Radiant Logistics, Inc Q3 FY2023 Earnings Call

This afternoon, Bohn Crain, Radiant Logistics' Founder and CEO; and Radiant’s Chief Financial Officer, Todd Macomber, will provide a general business update and discuss financial results for the company's third fiscal quarter ended March 31, 2023. 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 been in the past and may be 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. Over to you.

Thank you. Good afternoon, everyone, and thank you for joining today's call. Let me start by saying it's never dull in freight forwarding. The volatility that we have seen in the market as we have come through the pandemic is unprecedented. As you can see from the release, our results for the March quarter were heavily impacted by the rapid softening of the freight market that has occurred in recent months. These quickly evolving market conditions have negatively impacted not only our results but also the year-over-year comparison to our record results from the prior year period. While our core domestic forwarding services have been relatively durable, some of our smaller service lines, including ocean imports, intermodal and truck brokerage operations have been particularly hard hit as a result of the dramatic fall off from the robust operating environment that we experienced last year. The confluence of shippers continuing to manage through elevated inventories, reduced imports, and a slowing economic environment is having a cascading effect across virtually every mode of transportation, where the balance of supply and demand has shifted from a tight market a year ago to one that is now oversupplied. We do believe we are at or near the bottom of the cycle and would expect markets to begin to find their way to more sustainable and normalized levels over the balance of calendar 2023. While our comparative year-over-year numbers are down significantly from the historically strong freight market created by the pandemic and associated supply chain disruptions, our results for the quarter ended March continued to trend meaningfully ahead of our historical financial results from the pre-pandemic era. I view the fact that we generated over $11 million in adjusted EBITDA in our historically slowest seasonal quarter in what everyone recognizes as a very typical market environment as a very positive indicator for Radiant and our prospects as we come through the cycle. It is worth noting that we are in the strongest financial position in the history of the company. And having generated over $76 million in cash from operations through the nine months ended March 31, we remain virtually debt-free and continue to make good progress with our stock buyback having acquired $5 million of stock through the nine months ended March 31 and another $4.2 million of our stock between March 31 and May 5. Our disciplined approach to capital allocation and low leverage continues to serve us well. And we believe we are well positioned to navigate through this slower period as shippers work through their remaining excess inventories and we find our way back to more normalized market conditions. Looking ahead, we also expect to continue our balanced approach to capital allocation through a combination of agent station conversions, synergistic tuck-in acquisitions, and stock buybacks. Through this approach, along with our organic growth initiatives, we will continue to scale our business, leveraging our best-in-class technology and extensive global network, which we believe over time will continue to deliver meaningful value for our shareholders, operating partners, and the end customers that we serve. With that, I'll turn it over to Todd Macomber, our CFO, to walk us through our detailed 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 three and nine months ended March 31, 2023. For the three months ended March 31, 2023, we reported net income attributable to Radiant Logistics of $4,183,000 on $244.2 million of revenues or $0.09 per basic and $0.08 per fully diluted share for the three months ended March 31. For the three months ended March 31, 2022, we reported net income attributable to Radiant Logistics of $13,567,000 on $441.3 million of revenues or $0.27 per basic and fully diluted share. This represents a decrease of approximately $9,384,000 of net income over the comparable prior year period, or 69.2%. Our adjusted net income we reported $8,222,000 for the three months ended March 31, 2023, compared to adjusted net income of $16,056,000 for the three months ended March 31, 2022. This represents a decrease of approximately $7,834,000 or approximately 48.8%. Adjusted EBITDA, we reported $11,560,000 for the three months ended March 31, 2023, compared to adjusted EBITDA of $22,573,000 for the three months ended March 31, 2022. This represents a decrease of approximately $11,013,000 or approximately 48.8%. Moving along to the nine month results. For the nine months ended March 31, 2023, we reported net income attributable to Radiant Logistics of $17,452,000 on $853.3 million of revenues or $0.36 per basic and $0.35 per fully diluted share. For the nine months ended March 31, 2022, we reported net income attributable to Radiant Logistics of $27,715,000 on $1.08 billion of revenues, or $0.55 per basic and fully diluted share. This represents a decrease of approximately $10,263,000 over the comparable prior year period, or 37%. Adjusted net income reported was $32,845,000 for the nine months ended March 31, 2023 compared to adjusted net income of $39,057,000 for the nine months ended March 31, 2022. This represents a decrease of approximately $6,212,000 or approximately 15.9%. Our adjusted EBITDA reported was $46,434,000 for the nine months ended March 31, 2023, compared to adjusted EBITDA of $54,534,000 for the nine months ended March 31, 2022. This represents a decrease of approximately $8,100,000 or approximately 14.9%. With that, I will turn the call back over to our moderator to facilitate any Q&A from our callers.

Your first question is coming from Jacob Stephen from Lake Street Capital.

Jacob is on for Mark today. Thanks for taking my question. So maybe I just want to kind of hone in on your visibility into this path to normalization. How much visibility do you guys have and maybe what does that look like as we enter into your fiscal '24?

I'm sorry, Jacob, one more time as we look into what? I'm not sure I caught your question.

Yes. Sorry, just as we look into your next fiscal year here, crossing into June and the September quarters, what does that path to normalization kind of look like?

I think we hinted at this during our last call; the situation is always changing. We had a strong fiscal year end last year with over $80 million in EBITDA. However, the circumstances have shifted back in a significant way as we manage our inventories and navigate the slowing economy, which we are all aware of. Addressing your question directly, we're all trying to understand what the new normal will look like and how it will affect us and the economy as a whole. We estimate that a normalized run rate for our business will be in the range of $50 million to $60 million as we work towards establishing our view of normal.

Okay. That's helpful. Thank you. Maybe just kind of looking at the M&A environment overall. Have you guys seen your pipeline fill up with potential M&A targets or are you guys kind of taking a wait-and-see approach as you kind of just discussed as you find out kind of what the new normal is? I'm just wondering what kind of…

We are continually seeking out deals that make sense. Our perspective on the available opportunities has remained consistent. We believe there is a natural pipeline of potential acquisitions as we assist our current agency stations with their exit strategies when they are ready. We refer to these as agent station conversions, which carry no integration risk since they are already part of our system for those familiar with our company. We recognize the aging of our agent station owners, who will eventually reach a point in their lives where they consider their exit strategies, and we are prepared to support them in that transition. Given that no one is getting younger, we anticipate the frequency of these occurrences will increase over time, resulting in margin expansion and improved EBITDA as a function of gross margin. Concurrently, we are also looking for standalone tuck-in acquisitions that would complement our business, whether in our core forwarding operations, our brokerage intermodal business, or supported by our Canadian platform. We have multiple platforms available for acquisitions. Regarding stock buybacks, our shares continue to trade below what we consider fair value. As we consider capital allocation, we will weigh acquisition opportunities against the option of buying back our own stock. Currently, I am not aware of any non-asset-based 3PLs with an EBITDA run rate of around $60 million that are available for purchase at a 6x multiple without integration risk, making it an appealing option. We believe this is often the best use of our capital, which is why we have accelerated our buyback rate to about $5 million per quarter recently. We anticipate this trend will continue alongside our search for acquisitions. Our general strategy involves using half of our free cash flow for stock buybacks and the other half for pursuing acquisitions. While this may not be reflected precisely on a quarterly basis, this is our overall approach to the market. If a larger or more appealing opportunity arises, we will reconsider this strategy, but this is the framework guiding our decisions.

Your next question is coming from Elliot Alper of TD Cowen.

I want to start on freight forwarding. I know you touched on it briefly in the prepared remarks. But if you could talk about a little bit between the difference in the domestic and international businesses in the quarter?

Certainly. Our core business focuses on domestic forwarding, specifically time-definite and expedited forwarding across North America. This segment has shown remarkable durability through the economic cycle so far. When we evaluate our service lines, domestic forwarding remains central, while international forwarding—generating several hundred million dollars—has been more affected by the current economic conditions, especially ocean freight compared to other areas. Historically, ocean freight was our smallest service line, but during the pandemic, we saw a significant boost due to supply chain disruptions and port challenges. This surge in ocean services provided us with an excellent opportunity to participate in the market, resulting in strong cash flow generation and enabling us to reduce leverage. Consequently, our balance sheet is in the best shape it has ever been. While our year-over-year numbers are down, we should note that our figures for March this year are considerably higher than those from March 2019, which was the last pre-pandemic comparative quarter. Overall, we are progressing well compared to our historical performance for the March quarter, and during this unusual period, we amassed substantial cash flow, which we utilized effectively for reducing debt and stock buybacks.

Now, that's helpful. Thanks for that. I guess, maybe just following up on the international side, are you seeing anything noteworthy or any color on kind of the China reopening side?

I believe we are starting to see some positive indicators, but we still have a long way to go. While we are cautiously optimistic, we do not expect to return to last year's levels regarding ocean rates and similar metrics. However, we are hopeful for a return to a more normalized environment, whether that happens this year or next. Our focus will be on the pace of that recovery.

Your next question is coming from Mr. Jeff Kauffman from Vertical Research Partners.

Well, first of all, congratulations in a challenging operating environment. I want to ask two questions, if I can. One kind of general market and one a little more financial specific for Todd. Bohn, I'm just kind of curious, we all talk about normalization and kind of where we're going back to and nobody is really sure. But I'm just kind of curious, your view, as the floodwaters are receding here, and we're going back to some semblance of normality, I'm just kind of curious how the coastline looks different to you? Whether it's industry-specific, or product specific, what's different on the other side of normalization now from where we started?

It will be interesting to observe the situation. There is certainly increased sensitivity regarding sourcing strategies in Asia, with discussions centered around nearshoring and possibly relocating operations to Mexico. However, even if these strategies are pursued, the transition will not happen overnight; it will take time to develop fully. Additionally, while some may want to diversify away from Asia, that doesn’t necessarily mean a complete exit from the region, which seems unlikely. Although some companies might make that move, overall, I don't expect a significant shift in the opposite direction. This is definitely an area worth monitoring to see how actions align with discussions, particularly whether more manufacturing will return to the U.S. That would be a considerable advantage for us, aligning well with our domestic forwarding operations. Overall, those kinds of developments would be beneficial for us if they materialize.

Okay. And then more of a detailed question for Todd. This was one of those rare quarters where earnings looked great and EBITDA looked a little light relative to what we were hoping for. And the source of it was the D&A part of it, which was a couple of million dollars less than the run rate you'd had in the previous couple of quarters. Could you talk a little bit about that?

Sure. We basically wrote off some trademark names. We have been converting stations from their previous branding to Radiant stores. When we acquired those companies, we kept their names for a period of time. As we transitioned them to Radiant, which takes some time, we needed to relabel trailers and other items. This process involved writing off the trade names linked to the conversion to the Radiant brand.

And apologies, I'm just going through the release as we speak, but where would that write off have shown itself?

Well, it's in the amortization. It's the amortization of the trade gains.

Yes. Right, right. So the D&A is less.

The D&A line exactly.

Hi, Todd. Hi, Bohn. When we compare 2019 to the current situation, what is your view on the freight market now compared to 2019? At that time, we were in a challenging freight market. I've heard that currently, many consider this to be one of the worst rate markets in recent memory. What similar freight market do you think we are experiencing now to better understand our performance in this specific market?

Yes, I cannot point to another specific quarter. There is some seasonality, so comparing March to March makes sense. However, I want to emphasize that if this is historically our worst quarter and we are acknowledging a tough freight market, achieving $11 million of EBITDA while being debt-free is actually quite impressive for Radiant. Given this context, as the market and economy improve, we see opportunities for enhancing our overall results moving forward. I'm not sure if this fully addresses your question, but that's the best perspective I can provide.

Yes, that was where I was getting up after. And then on customer wins, how's the pipeline looking right now?

There are ups and downs. We are successfully acquiring new customers, including larger ones, which is encouraging. However, certain customers, especially in the ocean segment, who previously had tight market conditions, sought new service providers when larger companies weren't meeting their needs. We gained some of those customers temporarily, but they were more interested in a short-term engagement than a long-term partnership. As the market has eased, many of these customers have returned to their previous partners. Additionally, a number of asset-intensive companies currently have excess capacity, making them price takers and contributing to downward pressure on pricing. Until we achieve a better balance between supply and demand for volumes and capacity, we may continue to see fluctuations. However, historically, these situations resolve themselves in a relatively short timeframe, and we anticipate a similar outcome here.

And then last, do you feel like you get the sense that pricing is bottoming out here, give or take?

I do. I do.

Your next question is coming from Brandon Austin of Veneto.

Relatively new shareholder, we haven't spoken before. We haven't spoken for several years. Can I just clarify a few things here? Just sort of on the balance sheet, the double negative here, negative net debt of $17 million. That means like positive net cash of $17 million, right?

Correct.

Yes. So at least for us, net debt means debt less cash, so we had more cash than that.

So that's how I read the balance sheet. I just wanted to make sure I wasn't missing anything. And just again, sorry to do this. Just focusing on clarifying some of your comments that I mean we're talking about a seasonal trough quarter in what you seem to be saying and I seem to be hearing from other people is a trough macro. To the extent that you guys were able to do $11.5 million EBITDA and $0.17 share in adjusted net income, is it fair to say that in some future 12-month period not very far out that you guys would be comfortable annualizing that? Or is there a little more macro managing to do?

Well, I would say in a normalized environment, we would be annualizing something north of that.

Okay. No, I mean, like, it's great. I'm looking at $0.60 in earnings and $47 million. You're saying normalized, 50 to 60 in a normal environment. I think a normal environment might look a lot better than this. And just on the acquisition side, not sure if we've covered it here, but what's the receptivity of your targets? Like, do they have unrealistic multiples? Are they saying cheese we made a mint in the last couple of years, I'm ready to call it a day? I know people are getting older, but are people just like after how relatively easy it was for two, three years of they sort of just don't feel like fighting the fight? Or…

I think I have to return to my pendulum analogy. It has been more challenging for us to transact over the last 12 to 18 months because everyone experienced peak earnings, and there is hesitation about making deals at that point, knowing a correction is likely. Finding common ground between buyers and sellers regarding what constitutes fair ongoing earnings has been central to our discussions. Currently, these near-term quarterly results for businesses probably don't reflect what is normal, outside of our immediate experience, due to the changing dynamics. It hasn't been the most favorable market for transactions. That said, I am pleased with our disciplined approach; we avoided making acquisitions at high multiples and heavily leveraging our balance sheet. Had we done so, our conversation today would likely be quite different. Ultimately, while our acquisition pace may not seem exciting, it's cautious and well-considered. Looking back, I'm glad we opted for a slow and steady approach.

Sub 10x earnings and 6.5x EBITDA I think we can be patient.

Yes.

Don't need to push anything to make money here, hopefully.

Yes. Well, I mean, to your point, buying back our stock is just a great option.

Everyone on this call has purchased your stock, so we all share the same view.

Well, it's never too late to buy more.

Thank you, everybody. And that appears to be the end of our Q&A session. I will now hand back over to Bohn for any closing remarks.

Thank you. Let me close by saying that we remain optimistic about our prospects and opportunities to continue to leverage our best-in-class technology, robust North American footprint, extensive global network of service partners, to continue to build on the great platform we have created here at Radiant. At the same time, we intend to thoughtfully re-lever our balance sheet and through a combination of agent station conversions, synergistic tuck-in acquisitions and stock buybacks, continue to create shareholder value. With that, I'll offer my thanks and thank you for your continued support of Radiant Logistics.

Thank you, everybody. This does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.