Daseke, Inc. (DSKE) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning everyone and thank you for participating in today's Conference Call to discuss Daseke's Financial Results for the First Quarter Ended March 31, 2021. With us today are Jonathan Shepko, Interim CEO and Board member; Jason Bates, EVP and CFO; and John Michell, VP of Treasury and Investor Relations. After their prepared remarks, the management team will take your questions. As a reminder, you may now download a PDF of the presentation slides that will accompany the remarks made on today's conference call, as indicated in the press release we issued earlier today. You may access these slides in the Investor Relations section of our website.
John Michell: Thanks Kathy. Please turn to Slide 2 for a review of our Safe Harbor and non-GAAP statements. Today's presentation contains forward-looking statements as within the meaning of the Private Securities Litigation Reform Act of 1995. Projected financial information, including our guidance outlook, are forward-looking statements. Forward-looking statements, including those with respect to revenues, earnings, performance, strategies, prospects and other aspects of Daseke's business are based on management's current estimates, projections and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. I encourage you to read our filings with the Securities and Exchange Commission for a discussion of the risks that can affect our business and to not place undue reliance on any forward-looking statements. We undertake no obligation to revise our forward-looking statements to reflect events or circumstances occurring after today whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. During the call, there will also be a discussion of some items that do not conform to U.S. Generally Accepted Accounting Principles or GAAP, including, but not limited to, adjusted EBITDA, adjusted operating ratio adjusted operating income, adjusted net income or loss, free cash flow and net debt. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the appendix to the investor presentation and press release issued this morning, both of which are available in the Investors tab of the Daseke website, www.daseke.com. In terms of the structure of our call today, Jonathan will start with a review of our business operations and the progress we are making as we execute against our key strategic priorities. Jason will then walk through a financial review of the quarter and finally Jonathan will come back to wrap up our remarks with a few closing comments before we open the line for your questions. I'd like to turn the call over to Daseke's Interim CEO, Mr. Jonathan Shepko. Jonathan?
Jonathan Shepko: Thank you, John. Good morning, everyone. I like to start off today's call by taking a moment to mention of a noteworthy accomplishment by our company. This quarter will mark the fourth consecutive quarter in which our team has successfully executed against our internal and external expectations. What's more, this accomplishment has been realized in the midst of not only a comprehensive transformational overhaul within our organization, but also strong headwinds from the global pandemic. Our results continue to reflect the hard work and commitment of all of our employees, and the benefit of our unique business model, which remains supported by diversity across our customer base, as well as the industrial and markets that we serve. Our unique model, which at its core, is constructed around an asset light fleet, serving a well-diversified portfolio of end markets, geographies, and customers enabling Daseke to better weather volatility across market cycles. It offers a unique advantage and that it allows us to reposition and flex our resources to take advantage of the highest and best use opportunities available to our fleet at any point in time. And our strong performances this last quarter was underpinned by these very attributes, as we captured the reflation of numerous markets, such as steel, glass, construction and manufacturing, that are approaching and, in some cases, exceeding their pre-pandemic levels. Let's begin our discussion on Slide 3, where we outline a few of the notable takeaways from the first quarter. We had $334 million of revenue during the period and nearly $36 million on adjusted EBITDA. Daseke's transformation over the last year and a half has been focused on operational excellence and improving our cost structure in order to drive performance, reduce costs and achieve greater efficiency. We've held true to those lasting priorities, and we are working hard to ensure continuous improvement remains part of our culture. To that end, we believe we are making solid progress, as evidenced in our results, as our adjusted operating ratio of 95.6% was a 140 basis point improvement on a consolidated basis and our free cash flow was $34 million for the quarter. Our business performance in Q1 was clearly supported by the improving economic landscape across the broader industrial economy, which is driving a healthy rate environment. For those of you not familiar with the seasonality of open-deck transportation, I'd like to note that we have a slightly different seasonal pattern there are trends in dry van.
Jason Bates: Thank you, Jonathan. I will start by briefly addressing the 10-K/A that we put out last night, as outlined in our press release on April 22. Last month, the FTC issued a statement concerning the accounting for warrants issued by companies that went public through SPAC. Well, that we did go public through a SPAC vehicle, which involve the issuance of warrants. That process was completed over four years ago. As outlined in our 10-K/A, we have restated our previously issued financial statements to reflect the warrants as a liability with subsequent changes in their estimated fair value recorded as non-cash income or expense. The corrections in the accounting for these warrants was non-operational and non-cash and those had no impact on our revenue, operating income, operating ratio, adjusted EBITDA, adjusted EPS or free cash flow in prior years for moving forward. So with that, I'll now turn our discussion to the consolidated results from the first quarter, which can be found on Slide 4. As Jonathan mentioned at the top of the call, our results reflected our expectations of improving broader market dynamics, particularly on the Flatbed side. These were partially offset by an expected normalization of demand and selected specialized markets, specifically wind energy, and the uptick in certain operating costs, particularly stemming from the insurance markets. Q1s results were driven by the various ongoing operational improvements we have undertaken, combined with improving market demand. The uplift in construction related verticals such as lumber, roofing, steel and glass, combined with strengths and munitions, gained momentum in the first quarter. And this growing demand combined with a tighter market capacity led to a strong rate environment in the first quarter. Consolidated revenues were 333.9 million for the quarter, down 15% compared to revenues of 391 million in last year's first quarter. This decline in revenues was driven in large part by the strategic divestiture of the Aveda business and from fleet downsizing as we look to shed less attractive revenues.
Jonathan Shepko: Thank you, Jason. I'll complete our prepared remarks with Slide 9, where I'd like to spend some time discussing some meaningful insight initiatives and milestone decisions we push forward in this first quarter, substantial progress this organization has made that isn't necessarily reflected in our numbers. First, we have developed a preliminary future state map outlining the necessary and continued evolution of Daseke that complements our longer-term vision, all of which we intend to share in more detail during our Investor Day, which we are tentatively slating for early fall. That said what I can tell you is that it answers some of the fundamental questions around the value proposition of our consolidation strategy, offering up a consolidated shared service center model that'll drive efficiencies in the back and mid offices and provide through additional rationalization over time, over OpCo stable. This next phase of inter OpCo consolidation however, will be carefully and thoughtfully executed with a keen eye on compliment cultures and driven by strategic fit, as opposed to the vintage 2019, 2020 consolidations, which were generally done in an effort to salvage the brand and customer relationships of underperforming OpCos. As discussed briefly on our last call, we will be undertaking a comprehensive overhaul of our system staff not only ended ensuring efficiencies across our enterprise, but equally as important, getting accurate, insightful, real time data into the hands of our decision makers. Moving down the slide, institutionalizing our company will be grounded in the fundamental shift of our mindset from one that focuses on the performance and capabilities of a single OpCo to one that unlocks the power of our entire network. We are rebuilding the business to function as a network operation, whereby we are able to better leverage the scale, capabilities and footprint of our entire platform to better service our customers. To help facilitate a more efficient shift, we have among other things, established a number of councils and teams consisting of functional and cross functional leaders from our corporate center and our OpCos. These teams are closely working with senior leadership and a newly formed OpCo CEO council and they have been tasked with the identification and prioritization of high impact initiatives, and best in class standards that are driving the implementation and adoption of those priorities across the enterprise. Examples of just some of the functional areas represented by these teams include safety, maintenance, procurement, and business analytics. Lastly, with respect to growth, as Jason mentioned a moment ago, we notched a very important win with refinancing our term loan this quarter. With the cash we have on hand, our upsize of $150 million revolver and this new term loan facility, we have the financial wherewithal to do some very transformational things on the M&A front, coupled that with our ability to tuck in OpCos, an approach that was successfully proven out during our 2019, 2020 integration efforts and it creates an exciting equation for strategic growth, vis-à-vis a tuck in strategy. Additionally, we are building out longer term sustainable fleet capabilities that will help drive organic growth, with a renewed emphasis on third party brokerage and a more coordinated network-based initiative focused on private dedicated sole source fleet services. As I mentioned, we expect to be in a position in the coming months to share redefined multiyear vision for Daseke's future with all of you, during which we will provide a greater breadth and depth around our strategy and playbook for organic and strategic growth among other things. With that, though, I'd like to conclude our prepared remarks this morning. And I'm excited to turn the call over to the operator for your questions. Kathy?
Operator: And your first question is from Ryan Sigdahl of Craig-Hallum Capital.
Ryan Sigdahl: Good morning, guys. Thanks for taking my questions. Curious to - I know it's somewhat apples and oranges between you guys and the other public trucking companies, but industry trends are accelerating. Most of them, again, different trends and sectors, but most of them beat and raised. You guys reiterated your guidance a little more cautiousness kind of on the commentary. I guess can you really walk through the differences and where you guys are seeing more headwinds than others?
Jason Bates: Yeah, happy to hit that real quick Ryan, so I think - the way I think about it, it's important to kind of remind everyone about kind of the cadence that we've had here, because there's been a lot of moving pieces in the Daseke story over the last 18 to 24 months. And so with the divestiture of the Aveda business, and with the really disproportionately strong wind energy market that we saw last year, it's important to kind of refresh everyone on how those things affect the earnings cadence for our business. And so if you think about it, really the 2019 kind of normalized adjusted EBITDA was about 155 million. And last year, we had about $178 million adjusted EBITDA of which we highlighted 22 million was a net benefit from that wind energy and high security cargo tailwinds. And so when you look at it that way, you had kind of 155 in '19 and 156 on - I'm using air quotes here, adjusted basis for 2020. And our guide is kind of 165 to 175 for 2021. We knew we were going to have some insurance headwinds that we kind of highlighted to you guys in that roughly $8 million to $10 million headwind range that was factored into that. So when you think about all those different puts and takes the 165 to 175 really represents a pretty meaningful and somewhat aggressive target. And so I think, laying it out like that's important for people to have the context of kind of the stretch that we're placing on the organization this year, but we feel really good about it. We wouldn't have put that number out there if we didn't think we could achieve it. It's going to be a threat. There's going to be a lot of hard work to get there to kind of overcome some of those unusually beneficial things that we saw last year. But with the COVID recovery that we're seeing, the strengthening that we're seeing in a lot of construction related verticals, in the munitions area, we're really able to kind of overcome that year-over-year headwind on both the insurance and on the wind energy kind of softness. And so I just think it's important to kind of lay those breadcrumbs out for everyone to kind of reiterate kind of some of the - because there have been a lot of moving pieces in the Daseke story. And so hopefully, that helps kind of paint the picture of while we didn't necessarily - it was a beat, but it wasn't a raise. It's important that people understand the context of why. And we're rolling into the second quarter, which is typically, Q2 and Q3 are our stronger quarters. And we'll know a lot more here in the next three months about how the year is looking to shape up. And hopefully second quarter will be a little bit - even more optimistic than we are now.
Jonathan Shepko: Yeah, couple of other perspectives and tacking on to Jason's comments. And I appreciate you acknowledging that. Look, it's difficult to really have an apples-to-apples comparison here, because we've done the same, but we looked at earnings calls commentary from the analyst community as earnings have come out for industry. And look the asset light guys are having, understandably a great year with - given where spot rates are, their ability to kind of flex up take advantage of the prevailing rate environment. The asset heavy guys, look, for a lot of those guys, if you look at the end markets that they service, I mean, it's been a tremendous boon for carriers, servicing consumer facing verticals, with the e-commerce, e-retail pull forward and some of the other COVID tailwinds Jason referenced. And so we're - as we look ahead, we - if you look at one of the asset light guys that shares common end markets, industrial facing end markets mentioned that they saw their Flatbed business up 5% year-over-year. If you look at that and some of the other data points, really comparing Flatbed segment, within some of our peers, we're absolutely holding our ground if not exceedingly over performing, relative to some of those data points. And I think the other thing here that some of our peers have talked about is the weather impact in Q1. For us, I mean, we're live load and unload versus the van guys that are dropping hook. So we think about our drivers out there, and minus 10, minus 20, minus 30 degree weather, whether you're their tarps, and their belts and their cables and everything else, trailers are frozen over, and it shuts us down. So it had a meaningful impact, noteworthy impact storm - winter storm Uri and some of the other regional storms that they came through in Q1, absolutely hit us around. And I think the other point that Jason touched on in his monologue in our earnings call was really the right sizing that went on going into 2020, on the fleet side of things. And then we took out nearly 400 trucks, I mean, those were obviously company trucks that had disproportionately high margin profile relative to owner operator no fee trucks. So it hit us a lot more and it was the right thing to do at the time. And it was one of the reasons we outperformed last year, when everyone else was getting knocked around a bit with COVID. But we did this for efficiencies, better utilization, pulling out our fleet age. And we'll look to add 60% or so of those trucks back on, the 200 trucks or so back on, really in Q2, Q3 tying back to Jason's point, which is really peak season for us. And what that's going to do is it's going to provide a better maintenance profile. It provides our drivers with better safety features, better amenities, these newer trucks are better for the environment, most are Smart Way compliant. So as you look at our CapEx spend which is concentrated really in Q2, Q3, as we shift to on season, start to have some of these new trucks come back into our fleet, met our fleet size, and looking at what should be - what should continue to be a strong rate environment, we feel really good about the coming quarters.
Ryan Sigdahl: Helpful, specifically on specialized I get the year-over-year comps and some of the unusual good guys last year, but we've seen kind of rates sequentially declining each of the last couple of quarters here. And I guess, Q2 going forward, what the visibility you have? Do you think those trends continue? Or can we at least on a sequential basis kind of relative to a more normalized Q1 here start indicating similar to kind of the Flatbed trends on our life?
Jason Bates: Yeah, I mean, Ryan the specialized rates are going to be tricky for the next two or three quarters from a comparable basis, because that was really when the wind energy - so we saw a little bit in Q1, and then in Q2, and especially in Q3, it was really strong and those rates are - as you know, the way that business is it's not about the rate per mile, it's about the rate for the move - the overall payment for the move, and they're usually not really long mileage moves. And so those rates are unusually high and skew those data points. And so I think it's important to keep that in mind that those - Q2 and Q3 are really tough comps from a rate perspective, and that we really won't be normalized and again, using air quotes on that kind of rate, normalized rate trend until we get past those periods.
Ryan Sigdahl: But what about specifically kind of sequential use Q1? Sounds like more of a normal, I get the year-over-year ones. But on a sequential basis, can we work higher from here?
Jason Bates: Yeah, I think you should see us trend upward from a rate perspective in the specialized and Flatbed segments from Q1 as we move forward.
Ryan Sigdahl: Good. CEO search, I don't believe I caught an update there. Can you give one? And then secondly, on the stock buyback, I didn't see anything. But have you guys started to execute on that in the quarter or post quarter here?
Jonathan Shepko: Sure. Ryan I'll hit the CEO search, just a couple of comments on that. So the search is ongoing. We don't have any material updates at this time though. Look, I'd expect to have an announcement on or before our next earnings call certainly. And I think while we all look forward to next phase of leadership, look, I'd like to be clear, from my perspective, from our senior leadership team's perspective, from the board's perspective, things are moving full steam ahead. As mentioned on our last call, I would slide into this role because of my experience sharing the operating committee and 2019 and 2020 I worked closely with Executive Chairman at the time to architect the turnaround plan. And I have a lot of legacy with the company. And I'm always saying that because I want to reinforce that I'm not simply keeping the seat warm, I'm pushing. The team is pushing. And look, we're all intensely focused on execute our vision and strategic plan while managing the opportunities ahead. It's the momentum that we're seeing, hopefully, you're seeing it. It's the strong teams we have in place, the corporate, it's the strong teams we have in place with the OpCos that are allowing the board to be much more methodical around the search process.
Jason Bates: Yeah, and I'll hit the second part of your question there about the share repurchase program. So as a reminder, we did put into place a - there was a share of cooperation agreement entered into at the end of last year between Don and Phil and the board. And in conjunction with that there was an agreement to do a 3 million share repurchase. There has been a lot of moving pieces that have been going on specifically in around the 10-K/A and some of the other things that have kind of necessitated us to kind of wait until we got all that done, so that we can then get out of the blackout period and put a 25/1 in place. But we look to move forward on that here, now that we've got all that behind us. And we'll begin pursuing that share repurchase program that we had committed to in some form or fashion.
Ryan Sigdahl: Great I'll hop back in the queue. Good luck, guys.
Jonathan Shepko: Thanks Ryan.
Operator: Your next question is from Greg Gibas of Northland Securities.
Greg Gibas: Hey, good morning, guys. Thanks for taking the questions. I guess first to follow up on kind of the revenue dynamics there. You mentioned the lower freight volumes from fleet downsizing. But that obviously being partially offset by the improving freight rates. So I guess just wondering if you could discuss maybe what revenue growth would have looked like if you back out the downsizing and the fleet size. And I guess along those lines what those fleet reinvestment budget look like this year, and maybe the cadence of that spend for the year?
Jason Bates: Yeah, so I think our guide on kind of CapEx, we haven't really changed at this juncture, we still believe the ranges that we put out at the outset of the year are still good ranges to use. And from a cadence perspective, as Jonathan, I think alluded to earlier, you're going to see more of that in the second quarter and third quarter with a little bit less in the fourth quarter just removed from a kind of cadence and flow on how that works, which kind of aligns with kind of our business trends anyway. With regard to what the kind of revenue growth or earnings profile might have looked like, absent the shedding of the business, I think if you go you look at kind of the truck count trends, and you can kind of see what kind of reductions we had in truck counts. That hopefully will help you kind of - depending on what assumptions you're assuming there with regard to revenue and profitability that will help kind of inform you about how strong the performance really was in the quarter with regard to kind of get to an apples-to-apples basis. And I appreciate Greg the challenge, right because there's so many moving pieces in our business over the last 18 to 24 months it is kind of hard to see. And that's why we want to make sure we take the time to kind of highlight for you guys that the business is actually doing really good. And when you look at it on an apples-to-apples basis, which is tough to get to, we're seeing really strong rate environment, we're seeing really good execution in the field. We're seeing trucks getting good rate increases with customer, there are some cost headwinds that we got to be mindful of right on the insurance front on the driver front. But overall, the business is actually trending really well.
Greg Gibas: Great. Yeah, that's helpful. And I guess given you maintain the full year guidance. I guess I just wanted to ask and maybe this isn't the case. But is any of your end market verticals are performing differently than expected so far this year?
Jason Bates: Yeah, I would say that we had highlighted the fact that we expected wind energy to be down. Aerospace is still down. If I'm being honest, I think we would have hoped it would have been doing a little bit better right now than it's been it is. So that one, I guess, is a little bit of a disappointment or different than our expectation. But on the flip side of that, several of these construction verticals are doing very well. And I would say it's better than we expected. When you look at roofing and lumber and flat glass and steel, like some of these things are doing really, really well. And the other one, that's kind of been a really pleasant surprise, to be honest with you is munitions. Munitions, has been killing it here. No pun intended, in the first quarter. And hopefully that trend continues.
Greg Gibas: Great. Yeah, that's good to hear. Regarding your efforts to continue streamlining the business, and then maximizing efficiency, I recognize it's always an ongoing process. But where are you finding near term opportunities there? You talked a little bit about in the prepared remarks. But for improved optimization, what kind of financial impact might we see this year, maybe more near term?
Jonathan Shepko: Yeah, look I'll give you some high-level points. Don't need to be circumspect on this. But this is something that provided quite a bit of detail on in the coming months. But our efforts to refine systems and processes to hit some of these efficiencies, it's something we've been focused on for a while. You all have been focused on it for a while. And we're addressing it. We don't think the answer is necessarily centralizing everything and corporate pulling everything up to the mother ship. But a hybrid approach that provides the benefits really does a better job at purchasing the talent depth we have in the field that our OpCos is part of that playbook. And a lot of this is going to be driven by systems. I mean, I think that's the fulcrum for a lot of the change within our organization right now is overhauling that system stack and providing a system that's capable of driving through some of these efficiencies through mid and back office, providing the ability to leverage some of the insights perspectives and better decision making for the front office. That's where a lot of this is going to come.
Greg Gibas: Okay, great. Thank you.
Jason Bates: Thank you, Greg.
Operator: And that is all the time we have allocated for Q&Q today. I will now turn the call back to Jonathan Shepko for closing remarks.
Jonathan Shepko: Yeah. Thank you, Kathy. Thank you all for your time and support today. We look forward to speaking with you again soon and everyone enjoy their weekend.
Jason Bates: Thanks everyone.
Operator: Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
