Radiant Logistics Inc (RLGT) 2017 Q4 法說會逐字稿

This afternoon, Bohn Crain, Radiant Logistics of founder and CEO and Radiant's Chief Financial Officer, Todd Macomber, will discuss financial results for the company's fourth fiscal quarter and year ended June 30, 2017. (Operator Instructions) 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.

Thanks a lot. Good afternoon, everyone, and thank you for joining us on today's call. We are very pleased to report another year of solid financial results for fiscal 2017, setting new records across several key financial metrics. Net revenues of $194.6 million, up $7.9 million or 4.2%, adjusted net income of $15.8 million, up $4 million or 33.9%. Adjusted net income per share of $0.32 per basic and fully diluted share, up $0.08 or 33.3%; EBITDA of $23.4 million, up $11.9 million or 103.5%; and adjusted EBITDA of $29.6 million, up $5.2 million or 21.3%. In addition, we also set a new record in terms of our adjusted EBITDA margins, up 210 basis points to 15.2%, up from 13.1% over the comparable prior year period. As we previously discussed, our incremental cost of supporting the next dollar of gross margin is very small, and we are very excited about our opportunity to drive further expansion of our adjusted EBITDA margins as we continue to scale the business, and we leverage the benefits of our ongoing technology investments. For the quarter, ended June 30, 2017, we posted revenues of $201.8 million, up $19.4 million or 10.6%. Net revenues of $49.8 million, up $3.3 million or 7%; and adjusted EBITDA of $6.9 million, up $1.5 million or 27.8% over the comparable prior year period. These quarterly results reflect the impacts of the margin pressures on our U.S. brokerage operations associated with the excess capacity that continued through the quarter ended June 30, which proved to be a drag on the balance of our operations. There are indications that this excess capacity of the asset-based carriers may finally, be getting absorbed in the marketplace, which would suggest some relief on the margin pressure on our brokerage operations on the horizon. It will take a few quarters to work this way into our results given the contracted nature of our U.S. brokerage business, but we would view this as a net positive over the longer term, assuming of course, that this trend holds. We also continue to make progress on the acquisition front having recently completed 3 tuck-in transactions with Canada-based Lomas logistics in April of '17, Dedicated Logistics Technologies in June of '17 and Sandifer Valley Transportation & Logistics in September 17. We're very happy to have these new operations as part of our organization. One of the principal thematics of our acquisition strategy is supporting our strategic operating partners in their exit strategies by converting them to company-owned operations, and we believe this gives us the best opportunity to drive margin expansion and create durable shareholder value. I will also provide a quick update on our technology initiative. Through our ongoing investment in technology, I believe we have a unique opportunity to deliver a state-of-the-art technology platform to our strategic operating partners and the end customers that we serve. At the same time, technology is the key to driving productivity improvement in the back office and can ultimately help facilitate revenue synergies across the platform. With the new SAP accounting system fully deployed here in Bellevue, we are now focused on a number of productivity initiatives to streamline our back office processes and accelerate the realization of back office cost synergies associated with existing and future acquisitions. We are also on track to hit our next major milestone, which is the deployment of a new SAP-based TMS, which we are expecting to pilot later in calendar 2017. Over time, we will sunset our legacy freight forwarding platform CargoWise as we migrate our forwarding operating's onto SAP. We expect to transition from CargoWise to SAP, one station at a time, giving us the opportunity to address any challenges as we go and mitigate the risk of this transition. Similarly, over time, we will also expect to replicate the same two-step integration process for Wheels International in Toronto and Wheels Clipper in Chicago. First integrating the various legacy TM applications at Wheels to our SAP accounting system and eliminating redundant back-office operations and shedding legacy accounting systems, and then ultimately sunsetting these same legacy Wheels TM applications as we migrate to SAP. Getting our various operations onto a singular platform will not happen overnight, but we believe that we have the right strategy to drive long-term shareholder value in terms of maximizing our opportunity to capture revenue and cost synergies, while positioning ourselves to support future growth through acquisition. Let me also take a moment to talk about our capital structure. In June of this year, we were able to expand and extend our senior credit facility with Bank of America and Bank of Montreal. We expanded the facility in that we increased the facility from $65 million to $75 million and also added a $50 million accordion feature to support our M&A activities. The facility is available to fund future acquisitions, capital expenditures or other corporate purposes, including, if warranted at the time, the repurchase of the company's common stock and/or the redemption of the company's $21 million redeemable perpetual preferred stock, which is redeemable at the company's option beginning in December of 2018. As most of you on the call will appreciate, there has been some level of confusion surrounding our redeemable perpetual preferred stock. As a reminder, we raised $21 million of the preferred back in 2013. The preferred pays a dividend of 9.75% and included a 5-year no-call feature at the time we issued it in. This no-call feature expires in December of '18. This means we have the right, but not the obligation to call the preferred at par at any time starting on or after December of '18. We estimate an after-tax savings of approximately $1.5 million per year assuming we retired the preferred. Also as of June 30, we had over $50 million of availability under our facility, clearer capacity to retire the preferred. I'll wrap up my comments by saying that we head into the new year with a focus on leveraging our ongoing investment in technology focused on continuous improvement of our existing business. We have low leverage on our balance sheet, strong free cash flow and remain committed to our long-standing strategy to deliver profitable growth through a combination of organic and acquisition growth initiatives. With that, how turn the call over to Todd, our CFO, to walk us through our detailed financial results, and then we'll open it up for some Q&A.

Thanks, Bohn, and good afternoon, everyone. Today, we will be discussing our financial results, including adjusted net income and adjusted EBITDA, for the 3 and 12 months ended June 30, 2017. Quarterly net income results. For the 3 months ended June 30, 2017, we reported a net loss attributable to common stockholders of $1,028,000 on $201.8 million of revenues or $0.02 per basic and fully diluted share, which includes $953,000 of transition and lease termination costs and $1,638,000 on change in contingent consideration expense. For the 3 months ended June 30, 2016, we reported net loss attributable to common stockholders of $633,000 on $182.5 million of revenues or a loss of $0.01 per basic and fully diluted share. This represents, a decrease of approximately $395,000 over the comparable prior year period. Quarterly adjusted net income results. For the 3 months ended June 30, 2017, we reported adjusted net income attributable to common stockholders of $3,441,000. For the 3 months ended June 30, 2016, we reported adjusted net income attributable to common stockholders of $2,792,000. This represents an improvement of approximately $649,000 or 23.2%.

Quarterly adjusted EBITDA results. We reported adjusted EBITDA of $6,915,000 for the 3 months ended June 30, 2017, compared to adjusted EBITDA of $5,420,000 for the 3 months ended June 30, 2016. This represents, an increase of $1,495,000 or approximately 27.6%. Adding back transition costs associated with SBA's back-office representing an additional $275,000, adjusted EBITDA would have been $7,190,000 for the June 30, 2017, period versus $5,897,000 for the June 30, 2016, period, which included an add back for the 2016 period of $477,000. This represents an improvement of $1,293,000 or 21.9%. For the 12 months. 12-month net income -- For the 12 months ended June 30, 2017 we reported net income attributable to common stockholders of $2,816,000 on $777.6 million of revenues or $0.06 per basic and fully diluted share, which includes $2,260,000 of transition and lease termination costs and $3,431,000 unchanged in contingent consideration expense. For the 12 months ended June 30, 2016,, we reported a net loss attributable to common stockholders of $5,565,000 on $782.6 million of revenues or a loss of $0.11 per basic and fully diluted share. This represented an improvement of approximately $8,381,000 over the comparable prior year.

For the 12 months ended June 30, 2017, we reported adjusted net income attributable to common stockholders of $15,792,000. For the 12 months ended June 30, 2016, we reported adjusted net income attributable to common stockholders of $11,793,000. This represents, an increase of approximately $4 million or 33.9%. For adjusted EBITDA results. We reported adjusted EBITDA of $29,595,000 for the 12 months ended June 30, 2017. This compares to adjusted EBITDA of $24,406,000 for the 12 months ended June 30, 2016. This represents, an increase of $5,189,000 or approximately 21.3%. Adding back transition costs associated with SBA's back-office, representing an additional $1,539,000, adjusted EBITDA would have been $31,134,000 for the June 30, 2017 period versus $26,814,000 for the June 30, 2016, period, which included, for 2016, on add back of transition costs of $2,408,000. Overall, this represents, an increase of $4,320,000 or 16.1%. With that, I will turn the call back over to our moderator to facilitate any Q&A from our callers.

(Operator Instructions) Our first question is from Jason Seidl of Cowen & Company.

Hey Bohn, a couple of quick questions here. When you're looking at your different businesses, can you talk a little bit about ranking them and what's the strongest right now, as you look at the marketplace. And also, on the brokerage, what gives you confidence that sort of the margin squeeze is behind you guys?

So if we kind of rack and stack the different elements of the business, our forwarding business is performing well, has been performing well pretty consistently. It's more transactional in nature and what hasn't been caught up in kind of tightening capacity environment to the extent that our U.S. brokerage operations have been. The Canadian operations have really started to hit their stride. When oil prices went down and the Canadian economy was suffering relative to exchange rates and et cetera, it had been down a bit, but it really is coming on strong and looks very positive as well in terms of the trend lines and our expectations for the Canadian operations.

And as we alluded to in our prepared comments, kind of the weakest on the component parts right now, has certainly been our U.S. brokerage operations. The Wheels Clipper operations in Chicago, they're the ones that have been most directly impacted by the excess capacity dynamics and with the asset-base guys trying to fill their trucks kind of caught up in that vortex. Even so, we posted extraordinary results, notwithstanding those challenges and as we get some, hopefully, some tailwinds coming for brokerage, I think, we can really start to print some really exciting results for folks. Ultimately the why, we don't -- certainly the narrative and dynamics over the last, call it 6 to 8 weeks, have been meaningfully more positive in terms of kind of seeing the behavior of the asset base carriers and kind of what they're doing in the marketplace and they're basically starting to de-market customers in terms of taking their own prices higher, only fulfilling minimum contractual requirements and pushing more freight volume back out into the spot market, which is now trending higher than the contract rates. And the ultimate question that you may, in fact, have a better perspective on than me is how durable or the likelihood that this is going to sustain itself. But with ELDs and regulation and driver shortage and all of those kind of macro-trends, I think, everybody has an expectation at some point the supply/demand dynamic is going to come into a more normalized environment, which is going to give us some relief. Whether this is that point of inflection and it's going to stick or not, that remains to be seen, but certainly, the narrative is more pervasive, I think, across the industry and I think there's more -- a more bullish view just in the conferences that I've attended, a more bullish view across the industry of, hopefully, a change here.

Now, Bohn, remind us, obviously, your folding business is more transactional, remind us of the split between contract and transactional in your U.S.-based truck brokerage.

Well, it's -- in rough numbers, I would say we're probably, within our brokerage business in the U.S., we're roughly, I would say 75% intermodal and 30% truck brokerage. And it's that intermodal business that's more contract in nature than the brokerage business.

Okay. So you're going to get squeezed more so on the rail cost going up on the intermodal side right now then?

Correct. Well, said a little bit differently, we have been getting squeezed, and we see some relief on the horizon.

Okay, perfect. Also looking at some of the opportunities you'll see there for more acquisition, some all the more recent ones have been tuck-ins by nature. Do you foresee that continuing when you look at the pipeline that you have in front of you? Or should we read something different into getting that $50 million accordion feature put in there?

Well, we certainly place a lot of value on financial flexibility and being actionable if the right type of transaction or transactions present themselves, but I would -- no one should interpret the accordion that we're on the verge of doing some super large deal. That's not kind of in our crosshairs at the moment. Again, not to say that we won't do a larger transaction, but our real focus is supporting our operating partners and agent locations and other networks who are looking for liquidity. We think we've got -- we believe we are uniquely positioned in the marketplace in term of the valuation structure and everything associated, there too, all aligns with creating long-term shareholder value. We would -- I think we to really boil it down, we would rather buy 5 $2 million EBITDA businesses at a 5x multiple than 1 $10 million EBITDA business at a 10x multiple. So we would, as we talked about before, we would much rather kind of serially do smaller transactions, take a portfolio approach and, while at the same time, supporting our operating partners who have been such good partners for a long time.

All right. And one question about your redeemable preferred, the $21,000,000 one. If that redeemable preferred date was September 1, with the preferred -- of 2017, would the preferred still be around?

That's an interesting way to frame the growth. Probably not. Probably not.

Our next question is from Mark Argento of Lake Street Capital Markets.

Just following up in terms of some additional color on the acquisition strategy. Obviously, it continues to -- you're the go-to aggregator for some of these smaller players out in the market, but could you provide any data, maybe you could help us think about same-store sales versus businesses recently acquired? Just trying to get a better flavor of how well these businesses are performing once they're under roof, so to speak, and better understand kind of the dynamic there. I know historically, you've done a pretty good job of being able to keep the levels of business up, and in some cases, see things accelerate, but any metrics in terms of same-store or any other kinds of data points you could provide would be very helpful.

Yes. There's not much kind of acquisition earnings in our quarter or year ended June. So it's a relatively clean quarter. So those year-over-year growth rates are pretty reflective of our same-store results. So that's -- I think that's a really positive story, particularly in the context of what was going on within brokerage. And I don't have the kind of the with and without brokerage math in front of me, but the business in the aggregate is doing very, very well. And then, another kind of anecdotal way to look at that as well, is the change in contingent consideration. We took, I think, it was a $1.6 million charge because the businesses that we acquired are doing so well, we're expecting to pay more out in earn-outs than originally expected. And the way the financial accounting rules work, we ended up flowing that through as an additional noncash charge into our P&L.

Sure. That's helpful. If you were to take a look at, particularly that $1.6 million charge, when you look at the outperformance of the business, is it because they're on your platform, and have access to better services or broader portfolio that's getting cross-sold or is it that customers of that particular business are performing better, either given the market they're in or geography?

Well, again, as usually, I think it's a combination of things. I think with the benefit of the robust platform, they get access to better technology, better buy rates an opportunity to call on and capture customers that they may not have had the opportunity to go after in their prior environments. And then, there's also just the practicality of they're in their earn out phase and this is their opportunity to maximize the value of their life's work. So they're out there busting their tails, right, to maximize our collective opportunity during the earn out.

Last one for me. Any near term exposure issues or operating issues with any of your facilities that are around Houston or Florida?

Not from a -- certainly not from our -- not from a company-owned store environment. We certainly have agency locations in those individual locations, most of which I would say are in geographies that were negatively impacted for sure. So we've been keeping an eye out for them and they're certainly in our thoughts as they're working through that. So on a personal note, it's horrific for them individually. In terms of its financial implication on Radiant, there's not much exposure on the forwarding side in particular.

Our next question is from Marco Rodriguez of Stonegate Capital markets.

I was going to piggyback one of the earlier questions on the M&A market, maybe Bohn, if you could talk a little bit about what of what the valuations are kind of looking like out there and then maybe if you could talk about your guys capacity or ability to do a large acquisition here in the near term if one was nice enough.

Sure. I think kind of our -- sort of our general approach to M&A hasn't really changed, right? We would expect companies doing plus or minus $2 million of EBITDA to attract, plus or minus 5x multiple and kind of follow our traditional earn-out structure. Companies with earnings power less than that, multiples would likely come down and companies with earnings power higher than that, will likely attract higher valuations and structures that would be less attractive from our standpoint and relative to the earn-out structure that we use on our smaller deals.

So if we take a snapshot of our own balance sheet, you don't have to work too hard -- so to just kind of play with some math for a moment, let's just assume that through a series of transactions we were going to go out and acquire $20 million of incremental EBITDA at a multiple of 5x, that would be $100 million purchase price, $50 million of which, we would have to come out a pocket for, kind of liquidity or cash to fund those transactions. We would have the capacity within our existing capital structure to do that. Given the capacity we have now, along with the benefit of the incremental AR and EBITDA that would come from the companies that we would onboard. So there's at least a framework to think about the -- our capacity to grow within our existing capital structure on the smaller transactions. The larger transactions, I think, as a rule of thumb, if we we're looking at the company doing $10 million of EBITDA, we -- I think we would have to expect to pay a 10 times tight multiple for that business in this market environment. So we're dealing with the same capital structure, but our ultimate -- the incremental EBITDA we can onboard at a larger size, gets ratcheted back just because of the valuation mechanics.

Got you. That's helpful color. I apologize also if my question was somewhat confusing. I guess, I was trying to figure out what are the valuations look like at some potential targets you have in your pipeline. Are they looking -- are the targets more -- are there more of them out there? And then also based on a lot of the kind of the internal things that you're working with for the technology transition and getting the brokerage business back right up, your capability of kind of taking on a large acquisition and integrating that.

Yes. So Okay, that is a different question than I had provided assist so let's kind of take that one. As we've talked about before, we really view ourselves as having 3 platforms from which to support acquisitions from an integration standpoint. We have our Canadian platform in Toronto that can support Canadian M&A like our recent acquisition of Lomas, and I would view them as having lots of kind of organizational, and technology, and leadership bandwidth to support incremental M&A there. I think we also have the opportunity from a kind of organization and bandwidth and back-office infrastructure in Chicago to do things on the U.S. brokerage side. And on the forwarding side, I think we have -- we certainly have the capacity to continue to do these smaller tuck-in acquisitions. One, I guess to point out the obvious, but maybe not so obvious is when we convert an existing agent station to a company-owned store, there's no incremental pressure on our back-office at all because we're already doing all of that back-office work. So that would simply be a financial transaction in that regard. But at the same time, we have the capacity to onboard additional incremental tuck-in agencies like our most recent acquisition of Sandifer Valley in Mcallen, Texas. So we can continue to do those as well, but ultimately to your point, we're not likely to go do another major freight forwarding acquisition until we get further downstream with our technology upgrade.

Got you. That's very helpful. And then in regards to the technology upgrade, you've provided some nice color on the strategy there as far as the implementation is concerned. Could you maybe kind of help us think about timing? When do you think the transition will be complete, i.e. just kind of rolled out throughout your whole operations?

Well, we're piloting the TM or Transportation Management System here in the coming months in a number of our company-owned locations. And assuming we get everything working the way we would expect it to, we'll -- we will -- it's our hope and expectation to be able to aggressively deploy it over the course of calendar '18. So, hopefully, in Q1 of '18, we've kind of moved beyond the pilot phase and have matured the solution set enough that we can begin to take it out to our agency locations. And then, it will, based upon our experience and kind of the agency locations capacity to work with us to transition, I would hope over the course of calendar '18, we can get that done.

Got you. And last quick question, just kind of a housekeeping item. Lomas Logistics, what was the revenue contribution in the quarter for them? Or if you have some sort of an organic growth rate for year-over-year, it would be helpful.

I don't have that at my fingertips, Marco. I apologize.

I think it would be pretty darn small because we only had a quarter for...

A quarter is what it is.

And they're on a revenue basis, they weren't that, candidly they weren't that large on a revenue basis.

Our next question is from David Campbell of Thompson, Davis and Company.

Bohn and Todd, I would just wanted to ask you why the company's expenses went up so much from the December and March quarters. I'm talking about personnel costs and also SG&A, both substantially higher than the March quarter and the December quarter. Are there some nonrecurring charges in there that you had to put in the June quarter, because that -- what that meant was that your adjusted EBITDA for the June quarter was actually down from the December quarter.

Well, there is seasonality in the business for sure, right? So ultimately, while we are looking at the kind of the absolute dollar change, we also look at those dollar amounts as a percentage of gross margin. So as we're converting agency locations to company-owned stores and/or acquiring other businesses in, we would expect those numbers to go up. They're not going to go -- we wouldn't expect them to go down as we would grow. We would expect them to go up, but as a percentage of gross margin, they will continue to go down.

Well, they didn't in this June quarter. The gross margin was $50 million. That's what it was in December. But both those costs were much higher than they were in December. So it seems like you probably have more company-owned stores in that...

We do. Exactly, that would be kind of the emphasis or part of the conversation, but ultimately I think if we look at EBITDA as a function of gross margin, right, that's kind of the ultimate math that we would look to.

That was down. That was down from December to June. It was down. On the same...

We compared that against the prior year period, as Bohn mentioned, there's seasonality. And the adjusted EBITDA as a percent, went up to -- it's 15.3%.

On a comparable year-over-year basis, we improved to 13.9% from 11.6%, David, for the quarter. And on a comparable year-over-year basis, we improved from 13.1% to 15.2%. So on a sequential basis...

These quarterly expenses in the June quarter, they're expected to continue at that level. There's nothing to bring them down?

There's no -- a lot of it is going to be the Lomas transaction. We brought on DLT, Dedicated Logistics Technologies. So those, both of those -- well certainly with Dedicated, it was an agent-based store, but then the commissions go down, but the personnel costs go up associated with those tuck-in acquisitions. So there is the personnel costs should be fairly consistent at this rate right now, based upon where we are with the new acquisitions.

Same with the SG&A?

Yes. The SG&A we're going to have a lift in that too as we acquire more and more stations. And the personnel costs are going to go up probably a little bit because Dedicated was only in these numbers for 1 month as opposed to the full 3 months.

Right. But all along -- the gross margin percentage should go higher as you convert -- you acquire more stores to the company locations?

That's correct.

Gross margin percentage should go up, it should offset the increase in those costs. Isn't that, right?

Gross margin -- yes, were going to get more gross margin dollars, right? And then, what happens when we convert is we have less operating partner commissions, but in -- but, along with that, we're going to have personnel costs, we'll have SG&A, we'll have facilities, all of those costs. So if we -- obviously, if we bring in new stations, we're going to add to the gross margin dollars. If we convert, like Bohn mentioned earlier, they're already part of our overall financials. And so the gross margin dollars in that case for conversion would be -- that would stay the same. And what's going to move is the operating partner commissions are going to decrease and we're going to have increases in personnel costs, SG&A, facilities, et cetera.

And last question was, it doesn't sound like Lomas actually contributed any earnings in the June quarter. I'm seeing very little in revenues, and you had acquisition costs. So they probably didn't make any money, or very little in the June quarter. Is that right?

Yes. I would think that was fair. Yes, on the -- for that individual quarter yes. But having said that, we're very bullish on the Lomas transaction and what it's bringing to the network.

So the acquisition costs were a largely related to Lomas?

Right, exactly. So yes, that's kind of a one-time thing, right? And then moving forward they're not going to -- it's done, the transaction has occurred so...

Our next question is from Kevin Sterling of Seaport Global Securities.

This is actually Will on for Kevin. I just wanted to ask a question around the U.S. forwarding net margin, and I was just doing some back of the envelop stuff here with the K coming out. It looks like the -- I guess the U.S. forwarding net margin was at its low point here in the fiscal Q4 for the 2017-year and I was just curious if you saw that kind of progressing into the Q1, '18 quarter. I know you're talking about brokerage getting a little bit better, truck load market getting a little bit tighter, helping you guys out. Do you think that, that margin should lift back up to closer to the 30% range as we move into '18?

Yes. I think we will see improvement. It kind of -- the ultimate timing will be interesting. I would not expect meaningful shifts for the quarter ended September, because some of these changes that we've been talking about and that people are experiencing, kind of are happening kind of mid-quarter or towards the end of the quarter. But for the quarter ended December, I think, that will be, hopefully, a quarter more reflective of what we're hoping to see in terms of rates.

Okay. And one housekeeping item. Just kind of looking at the year-over-year numbers between brokerage and forwarding, it looks like there might have been a reclassification of revenues from brokering to -- brokerage to forwarding. What was that about, if I'm looking at this right? It looks like the net revenues didn't change too much.

I would have to look at the, yes, yes.

Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call over to back to management for closing remarks.

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 in the growth platform that we've created and the scalability of our nonasset-based business model and the benefits that will flow from our ongoing investment in technology. We have low leverage on our balance sheet, strong free cash flow and remain committed to our long-standing strategy to deliver profitable growth through a combination of organic and acquisition initiatives. Thanks for listening and your support of Radiant Logistics.

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