Radiant Logistics, Inc.
Q1 2016 Earnings Call Transcript

Published: 17 Nov 2015

[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 first fiscal quarter ended September 30, 2015. 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 ww.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:]

Thank, Doug. Good afternoon, everyone, and thank you for joining in on today's call. We are very pleased to report record results for the quarter ended September 30, 2015, and our continuing trend of profitable growth. This was the first reporting period to reflect the run rate contribution of our recent Wheels, Service by Air and Highways and Skyways acquisitions. And we posted record revenues of $218.7 million, up a $120.5 million or an increase of 122.7%; net revenues of $50.7 million, an increase of $24.4 million or 92.6%; and adjusted EBITDA of $8.2 million, up $4.6 million or 128% over the comparable prior-year period. As you know, our ability to leverage our personnel and general administrative costs as a function of our net revenues is what really allows us to drive profitable growth. As a percentage of net revenues, our adjusted EBITDA, normalized to exclude the non-recurring transition costs associated with the operation of Service by Air's back-office operations improved 380 basis points from 13.6% to 17.4% for the comparable prior-year period. We are excited to see these metrics continue the anticipated progression, as we scale the business. We also continue to make good progress on the integration front. In Toronto, we completed our facilities consolidation combining three separate Wheels operations under one roof. In New York, we are combining our company-owned SBA and Radiant operations. In Los Angeles, we are combining company-owned Wheels, Service by Air and Radiant operations. And in Cincinnati, we are combining our company-owned Wheels and Highways and Skyways operations. Each integration represents an opportunity for us to unlock both revenue and cost synergies across the network, as we combine the strengths of each respective group. In addition, earlier this month, we successfully cut-over to our new SAP platform. As we have previously discussed, we have been a long time user of SAP, but needed to upgrade to a new version of the software as a first step to position the company to consolidate its forwarding and brokerage operations on to a singular platform, which will help us to unlock both revenue and cost synergies across the combined organization, while positioning us for future growth. We continue to focus on growing our business through a combination of organic and acquisition initiatives. Our organic growth strategy will continue to focus on strengthening existing and expanding new customer relationships, leveraging the benefit of our new truck brokerage and intermodal service offerings, while continuing our efforts on the organic build-out of our network of strategic operating partner locations. Also, with the benefit of our recent equity raise, we believe we are very well-positioned to continue our disciplined approach of acquiring non-asset based businesses. We have very low leverage on our balance sheet at this point and continue to search for candidates that bring critical mass from a geographic standpoint, purchasing power and/or complementary service offerings to the current platform. In this regard, we recently completed the tuck-in acquisition of Minneapolis-based Copper Logistics, which we have integrated into our existing company-owned operations in that market. We have a particular interest in continuing to build density in strategic markets like Minneapolis, where we already have company-owned operations that we can leverage in driving both revenue and cost synergies. We currently have company-owned operations in 15 markets across North America and each of these locations represents a platform from which we can continue to attract like-minded logistics entrepreneurs who see value in our platform. Notwithstanding the general negative market sentiment that seems to be reflected in recent stock prices across the transportation sector, we remain generally upbeat about our prospects here at Radiant. There are a number of factors that contribute to our positive long term outlook

[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 months ended September 30, 2015. The quarterly net income results. For the three months ended September 30, 2015, we reported a net loss attributable to common stockholders of $172,000 on $218.7 million of revenues or $0.00 per basic and fully diluted share, which included a $3,162,000 of transition and lease termination costs, a $412,000 of a gain on change in continued considerations, and additionally approximately $310,000 in legal costs we anticipate will be non-recurring. For the three months ended September 30, 2014, we reported net income attributable to common stockholders of $1,009,000 on $98.2 million of revenues or $0.03 per basic and per fully diluted share. This represents a decrease of approximately $1,182,000 or approximately 117.1% over the comparable prior-year period. Quarterly adjusted net income for the three months ended September 30, 2015 we reported adjusted net income attributable to common stockholders of $3,799,000 or $0.08 per basic and fully diluted share. For the three months ended September 30, 2014, we reported adjusted net income attributable to common shareholders of $1,653,000 or $0.05 per basic and fully diluted share, an increase of approximately $2,146,000 or approximately a 129.8%. For quarterly adjusted EBITDA, we reported adjusted EBITDA of $8,184,000 for the three months ended September 30, 2015 compared to adjusted EBITDA of $3,587,000 for the three months ended September 30, 2014. This represents a sizable increase of $4,597,000 or approximately 128.1%. I mean, if you add back to transition costs associated with SBA's back-office, this represents an additional $640,000 that we highlighted, which would have been adjusted EBITDA. Have this transition already occurred, it would have been $8,824,000 or an increase of $5,237,000 or 146%. I'd also like to highlight that the net revenues before agent commissions increased $24,388,000 of which $3,714,000 of it was organic in the quarter, that the quarter-over-quarter increase was about 14% for intangible. With that, I will turn the call back over to our moderator to facilitate any Q&A from our callers.

[Operator:]

[Operator Instructions] Our first question comes from the line of Jason Seidl from Cowen and Company.

[Jason Seidl:]

Bohn, I guess, my first question is going to be, can you talk a little bit about some of the cross-selling that's going on between Wheels and sort of the legacy Radiant business and some of the success that you're seeing out there?

[Bohn Crain:]

Sure. So that's coming in a couple of different flavors. As we have alluded to on some of our prior calls, historically as a freight forwarder and wearing a freight forwarder hat, we have for a long time sourced capacity from time to time through various truck brokerage operations. So one area of what we would, I guess, characterize as low-hanging fruit is the ability to begin to service our own forwarding network as a capacity provider on the brokerage side. So that was one of the early areas of opportunities. So now our 150 some odd locations across the country, as they're looking for capacity, are calling Wheels Clipper in Chicago, as a potential source of capacity for them. So that is one area. We've also had a number of success stories where our traditional freight forwarding locations had an opportunity to sell intermodal into their accounts, so that's really exciting for us. That's a whole new conversation with customers that we've never had a platform from which to pursue those types of opportunities. And then ultimately the third prong of that is really mobilizing what's now our Canadian competency for the benefit of our installed customer base. So we've got a number of examples where we've been able to go into existing accounts where we have been supporting them in other areas of their supply chain. We knew they had some opportunities in Canada, and we've been able to begin to support them in that way. And for those who may not be familiar, I'll just call out, that may not be readily apparent to everybody, but Canada is in fact our largest freighting partner, it's not China, it's not Japan, its Canada. So we know that there is just a lot of freight and a lot of opportunity that we're excited to be able to bring to the market for the benefit of our customers. And then as we've talked about before, at the end of the day, all of these things are incremental capabilities that other agent-based freight forwarding networks don't have within their portfolio of services. So as we think about trying to further differentiate ourselves in the market to put us in a position to attract more of the logistics entrepreneurs to choose our platform, all of these things come together, I think, as we continue to put points on the board.

[Jason Seidl:]

Could you talk a little bit about the guidance? I mean, it's unchanged, but it's tweaked a little bit, so you've kind of took the revenue side down and took your margins up a bit. Could you tell us what's behind that? Is it sort of the mix of business coming in? Is it the market itself softening in certain areas versus others?

[Bohn Crain:]

Well, I think it's a combination of all of those things. I mean, there is certainly is a lot of, I guess, what we would call, concern or negative bias in the broader marketplace about what's going on or what may go on out into the future. But based upon kind of where we sit here in our fiscal quarter of the year, we still feel pretty good about our numbers in general. I think as we've also talked about on some of these calls previously, given in part, that such of a big piece of our business remains driven by the agents themselves. We don't have the absolute best visibility as to how the numbers are going to come in. We could make our best estimates. And based upon the results for the quarter ended September, it was up. The numbers tell us that our topline revenues weren't trending as high as we had initially expected. But in fact, the margin characteristics of the business that we do enjoy have outpaced our original expectations. So I think I'll just leave it there at this point in time and we'll continue to work aggressively to try to grow our business in the markets ahead. And we feel pretty good about where we are and kind of where we're positioned in the marketplace and we are particularly happy to be able to come back and share some really market improvements in organic growth at the net revenue line relative to what we've historically have delivered.

[Jason Seidl:]

So if I can just ask a question on the acquisition front. Obviously, Copper, seemed like another nice add that's sort of in line with your traditional acquisition bed that you've had. Has the market changed any with the overall softness out there in the transportation space? Obviously, the equity markets have softened in valuations, but how do the valuations look for the potential acquisition targets?

[Bohn Crain:]

Well, I think time will tell. I think it's a little early I think to draw conclusions. I'll tell you what my expectations would be, but again, this is a little bit of a pontification on my part, I think in the area of our historical smaller tuck-in type acquisitions, I think kind of the valuation multiples aren't going to move that much. I think they will continue to be in the 4x to 5x valuation multiple. I would expect, but I think the market will ultimately tell us, but I think at the higher end, I would expect the market to slow down a little bit. And if not slow down in terms of deal volume, I would generally expect the valuation multiples to come in a little bit. But I could be proven wrong. We'll just see what's going on now at the marketplace and what turns out to be the clearing prices for transactions in the coming quarters.

[Jason Seidl:]

And Bohn, do you think these smaller companies are more willing to sell, when there is uncertainty in the marketplace and economy or do you think that causes them to put it on pause?

[Bohn Crain:]

I think at least historically, we have our own sets of experiences to draw from. And I think kind of uncertain markets ultimately act as a catalyst and mobilize more sellers to the table. So I think this will ultimately translate into a favorable M&A environment for us and we were very fortunate to have concluded our equity raise when we did this summer, because we really have the proverbial dry powder to action against those opportunities in a way that historically we wouldn't have. And we can look back to the last cycle and in 2008, and if you'll remember from our numbers, we grew right through that cycle and that's not to say that individual station locations weren't negatively impacted, because if our customers are moving less freight, we'll have less freight to move. But the second prong of our strategy in the M&A side of things, at least historically, has far outpaced any of that temporary compression.

[Operator:]

Our next question comes from the line of Kevin Sterling from BB&T Capital Markets.

[Kevin Sterling:]

And let me follow-up on the acquisition question. You were talking about the soft patch, and you might see more guys come to table and more agents knocking your door. As your platform has gotten bigger, your intermodal, brokerage, freight forwarding, I assume that makes it more attractive to agents given we might entering a soft patch that you're able to sell more products and offer these agents more products to sell, is that the right way to think about it?

[Bohn Crain:]

Absolutely, so if you think about the logistics entrepreneurs that we see as our strategic operating partners, their asset is their customer relationship. And so they're naturally looking to align themselves with a partner that will allow them an opportunity to maximize the value of that customer relationship. Well, historically, they have a relationship with the decision maker, who will like lead span of control moves beyond time definite expedited domestic and international forwarding into these other categories that we now have as part of our service offerings. So it really gives them, as we've alluded to kind of more tools in the toolbox, more opportunities to monetize that customer relationship that they enjoy.

[Kevin Sterling:]

And then, I think you touched earlier on, you talked about some market improvements and organic growth and net revenue this quarter. Could you expand on that a little bit more on what type of organic growth that we're talking about? Maybe what type of organic growth should we be thinking about for the rest of this year?

[Bohn Crain:]

Kevin, I'll give it to Todd, as he can walk through a little bit of the details in terms of the organic growth.

[Todd Macomber:]

Sure. The organic growth, I mean, a fair amount of it was brand new stations that came onboard that weren't in existent in the prior year.

[Bohn Crain:]

So let me just kind of clarify. So that's not acquired station, but new stations that we onboarded organically.

[Todd Macomber:]

And then furthermore there was a station that had a sizeable amount of kind of project related work that occurred in this quarter that also was very beneficial to the organic growth, but going forward --

[Bohn Crain:]

And let me get one anecdote, because it's another good data point for everybody. One of our locations that has really been driving is our Philadelphia acquisition. That was an acquisition now over a year ago, because they are in the comparable prior-year period, but it's a great example of someone who's become part of our network and has really continued to grow their business beyond kind of that core financial gearings in which our original transaction was done. There has certainly been some conversations around earn out and contingent purchase price and how the purchase price mechanic works and how the various acquisitions are doing. And Philadelphia, as an example, is doing really well. And one of the areas in which that's manifesting itself on our financial statement is in that net revenue growth quarter-over-quarter.

[Kevin Sterling:]

And then you highlighted your gross margin expansion in the quarter. What's driving the nice margins? I assume its lower purchase transportation costs or the acquisition synergies or anything else that might be driving some of this margin expansion that I might be missing?

[Bohn Crain:]

No, I think at those kind of obvious things. I know that the guys with Wheels have been working a little bit on margins. I think that's a contributing factor, as well as some of this project type work that Todd was alluding to that also gave us a good path this quarter.

[Kevin Sterling:]

And last question, Bohn. You talked about your acquisitions and the pipeline. I think you talked about you're going to stick to a non-asset based approach. And as you look across the landscape, we're seeing other transportation companies kind of changed their colors a little bit, but I don't think that's in your game plan. It seems like you really like the non-asset business model. Is that correct?

[Bohn Crain:]

Yes, absolutely. We think we have been extraordinarily consistent in our message, in our strategy, in our focus, in our discipline to our business model. And we certainly expect to tend to our knitting and continue that approach. And just too kind of emphasize it for a moment, and we kind of touched on it on our last couple of press releases, but we constantly sit at this intersection of should we do larger transactions, which imply a higher multiple or continue to do smaller transactions that follow out more consistent earn out model valuation and structure. And although, I don't want to give you to say, we're never going do a larger deal, because if we find one that's really compelling, we certainly would. But we're really kind of consciously focusing on trying to organize ourselves to serially do a number of smaller transactions. And each of these 15 company-owned locations across the country effectively represents a mini platform from which we can really easily digest and integrate $5 million to $10 million revenue-type opportunities in using valuations and structures that we really think in the aggregate and over time will create real meaningful long-term durable shareholder value.

[Operator:]

Our next question comes from the line of Mark Argento from Lake Street Capital Markets.

[Mark Argento:]

Could we talk a little bit, I know you referenced one of the opportunities, obviously given the environment, as to continue with your M&A strategy focused on the agent-based marketplace. Could you talk a little bit about maybe the pace or kind of the model looks that you're getting right now in terms of opportunity, call it, kind of your pipeline. And then also, Todd, if you could talk a little bit about the balance sheet as it sits today, including what kind of liquidity you have available on your line of credit, that would be helpful.

[Bohn Crain:]

Let me at least start at the risk of stealing God's thunder a little bit, but just as a reminder, we provided guidance of EBITDA of $30 million to $34 million. Let's just assume the low end of that range for purposes of this conversation. We're at a run rate of $30 million of EBITDA. We have net debt of, I think, it's approximately $45 million of net debt at this point in time. So we would have very, very low leverage. And we were presenting at a conference last week, we filed an 8-K with that deck that's in there. And one of the takeaways that we want people to make sure that they have an appreciation for us is really our opportunity within our existing capital structure to grow the business from here. In terms of debt capacity, we think we can onboard another plus or minus $25 million of EBITDA following our traditional earn out model, not $25 million in a singular transaction, but an aggregate, a number of acquisitions taking our combined our then pro forma EBITDA north of $50 million and still have less than 2x funded debt. In that particular schedule, it's a pretty simplified approach. It doesn't consider any organic growth in the business. And it doesn't consider the benefit of the ongoing free cash flows of the business as we continue to grow. So we think there is just a big opportunity, and it's why we did the equity raise to begin with to effectively delever and position us to continue to execute the strategy that we believe so passionately in. In terms of deal flow itself, I think as we talked about before, at any point in time we're talking to quite a few folks and it's not unusual for our transactions to be culminations of three to five-year conversation. So rest assured that we're actively talking to lot of folks, one within the freight forwarding space, which is the pipeline that we historically have been developing. But remember as well, that Wheels was the product of some of its own M&A and had an M&A orientation in terms of its core strategy. So in connection with our acquisition of Wheels, we also inherited their own pipeline, their sets of relationships, their sets of conversations, so we continue to look to prioritize kind of what we do next in terms of our M&A.

[Mark Argento:]

And then lastly, looking at specifically, I know trucking has been an area where pricing has been a little slacked over the last few months in particular. Any recent trends you're seeing that support any kind of firming of prices or maybe you could talk a little bit about, more broadly speaking, the activity levels you're seeing across the network?

[Bohn Crain:]

Well, I think we're all looking at some of the same data, right. I think certainly capacity has been a little looser than people might have anticipated. But my own interpretation of the data is when everybody began to tell the shippers that we're heading into a tightening capacity market, I think to manage their own risk, a lot of shippers moved more of their freight volumes into dedicated lanes to reduce their exposure to the spot markets. And so now the spot market is a little weaker, but there is perhaps a little less freight moving. But part of the reduction in volumes available for the spot market is because some people moved a bigger percentage of their freight volumes into more of a dedicated solution. So I think that kind of plays into the landscape a bit. And then ultimately what I believe and we'll find out here in the quarters ahead that I think ultimately my hope is that we're going to be able to see or be kind of collectively reminded of one of the benefits of being a non-asset based service provider as opposed to an asset based service provider. We're simply in a better relative position in terms of flexibility without having capital hung up in the hard assets to be able to move with the market. And in a softening market environment, if there's excess capacity, the asset base guys will naturally become more aggressive in their pricing to try to get better utilization of their equipment, and that will translate into opportunities not just for us, but with all the non-asset based players in the market.

[Operator:]

Our next question comes from the line of Marco Rodriguez from Stonegate Capital Markets.

[Marco Rodriguez:]

Just a couple of quick follow-ups here. In terms of the acquisition Wheels, SBA, can you kind of give us a little bit of an update on where you are in terms of finishing up all that integration work there?

[Bohn Crain:]

Sure. So let's start with Wheels. If you remember, we're operating Wheels as the brokerage group effectively in a brother-sister relationship for the forwarding network. So there is not a lot of operational integration afoot at present. What we had done in the early days with Wheels, we had identified plus or minus $3 million of cost synergies and that was reconstructed as $1.5 million of contractual reduction in comp from the selling shareholders; $0.5 million in redundant pub-co cost; and $1 million in annual cost savings in connection with facilities consolidation in Toronto. All of those have been achieved and realized of commencing with this quarter, with the last thing, the facilities consolidation. So we certainly have captured all of those synergies and now we're working more on the revenue synergy side of things relative to our interaction with Wheels. And with respect to Highways and Skyways, that being integrated in Cincinnati and that work is underway. Our bigger opportunity for kind of further cost synergies to rest with the SBA transaction, which is why we've kind of called out this line item, with what we've identified is transition cost. These are the kind of the current run rate back -- the cost of operating the redundant back office infrastructure of Service by Air in Woodbury, New York that we will be transitioning away from over time. It's going to be a while yet before we ultimately are able to capture those synergies, but I would expect over the course of our fiscal '16, we will have completed that transition and have the benefit of what it will be in access of $2 million a year in cost synergies come from getting that done.

[Marco Rodriguez:]

And then, last quick question, I didn't quite catch the organic growth numbers you mentioned for the quarter. Could you go over that again please?

[Todd Macomber:]

Yes. The organic growth was around 14% quarter-to-quarter. That really represented like -- there is handful stations that were in the network from the prior year, but in addition to that some of that also was new stations who have chosen to walk away from old networks and plug into our network, that were not acquisitions. They've simply hooked up with us instead of remaining with their private predecessors.

[Marco Rodriguez:]

And do you by chance have a year-over-year growth rate?

[Todd Macomber:]

Well, no, it's just for the quarters, all I've got, Marco.

[Operator:]

We have time for one last question. The last question comes from the line of Jeff Kauffman from Buckingham Research.

[Jeff Kauffman:]

Couple of quick questions just some details. So if I heard you correctly, you're maintaining the net revenue guidance, but you're brining down the gross revenue numbers a little bit?

[Todd Macomber:]

That's correct.

[Jeff Kauffman:]

Now, did the previous guidance include Copper or should I think of it is you're maintaining your net revenue guidance despite quite acquiring Coppers?

[Todd Macomber:]

The latter.

[Jeff Kauffman:]

And then one quick detail question, when you are computing the adjusted earnings and adjusted EBITDA, why do you add back to depreciation?

[Bohn Crain:]

That depreciation enabled -- I'll let Todd speak. As a non-asset based company, it's intended to be adding back the amortization of the customer relationship intangibles. I think depreciation is kind of filled in there, but it's only because it's not material or meaningful for the analysis.

[Todd Macomber:]

And that's correct. The vast majority of that is absolutely the amortization of the customer list. So reporting time is we were done amortizing, but yes, the customers generally are still with us.

[Jeff Kauffman:]

So if I look at your reported figure, which is about flat earnings slight negative, and I say, okay, the transition costs associated with these acquisitions is kind of an oddity temporary thing, the legal cost associated with these transactions. I try to look at what an operating number is without changing contingent consideration or playing around with the amortization? I'm getting a number closer to a nickel of earnings. Is that ballpark with the 36% tax rate?

[Todd Macomber:]

I'd have to go through that math myself.

[Jeff Kauffman:]

I'm adding back $3 million and changing transition costs another $300,000?

[Todd Macomber:]

It sounds reasonable. Again, I'd have to go through and punch it out, as far as the number itself. But yes, I mean, you're right, you should add it back. I mean, I think it makes a lot of sense to look at those one-offs.

[Bohn Crain:]

Well, let's kind of drill down just a second to make sure that I understand what you're talking about. So the presentation format shows all the puts and takes and gives us the $0.08 a share, Jeff. So if there is any particular line items you want to drill down on, we could kind of talk about that. But I don't think it's a nickel, I think its $0.08.

[Jeff Kauffman:]

And then last and final question. You had a terrific organic growth rate. You had mentioned some slowing. Could you identify, where the slowness seems a little more acute, whether it's a particular industry or particular geographic region or is it general across the network?

[Bohn Crain:]

Well, that's a very interesting, and I'll say, a tricky question. And what I mean by that is at least at this moment in time we're not seeing all the slowness that everybody else seems so concerned about. So it may in fact show up, but we're just not -- we're not seeing it, certainly not through the extent that everybody else is. Now, we're up here in Pacific Northwest, Nordstrom just revised down the other day, so some of the big box retailers. It's kind of all around this, but it just hasn't manifested itself in our numbers as you see from our results. In Canada, we're not expressly exposed to oil and gas or commodities. We're more in the non-cyclical CPG and food and beverage space. And so that's holding up reasonably well. Would it be doing better, if the Canadian economy was zooming? I would expect it would be. But all in all, I think our business continues to perform pretty well and I'm certainly getting more good feedback across the network from incremental wins and new pieces of business that we've been able to capture from some of these cross-sale opportunities.

[Operator:]

There are no further questions. I'd like to turn the call back over to management for closing comments. End of Q&A

[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 that we created and the scalability of our non-asset based business model. We continue to make good progress in executing our strategy, leveraging the Radiant platform to bring value to our operating partners. And we remain very excited about the opportunity to grow our business organically both on a same-store and new store basis and by completing acquisitions of other companies that will bring critical mass from a geographic standpoint, incremental purchasing power and/or complementary service offerings, which will benefit the broader network. At the right place, at the right time, with the right value proposition, we are patiently persistent in executing our business strategy, which we believe will continue to deliver value for our shareholders, our operating partners and the end customers that we serve. Thanks for listening and for your support Radiant Logistics.