Radiant Logistics, Inc. (RLGT) Q3 2014 Earnings Call Transcript

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 third fiscal quarter ended March 31, 2014. Following their comments, we will open the call to questions. This conference is scheduled for 30 minutes. This conference call may include forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The company has based these forward-looking statements on its current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about the company that may cause the company's actual results or achievements to be materially different from the results or achievements expressed or implied by such forward-looking statements. While it is impossible to identify all the factors that may cause the company's actual results or achievements to differ materially from those set forth in our forward-looking statements, such factors include those that have in the past, and may in the future, be identified in the company's SEC filings and other public announcements, which are available on the Radiant website at www.radiantdelivers.com. In addition, past results are not necessarily an indication of future performance. Now I'd like to pass the call over to Radiant's Founder and CEO, Bohn Crain.

Thank you. Good afternoon, everyone, and thank you for joining in on today's call. This is a first for Radiant, and that I'm doing the call from Hong Kong this morning, and it happens to be 4 a.m. for me here. So I apologize in advance for any technical issues with today's call. But I'm attending the annual conference for the World Cargo Alliance, which happens to coincide with our quarterly call. With that proviso, on to the task at hand. We are very pleased to report another solid quarter and continuing our trend of margin expansion and earnings growth for the quarter ended March 31 where we posted adjusted EBITDA of $3.5 million, up $0.5 million and 17.2% over the comparable prior year period. We're particularly pleased with these results in the face of the tough weather conditions along the East Coast that plagued most of the industry participants this quarter. Consistent with past quarters, we also continued to make good progress on leveraging our scalable business model to drive margin expansion with adjusted EBITDA as a function of net revenues up 80 basis points for the comparable prior year period to 14.6%. As we've previously discussed, our incremental cost of supporting that next dollar of gross margin is very small, and we remain very focused on our opportunity to drive further margin expansion as we continue to scale the business and convert more agent locations to company-owned stores. We also continue to make good progress on our network expansion and in March of this year, we opened new operations in Philadelphia and completed the transaction with Phoenix Cartage and Airfreight. Prior to the acquisition, Phoenix Cartage operated as part of our competing national transportation group who saw value in transitioning to us here at Radiant. We believe the transaction is representative of the broader pipeline of opportunities available to us in the marketplace, and is further evidence of our ability to attract large individual contributors from competing networks who can benefit from the Radiant platform, similar to our Laredo transaction on December '11 and our JFK transaction in February of 2012. In addition, we recently had some positive developments on the legal front. On April 25, a jury returned a verdict on the company's favor in the amount of $1.5 million in connection with our claims for statutory and common law misappropriation of our trade secrets in the State of California, in a case emanating from our 2011 acquisition of DBA. Notwithstanding this positive development, the ultimate resolution of this dispute is not expected to occur until the appeals process has been exhausted by the non-prevailing party. And accordingly, we will not record any benefit from this award until such time as the dispute has been fully adjudicated. And the ultimate timing of this process remains uncertain. As we've discussed on our previous call, we remain very bullish on the growth platform we created at Radiant and the scalability of our non-asset based business model. Looking forward, the heart of our growth strategy continues to focus on bringing value to the agent-based foreign community, leveraging our status as a public company to provide our operating progress with an opportunity to share and the value that they help create, providing a robust platform from which to serve the end customers, including providing differentiated service offerings like our wide home [ph] network that we've enjoyed through our time, and offering a unique opportunity from the succession planning and liquidity for our station owners. This approach has made us unique in the marketplace and has been key to our ability to grow. Within this framework, we are fueling our growth through a combination of organic and acquisition initiatives. Organically, we continue to focus on improving the tools available to our existing network to win new business, as well as expanding the network itself by on-boarding new agent stations that recognize the benefit of our platform. In addition, we've also continue to be opportunistic in our pursuit of accretive acquisition opportunities to further accelerate our growth. This would include: the conversion of our current agent stations, like our acquisitions in Los Angeles and Portland; the acquisition of agent stations participating in competing networks like Laredo, JFK, and now Philadelphia; and ultimately, the potential acquisition of other competing networks. In addition, we also have an interest in pursuing other non-asset based acquisition opportunities that bring critical mass from a geographic standpoint, purchasing power and/or complementary service offerings to the current platform. Broadly, these involves some categories of truck brokerage, intermodal, NVOCC, and customs brokerage services. We also continue to enjoy significant capacity under our existing $30 million credit facility with Bank of America to execute the strategy. And while not ruling out the possibility of larger transactions, or even smaller transactions given the right circumstances, our efforts are largely focus on acquisition candidates generating $1 million to $3 billion of EBITDA where we believe we're able to value and structure the transaction consistent with our past practices. That is valuations of plus-or-minus 5x, and using earn-outs structures to achieve the transactions. Moving on to the outlook. We're providing guidance for the upcoming quarter ended June 30, and excluding the benefit of any further acquisitions or any benefit from litigation, we are projecting adjusted EBITDA in the range of $3.4 million to $3.9 million on approximately $88.1 billion to $92.8 billion in revenue, which equates to adjusted net income available to common shareholders in the range of $1.4 million to $1.7 million, or $0.04 to $0.05 per basic and $0.04 per fully diluted share. We would also like to remind investors that our free cash flow is generally higher than our net income, because we have significant non-cash depreciation and amortization expenses flowing through our financial statements as a result of the mechanics of accounting for acquisitions, and the fact that we have minimal maintenance capital expenditure requirements. This remains a very exciting time in the evolution of Radiant, and we remain confident that our growth strategy will continue to bring value for our operating partners, shareholders, and the end customers that we serve. I will now turn it over to Todd Macomber, our CFO, to walk us through our financial results, and then we'll open it up for 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 9 months ended March 31, 2014. In reviewing net income, for the 3 months ended March 31, 2014, we reported net income attributable to common shareholders of $1.137 million on $86 million of revenues or $0.03 per basic and fully diluted share, including a $1.145 million gain on change in contingent consideration. For the 3 months ended March 31, 2013, we reported net income attributable to common shareholders of $882,000 on $72.8 million of revenues, or $0.03 per basic and fully diluted share, including a gain of $675,000 on change in contingent consideration. This represents an increase of $255,000, or 28.9%, over the comparable prior year period. For the 9 months ended March 31, 2014, we reported net income attributable to common shareholders of $2.424 million on $246.9 million of revenues or $0.07 per basic and fully diluted share, including a $1.358 million gain on change in contingent consideration significantly offset by a noncash charge of $1.238 million related to the unamortized OID and debt issuance costs written off in connection with the retirement of the subordinated debt. For the 9 months ended March 31, 2013, we reported net income attributable to common shareholders of $1.306 million on $230.1 million of revenues, or $0.04 per basic and fully diluted share, including a net gain on litigation settlement of $368,000 and another $950,000 gain in changing contingent consideration. This represents an increase of $1.118 million, or approximately 85.6% over the comparable prior year period. In reviewing adjusted net income for the 3 months ended March 31, 2014, we reported adjusted net income attributable to common shareholders of $1.418 million, or $0.04 per basic and fully diluted share. For the 3 months ended March 31, 2013, we reported adjusted net income attributable to common shareholders of $1.482 million, or $0.04 per basic and fully diluted share. This represents a slight increase in $64,000, or 4.3%. For the 9 months ended March 31, 2014, we reported adjusted net income attributable to common shareholders of $4.731 million, or $0.14 per basic, and $0.13 for fully diluted share. For the 9 months ended December -- I am sorry, March 31, 2013, we reported adjusted net income attributable to common shareholders of $3.702 million or $0.11 per basic and fully diluted share, an increase of $1.029 million or approximately 27.8%. In reviewing adjusted EBITDA, we reported adjusted EBITDA of $3.503 million for the 3 months ended March 31, 2014, compared to adjusted EBITDA of $2.988 million for the 3 months ended March 31, 2013. This represents an increase of $515,000, or 17.2% over the comparable prior year period. We reported adjusted EBITDA of $10. 254 million for the 9 months ended March 31, 2014 compared to adjusted EBITDA of $7.651 million for the 9 months ended March 31, 2013. This represents an increase of $2.603 million or 34% over the comparable prior year period. A reconciliation of the company's adjusted EBITDA to the most directly comparable GAAP measure appears at the end of our earnings release. With that said, I will turn the call back over to our moderator to facilitate any Q&A from our callers.

Our first question comes from Jeff Martin with Roth Capital Partners.

Bohn, can you give us an update on On Time Express, how the integration process or leveraging process is there? Are you seeing any increased utilization there and what's your outlook for it?

Sure. The integration is going at -- quick background for those who might not have the benefit of it. So On Time was an acquisition that we made back in October 1 of last year. Their core business, historically was servicing the aviation industry, specifically, and they represented for us a dedicated line haul network, effectively a mini foreign air [ph] Network, for those familiar with the industry. So in acquiring them, not only did we get what we thought was a great acquisition opportunity, but what we saw as a differentiator for us in the marketplace to help expand margin characteristics of our existing business, as well as the differentiator to win new end customers, and also a differentiator to attract additional agent stations to the platform. So that's kind of the background on the question itself. So On Time, the integration is going well. We are steadily getting more and more participation and support across the network, so the trend line is positive on that. As well as On Time, what I'll call as retail business as opposed to its wholesale business, it continues to expand within its industry vertical focus and is continuing to have some incremental success kind of in its own lights. So we still certainly have some work to do in terms of getting more networks and more freight on the network. But the trend line is good. They're developing a very good reputation across the network in terms of what they represent, in terms of price and service as an alternative to some of the traditional nonaffiliated third party carriers that would be available to our stations to select from. And then we remain very -- I guess we would say, bullish about On Time and what it's going to do for us over the longer-term.

Okay. And then could you give us maybe, from a high-level areas of the business that you feel are performing well, areas you feel are somewhat of a work in progress at this point? I know some of the cross-border business has been challenging as of late, and I would imagine the Newark facility was weather impacted in the quarter. Just -- and if you could kind of walk us through the strength and areas that you're working on improving, that will be helpful.

Sure. So well, you kind of touched on a couple of interesting points, that I'll kind of use just to kind of launch from. For those who follow a lot of companies in the space, they -- people would know that most folks just really kind of tough go of it relative to the weather. And what that did along most of the Eastern seaboard, from Boston and Atlanta, I think. And we certainly were impacted by that, as well, or I think our results would have been that much stronger. So we have a combination of March being typically the seasonally slowest quarter to begin with, along with the weather kind of diminished or dampened the quarterly results a little bit. And kind of reflecting back on some of the things that we have been working on and some of the successes, we certainly have made some good progress and what with a, kind of historically acquired company-owned operations of Distribution By Air, which was the Los Angeles and Newark operations. With the acquisition of Marvir in Los Angeles, we were able to integrate the legacy DBA company-owned operations with Marvir and eliminate redundant costs and infrastructure facilities, specifically a drop of $0.5 million a year of run rate profitability to the business. Won't be quite to that extent, but we have a similar opportunity coming up here with Newark. Newark was the legacy corporate back-office for DBA that was set to expire later this year. And so we're looking to kind of right size that facility, and that will definitely be helpful to kind of the overall financial results going forward, just not quite to the magnitude of what we were able to achieve in Los Angeles. Laredo has -- to your point, has softened a little bit. We are seeing a positive trend there, with that kind of reverting back to more normalized results. So in terms of kind of high level schematics, our company owned locations, the trend-line is very positive. We've been putting a lot of focus in on those locations and it's bearing fruit. So we're really pleased there. We have been spending a lot of time identifying kind of some of the key sales folks, bringing them in for some sales training, getting them kind of dialed up and focused on -- kind of the on time capabilities and what the line haul network would represent for us in terms of the differentiator. And really, trying to get kind of that leadership team organized to help drive organic growth. And we're starting to see some positive results out of some of those initiatives, as well.

And then last question, Bohn, on the acquisition pipeline. How do you feel the pipeline is at this point, how does that compared to recent past?

It truly is an exciting time. We probably -- well, not probably, we definitely have more financial flexibility today than we've ever had in the history of the company to go execute our strategy. And we have, as robust, if not a more robust pipeline than we have ever had. Including an increasing number of, I guess what we would call reverse inquiries, with folks actually reaching out to us to open up the dialogue. So we have active -- as you know, we've maintained any number of conversations at any point in time, and that remains true today across kind of all the categories. In conversations, there's opportunities to convert agent stations to company-owned stores, there's opportunities to attract agent stations away from competitors' networks, as well as potential opportunity to do some larger acquisitions. So we're actively looking across all of those horizons and expect to remain acquisitive here in the quarters ahead.

Our next question comes from Marco Rodriguez with Stonegate Securities.

Just kind of wanted to follow-up on the OTE acquisition in question earlier. Obviously, you've had it here now for a couple of quarters. I am just kind of wondering if margins are kind of coming in as you expected for them?

I think over the longer term, yes. Near-term, there's been a little compression in margins. And as they have on-boarded additional capacity in our targeted trade-ins to support our network freight in addition to their, I guess, what we'll call, their retail business. So I think over the very shortest term, there's been a modest dip at On Time, but that's just a timing -- we view that to be more of a timing issue as we match capacity and demand, as opposed to anything systemic.

Got it. And that kind of dovetails to my next question. I was looking at your pro forma numbers that you published in your Q that sort of capture the acquisition FX. And it looks like your EBITDA margin as a percent of net revenues for Q3 declined sequentially in year-over-year in the quarter while revenues were kind of flat, or rather did decline sequentially and relatively flat year-over-year. I am wondering what might have been kind of driving that issue on a year-to-year basis?

I'm going to let Todd deal with that question. I'm not in the position to look at the number this morning than I am. So...

I'd have to -- I don't have a good answer right now, Marco, I'm sorry.

Okay, I'll follow-up with you afterwards.

Marco, I can give you a little bit of color on it. And that is, as we think about On Time, one of the things that they did in response to the opportunity was add some additional shifts. They had to change their cutoff times to be able to effectively hold trucks to capture freight. So their trucks basically would leave a given location later in the evening that historically had, so they had a little bit of incremental costs of getting configured to support the wholesale business opportunity growth from the forwarding network. But again, I view that to be more of a kind of a timing issue as we balance kind of demand and capacity as opposed to anything systemic. We continue to kind of march up the curve, so to speak. I think we were -- adjusted EBITDA, as a function of net revenues up, my recollection was at 14.7% this last quarter. And I think will continue to kind of March up that curve and the next stop, we would hopefully will be able to consistently share 15-plus percent type ratios here in the coming quarters and continue to build from there.

Okay, perfect. And then last quick question, I'll jump back in queue. But just kind of want to circle back around into the new organizational structure that you guys implemented back, I think it was July of last year, to help drive organic growth. Can you talk a little bit about how that's shaping up versus your expectations? And then what sort of incremental net revenue growth are you expecting this actions to yield?

Okay. And again, just a background for folks on the call. In an effort to kind of dial up and focus on the organic growth, as well as to support just a larger organization, we rolled out a new structure in July of this last year where we have what our 4 regional VPs that effectively have and our accountability is responsible for driving growth within the regions; that's the East, Central, West, and Mexico markets. And we're getting good traction. It certainly takes time, and it's an investment of effort and resources. But we certainly have a number of kind of case studies or data points where we've been able to kind of in collaboration with the regional VPs and the On Time sales folks and the local station manager, to go into accounts where historically, we couldn't get an audience, or historically, we may have the audience, but weren't getting incremental business. Those dynamics are changing. So as we had -- we're still working through our budget process for the next fiscal year. But we're kind of internally, we're targeting -- call it 8% organic growth type numbers at the gross margin line item. That's what we hope through these efforts. And kind of at the regional VP structure.

David Campbell with Thompson Davis and Company.

Bohn, just wanted to ask you, if you could explain how you did so well in revenues? It seems like you're March quarter revenues were $3 million to $4 million -- gross revenues, $3 million or $4 million more than you had assumed a few months ago. What happened? You did so well.

Todd, will give more precise. Certainly, one of the factors is that we'll come into that would be the Philadelphia acquisition. So we only had 1 month for the benefit of Philadelphia, but that's going to be a meaningful station for us. And that certainly would be at least 1 delta to the numbers.

I could add, Bohn, absolutely that's part of the biggest driver in what -- we didn't contemplate when we put together as we report Q2.

Okay. And what about On Time's revenues in the quarter? The $2.3 million of net revenue both year-to-year, I guess most of that was On Time?

Yes, most definitely, it's On Time. So we're seeing a slight uptick [indiscernible] some of the agencies -- a lot of the stations. But the vast majority of that uptick year-over-year is definitely going to be On Time. So we have them there.

Right, right. And the gross margin was down from the second quarter. That's probably On Time because they have lower gross margins.

Yes, it's going to be On Time and a little bit of it was Philadelphia acquisition. And in the year-ago period, we had some really strong project work that had very, very high margins. So it kind of inflated the baseline to begin with. But -- it's kind of those 3 factors.

Right. And what about the process that you have underway to increase the gross margin of your domestic stations by moving more of their freight on the On Time network, is that process continuing or where do we stand on that?

Yes, that will be a perpetual process as we continue to educate and combine the On Time network itself, but really just kind of communicating out and the network gaining confidence and kind of the service levels and execution capabilities of On Time. But we're literally measuring that every week and monitoring effectively every calendar freight, and if it could have gone on the On Time network, and didn't, getting a deeper understanding of that down to the individual associate desk level on the folks responsible for those routing decisions. To make sure that we got a truck running in a trade lane and it has capacity on it, and we have freight, that that freight find its way onto the truck.

There's still a long-term plan to increase your domestic gross margins?

That is correct.

And what about your conversion of agents to company offices, any news on that?

Nothing to share in specifics, other than to acknowledge that it remains one of our acquisition thematics, and we're certainly talking to a couple of different locations about that opportunity.

Okay. And the preferred dividends on the P&L were not on the cash flow statement. Is that -- why is that?

It's really a memo type of line item that we have to add in for GAAP purposes, because for all intents and purposes, it was earned and not paid. We did not pay that until the end of April, so it was kind of a GAAP type line item that we have to layer on for the financial presentation purposes only.

But it will be in the second quarter?

Correct. Correct It just hasn't been a player as of the quarter.

And what was the new $3.1 million payment to shareholders, what was that, in the third quarter?

$3.1 million.

$1.3 million.

That's going to be some of the earn-outs that -- it was partly On Time working capital adjustments. Part of the things that we put -- that -- as part of the negotiations, we end up having to -- there's a threshold that we anticipate for working capital. If that working capital, as of the acquisition date, is higher or lower, we end up having to pay that money back to the former shareholder. And his working capital was higher than the target threshold.

Okay, good. Okay. And the provision for bad loss -- loan losses that was down, I guess that's just temporary thing. And your projections for growth in the fourth quarter, again, higher than previously. I guess that's because the Philadelphia acquisition primarily?

Yes, Philadelphia is a big piece of it. Of course, we didn't have On Time in the year-ago period. So that's -- yes, that's the biggest driver is right there.

And that'll largely be an International business?

The Philadelphia?

Right.

That's about 50-50, Dave.

50-50?

Yes.

[Operator Instructions] Our next question comes from Mark Vinske [ph].

Just to clarify. The organic revenue growth for the quarter year-over-year was pretty minimal, is that correct?

Correct.

Okay. And do you have any expectations for organic revenue growth for calendar year 2014? Do you expect any kind of baseline of organic growth, or do you think it will be primarily through acquisition?

We're still kind of working through to finalizing our budget and forecasting for next year, but we're certainly trying -- we're certainly organizing and holding a conversation internally with the RVPs trying to get them organized to execute and deliver against the plan that would deliver the 6% to 8% type organic growth, net revenue or gross margin in the business. So we have a kind of locked that down, but that certainly where we're trying to drive the organization. It's -- kind of coming back to your earlier point as well, while it's certainly true that organic growth was relatively flat, I think, as in some of my prepared comments a little earlier, part of that was driven by the horrific weather that took place in the Northeast. So I certainly don't want to use that as the dog-ate-my-homework conversation, but we're having better success in the field than what that -- what the quarterly results might suggest on the organic side.

Okay. So can you explain the dynamic with the relationship with rail traffic, because rail traffic, obviously, was snarled because of the cold in calendar Q1. And there's been discussion that some of that spilled over to trucking, so that would have been a positive for trucking. But you're saying you didn't see that in your business.

Yes, in terms of modality, we do, today, we do very, very little intermodal. Most of our stuff is more high value, high velocity, time definite supply chains. Which almost by definition, take this away from the intermodal side of things. And even on the trucking side, our -- just to kind of hit it again, we're much more -- we do very little truck brokerage type work today. Our stuff is really time-definite, expedited services. And so we really don't necessarily get caught up in mode shift in rail versus truck; although we're kind of ultimately share in that experience by expanding the tightened capacity, but that's not necessarily the same carrier base that we're working towards.

Okay, great, understood. And then next on the cross-border traffic, specifically with Mexico. With the ensuring phenomenon and the discussion that, it's -- from a logistics standpoint now, in terms of processing paperwork and so forth, going between countries, it's becoming easier. Wouldn't you expect that business to have some decent growth in calendar 2014, or are there some other kind of things going on behind the scenes there?

No, we would. We just got the macro trend of people using the term, near-sourcing and what's going on with Mexico specifically, we think that should, and hopefully will, continue to deliver solid growth in the organization.

Okay, and then lastly, in terms of the capacity constraints within trucking and the driver shortages, is that ultimately sort of a wash for you in terms of increase revenue and increase cost of goods sold? Or does it flush out differently?

That's a very interesting question. I'm going to give you a couple of potentially counterintuitive responses to that. And that is, for our domestic services -- or let me back up set the stage here just a little bit. Our network is still more heavily weighted toward the agent stations than the company-owned stores. And for the agent base stations and for domestic services, we actually retaining negotiated percentage of the gross build out. Which is a long way of saying that it's the individual agent stations that bear the risk reward margin expansion and contraction on the domestic service. So if, in fact, there's a tightening capacity and rates get taken up, we will actually get a net benefit of that with the agent stations bearing both. So that's kind of one of my two responses. And the second is that we view -- hours of service, tightening capacity, driver shortage, all of those are very real things facing our industry. With that said, we believe that the On Time network represents, at least in part, a competitive response to that. With our dedicated line haul network, we believe we're going to be in a relatively stronger position to the more traditional freight forwarding networks that we compete against kind of day to day because of the network that we enjoy through On Time.

So in other words, you don't see major volatility in your gross margin related to this issue?

I have to kind of think through that. I don't think we'll see major volatility in the ultimate earnings, whether it shows up as a gross margin line item, but we may get back -- in terms of the relative proportion of agent commissions paid out, I think that's where we may see it.

At this time, I'd like to turn the call back over to Mr. 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 that we've 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 opportunities to grow our business organically, leveraging the capability to On Time's dedicated line haul network to strengthen existing and expand new customer relationships, as well as help us attract additional independent agent locations to our platform. And by completing acquisitions of other companies that bring critical mass from a geographic standpoint, incremental purchasing power and/or complementary service offerings that will benefit from the broader network. Thanks for listening, and your support of Radiant Logistics.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation.