Radiant Logistics, Inc. (RLGT) Q2 2013 Earnings Report, Transcript and Summary

Hello. This afternoon, Bohn Crain, Radiant Logistics Founder and CEO, will discuss financial results for the company's 3 and 6 months ended December 31, 2012, as well as the company's recent restructuring in Los Angeles. Following his 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 meanings 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 or 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. As you can tell from our earnings release, we made significant progress across a number of different fronts in this most recent quarter, ended December, with the acquisitions of Los Angeles-based Marvir Logistics and Portland, Oregon-based International Freight Systems, or IFS, which we converted to company-owned stores from our agent network. Also, the favorable conclusion of the New Jersey arbitration with the former shareholders of DBA and the recent restructuring in Los Angeles, which we believe to be a very significant development as we head into calendar 2013. We differentiated ourselves in a marketplace with the growth strategy that continues to focus on bringing value to the agent-based forwarding community. We launched Radiant in January of 2006 with the goal of bringing value to Logistics entrepreneurs like Marvir and IFS, who would benefit from our unique value proposition with the immediate opportunity to become a shareholder and share in the value they were helping to create, and the longer-term opportunity to take advantage of the built-in exit strategy available to the entrepreneurs participating in our network. It was September of 2006 when we welcomed Marvir to the network. Marvir was truly the first new station to join the Radiant family. And as it happens, IFS was the third station to join us. From the beginning, they have led the way for many that have followed. And from the beginning, they have participated as shareholders, and we are very proud to able to support them in these transactions and help them reach their own individual goals. We believe that the Marvir and IFS transactions are also indicative of the broader opportunity available to us in the marketplace and that there will be more entrepreneurs, both internal and external to our existing network, that will look to join our ranks. This remains a very exciting time in the evolution of Radiant. Our value proposition continues to gain traction within the forwarding community, and we remain confident that our growth strategy will continue to bring value to our operating partners, shareholders and the end customers that we serve. Let me now submit my comments to the DBA arbitration. In December of 2012, we were awarded $699,000 in damages from the former shareholders of DBA Distribution Services, a company we purchased in March of 2011, where the arbitrator found that the DBA shareholders had breached certain reps and warranties in the purchase agreement. In addition, the arbitrator found that Paul Pollara have breached his noncompetition obligation to us and enjoined Mr. Pollara from engaging in any activities in contravention of his obligations of noncompetition and nonsolicitation, including activities related to Santini Productions and his spouse, Bretta Santini Pollara, until March 31, 2016. The award was taken as an offset against the $1.8 million integration payment that we were carrying on our balance sheet and recognized net of associated legal costs as a gain of approximately $368,000 in the quarter. As you may remember, we're also -- in addition to pursuing claims in New Jersey with respect to the breaches of the [indiscernible] Shareholders, we're also pursuing claims against Bretta and another company by the name of Oceanair in California, and we expect to conclude this California matter sometime over the course of 2013. Let me also spend a moment on the restructuring in Los Angeles. In December of '12, we completed the integration of the recently acquired operations of Marvir Logistics with our legacy operations in California. This was a significant event for us. One of the benefits of our acquisition strategy is the ability to capture meaningful cost synergies as we consolidate and streamline our operations. We've been able to take advantage of similar cost savings opportunities in the past, eliminating redundant back-office operations when acquiring other agent-based networks like Adcom Worldwide in September of 2008 and DBA Distribution Services in April of 2011. But the Marvir transaction, in combination with our legacy DBA operation in LA, represented our first real opportunity to fundamentally change our cost structure through station-level consolidation. We expect to realize approximately $1 million a year in annualized cost savings from the elimination of redundant operating facilities in Los Angeles that are not part of our go-forward cost structure. The company recorded a onetime pretax restructuring charge of approximately $1.4 million related principally to the abandonment and sublease of our legacy facility operated by DBA. This was value that we were able to unlock specifically as a result of the Marvir transaction. We were effectively able to pick up an incremental $1 million in bottom line earnings, with a corresponding increase in debt representing the net future lease obligations that we were required to [indiscernible] that will be paid off over the next 3 years. Looking ahead, in markets where we already have company-owned locations like JFK, Newark, Los Angeles, Seattle, Detroit, Laredo and Portland, we should also have the opportunity to capture further station-level cost synergies as we tuck in acquisitions in these markets. [Audio Gap] All right. I apologize for the dropped call. One of the challenges of doing this from the road in the middle of investor conferences. So as I was mentioning, we're making progress with our investment efforts. Jeff Kauffman initiated coverage -- he's with Sterne Agee, initiated coverage this last quarter. Yesterday, I presented here at the Stifel, Nicolaus conference, and tomorrow, I'll be presenting at the BB&T Conference. We believe we have a good story to tell, and I'm getting out on the road to do just that. And then the heart of our growth strategy continues to focus on bringing value to the agent-based forwarding community, leveraging our status as a public company to provide our operating partners with the opportunity to share in the value that they help create; providing a robust platform in terms of people, process and technology, which is translated into better purchasing power with our vendors and more robust technology solutions for our customers; and offering a unique opportunity in terms of succession planning and liquidity for our station owners. 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, as well as expanding the network itself by on-boarding new agent stations that recognize the benefit of our platform. In addition, we will also continue to opportunistically pursue accretive acquisition opportunities to further accelerate our growth. Here, too, the core of our effort will remain on acquisition candidates who are linked to the agent-based forwarding community. This would include the conversion of our current agent stations, the acquisition of agent stations participating in other networks and the acquisition of other competing networks. In addition, we also have an interest in other non-asset-based acquisition opportunities that are complementary to our current offering. Broadly, these would follow to the categories of truck brokerage, intermodal, non-vessel owner common carrier and customs brokerage services. Last week, we also extended our senior credit facility with BofA through November 30, 2014. And as of December 31, we only had approximately $6 million drawn against this $20 million facility, leaving us with good availability and access to low-cost debt capital to support further acquisitions. And of course, this is before considering the benefit of any incremental debt capacity available from adding the accounts receivable of target companies that we might be acquiring. I will now shift my comments to our financial results, and then I will open it up for Q&A. Today, we will be discussing our financial results for our 3 and 6 months ended December 31, 2013. As we discuss our financial results in addition to the reported net income and adjusted EBITDA, you will also note that we've introduced another metric into our reporting format, providing an adjusted net income and adjusted EPS number in an effort to highlight what we believe to be more representative of the more normalized cash earnings per share generated from the ongoing operations of our business. For our adjusted net income, we use a 38% tax rate for calculating the provision for income taxes to provide our tax rate. In addition, in arriving at adjusted net income and adjusted net income per share, we adjust for significant items that are not part of our regular ongoing operating activities. These include adjustments for acquisition costs, transition, severance, lease termination costs, unusual legal claims and settlements, as well as depreciation and amortization and certain other noncash charges. As we consistently discussed over the years in the context of accounting for our acquisitions, impacts [ph] and rules around purchase accounting requires us to attribute a significant amount of the purchase price to a class of amortizable intangibles to attribute a value to the acquired customer relationships. And as a result, our GAAP-based financial statements are burdened with significant noncash costs associated with the amortization of these intangibles, which suggests degradation in the value of our customer relationship assets. We believe this is inconsistent with our own economic reality and distorts the true earnings power of the business. And executing our strategy, we believe the value of our customer relationships is actually increasing, but GAAP requires that to be amortized. And as a non-asset-based company, these noncash charges are not at all representative of any type of sustaining CapEx requirement that would be required to sustain the earnings power of the business. Our ongoing CapEx requirements remain minimal and principally relate to the care and feeding of our technology platform. For the 3 months ended December 31, 2012, we reported net income attributable to common shareholders of $21,000 on $78.2 million of revenues, or 0 basic and diluted shares. This included the gain of $368,000 in connection with the DBA arbitration award and a loss of the $1,439,000 associated with the lease termination for the redundant facilities in LA. For the 3 months ended December 31, '11, we have reported net income attributable to common shareholders of $417,000 from $72.6 million revenue or $0.01 per basic and fully diluted share. For the 3 months ended December 31, '12, domestic transportation revenues decreased modestly by 3.3% to $41.6 million for the 3 months ended December 31, '12 from $43 million for the 3 months from the prior year. And international transportation revenues increased by 23.6% to $36.6 million for the 3 months ended December 31, '12, from $29.6 million for the comparable prior year period. These increases in revenue were due principally to incremental revenues attributed to our acquisitions of Isla, which is driving our transporter business with Mexico, and our JFK operation, which also supports significant international air freights out of the Northeast. In the same time period, net transportation revenues increased 6.3% to $21.5 million as compared to $20.2 million for the comparable prior year period, with margins remaining relatively flat. For the 3 months ended December 31, '12, we reported adjusted net income attributable to common shareholders of $911,000 or $0.03 per basic diluted share. For the comparable prior year period, we reported a net income attributable to common shareholders of $1,278,000 or $0.04 per basic and fully diluted share. For the 6-month period, we reported net income attributable to common shareholders of $424,000 on $157.3 million of revenues or $0.01 per basic and fully diluted share; again, including the gain of $368,000 in connection with the DBA arbitration and the $1.4 million loss we booked in connection with the lease termination. For the 6 months ended December 31, '11, we have reported net income of $1,073,000 on $144 million of revenues or $0.03 per basic and fully diluted share. For the 6 months ended December 31, '12, we reported adjusted net income to common shareholders of $2,294,000 or $0.07 per basic and $0.06 per fully diluted share. For the 6 months at December 31, '11, we reported adjusted net income attributable to common shareholders of $2,482,000 or $0.08 per basic and fully diluted share. We also reported adjusted EBITDA of $4,540,000 for the 6 months ended December 31, '12, compared to adjusted EBITDA of $3,580,000 for the comparable prior year period. A reconciliation of our adjusted net income and adjusted EBITDA to the most directly comparable GAAP measure for both the 3- and 6-month periods appear at the end of our release. I've touched on our acquisition pipeline, but let me reiterate how excited we are about the opportunities we're seeing in the marketplace. Both big and small, we believe that we are in the right place at the right time with the right value proposition, and we enjoy the financial flexibility to execute against these transactions with very cost-effective capital available to us from our senior credit facility. With that, I'll turn the call back over to our moderator to facilitate any Q&A from our callers.

[Operator Instructions] Our first question comes from Howard Halpern of Taglich Brothers.

You gave third quarter financial guidance, and sales appear, in your seasonally slowest quarter, based on your estimate, they appear to be up a little sequentially. Is that going to be driven by just overall operations, or is the LA -- the restructuring of LA operations really seeing new customers and businesses, is a little more robust there than it had been in the past?

I think you should look at that revenue guidance of the $80 million with the implied word of "approximately" in front of it. Q1 is our seasonally slowest quarter, and whether we do $76 million or $83 million, it's hard for us to predict where exactly those numbers are going to come in. The -- I think overall, there's, I think, a little bit of positive sentiment in the marketplace in terms of some slow but steady recovery in the marketplace that we hope to see. But for us, I think the reality is, while that's going to be relatively flat and ultimately beyond our control in some respects, there's a lot that we're going to be doing from a productivity standpoint where we should really see kind of more of those gross margin dollars finding their way to the bottom line, and of course, the most obvious is the restructuring that we were just able to achieve in Los Angeles.

And just to follow up on that. The restructuring, the savings from that, we're going to see that most primarily in the SG&A line off of this current quarter's level, or approximately...

Yes, and you'll see a little bit in the personnel line item, because there was a little bit of redundant overlap in the accounts that we were able to address. But certainly, the lion's share of it will come from the avoided future lease payments. When we acquired DBA, we inherited a significant lease obligation in LA tied to their Warehousing & Distribution business. And as we got deeper into our integration and got a deeper understanding of that business and the margin characteristics of that particular piece of business, we discovered it was a real drag on the operation. And so we -- with the kind of the commitment on the lease, we couldn't just roll with our feet and exit that cost. So we'd spend some time trying to find a subtenant to effectively lay off that obligation, which we were happy to have achieved here in December. So I forget the precise numbers, but I want to say that there was plus or minus $4 million, $4.5 million of future lease obligations, and we were able to lay off all but $1.5 million of that, the $1.4 million of that through the sublease.

And we're going to still see the -- as you continue to onboard, the trend that maybe commissions as a percent of revenue will continue to decline?

Well, let's see how it's going to be crisp on the semantics. As we do conversion -- yes, that's absolutely true. As we convert agent stations to company-owned stores, we should see the agent commission line item go down by x amount with personnel and G&A coming up by y amount, and the difference between those 2 numbers effectively being the profitability of the agent station that we tucked in, which should find its way to the bottom line.

Next question comes from Aditya Mehta of Sterne Agee.

This is Jeff Kauffman. We spent a lot of time talking about what you've done and just a little bit of time about what you intend to do. Can you tell us how the economy looks like to you just based on what you're seeing in what I understand is a seasonally slow period? And I guess, just in general, as you grow and become more national, are your customers having different kinds of discussions with you?

The -- well, I guess, a couple of different questions in there. I'll start, I guess, at the top. I think there is, I guess, a modest, favorable trend in terms of people's view of the economy out there. But we're -- I think we're kind of obligated to be cautiously optimistic in that regard. And ultimately, our crystal ball [ph] just isn't that good in terms of what -- ultimately, what the economy's going to do. Typically, how I respond to kind of what's the economy's going to do question is we've got a sustainable business model in place and positioned to respond to an expanding economy, but also one that we've demonstrated can and has done well in a down economy. So as we went through the kind of this last economic cycle, in a general sense, we certainly didn't lose any customers. And as our customers had additional business, we enjoyed that additional business alongside it. So I think, as we talked about before, we think about our organic growth as really kind of 2 components. Of that, one is kind of the traditional same-store type analysis. I think generally speaking, we're going to see that kind of track with GDP and how that trends in terms of our same-store. But the second, and what has been a bigger contributing factor in our growth to date, has been our ability to onboard additional agent stations. Not stations that we're acquiring but stations that are just leaving their current situations and recognizing value in our platform and coming to join us. And so that always remains an interesting and appealing aspect of growth available to us as we're moving forward. And then before we kind of move over to the acquisition side of the ledger, there's a lot of things -- we reached a size and scale where there's a lot of things that we're going to start to tackle that are really kind of the more traditional productivity-improvement type initiatives that I think will hopefully translate into better EBITDA as a function of gross margins, which is a metric that we pay pretty close attention to, to try to leverage the platform that we have in place. Yes, on the acquisition front, I think it's pretty clear we built up a pretty good pipeline of acquisition opportunities, both indigenously to our network currently, as well as potentially some agent stations in our competitors' network who have -- who have expressed an interest in joining our network. And then we're also constantly out looking for a few bigger fish that we think might complement what we're doing. And as we've discussed, almost without exception, when we do a transaction, it's the culmination of a 3- to 5-year conversation. So at any point in time, we're having a range of conversations with a lot of different folks and -- so we can be there to support folks when they're ready to make that move.

Just one final [indiscernible] question, and then I'll -- that's it for now. We've had a lot of weather in the last 3 to 6 months. Sandy affecting your quarter, particularly operations at Newark and JFK might have been affected. You've had some blizzards coming through. Can you discuss, despite the good results, how much revenue do you think may or may not have been lost to weather?

Yes, that's a good question. We -- it's hard to really get crisp around that. We know it was meaningful. We would look -- we looked at some of the data, and we were effectively down for what I would call 1.5 to 2 weeks' worth of business in Newark and JFK, specifically, when we just kind of went back to look at the preliminary shipment volumes. Now presumably, we caught up a little bit of that in the following week, but I certainly don't think we recovered fully. So without attempting to dollarize this specifically, it was 1.5 weeks or 2 weeks' worth of work on what was probably, if I had to take it in [ph] our stations, plus or minus $30 million of annual business between the 2 locations.

[Operator Instructions] Our next question comes from Jeff Martin of Roth Capital Partners.

What was the comparable pro forma revenue number from Q2 of 2012?

The -- I would have to go back and look at the Q. I think it's down a little bit. Precisely how much, I do not have on the tip of my tongue. And unfortunately, I don't have Todd here with me to punt to, so he isn't going to pass me that number.

I think, if you don't have the answer, I'll go dig it up. Are you there? [Technical Difficulty] Have we anniversary-ed the impact of the comparisons in terms of quarterly revenue from DBA at this point?

I'm sorry. Give me that one more time?

Has the impact of DBA been longer than 12 months? Basically, is that no longer a headwind for growth?

The -- well, certainly, on the top -- on a comparable year-over-year basis, we acquired that -- we partnered [ph] DBA in April of '11. So there'll be a little bit on the top line. So that piece of it on the top line, there shouldn't be any noise. But there is certainly, on a comparable basis, kind of on a profitability basis, given some of the challenges that happened in LA kind of -- the no competes and all and some of that stuff, on a pro forma basis, I think the math would still show that we were behind those levels. But we've obviously got a number of other things to try to restore or kind of get back to something more normalized for the DBA contribution as a result of LA. So I think that's the long -- maybe not an eloquent way of saying it. But at least from my perspective, I think we've taken our lump sum on DBA, and that is largely behind us in terms of going forward and the guidance that we're providing. They're both -- we expect to incur a modest amount of incremental legal expense working through the California matter. But beyond that, they're really kind of transition costs and restructuring costs, and all of that stuff is behind us. So we should see some pretty clean results here for the quarter ended March and going forward. So hopefully, the numbers will get a little less complicated and a little more obvious for us.

Okay, great. And then on the Marvir restructuring, the lease restructuring, is that $1 million savings going to be $1 million pretax cash savings for you, or is some of that noncash?

No, that's all cash dollars. It's a voided rent expense and a voided labor dollars.

Okay. And then you mentioned there's other markets that are prime candidates for similar things. I mean, obviously, you can't predict what kind of timing you'll bring those in-house, but are there any opportunities that could happen before you bring some of your partners in-house?

Well, as I said, never say never. We're constantly talking to a lot of folks. It's hard to predict the absolute timing of any individual transactions. I mean, I think what we can say is over time, we would expect there to be a lot more of the kind of the tuck-in agent conversions in terms of frequency and number of transactions. But how these fall sequentially within the quarters, I wish I knew. But it's just -- you can see it over all the conversation and try to be responsive and respectful to the -- to our business partners to support them in their own goals, and that means different timing for different folks.

Sure, sure, okay. And then should we be thinking, in terms of modeling, should we model agent commissions down as a percentage of gross revenue in the future? I mean, we haven't quite seen that trend come through yet. I'm wondering if there's a logical reason for that, and if we should start to see it come down in future quarters. And what's a reasonable assumption in terms of basis points to model it down?

What -- that's a different way of asking the same question you just asked in terms of kind of the timing and frequency. The...

You've got Marvir and IFS, right? That should have some impact to it.

That's not going to -- Marvir was a substantially larger operation than IFS in total. But you should see it here, at least modestly in the coming quarters as a result of those transitions particularly with Marvir being the driver.

Okay. And does that come in a step function? Does it all come at once, once those become in-house operations or does that take a couple of quarters to really see an impact?

Those are, at least on their face and at least our experience to date, a heck of a lot easier to accomplish. When we're trying to get at kind of productivity gains and cost synergies when we acquire other agent-based networks, we effectively have to run off the tail. It's a term that we use for, before we can exit folks of the back-office infrastructures, they've got to collect all the receivables and process all the tables that were posted in the legacy company's operating system. And that's why we carried transition costs with DBA for as long as we did. We knew that they were leaving, and we communicated to them that was the case, but they had to be there for a period of time to help us work through that process. We simply don't have that dynamic when we're converting agent stations. So they're just a lot easier to capture those synergies. With that said, where we have the opportunity to do further station-level of consolidation depending on the individual facts and circumstances, we could have other lease termination costs to deal with. Not every company out there operates on a month-to-month lease and -- where you can just give the landlord the keys and be done. So although there's nothing immediately on the horizon, it certainly wouldn't surprise me if from time to time when we do these conversions, we end up with redundant facilities costs. And those will have to be dealt with in terms of the integration process.

It appears we have no further question at this time. I would now like to pass the floor back for closing comments.

Great. Let me close by saying that we remain very excited with our progress and prospects here at Radiant. We continue to make good progress in executing our strategy, leveraging the platform to bring value to the agent forwarding community. We remain very excited about the opportunity for a continued organic growth available through expansion of our network and believe we remain uniquely positioned to bring value to our network participants, leveraging our status as a public company to provide our partners to share in the opportunity that they helped create; providing a robust platform in terms of people, process and technology; and offering a unique opportunity in terms of success in planning and liquidity for station owners. This approach has made us unique in the marketplace and has been key to our ability to grow, even in tough markets. Within this framework, we're 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, as well as expanding the network itself by on-boarding new agent stations that recognize the benefit of our platform. In addition, we will also continue to opportunistically pursue accretive acquisition opportunities to further accelerate our growth, where we will continue to focus on the agent-based forwarding community. Radiant is a growth platform, and we look forward to providing you with further progress as we continue to move forward. Thanks for listening and for your support of Radiant Logistics.

This concludes today's teleconference. You may now disconnect your lines at this time, and have a wonderful day.