Radiant Logistics, Inc (RLGT) Q1 2021 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 First Fiscal Quarter ended September 30, 2020. 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.

Thanks, Toren. Good afternoon, everyone, and thank you for joining in on today's call. We are very pleased to report another quarter of solid financial results as we continue to navigate the challenges presented by the COVID-19 pandemic. We reported revenues of $175.9 million and net revenues of $46 million for the quarter ended September 30, 2020, which were down on a comparable prior year basis, largely as a result of the impacts of the COVID-19 pandemic. Fortunately, however, through a number of cost savings and other strategic initiatives, we were able to manage our operating costs to mitigate this negative financial impact and keep our bottom line largely intact. For the quarter ended September 30, we also reported net income of $3.1 million, adjusted net income of $6.5 million, and adjusted EBITDA of $9.2 million. In addition, we also continued our positive trend with our adjusted EBITDA margins, which were up 270 basis points to 20.1% from 17.4% for the comparable prior year period. Also, over the same period, we generated $13.4 million in cash from operations finishing the quarter with net debt of only $10.4 million. The pandemic, as unfortunate as it is, has reinforced the benefits of our non-asset based variable cost model, diverse service offerings, and low debt levels. Although the overall demand for transportation services has been significantly impacted, we continue to see slow and steady improvement across many industry verticals that we serve along with a broad-based tightening of capacity as we head into peak season. With the diversity of our customers and service offerings, the strength of our balance sheet, the scalability of our technology, and our extensive carrier partner network, we are certainly optimistic about the economy, its ultimate recovery, and the opportunities that it will present for Radiant. In the months ahead, we will continue to closely monitor how we and the economy are progressing and look forward to re-engaging in acquisition opportunities and/or our stock buyback activities as the opportunities present themselves. With that, I'll now turn it over to Todd Macomber, 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 three months ended September 30, 2020. For the three months ended September 30, we reported net income of $3,088,000 on $175.9 million of revenues or $0.06 per basic and fully diluted share. For the three months ended September 30, 2019, we reported net income of $3,235,000 on $200.5 million of revenues or $0.07 per basic and $0.06 per fully diluted share. This represents a decrease of approximately $147,000 over the comparable prior year period or 4.5%. For the three months ended September 30, 2020, we reported adjusted net income of $6,520,000. For the three months ended September 30, 2019, we reported adjusted net income of $6,484,000. This represents an increase of approximately $36,000 or approximately 0.6% or less than 1%. We reported adjusted EBITDA of $9,226,000 for the three months ended September 30, 2020, compared to adjusted EBITDA of $9,678,000 for the three months ended September 30, 2019. This represents a decrease of approximately $452,000 or approximately 4.7%. With that, I will turn the call back over to our moderator to facilitate any Q&A from our callers.

Thank you. The floor is now open for questions. Our first question comes from Jason Seidl with Cowen. Please state your question.

Thank you, operator. Hi Bohn, hi Todd. Bohn, could you provide some insight into how demand develops throughout the quarter across each of your divisions and how we should approach modeling your fiscal year second quarter?

I'll start and when it gets hard, I'll pass it over to Todd. We'll begin in Canada, where they have performed well throughout the entire cycle due to the various industry verticals they serve and their success in implementing our bundling strategy of combining value-added warehousing services with our core transportation offerings. This approach continues to yield positive results in Canada. As we mentioned in our prepared comments, and as you may know from your experience in the transportation sector, capacity has been extremely tight recently. This started on the West Coast and gradually spread across the rest of the U.S. Clipper has benefited from this tight capacity. Recently, they have started to excel in intermodal services. In the past, the asset-based carriers were aggressive with their pricing during softer markets, taking freight they typically wouldn't handle, which negatively impacted Clipper. However, as capacity tightens, prices in intermodal and trucking have become more disciplined, and freight volumes from customers that previously utilized Clipper are returning to us. In forwarding, which constitutes the largest segment of our business, certain verticals like cruise lines and retail store fixturing continue to face challenges and will likely be among the last to recover. However, many other sectors we engage with, such as PPE, life sciences, and other time-sensitive activities, are thriving in this environment. This provides a general overview of how we view the upcoming quarters. I'll now hand it over to Todd and advise him to take a cautious approach.

Thanks. As we analyze operating expenses, it's clear that things are starting to improve. I expect the percentage of expenses relative to revenue to remain consistent with what we are experiencing in the current quarter. This ratio will improve as we continue to bring on new stations. You might recall that we added a couple of stations in February, which influences other areas. Personnel costs are likely to align more closely with the levels seen in Q3. We implemented several cost reductions and managed expenses in Q4, which also had a slight effect in Q1, but I anticipate that personnel costs will resemble those of Q3, before the COVID impacts.

Before you move on, I want to highlight that we have been intentionally reinvesting in our sales team to drive organic growth. We've made several new sales hires during this quieter period. As a result, we will incur some additional costs linked to this initiative, but we are hopeful that over time, it will lead to higher gross margins as a return on our efforts.

Okay. We are closely monitoring SG&A expenses, and I anticipate that they will increase similarly to Q3 as we move back to the levels we experienced previously. Regarding depreciation and amortization, I expect those figures to remain relatively stable from quarter to quarter, and they are key components in our financial modeling. Interest expenses are projected to decrease slightly as we continue to reduce our debt, leading to somewhat lower interest payments.

I don't want to ask, I didn't want to ask about that, but also want to make sure how should we think sort of your net revenue margin? Are things slowing down on that sort of buy versus sell? Back and forth, you guys always deal with, is 2Q going to be somewhat easier than 1Q?

It's difficult to predict, but I believe the current situation will likely continue for the foreseeable future. As Bohn mentioned, capacity is constrained, and I suspect this will persist for some time. Therefore, I expect Q2 to unfold in a manner similar to what we are currently experiencing. Bohn, do you have a different perspective?

No. I believe these margins will be stable through the peak, certainly in the upcoming quarter, which is my general expectation. After that, we will see what happens following the traditional holiday push. However, for the next quarter, I anticipate the current environment will persist, at least for this period. Perhaps this trend will continue beyond that, depending on various factors such as global trade and political changes that will ultimately influence the situation. Additionally, the speed at which the asset management teams begin to invest in new transportation assets will also play a role in this.

How should we consider your balance sheet? It has clearly been strengthening, as you've paid down more debt this quarter. What leverage numbers are you aiming for, not including acquisitions at this time?

Well, let's start on a positive note. We're close to being effectively debt-free, which is remarkable considering the economic challenges we've faced and our ongoing efforts to reduce our debt. Our balance sheet looks really strong right now, and I'm proud of what we've accomplished in that area. It gives us financial flexibility and the opportunity to pursue deals if they arise. Typically, we would consider our normalized leverage to be around 2.5 times debt to EBITDA, and while we could increase that if necessary or if the situation requires it, that's our general perspective on it.

Okay, fair enough. I'll turn it over to the next guy. And I appreciate the time as always, gentlemen.

Thank you.

Okay. Our next question comes from Mark Argento with Lake Street Capital. Please state your questions.

Hey, Bohn. Hey, Todd. I wanted to discuss the current M&A environment. Are you finding more opportunities in light of the current conditions, especially with some smaller companies? Could you share some insights on the chance to reinvest capital? Additionally, I wanted to address the significant topic of vaccines and the potential for your involvement in distribution as it becomes available.

Yes. Before COVID, we were looking to revive our M&A initiatives and actively build pipelines across all three of our platforms. We aimed to establish a pipeline for Canadian M&A, U.S. brokerage M&A, particularly for Clipper, as well as for our forwarding operations. These have been the three main areas guiding our M&A strategy. We plan to re-engage in this process. The current environment presents an interesting backdrop for M&A since many companies have unusual trailing 12-month results, either significantly down or unexpectedly strong. When considering normalized earnings power, negotiating deals with prospective sellers will require careful navigation. However, I believe our earn-out structure will facilitate completing transactions as we identify suitable opportunities. Moreover, it's worth emphasizing that I can't see where else we could acquire a business with $35 million to $40 million in EBITDA at a multiple of 7 or 8 times with no integration risk, and that company is RLGT. Therefore, while M&A remains an appealing avenue, we will stay grounded in our trading multiples as we contemplate capital allocation, which we see as a viable alternative for deploying capital.

Do you have any updates on the vaccine or any other initiatives, particularly regarding your work with the government?

At this time, we have nothing specific to announce. We have been actively engaging with FEMA and project Airbridge, and we maintain a strong relationship with them. It would be too early to determine what opportunities might arise. The exact role of FEMA is still uncertain, and different teams will be implementing various strategies. I believe that we will find a way to be involved, whether directly or indirectly. For example, the distribution of vaccines will necessitate a significant amount of temperature-controlled equipment. Even a request for temperature control solutions will influence pricing, and Clipper is involved in that sector. So, even if we don’t directly take part in vaccine distribution, Clipper will likely benefit from the related temperature control solutions. There are many companies pursuing these opportunities, and we are determined to ensure we seize our chances to participate. This involvement could include direct work with the vaccines or indirectly through the logistics and kits necessary for administering the vaccines and ongoing virus testing.

Thank you.

Okay, our next question comes from Mike Movement Capital. Please place your question.

Well, I got to say, it's amazing when I take a step back and think about the progress that Radiant has gone through. If I remember trying to think about this today, remember correctly back in 2014, we were breakeven-ish on an adjusted earnings basis. Now we're at double digit EPS per quarter, roughly, $0.10, $0.15. Back then we had more than I think $55 million or $60 million of net debt. And now we're approaching zero. If I calculate it correctly, I was looking at this, we're a lot higher than that right now. But if I normalize it, maybe $25 million plus of free cash flow run rate and our stock is pretty much in the exact same spot. It's amazing to me when I look at the progress that you've made on the balance sheet, on the earnings, and the fact that it hasn't been discovered yet. Now, we put that free cash flow back into stock buybacks at these levels. There's a dramatic shrinkage in outstanding shares that can happen at an extremely rapid and accretive pace. You know, you mentioned, you're comfortable at two and a half times debt to EBITDA, if you layered that debt on there, that's for practically half of our market cap. Yeah, it's hard to see any kind of acquisition out there that equals what the creativity of Radiant. How, if you don't see those acquisitions, how rapidly in 21 and 22? If the stock stays around here, would you be willing to deploy the capital back into the stock?

Well, that's you know, how do you eat an elephant one bite at a time? So, I think we'll take a measured approach and I guess, let me back up and say, we're going to continue to monitor closely the health of the economy and our health and we don't want to take anything for granted, or be cavalier in our approach to the market in our own circumstance. So we will continue to be measured in our approach. And so as we would think about, we always think about stock buyback and deployment of capital, in part in the context of opportunity costs and make sure that we don't kind of shoot all of our bullets and not continue to have some financial flexibility to be able to take advantage of a really interesting M&A opportunity should have come along. So you know, I don't think you'll, I can't envision us doing some tender offer as an example and buying in a bunch of our shares in a single whack. I think we'll take more of a quarterly approach and kind of pick away at it over time, like we had begun to do pre COVID and just kind of work through it that way.

Like, look at these levels, you can do a lot of picking away at with just the free cash flow, forgetting about taking on any leverage. You know, looking back, it's incredible. I guess what you guys have done through these last two quarters with corona virus with the cost savings. Looking at the flip side, I know everyone's thinking about now we've participated with FEMA, PPE movement, vaccine movement that's great upside potential. But really looking on the opposite side of this, how much of our business was exposed to certain areas of the economy that are going to really get a push from the opening up of the full economy. A cruise lines, trade shows, storefront edge, I got to believe that whether it starts to open up in six months, that that's going to be a dramatic tailwind for us. It's been amazing how you've stemmed the losses, and you actually come out of this looking phenomenal. But what's the tailwind as we look ahead? You know, two quarters from now, and how much I guess damage has been done from the absence of those markets?

Yes. I don't think we want to delve too deeply into specifics. However, generally speaking, in the early stages, when we were assessing the impact on our business, we experienced a 30% to 35% decline during our toughest weeks or months. We've likely recovered at least half of that. Overall, there may still be a 10% to 15% drop in our gross margin that hasn't yet been restored, due to weaker performance in certain categories. We need to be cautious about pushing that number all the way to the bottom line since much of that business is managed through our agency station locations, which provides a natural offset due to operational station commissions. In summary, there appears to be a 10% to 15% restoration in gross margin as conditions improve.

Excellent. Another one, I'll just throw out there. Going through this and I'm sure it's become worse through it. Most of our competitors are highly levered. So if I remember correctly, four or five to some are seven times levered. We've gone the opposite way through this, right, and then gone to basically close to get into be debt-free. Have you seen any agents or some of the smaller guys looking to break away and knocking on our door for M&A? And on the flip side, customers that are looking at us and saying, while Radiant, the strong, the financially strong and sound player right now, we're going to start moving business to Radiant away from the higher leverage players.

Again, without getting too granular, certainly some of those conversations are happening, both at the station level and at the customer level. But at the same time, I would say it can be difficult to affect some of those transitions. If for example, an existing target customer has a policy that they're not accepting visitors. So sometimes it's hard to get that face-to-face meeting that would help enable a new opportunity to occur. But those things are slowly opening up, right, we're slowly getting more and more of those meetings to kind of happen in real time and on a personal basis. And we certainly, it's been kind of an ongoing theme, I think, if we kind of look over time, and that add our progress, kind of the kind of the opportunities for us to participate in what I'll call a larger, chunkier type RFPs and to win larger, incremental pieces of business continues to improve. And so we're and I think that's reflective of a lot of things our size, our scale, people becoming more familiar with us in our financial strength, breadth and depth to service offering and so on.

Alright guys, look, it's a phenomenal job that we've done. It's an impressive last couple of quarters. And it's amazing that we're still at this valuation with the progress you've made. But, you know, if you take advantage of it with buybacks, it's an opportunity out there. So congratulations.

Thank you. Our next question comes from David Campbell from Thomson Davis & Company. Please state your question.

Thank you for taking my question. Is there anything you can say to help us understand the September quarter? There is a revenue change for each of the months, July, August, and September; is there a noticeable difference in how much it was going down in those months, relative to September was relative to July, for example?

No, that's not something we get particularly detailed on a month-by-month basis. But it is fair to say that there is a steady increase month to month over the course of the quarter.

Sequential increase, you mean from month to month?

Yes.

Well, that's certainly encouraging. And the December quarter will be another quarter when you have comparable numbers compared to the September quarter, but maybe not. Maybe December will be up from up from December those usually seasonally, it's not a good quarter. And you mentioned expenses going up with the increase in revenues is that, you can't take advantage of the decrease in salaries and related costs that's not sustainable and when you get into more revenues.

But we, when kind of in the pick of it, we did some pretty dramatic cost reductions across the board, just to make sure we were durable through the pandemic. You know, as a reminder, I myself took a 50% pay cut and the leadership team, everybody took a meaningful pay cut, it was a proverbial passing of the hat to make sure that we were durable through what was the unknown at the time. And as we're finding ourselves on better footing, we're restoring those compensations for folks where we can. So it's as much that as anything else, in terms of us kind of acknowledging there's going to be an increase in payroll.

Right. Well, certainly nice to have that with its matching up with the increase in revenue. So we'll be watching that pretty closely. I think you probably will do, obviously. Keep that situation, and SG&A. In terms of SG&A are there any changes in SG&A that you can sustain at lower levels when the revenue goes up?

We certainly have had some kind of facility rationalization, I'm thinking of an LA in particular, where we've been able to do some cost takeout. So there will be some level of kind of permanent improvement, if you will, on the SG&A line item as we made some kind of structural changes within our 40 segment around there.

Okay, that's great. Thank you very much. Yeah. Let someone else have it.

It looks like that was our final question.

Thank you. Let me close by saying that we remain very bullish on our prospects here at Radiant, and the scalable, non-asset-based platform that we've built. With the diversity of our customers and service offerings, the strength of our balance sheet, the scalability of our technology and our extensive carrier partner network, we are certainly optimistic about the economy, its ultimate recovery, and the opportunities that it will present for Radiant. At the same time, we remain patiently persistent in our pursuit of our long term vision to leverage our multi-brand strategy and scalable back office infrastructure to support further consolidation in the marketplace, which we believe over time, we'll continue to deliver meaningful value for our shareholders, our operating partners, and the end customers that we serve. Thanks for listening and your support of Radiant Logistics.