Radiant Logistics Inc (RLGT) 2018 Q2 法說會逐字稿

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 6 months ended December 31, 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, 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 million, 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 $0.6 million 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 state and other taxes, we have 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 of '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 4 of our company-owned operating locations, and now we're in Phoenix, Detroit, Los Angeles and Minneapolis. With 4 of our company-owned locations now providing the domestic forwarding services using SAP, we're starting 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 the 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 us through our detailed financial results and then we can 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 6 months ended December 31, 2017.

For the 3 months ended December 31, 2017, we reported net income attributable to common stockholders of $3,330,000 on $206 point million (sic) [$206.7 million] of revenues or $0.07 per basic and fully diluted share, including a $190,000 charge for change in contingent consideration. For the 3 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 3 months ended December 31, 2017, we reported adjusted net income attributable to common stockholders of $3,555,000. For the 3 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 recorded adjusted EBITDA of $7,132,000 for the 3 months ended December 31, 2017, compared to adjusted EBITDA of $8,866,000 for the 3 months ended December 31, 2016. This represents a decrease of $1,734,000 or approximately 19.6%.

Moving along to the 6 month numbers. For the 6 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 6 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 6 months ended December 31, 2017, we reported adjusted net income attributable to common stockholders of $6,494,000. For the 6 months ended December 31, 2016, we reported adjusted net income attributable to common stockholders of $9,774,000. This represents a decrease of approximately $3,280,000 or approximately 33.6%. We reported adjusted EBITDA of $13,616,000 for the 6 months ended December 31, 2017, compared to adjusted EBITDA of $16,191,000 for the 6 months ended December 31, 2016. This 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 any Q&A from our callers.

(Operator Instructions) Our first question comes from the line of Jason Seidl from Cowen & Company.

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, do intermodal, and you do, 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 see that flow through the model as we move throughout the coming quarters?

Sure. Thanks, Jason. So we talked about this a little bit on the last call, but we have kind of 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 and our Canadian operations. And I guess as a little bit of background for folks, and I -- we came to 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've continued to kind of build out that strategy with our tuck-in acquisition of Lomas Logistics a year or so ago. And then most recently and kind of we saw kind of evidence of it last quarter, we've begun to onboard additional customers, where we've been bundling our value-added warehousing with the transportation services, and that's one of the reasons we had, effectively, a soft quarter last year in Canada. We had taken on a new facility but we hadn't kind of fully ramped up and didn't have it fully utilized by the new customers being onboarded. So we've actually enjoyed a lot of success recently, particularly in Canada, as we think about this bundling strategy and look into kind of 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 and that success and 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 it -- even some of our existing kind of warehousing customers in Canada that are enjoying kind of 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 kind of 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 it's certainly kind of early days now. But as we kind of look or -- look at internally unbundled kind of 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.

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 that 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.

Well, I think it's hard to express kind of on a percentage basis. That's -- right now, it's a very small piece of our business at the -- kind of at the end of the day. But we do think it can be a growth engine for us, and I would also say that kind of 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 kind of move out over time. So -- but that's certainly fair to say it's a smaller piece of what 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 detailed Q, where we break down our revenues, we isolate value-added services for -- from transportation. So everybody can get a clean read of our transportation margins and the incremental value-added services that we kind of providing in and around the core transportation service offering.

Our next question comes from the line of Kevin Sterling from Seaport Global Securities.

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 if I'm right or wrong, if I'm thinking about it the right way. So it seems like you've kind of made it through the storm, what I would call the excess capacity and sloppy pricing that we saw from the asset guys last year. But -- and now you're ready to hit the ground running and kind of get price and improved margins across your business model. Am I thinking about it the right way, kind of where we are in the inflection point in the freight markets and where you are as a company that you've kind of weathered this -- that excess pricing environment, the market's really changed and now it's in your favor and you guys are going to go really kind of -- I think go get price and really have an opportunity to expand margins?

Well, at least -- we certainly hope so, right? So I think you framed it correctly. To kind of 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 locked everybody into a year's worth of firm contract pricing, which we all dutifully signed up for at the time. So we've been kind of living with that. And at the same time -- or not at the same time, but then shortly thereafter, price has swung the other way. So we and others had trouble -- or suffered margin compression as a result of the kind of that pendulum swing. We kind of caught it coming and going, if you will. But all of those kind of legacy 1 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 pun intended, than the truck brokerage side. And so when -- kind of when prices -- when trucking prices began to move up and moved away from intermodal, we didn't necessarily participate and 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 kind of -- we all kind of participated in the natural push and pull of modality between intermodal and truck brokerage, we're expecting a strong lift kind of coming back the other way to the intermodal side. So we're expecting our intermodal business to benefit in a good -- in a strong way relative to all of this kind the 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.

Yes -- no. Yes, intermodal is definitely going to benefit from what we're seeing on -- in the truck market. So I guess if I heard you correctly, the next couple of months, you're repricing some of those contracts, that then by the second half of this calendar year, we should really begin to see that inflection kind of in your numbers. Is that right?

That's correct, yes. I think pretty much everything resets by June.

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

Yes, that's correct. So it's callable at par in December of '18 should we choose. It's a $21 million instrument and would, 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 it within our existing credit facilities.

Yes, yes, yes. Right, because you just recently redid your credit facilities.

Correct.

So let me lead you on a path here, if you don't mind. As we think about that with taking out the preferred possibly, the reduction, obviously, you guys are a beneficiary of the tax reform as are other freight companies, could you -- 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.

Well, certainly, I think kind of the -- it's kind of the blinding flash of the obvious, right? There's -- 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? We were going to get the benefit of the taxes, and there's no integration risk of refinancing the preferreds. So we certainly can drop a couple of million dollars incrementally of free cash flow to the mix through those 2 levers.

Yes. 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 may be upwards of $30 million after pulling these levers?

I'll leave that to your modeling, Kevin. I'm not going to -- I'll walk out on a limb, but not on a twig.

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 a couple of these other kickers as well.

Absolutely, and I'm not trying to be facetious about the whole thing. Yes -- 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 kind of where we sit on our capital structure and low leverage and kind of the ultimate financial flexibility that we do enjoy as we continue to try to create shareholder value.

Yes. 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 and -- but they're all encouraged. So January is off to a good start, that it could mean good things for the rest of that year. How would you describe January with what you're seeing?

It is positive. And typically, the quarter ended March is our and most people's slowest seasonal quarter, but it certainly seems to be stronger than normal. So our view isn't inconsistent with what you're hearing from other places.

And last thing, 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 regarding that.

Yes. We're going very -- and in this case, slow and steady wins the race, right? So we're trying to go very methodically in our approach. We're -- and as a quick reminder, we've always been an SAP shop from an accounting standpoint. We're outgrowing CargoWise, which is our legacy TM on boarding side. We needed a new TM. We chose SAP, so we could have a kind of a fully integrated system between ops and finance. And we've got it configured and working end-to-end for our domestic boarding services, have it live and operational in 4 locations. And we want to -- now we're kind of hardening it, if you will, kind of debugging it, 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 other company-owned stores, and that will be huge for us as we go. So I'm -- I think the short version is these things always take longer than we would like for it to, but we're committed to being kind of cautious and then thoughtful on the rollout and kind of derisking our rollout and technology strategy. And as we move forward in time, I'm increasingly comfortable with kind of 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 just -- it takes time. But I do feel confident we did make the right choice, and we're headed in the right direction.

And the next question comes from Mark Argento from Lake Street Capital.

Just a couple of quick kind of follow-ups, one on the materials handling business. Obviously, it sounds like that's an area that you're kind of fairly bullish on. Where do you sit right now in terms of the capacity utilization? 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 kind of part of the investment thesis and strategy of the company. It's always been kind of playing the [gray] tail and buying in independent agent groups. And just want to see you where you were in terms of that strategy and where do you see that in terms of the remainder of this year and the opportunity there to continue play that gray tail strategy?

Yes, sure. So interesting question. And I know some of my Canadian leadership team is listening in on the call. So they're chomping 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, I think. But the -- kind of the short answer is that we are approaching capacity in our existing facilities. I mean, 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 kind of on our next incremental warehouse or facility in Toronto to support kind of another chunky customer in that operating location, which we certainly are happy to consider and continue to put resources against that. At the same time, we -- candidly, I'm -- in some of our other operating locations and I'll refer back to L.A., I don't think we are as a 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 to that location and others as we go. But we -- I do feel like we're kind of on to something with our value proposition, with our customers and kind of how we're positioned in our domestic inland network and kind of transportation capacity and what we can do on that side, combined with the value-added warehousing. It worked. I guess for emphasis, we're not -- we're really not interested in being in the warehousing business for the sake of warehousing per se. But in connection 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 furthered that strategy should they present themselves. It stays entirely consistent with kind of our vision and model for non-asset-based, and it's actually one of the verticals we've always identified as being kind of an M&A thematic 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 kind of 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 them sell. We're here to support them, kind of meet them where they want to be met. We welcome and support entrepreneurs as long as they want to be entrepreneurs and when and if they want to monetize or create that exit, then we'll support them in that strategy. So hopefully, that answers your questions.

No, that's helpful. In terms of the second part of the question, in terms of additional M&A and the gray tail, is there more of a propensity for these entrepreneurs to want to sell when things are going well? Or is it a better environment to get those deals done when maybe things are a little sluggish, maybe they've grown a little tired? What -- historically, you've been to some cycles, is there any correlation there?

Not necessarily. I mean, it's all facts and circumstance-based, right? 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. And 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 play golf or -- so I'm not saying that there aren't 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.

Got it. Then just one quick follow-up. So in terms of materials handling business and -- seems like you're seeing nice uptick there. Is there any macro theme that's driving that? Or is it e-commerce-centric? Is it -- what's kind of the value-add that you guys are providing that the customer is responding to?

Well, I think e-commerce certainly has a role to play in that in kind of the omni-channel kind of dynamics and needing to be able to ultimately push your product through various distribution channels and needing partners to support you in those strategies. And Canada itself is complex, just because of some of the cross-border dynamics and kind of language localization requirements and all of those things, where we -- and it was -- part of Wheels' 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 with them as part of our organization. But -- and now we're trying to figure out how to really leverage those skill sets 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's our competency and strength in Canada, those are proving to be very productive conversations.

Our next question comes from David Campbell from Thompson, Davis & Company.

I'm a little -- I'm confused by your report though. See, international air freight rates are up substantially since August, and we all know trucking rates are up substantially. I would've expected a significantly more gross revenue increases and, in the case of the forwarding business, comparable increases in net revenues. When you're not talking about contracts, and certainly, not all your business is contractual, so your transactional business, you should've been substantially stronger than it was. I mean, it looks like your revenues are up slightly, but it looks like only slightly. And it looks like shipment activity and pounds carried and so forth 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?

Well, I guess I would begin by the core of our business is on the domestic forwarding. So even within forwarding, we're principally a domestic forwarder. It's only a small piece of our business, is true international air and ocean. And so if you're trying to associate our forwarding numbers with international air freight numbers, you're comparing an apple and an orange as between the 2. So I don't know kind of what else to tell you on that point. And I don't know, Todd, I don't know if you want to...

Sure, yes. I mean, 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 project 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 the 2 bigger reasons, I mean, I'm thinking of -- I'm not going to name the station, but there's one in particular that was several million dollars of net profits that was more of a onetime project work that they had in the year-ago quarter that didn't occur. So that's just, for example, one reason. But again, I mean, it's a host of different reasons that impacted the overall net revenues.

All right. Well, as far as domestic versus international, I know international rates are up, but -- and our domestic air freight rates have to be going up as well. So it's not exactly -- it's not that that business is going down, it's been going up. So it doesn't -- it still doesn't make sense that your revenues would be up only slightly. And the other thing is your personnel costs are up $2 million, up $2 million from a year ago, and your net revenues are down $2 million. So I mean, that's not a formula that creates higher profits.

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 this agent-based model, where they're paid a commission. And as some of these guys, like for instance, the station I referred to earlier, a fair amount of that in the year-ago period would've increased the commission expense. So you got to factor that in too -- you're absolutely right on the personnel. The personnel costs are up, primarily due to the Lomas and the Dedicated Logistics Technology transactions. Those were 2 decent-sized stations where -- Lomas, we bought outright, and then we converted the agent-based business to a company-owned store. In the year-ago period, they were not part of the network or part of the overall corporate structure as opposed to the drivers there. Your SG&A is up -- going to be up too because of the facilities associated with those 2 transactions too.

Yes, right, right, right. Well, let's hope we can do better in the next 6 months. You've got to show substantially better revenue growth to keep pace with the industry.

Our next question comes from Mike Vermut from Newland Capital.

So I guess just to expand on that and a little bit on Kevin's question there. So I'm trying to understand how -- on our contractual business, our rate negotiations occur? Because the last year, we locked in rates between, say, March and June. We've been stuck with those rates and purchasing transportation at much higher rates, right? So we've had the absolute pure negative of the booming truck market, if that's correct. That's what we've been witnessing for the past 9 months. When we go now...

On a macro sense, yes. Yes.

-- on a macro sense, right?

Yes.

Now -- obviously, we don't know how much is contractual. That's one of my questions. How much of our business is contractual? When we go and renegotiate that business, 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 does 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? And then -- what do you think on we can expect on these rates?

Yes. Well, 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 the narrative by the underlying asset-based 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 we're ultimately going to be drafting behind the pricing strategies of the underlying asset-based 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.

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

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.

So it's a huge factor for us going forward in '18? , hopefully.

Well, we should see some improvement.

All right, okay. 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 0? Do we look for larger acquisitions? I think it's pretty hard to do a deal when our stock's trading at these levels. The rest of transportation index is up 50%, 100-plus percent, and we've kind of been stuck here. Or do we start taking that cash flow and buying back stock if the market isn't going to give us any benefit for what's to come?

Well, I think all of those are viable alternatives or options as we kind of think about how we deploy our capital. The question has 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 kind of 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. So -- but that doesn't mean we have quite a fair amount of debt capacity as it stands. And if we think about that in combination with our traditional earnout structure, there's a fair amount of M&A activity we could do, even within kind of the debt-carrying capacity of our balance sheet without considering equity. So we'll have to continue to evaluate that with kind of the moment of truth coming, I think, on December 11, 2018.

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

Yes. I think the answer is yes. I think relative to -- when you factor in earnout structures and kind of -- 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.

(Operator Instructions) Our next question comes from Walter Winnitzki from Buckley Capital.

Yes. I was wondering if you could provide a little further perspective-wise as to how you see the supply/demand imbalance during the current cycle playing out. You had discussed the -- that you're 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 get back to a more normal state or may take a little bit longer to reach that level.

Yes. And there's a lot of varying opinions about kind of the sustainability or kind of 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 pun intended, relative to regulation and the ELDs and aging of drivers, and that's all going to lead to tight capacity. But ultimately, things will revert -- revert might not be the right word, but will kind of stabilize into less -- a less frantic market. Maybe that's the right word. But I do think that underlying prices are going up. So I mean, here's how I would think about 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 at cost plus 30%, there's nothing that would preclude us to doing that, except a competitor offering to do it for 25%, but -- 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 it can move away from you. Which if you lock 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 turns out to be X plus Y, well, 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 at -- 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 were experiencing now as we kind of work our way through the balance of the term. But then we're -- we'll be kind of right back it again, so to speak, in that when you undertake contractual business, that's part of the risk or dynamic, depending if we -- if the underlying cost assumptions that we use were reasonable or not and the kind of variability of the market. That's the give and the take of transactional versus contractual-type business. I'm not sure if that answered your question, but those are my thoughts around it.

Yes. For the most part, it does. I guess -- so the $64,000 question is what do you think transportation costs 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.

Well, I'm sure you would get a thousand 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 investments 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. I -- no, far be it for me to pontificate about what that number will be. What I can tell you is we're now in the seasonally slowest time of the year, and capacity is still really, really tight. So if everything stayed constant, as we move back into peak season, there'd be further strain on price.

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

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 are 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.

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