Earnings Call Transcript - RLGT Q1 2024

Operator, Operator

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 first fiscal quarter ended September 30, 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 in the past and may in the future be identified in the company's SEC filings, 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.

Bohn Crain, CEO

Thanks, Angela. Good afternoon, everyone, and thank you for joining in on today's call. Our results for the quarter ended September 30, 2023, continue to reflect the difficult freight markets being experienced by the entire industry as well as our own operations. The confluence of shippers continuing to manage through elevated inventories, reduced imports, and slowing economic growth has had a cascading effect across virtually every mode of transportation. As in the prior quarter, these market conditions have negatively impacted not only our current results but also the year-over-year comparison to our record results for the prior year period. With that said, we remain optimistic that we're at or near the bottom of the cycle and would expect markets to begin to find their way to more sustainable and normalized levels in the coming quarters. Notwithstanding the tough year-over-year comparisons, we're very proud to report that we generated $9.2 million in adjusted EBITDA and almost $8 million in cash from operations for our quarter ended September 30. In addition, we continue to enjoy a strong balance sheet, finishing the quarter with approximately $36 million of cash on hand and nothing drawn on our $200 million credit facility. And as we detailed in our press release, we continue to allocate capital in support of our stock buyback program as well as converting our agent stations to company-owned stores as we did with our Daleray transaction in Florida. As previously discussed, we believe we are well-positioned to navigate through these slower freight markets as we find our way back to more normalized market conditions. At the same time, we believe our patience and discipline will be rewarded as market conditions become more conducive to our acquisition strategy, and we have ample dry powder to become more active on the acquisition front should the opportunity present itself. Looking ahead, we will remain focused on delivering profitable growth through a combination of organic and acquisition initiatives and thoughtfully relevering our balance sheet through a combination of agent-station conversions, synergistic tuck-in acquisitions, and stock buybacks. Through this approach, we will continue to scale our business, leveraging our best-in-class technology, our 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 some Q&A.

Todd Macomber, CFO

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, 2023. For the three months ended September 30, 2023, we reported net income attributable to Radiant Logistics of $2.622 million on $210.8 million of revenues or $0.06 per basic and $0.05 per fully diluted share for the three months ended September 30, 2023. For September 30, 2022, we reported net income attributable to Radiant Logistics of $8.433 million on $331 million of revenues or $0.17 per basic and fully diluted share. This represents a decrease of approximately $5.811 million of net income over the comparable prior year period or 68.9%. For adjusted net income, we reported $6.549 million for the three months ended September 30, 2023, compared to adjusted net income of $13.481 million for the three months ended September 30, 2022. This represents a decrease of approximately $6.932 million or 51%. For adjusted EBITDA, we reported $9.167 million for the three months ended September 30, 2023, compared to adjusted EBITDA of $18.669 million for the three months ended September 30, 2022. This represents a decrease of approximately $9.502 million or approximately 50.9%. With that, I will turn the call back over to our moderator to facilitate any Q&A from our callers.

Operator, Operator

Our first question comes from Elliot Alper with TD Cowen. Please go ahead.

Elliot Alper, Analyst

Great, thank you guys. This is Elliot on for Jason. I was hoping you could put some more context around the revenue decline sequentially in the quarter, maybe between the different business units. I know last quarter, you pointed to kind of a slight uptick on the ocean bookings side. I guess how did that play out? And maybe what are you guys seeing on the ocean side of the business?

Bohn Crain, CEO

Thanks. So ocean remains soft for us, particularly as compared to a prior year period. I think for everybody what the narrative would suggest is there's some modest uptick in imports and a little more activity on the West Coast. But on a comparative basis, it's still down and I think is expected to be down for a good bit yet with blank sailings from the steamship lines, and while their coffers are full of cash, I think volumes are certainly down and they've got a lot of excess equipment at this point that they'll have to figure out what to deal with on that side of the equation. But we don't see any, I think, meaningful increase in ocean near term. Call it, a muted peak might be a little bit of an understatement. But with that said, we are seeing volumes come back ever so slowly or at least not continuing to decrease. Our kind of looking at it on a kind of division-by-division basis or that type of conversation. Our core forwarding operations continue to carry the day as well as Canada, and our operations up there continue to be meaningful contributors to what we're doing, while our ocean and brokerage business, which we would again, just as a reminder, we define as both our intermodal and truck brokerage business, that's obviously been soft in this market environment. Having said that, I would take a second to just give a little bit of a shout out to the progress we're making in Kansas City with the truck brokerage team that we were able to onboard there coming out of the wake of what went on with Yellow, and we stood up a truck brokerage team in Kansas City. And while that's effectively an organic start for us, starting that business from a standing start, it's far exceeding expectations in terms of their growth and trajectory and path to profitability with the team that we've put in place there. So we're really excited for that and what I would characterize as expected incremental opportunities in the truck brokerage space. There's a lot of chaos in the marketplace right now in the wake of Convoy and others who have recently gone down and others that are rumored to be under pressure. And so we're seeing what opportunities may present themselves out of some of those dynamics as we move forward. So again, to recap, our core forwarding business along with the team in Canada continues to lead the way for the organization. And while our ocean and brokerage businesses are profitable, they could be a lot more profitable as the market gets better.

Elliot Alper, Analyst

Yes. No, absolutely. And maybe going off on an earlier point, I know you guys do some LTL business. I mean can you talk about how that performed in the quarter? Maybe just your high-level thoughts on how some of the LTL consolidation affects your offering?

Bohn Crain, CEO

We don't do a lot of what I would call pure deferred LTL more. Our LTL was more expedited time definite. So we weren't necessarily impacted to the good or the bad around what's going on kind of within the LTL community. There were obviously some clear winners and clear losers in connection with kind of Yellow and what happened there. So not a significant or meaningful direct impact to us from what's been going on in the LTL space.

Elliot Alper, Analyst

Understood. And then maybe just last question then I'll hand it over. I guess there's been a lot of mixed reporting on the Chinese economy. I know you guys have a location in Shanghai. I would be curious to get your thoughts on maybe the outlook or anything you're seeing on the ocean bookings side in China. Thank you.

Bohn Crain, CEO

It still remains soft. We're noticing a slight increase in orders from our customers. However, some of our customers are starting to shift their focus to Southeast Asia or Mexico, which has been widely discussed. The volumes are significantly lower compared to historical levels, but China is still a part of the picture. Currently, this would normally be peak season, but it's quite subdued. With the Chinese New Year approaching, we don't anticipate any significant change in this lackluster ocean market. We're expecting that we might get a clearer view during next year's peak season in the fall.

Elliot Alper, Analyst

Helpful, thanks Bohn.

Operator, Operator

The next question comes from Mark Argento with Lake Street. Please go ahead.

Mark Argento, Analyst

Hey guys, yes, just a couple of quick ones. One, I guess, the balance sheet is in fantastic shape. Are you starting to see any opportunities out there? Do you think we need a little more distress to set in before deals start popping, but any kind of overview on the M&A market right now?

Bohn Crain, CEO

We are very engaged and hopeful about having opportunities to accomplish some goals in the upcoming quarters. However, we will continue to be thoughtful in our approach. I believe there will be many opportunities for us to consider. A significant number of companies in our industry were heavily leveraged and had their balance sheets set for higher earnings levels. As conditions have softened, those who thought they were at a leverage ratio of 3x or 4x might now find themselves at 5x or 7x, which is not an ideal situation in the current bank market. As a result, there aren't as many companies available for deals. We are grateful for our current position and the financial flexibility it provides. Nonetheless, we believe our stock is a compelling option for our capital allocation. While we are exploring various opportunities and are prepared to act if the circumstances are right, we won't be disappointed to continue buying back our stock at what we consider an attractive valuation.

Mark Argento, Analyst

That's helpful. And maybe, Todd, can you just remind me kind of what's the typical conversion of EBITDA or adjusted EBITDA to free cash flow given the capital structure you have right now?

Todd Macomber, CFO

I believe that adjusted net income is a good indicator of free cash flow and is likely the best metric to track.

Bohn Crain, CEO

Yes. I believe Todd can correct me if I'm wrong, but I think the question was about our expected CapEx spending, which is primarily focused on technology for us. I would estimate that it would be around $5 million, reflecting our usual capitalized technology expenses.

Mark Argento, Analyst

$5 million a year or over what period?

Todd Macomber, CFO

Yes. Yes, $5 million a year.

Mark Argento, Analyst

Okay. So like this quarter, you guys did adjusted EBITDA $9.2 million. I'm looking for adjusted net income. Adjusted net income $6.5 million, less $1.25 million or whatever five divided by four is. So kind of $5 million roughly would probably be a good kind of free cash flow. So just over half of EBITDA you're turning into free cash.

Todd Macomber, CFO

Yes, I think that's fair.

Bohn Crain, CEO

Yes, I think that's a reasonable assessment of our situation. It was quite an extensive effort, especially considering that the current environment can’t be described as normalized. Given where we stand in the business cycle, I believe it reflects our cash flow characteristics during this downturn. However, we anticipate it will improve significantly with fewer headwinds.

Mark Argento, Analyst

Yes. If you can generate $15 million to $20 million in free cash in this environment, that's impressive. You have a strong balance sheet, so you are in a good position. I appreciate the insights. Thank you for the question and the responses.

Operator, Operator

The next question comes from Jeff Kauffman with Vertical Research Partners. Please go ahead.

Jeffrey Kauffman, Analyst

Hey, gentlemen. How are you?

Bohn Crain, CEO

Good, Jeff.

Jeffrey Kauffman, Analyst

All right. Good. A couple of knits here. Could you talk a little bit about what the impact of the Daleray acquisition is going to be to the financials? I guess since it's an agency, our former agency tuck-in, we're not going to see a revenue impact, but we will see more of a margin impact. Can you set me straight?

Bohn Crain, CEO

The transaction is relatively small when considering the bigger picture, so I wouldn't anticipate any significant effects from it. However, it does suggest that we expect to increase the number of agent stations transitioning to company-owned stores. It's a pertinent question, Jeff, and I was actually going to playfully call you out on this. For everyone on the call, Jeff is known for incorporating M&A transactions into his projections. He tends to set high expectations based on this model. So, Jeff, please refrain from including any M&A transactions in your calculations and stick to the baseline.

Jeffrey Kauffman, Analyst

I'm looking ahead to where the revenue will be rather than where it currently stands. Typically, in a usual environment, we would expect second-quarter revenues to increase by about 4% to 5% compared to the first quarter, although there might be a slight decline in net revenue margin due to changes in mix. With your remarks about the somewhat subdued peak season we are experiencing, could you indicate if we should expect to be above or below that usual range? Or do you believe we should view this as a typical, albeit quieter, transition from the first fiscal quarter to the second?

Bohn Crain, CEO

We're in such foreign territory. I'm not sure I would rely on some of those historical trends right now. Firstly, we'll see how it plays out. But I would kind of anticipate us being relatively flat on a sequential basis here through the end of the year and then likely a softer quarter ended March and kind of building back from there.

Jeffrey Kauffman, Analyst

Maybe give you some fun to talk about here. There's been a lot of discussion about near-shoring and reshoring and companies kind of moving supply chains around. I know in Asia, it's resulted in some Chinese-based manufacturing going to say Vietnam or Thailand or Cambodia. Can you talk about where you're seeing the impact of reshoring, whether it's on the international side, whether it's, say, things going into Mexico, and then coming into the U.S. through your networks? Just give us an idea of what you're seeing on that side.

Bohn Crain, CEO

Yes. I think the short answer is yes, right, to both of those. And even before COVID and kind of the more recent challenges, those trends were occurring. There we always are kind of historically have been in this environment where manufacturing and seeking lower cost labor and all of that type of stuff. And so Mexico and Southeast Asia have been, I think, never so slightly taking share away from China over time. But I think what we're seeing is an acceleration of some of those strategies with a kind of tipping more, even more heavily towards Mexico and kind of supply chain strategies. But with that said, I don't want to give the impression we would expect the turning off the lights in China and the trade players are going to stop, right? It's still going to be an extraordinarily large market and an extraordinarily large opportunity set that we would expect to continue to participate in. So our conversations right now are more around what do we need to do to be in Southeast Asia, to be in Mexico to support our existing and prospective customers as they're executing those types of strategies.

Jeffrey Kauffman, Analyst

All right. And then one last one if I could. There has been a lot of movement and I'm going to focus more on the domestic freight market, the domestic forwarding, domestic brokerage. Yellow went down, you were opportunistic, came in, swooped up their logistics and brokerage effort. We've seen some trucking companies and brokers go out of business in recent weeks, a lot of stress in the marketplace. Where has this created new opportunities for you that maybe six or eight months ago, we might not have been talking about?

Bohn Crain, CEO

I believe this situation has created a unique environment for us, and while it's still too early to celebrate, we feel confident about our strong balance sheet, technology platform, and carrier relationships. As some companies face tough times, we're in a good position to attract new business. We even have a positive example from our experience in Kansas City, where we quickly onboarded a new team and started supporting customers. Recently, I have been engaging in numerous Zoom calls with individuals seeking new opportunities, so we'll see how that unfolds. However, we are not the only platform pursuing these opportunities, and we hope to capture our share. We believe we offer a unique value proposition. Additionally, many individuals seeking new opportunities hold existing customer relationships where they previously provided truck brokerage services. By partnering with Radiant, they would not only be able to offer truck brokerage services but also international forwarding, intermodal, customs brokerage, and cross-border services in Mexico and Canada. This positions us as an appealing platform for those transitioning from distressed truck brokerage operations, as we provide a broader range of solutions they can offer to their clients.

Jeffrey Kauffman, Analyst

All right. Thank you very much and congratulations.

Bohn Crain, CEO

Thanks, Jeff.

Operator, Operator

The next question comes from Kevin Gainey with Thompson Davis. Please go ahead.

Kevin Gainey, Analyst

Hi, Bohn. Hi, Todd. Kevin on for David. How are you guys?

Todd Macomber, CFO

Good. Thank you.

Kevin Gainey, Analyst

I wanted to explore the adjusted gross margins, which have consistently improved over the last few quarters. I'm curious about your thoughts on this and how you plan to maintain these levels moving forward.

Todd Macomber, CFO

A lot of our comparisons are against the previous year. In the same period last year, ocean freight was a larger part of our business, and its revenues have low margins. It decreased from about 9,000 to 3.8 per shipment this year compared to last year. This shift in product mix has resulted in a greater focus on domestic services, which have higher margin characteristics, leading to an overall composite margin improvement. I believe the margin trends we see now will continue moving forward.

Bohn Crain, CEO

In the slower market, I will provide a broader answer to your question. We always focus on growing our total gross margin dollars and maximizing the amount that goes to our bottom line. In comparison to prior year periods, we had lower margin ocean and air charter businesses. This quarter, domestic margins are less affected by these lower margin services. However, our total gross margin dollars are down. Although it may seem counterintuitive, I prefer to have lower gross margin percentages with more gross margin dollars reaching the bottom line. This is a comprehensive response to your question. If your inquiry was about how to model upcoming quarters regarding margin characteristics, I believe this quarter's margin characteristics will likely continue in the next several quarters until we see some improvement in ocean services or a surge in project work, which could happen given the current global situation with ongoing events in Israel and Ukraine.

Kevin Gainey, Analyst

No, that's very helpful. I want to revisit the macro situation one last time. I understand you believe we are at the bottom, and I’m curious about the signs that lead you to that conclusion.

Bohn Crain, CEO

I hold staff calls every Monday with each of my operating divisions, where I ask them these same questions literally every week. I believe I have a good sense of how they're feeling and the feedback they're receiving from our end customers. What I'm sharing with you is the best reflection of the team's engagement with those customers and their feedback. That's the best answer I can provide.

Kevin Gainey, Analyst

That's all. I appreciate the color guys.

Bohn Crain, CEO

Yes, thanks.

Operator, Operator

It appears we have no further questions at this time. I will now turn the program back over to our presenters for any additional remarks.

Bohn Crain, CEO

All right. 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, and extensive global network service partners to continue to build on the great platform we've 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. Through our multipronged approach of organic growth, acquisitions, and stock buybacks, we believe we will continue to create meaningful value for our shareholders, operating partners, and the end customers that we serve. Thanks for listening and your support of Radiant Logistics.

Operator, Operator

This does conclude today's program. Thank you for your participation. You may disconnect at any time.