end of December you have the option if you want to call that preferred and take out that preferred at your option, is that right as well? You call it a par.

[Bohn Crain:]

Yeah that's correct. So that's callable as far in December of '18 should we choose $21 million instrument and I think drop $1.5 million after-tax benefit to the bottom line if we were to do that and we have the capacity to do within our existing credit facilities.

[Kevin Sterling:]

Right, because you just recently re-did you credit facilities. So, let me lead you on a path here if you don't mind, as we think about that with taken out the preferred possibly, the reduction obviously you guys are beneficiary of the tax reform as our other freight companies, how are you thinking about when we get all that together, how are you thinking about your free cash flow generation on an annual basis? It seems to me it could be quite powerful. I would just like to know how you're thinking about it?

[Bohn Crain:]

Well certainly I think of the blinding flash of the obvious right, as we think about in different ways to drop money to the bottom line, those are both I guess the proverbial shooting fish in a barrel metaphor right. You're going to get the benefit of the taxes and there's no integration risk of refinancing the preferred. So, we certainly can drop a couple million dollars incrementally of free cash flow to the mix through those two levers.

[Kevin Sterling:]

Can we think when it's all said and done, in terms of potential free cash flow generation on an annual basis. Can we think of $25 million maybe up versus $30 million?

[Bohn Crain:]

I always back to your modeling Kevin, I am not going to -- I'll walk out on a limb, but not on a twig.

[Kevin Sterling:]

Okay. But the bottom line is you've got an avenue to generate tremendous free cash flow with your asset light business model and then companies are the kickers as well.

[Bohn Crain:]

Absolutely I'm not trying to be thesis about the whole thing. No, our non-asset-based model is strong and it's got good free cash flow characteristics and so we do feel really good about that and where we sit on our capital structure at low leverage and the ultimate financial flexibility that we do enjoy as we continue to try to create shareholder value.

[Kevin Sterling:]

Lastly, some of the anecdotes we're hearing from some of the other freight companies that reported, January is off to a good start and historically January can be sometimes weaker but they're all encouraged that January is off to a good start that it could mean good things for the rest of the year. How would you describe January with what you're seeing?

[Bohn Crain:]

It is positive and typically the quarter ended March is our and most people slow as seasonal quarter, but it's certainly seems to be stronger than normal. So, our view is consistent with what you're hearing from other places.

[Kevin Sterling:]

And lastly on your technology and SAP rollout, is that progressing as planned or maybe even a little bit better than planned? It seems like it's going well. Just anything you want to share there in regards to…

[Bohn Crain:]

We're going very in this case slow and steady wins the race right. So, we're trying to go very methodically in our approach. And as a quick reminder, we've always been an SAP shop from an accounting standpoint. We are outgrowing CargoWise, which is our legacy TMO on the boarding side. We needed a new TM. We chose SAP, so we could have a fully integrated system between offset and finance and we got it configured and working in the end for our domestic forwarding services. Had it live in operational in four locations and we want to now hardening if you will debugging it and getting comments back from users and their experience so that we can drive as much efficiency and create as positive a user experience as we can with the rollout. And then we'll begin taking it out to the agency stations and our company-owned stores and that will be huge for us as we go. So, I think the short version is these things always take longer than we would like for it to but, we're committed to being cautious and then thoughtful in the rollout and de-risking a rollout and technology strategy and as we move forward in time, I'm increasingly comfortable with where we are and that we made a good decision and that it's going to work and that we're getting there. We all wish it was already all done, but it takes time but I do feel confident we did make the right choice and we're headed in the right direction.

[Kevin Sterling:]

Great. That's all I had this evening. Thanks for your time. It sounds like you got the wind at your back, so best of luck to you and really, really do appreciate your time answering my questions.

[Bohn Crain:]

All right. Thanks.

[Operator:]

And your next question comes from Mark Argento from Lake Street Capital. Please proceed with your question.

[Mark Argento:]

Hey guys. Good afternoon. Just a couple quick follow-ups, one on the materials handling business, obviously it sounds like it's an area that you're fairly bullish on, where do you sit right now in terms of the capacity utilization? It sounds like you're getting some better efficiencies out of that platform. What's your plans in terms of adding additional capacity? And then my second question is more focused on the M&A, part of the investment thesis and strategy of the company had always been playing the grade tail and buying in independent agent groups and just wanted to see where you are in terms of that strategy and where you see that in terms of the remaining this year and the opportunity there to continue to deploy that grade tail strategy?

[Bohn Crain:]

Yeah sure. So interesting question and I know some of my Canadian leadership team is listening in on the call. So, chopping at the proverbial bit to go add more capacity. So, I have to be more even more guarded in my comments relative to their ears than yours, but the short answer is that we are approaching capacity in our existing facilities. We are really getting a lot of traction, a lot of interest from accounts. So before too long, we would have to consider taking on our next incremental warehouse facility in Toronto to support another junkie customer that operating location, which we certainly are happy to consider and continue to deploy resources against that. At the same time, we candidly in some of our other operating locations and I'll refer back to L.A., I don't think we are as fine-tuned as we need to be in how we operate our facility in Los Angeles. And I'm curious to see what we can do to kind of fine-tune our operations in L.A. and get more business and more value flowing through that location and others as we go. But I do feel like we're kind of on to something with our value proposition with our customers and kind of how we're how we're positioned in our domestic in-land network and kind of transportation capacity and what we can do on that side combined with value added warehousing. I guess for emphasis, we're really not interested in being in the warehousing business for the sake of warehousing per say, but in connect or bundling it with the transportation services offering that's really where our focus is. And ultimately, we would even look at M&A opportunities that accelerated or further that strategy should they present themselves that stays entirely consistent with kind of our vision and model for non-asset based. And you know it's actually one of the verticals we've always identified as being kind of a M&A dramatic within the broader platform. So, we're certainly not looking exclusively there. We continue to look for other M&A opportunities, including tuck-in, acquisitions and conversions of the agency stations which was kind of the second or third part of your question. So, we remain open for business to support our operating partners as those opportunities present themselves, while at the same time, as we've talked about before we're not out twisting people's arms, trying to make themselves. We're here to support them, kind of meet them where they want to be met. So, we welcome and support entrepreneurs as long as they want to be entrepreneurs and want it if they want to monetize or create that access and we'll support them in that strategy. So hopefully that answers your question.

[Mark Argento:]

It’s helpful. In terms of the second part of the question in terms of additional M&A and the great pal is there has a propensity for these entrepreneurs to want to sell, and things are going well or is it a better environment to get those deals done when things are a little slow, grown a little tired. Historically, you've been through some cycles, is there any correlation there?

[Bohn Crain:]

Not necessarily. I mean, it's all faction circumstance based right. I think it's I think it's more about what's going on in someone's individual world than the economy in terms of partners and kind of life experience and kind of what's going on. So, it's driven more by the personal dynamics. So, you might have a partner and your partner is ready to retire and you're not and you need to help facilitate his exit, so that could be the trigger as an example or you could be ready to go like off or - so I'm not saying that there are folks who would opportunistically say, okay I like my trailing 12 months and let's go now. But more often than not, that's not the dynamic.

[Mark Argento:]

And then just one quick follow up, so in terms of materials handling business and since like you are seeing some uptick there. Is there any macro theme that's driving or is that e-commerce centric, is it, what's kind of the value add that you guys are providing there, the customer is responding to?

[Bohn Crain:]

I think eCommerce certainly has a role to play in that and kind of the omni channel kind of dynamics and needing to be able to ultimately push your product to various distribution channels and meeting partners to support you in those strategies. And Canada itself it's complex just because of some of the cross-border dynamics and kind of language localization requirements and all of those things. And it was part of Wheel's original strategy, but it's really targeting the large multinationals who need a Canadian solution right. That was always their focus point and have done well. So, we're kind of continuing that theme within this part of our organization and now we're trying to figure out how to really leverage those skillsets back across the U.S. And then I would also have to say, when we think about just kind of the cross-sell opportunity and being able to go back to our existing U.S. customer base and say how can we help you in Canada? And here is our competency and strength in Canada. Those are proving to be very productive conversations.

[Mark Argento:]

Thanks guys appreciate it.

[Operator:]

Our next question comes from David Campbell from Thomson Davis and Company. Please proceed with your question.

[David Campbell:]

Hi Bohn, hi Todd. Thanks for taking my questions. I'm a little confused by your report. International air freight rates are up substantially since August and we all know trucking rates are up substantially. I would have expected significantly more gross revenue increases. And in the case of the case of the flooring business comparable increases in net revenues, when you're not talking about contracts and assuming that all your business is contractual. So, your transactional business should have been substantially stronger than it was. It looks like your revenues are up slightly, but it's only slightly and it looks like shipment activity intends carrying so with would therefore be down year to year and quarter to quarter and that's really not typical of the industry. So substantial growth in both those numbers for other companies, so could you please explain what's going on?

[Todd Macomber:]

Well, I guess I would begin by the core of our business is on the domestic porting, so even within porting we're principally a domestic porter that's only a small piece of our business, its true international air and ocean. And so, if you're trying to associate our boarding numbers with international air freight numbers you're comparing an apple and an orange as between the two. So, I don't know kind of what else to tell you on that point. I don't know if you want...

[Bohn Crain:]

Some of the net revenues we did have a fair amount of different product mix. Notably we had some significant charter business which had carried lower margin characteristics. And then in the year ago period we had some stations that had very, very profitable sizable projects work that occurred in 2016, that did not occur in the current quarter. So, it's really a host of a lot of different reasons. But I would say that you know the two bigger reasons I mean you know I'm thinking of if I am going to name the station, but there's one in particular that was you know several million dollars net profits that was more of a one-time new project work that they had in the year ago quarter that didn't occur so that just for example one reason. But again, I mean it's a host of different reasons that impacted to the overall net revenues.

[David Campbell:]

Well as far as domestic versus international, I know international research up the domestic air freight had to be going up as well. So, this is not exactly that business is going down is going up, so it still doesn't make sense that your revenue is up only slightly? And the other thing is, your personnel costs are up $2 million from a year ago. And your net revenues are down $2 million. I mean that's not a formula that creates higher profits?

[Bohn Crain:]

But you also got to factor in David the commissions paid to the agents are also down significantly. So, a lot of that forwarding business is agent-based model where they're paid a commission and some of these guys are the station I referred to earlier a fair amount of that in the year ago period would have increased the commission expense. So, you've got to factor that into. You're absolutely right on the personnel, the personnel costs are up primarily due to the Loman the dedicated logistics technology transactions. Those were two decent size stations where Loman's we bought outright and then we converted the agent-based business to company owned store in the year ago period they were not part of the network. They were part of the overall corporate structure. So those are the drivers there. Your SG&A in fact is going to be up to because of the facilities associated with those two transactions.

[David Campbell:]

Right. Let’s hope we can do better in the next six months. You got to shows some substantially better revenue growth to keep pace for the industry. Thanks for answering the questions.

[Operator:]

Our next question comes from Mike Vermut from Newland Capital. Please proceed with your question.

[Mike Vermut:]

Hi guys how are you doing? So, I guess just to expand on that and little bit on Kevin's question there. So, I'm trying to understand how on our contractual business our rate negotiations occur. So last year we locked in rates between March in June. We've been stuck with those rates and purchasing transportation at much higher rates. So, we've had the absolute pure negative of the booming truck market. That's correct. That's what we've been witnessing for the past nine months on a macro sense right? Now obviously we don't know how much is contractual that's one of my question, how much of our business is contractual? We go and renegotiate that bid, what are you thinking on the rate side. Everything we're hearing is double digit rate increases out there is that what we should expect on our renegotiation? And just that then imply, we're about to see that major inflection in our business and calendar 2018 should see that significant margin expansion, EBITDA growth, earnings growth as we get through these negotiations? What do you think on we can expect on these rates?

[Bohn Crain:]

I don't think it's prudent to conduct our customer negotiations on our earnings conference call. So, I'm not going to venture down that path. But what I would say is that, the narrative by the underlying asset base guys is, everybody seems to be pounding their chest and talking in fact about double digit and mid teen type price increases and that is a - I'll just say that, that is a helpful environment for us to be conducting our negotiations. So, I can't and it wouldn't be appropriate for me to sit here and predict what the outcome of my negotiations with my customers or our customers are going to be. But you know we're ultimately going to be drafting behind the pricing strategies of the underlying asset base guys who are tight on capacity and short on drivers. And I believe that when they say they're taking their prices higher and I think that's going to create a favorable environment for our discussions.

[Mike Vermut:]

And then how much of our business roughly is contractual? How much will these rates – how much have we been affected by this on the negative side and then how much of it impact - how much of our business will be impacted by this on the positive once we get into negotiations.

[Bohn Crain:]

I do not have a precise number. I would estimate our contractual business on the U.S. brokerage side to be in the 60% to 70% area with the balance being transactional.

[Mike Vermut:]

It’s a huge factor for us going forward in ‘18 hopefully?

[Bohn Crain:]

We should see some improvement.

[Mike Vermut:]

And then getting on to the free cash flow Kevin's numbers would be fantastic. Obviously, we only have I don't know, rough calculation $30 million $40 million of net debt maybe a little bit more. What are the goals with this free cash flow? Do we pay down all our debt and get to zero? Do we look for larger acquisitions? I think it's pretty hard to do a deal when our stock is trading at these levels. The rest of the Index is up 50%, 100% plus and we've kind of been stuck here or do we start taking that cash flow and buy back stock if the market isn't going to give us any benefit for what's to come?

[Bohn Crain:]

I think all of those are viable alternatives or options as we think about how we deploy our capital. The questions come up from time to time and will continue to be part of the narrative as December of '18 comes closer and we'll really have to evaluate what we're going to do with the preferred in the context of our M&A pipeline and kind of what we see as the opportunities. We continue to look for M&A opportunities that we believe would be of interest for the reasons that you're describing. We're not likely to use equity as a currency in these environments, but that doesn't mean we have quite a fair amount of debt capacity as it stands and if we think about that income combination with our traditional earnout structure, there's a fair amount of M&A activity we could do even within the debt carrying capacity of our balance sheet without considering equity. So, we'll have to continue to evaluate that with the moment of truth coming I think on December 11, 2018.

[Mike Vermut:]

I hear it, but forgetting about the trade-offs between the preferred and M&A, is it possible to find M&A as more attractive than where we trade now? That's the bigger question I assume.

[Bohn Crain:]

I think the answer is yes. I think relative to -- when you factor-in earnout structures and I think part of the answer to that question depends on your investment horizon, but we think we can continue to do M&A transactions that create meaningful long-term value and enhance the overall network's income generating capacity. But your point is well noted that acquiring our own stock is not a bad answer for deploying free cash.

[Mike Vermut:]

Okay. Excellent. I appreciate it and looking forward to good '18, sorry fiscal '19, thanks.

[Bohn Crain:]

All right. Thank you.

[Operator:]

[Operator instructions] Our next question comes from [Walter]. Please proceed with your question.

[Unidentified Analyst:]

Yes, thanks. Hi Bohn. I was wondering if you -- can you hear me?

[Bohn Crain:]

Yes, I can. Thank you.

[Unidentified Analyst:]

Great. I was wondering if you could provide a little further perspective as to how you see the supply-demand imbalance during the current cycle playing out? You had discussed that you are going to be going to your customers and trying to reprice some of those legacy contracts that have been sitting there for a couple of quarters now. But on the other hand, I keep reading in the newspapers about driver shortages, truck shortages ELDs being at issue as well. Are some of those factors likely to mean that the pricing that Radiant will have to pay is also going to continue to come up while the gap may narrow. It may not to get back to a more normal state or may take a little bit longer to reach that level.

[Bohn Crain:]

Yeah there is a lot of varying opinions about the sustainability long term trajectory of underlying cost of transportation, but I think some of -- personally I think some of these macro trends are going to be here for the long haul no front intended relative to regulation of the ELDs and aging of drivers and that's all going to lead to tight capacity. But ultimately things will revert, well revert might not be the right word but we'll stabilize into less frantic market maybe that's the right word, but I do think that underlying prices are going up. So here what I would think it. So, for our transactional business, we effectively have the opportunity subject to the market big asterisk subject to the market to pass prices on. So just hypothetically if we were trying to price a transactional piece of freight forwarding business that cost plus 30%, there's nothing that would preclude us to doing that except the competitor offering to do it for 25% rather than 30% margin. But at least we have an opportunity to ebb and flow with the market environment on the transactional business. On the contractual side of the equation, what can happen is they can move away from you which would be locked in a price certain to provide the service over a given origin destination for a fixed period of time, with an underlying assumption that your cost of transportation was going to be X and it turned out to be X plus Y where there's no place to go right. You're kind of saddled with that dynamic and that has been the case for our contractual brokerage business here for a period of time, but I think that that will reset as everybody's prices are going up, we will have an opportunity I would presume, we will have an opportunity to reset at a more normalized margin, which will be a meaningful improvement over the compressed margins that we are experiencing now as we work our way through the balance of the term. But then we'll be kind of right back in it again so to speak and that when you undertake contractual business, that's part of the risk or dynamic depending if the underlying cost assumptions that we used were reasonable or not and the variability of the market that's given the take of transactional versus contractual type business. I'm not sure if that answers your question, but those are my thoughts around it.

[Unidentified Analyst:]

Yeah for the most part it does, I guess so the $64,000 question is what do you think transportation cost will be relative to where they are now? I don't know if that's something that you can answer on this call or not?

[Bohn Crain:]

Well I'm sure you get 1000 different answers. There are so many different things that come into play including what's going to happen with the economy and everything else and including investment in equipment and more equipment coming online as prices go up, more equipment, more people are going to get off the couch and get in the truck and go drive right. So, people -- resources, people and equipment will mobilize into this opportunity as the price goes higher far be it for me to pontificate around what that number will be. What I can tell you is we are now in the seasonally slowest time of the year and capacity is still really, really tight. So, everything stays constant as we move back into peak season there would be further strain on price.

[Unidentified Analyst:]

Thanks for your thoughts Bohn. I appreciate it.

[Bohn Crain:]

All right. Thank you.

[Operator:]

There are no further questions at this time. I'd like to turn the floor back over to Bohn Crain for closing comments.

[Bohn Crain:]

Thank you. Let me close by saying that we remain very excited with our progress and prospects here at Radiant and we remain very bullish on the growth platform we've created and the scalability of our non-asset-based business model and the benefits that will flow from our ongoing investment in technology. We believe we're well positioned to benefit from a more favorable market environment as capacity tightens which we believe will lead to continued improvement in our financial performance over the next several quarters. Thanks for listening and your support of Radiant Logistics.

[Operator:]

That concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.