Dynamex Inc. F2Q09 (Qtr End 01/31/09) Earnings Call Transcript

Mar. 5.09 | About: Dynamex, Inc. (DDMX)

Dynamex Inc. (DDMX) F2Q09 (Qtr End 01/31/09) Earnings Call Transcript March 5, 2009 10:00 AM ET

Executives

Kevin Inda – IR

James Welch – President and CEO

Ray Schmitz – VP, CFO and Assistant Secretary

Analysts

Robert Dunn – Sidoti & Company

Clayton Ripley [ph] – Bears Capital [ph]

Christina Marsh [ph] – Thompson Davis

Operator

Greetings and welcome to the Dynamex Inc. second quarter 2009 earnings conference call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce Mr. Kevin Inda. Thank you sir, you may begin.

Kevin Inda

Thank you, Ryan, and welcome to the Dynamex conference call to review the company’s results for the second fiscal quarter of 2009, which ended January 31, 2008. Conducting the call today will be James Welch, President and Chief Executive Officer, and Ray Schmitz, Vice President and Chief Financial Officer.

Before we start, let me offer the cautionary note that this conference call contains forward-looking statements that involve assumptions regarding company operations and future prospects. Although the company believes its expectations are based on reasonable assumptions, such statements are subject to risk and uncertainty including among other things the effect of changing economic conditions, acquisition strategy, competition, foreign exchange and risks associated with the local delivery industry.

These and other risks are mentioned from time-to-time in the company’s filings with the SEC. In light of such risks and uncertainties, the company’s actual results could differ materially from such forward-looking statements. The company does not undertake any obligation to publicly release any revision to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

Caution should be taken that these factors could cause the actual results to differ from those stated or implied in this or in other company communications. With that stated, I’ll turn the call over to James Welch.

James Welch

Thank you, Kevin, and good morning everyone, and welcome to the Dynamex fiscal year 2009 second quarter conference call. We certainly appreciate you taking the time to listen to our comments about the second quarter, and the outlook for our business.

While there is no doubt Dynamex faced the same economic headwinds in our second quarter that all transportation companies are currently challenged with, we were overall pleased but certainly not satisfied with our second-quarter numbers. This quarter had only 60 working days, which was one less day than last year’s quarter, and we additionally pretty much lost the Friday workday after the Christmas holiday, due to customer closings.

Excluding the impact of the weaker Canadian exchange rate and fuel surcharge decline, our core sales per day were down only 1.3% versus the prior year quarter. We are pleased with this result, especially when comparing it to the numbers of the vast majority of other transportation service providers. I strongly believe it is a testament to the service value proposition that Dynamex brings to the marketplace, and our new and existing customers are valuing our capabilities.

It also demonstrates that Dynamex has the ability to perform well in virtually any operating environment, and that is very encouraging as we move forward. We believe that the current economic environment will remain challenging, but at the same time create additional opportunities for our business, as many of our competitors do not have the financial strength to expand their business, and in some cases continue to do business.

Lastly, in the second quarter, we did retain all but one of the service locations with our largest customer after negotiations were concluded, although some of the traffic was lost due to the distribution reconfiguration. We were also impacted by the reduction in their sales of 17%.

The encouraging news however, is that we have basically replaced the business we have lost and are actually seeing some fairly good momentum with potential new business in our pipelines. During the second quarter, we also did a good job of keeping our purchase transportation cost very much in line with our expectations, and also worked hard to keep our SG&A cost from getting out of line with our revenue.

Additionally, during the quarter we also had to make some painful decisions to adjust the SG&A headcount to reflect current business conditions. You will hear Ray discuss this in his comments, but our quarter results were also negatively impacted by our decision to increase our reserve for doubtful accounts in response to the weakening economy, and the potential impact this may have on our overall customer base.

As I stated earlier, we are pleased with our second-quarter results but not satisfied. To expand on this statement further, I want to comment on our sales organization and the direction we're heading. I have just concluded my fourth month at Dynamex, and continue to be both pleased and satisfied that our business model and ability to execute operationally are very powerful. However, we will need to take additional steps to gain more market share especially in this economic environment.

I firmly believe we must have a sales force in the marketplace that is of adequate size to sell our service value offering, a sales force that is fully trained, and a sales force that is properly managed.

From what I have observed and learned about the past of Dynamex, the sales effort has been a challenge for the company, and we must and will improve our sales organization, sales effort, and sales results.

In a time, when virtually every company is cutting back cost in all areas, we have made the decision to move forward with the hiring of additional salespeople, along with being more aggressive and proactive with a marketing emphasis.

We view this as an investment in order for our sales organization to leverage the opportunities that are in the marketplace, and we will continue increasing the size of our sales force in fiscal 2009. Now these costs are reflected in our outlook, yet due to the ramp up and training time, we do not expect to realize the full benefit of this investment until fiscal 2010.

I'm confident this investment will play off over time, and the company is continually hearing me talk about the fact that we must improve our sales program, and ultimately our sales results.

We also continue to have resources committed in the corporate development area as a way to improve our market share. We signed five new franchisees during our second quarter, bringing our total number of franchise locations to 52. We are also evaluating the effectiveness and the market demand for our (inaudible) offering and lastly, we are actively involved in the process of identifying and working through prospects for additional acquisitions.

During our third quarter, we anticipate making progress in all three areas of corporate development. Overall, we are pleased with our second-quarter performance, market position, and current trends in our business.

We have suspended our share repurchase program to be more aggressive with preserving cash, while looking for acquisitions that fit our model and allow us to expand our business.

With our continuing debt free position, we certainly have the financial strength to pursue attractive and meaningful acquisition opportunities.

Let me now turn the call over to Ray to provide an overview of our second-quarter results. Ray?

Ray Schmitz

Thanks, James. Good morning everyone. We reported net income of $0.24 per fully diluted share for the quarter, $0.09 below last year. Approximately one-third of the year-over-year decline in earnings per share is attributable to the weaker Canadian dollar. In the current quarter, the Canadian-US dollar exchange rate was 0.82, down 19% from the 1.01 in the same quarter last year.

The current year also includes several adjustments in one-time items. First, we increased our reserve for doubtful accounts by $800,000 due to the current economic environment and the potential impact in our customer base as James said earlier.

Second, we realized a foreign-exchange gain of some $215,000 that we do not anticipate recurring this fiscal year, and third, we reduced the US effective income tax rate from 44.8% to 42.5% as we made the decision to discontinue repatriating funds from Canada, to support the share buyback program. This change reduced income tax expense and increased net income $140,000 this quarter.

Sales were $98 million, down 12.9% from last year but in line with our internal estimates. As expected, a large portion of the decline, 80%, is attributable to the weaker Canadian dollar and lower fuel surcharges and we had one less business day this year than the prior year quarter. Excluding the impact of fuel surcharges and foreign exchange, core sales per day in Canada in Canadian dollars increased 2.3%, while the core rate declined 3.5% in the US due to lower shipping volumes from existing customers, and the previously announced changes to the contract with our largest customer.

The slowdown in the Canadian economy as with past economic cycles seems to be trailing the US. So we may see some additional core volume declines in Canada from existing customers in the remainder of this fiscal year.

Our gross margin was 26.0%, down from 26.7% last year. The accrual for doubtful accounts of $800,000 described earlier reduced the margin 0.8% this year, and excluding that adjustment our gross margin would have been slightly above the prior year and within our stated target range of 26.5% to 27%.

Purchased transportation costs represented 64.4% of sales compared to 65.7% in the prior year, the result of ongoing cost management initiatives. Excluding the $800,000 adjustment, other direct costs that are relatively fixed were essentially flat in dollars with the prior year, but increased as a percentage of sales on a lower sales base.

Salaries and employee benefits were $1.8 million lower this quarter than the prior year. 60% of the reduction relates to the lower Canadian dollar, while 40% is from lower expense including reduced bonus provisions. Our bonus plans are tied to operating results, and when results do not meet minimum targets, we do not accrue bonuses. We plan to add an additional 20 plus sales positions over the remainder of this fiscal year.

Total selling, general and administrative expenses were 21.9% of sales compared to 21.3% last year due to the reduced level of sales dollars and the relatively fixed nature of SG&A costs. We would expect SG&A to increase as a percentage of sales over the next two quarters, as we add the additional sales capacity. We do not expect those salespeople to be fully productive for about six months, as they are trained and build their pipelines. We expect to see tangible results from this investment beginning in the first quarter of fiscal 2010.

EBITDA was 4.4% of sales this quarter compared to 5.5% last year. The incremental accrual for doubtful accounts reduced the current-year percentage by 0.8%.

Our DSO was 43.8 days at the end of the quarter compared to 36.8 days at the end of July 2008, and the bulk of this increase is attributable to our largest customer, whose payment terms were extended during our recent negotiations.

Net cash used in operating activities for the six months ended January 31, 2009, was $1.7 million compared to net cash provided of $1 million for the same period last year. Looking at it a different way, net cash generated from operating activities, before changes in working capital was $9.3 million this year versus $10.2 million last year, which is primarily related to reduced net income.

The increase in working capital requirements this year relates to a weaker Canadian dollar, lower bonus accruals and the timing of payments to employees, vendors, and contractors.

Capital expenditures totaled $1.7 million in fiscal 2009, an increase of $275,000 over the last year. We intend to limit capital expenditures to the extent we can for the remainder of this fiscal year, but we have ordered specialized equipment to service one of our larger contracts that was recently extended for an additional five years. The balance of that purchase order, $2.6 million, is expected to be paid by the end of this fiscal year.

We continue to expect earnings per fully diluted share of $1 to $1.20 on sales of $405 million to $420 billion. Our outlook assumes an average exchange rate of 81 in the last two quarters of this fiscal year in that fuel will remain at current levels. As James indicated in his remarks, we intend to increase our investment in the sales and marketing area, and those additional costs are included in our outlook.

We have adjusted the US tax rate to 42.5% as we no longer intend to repatriate excess cash for the candidates, as we have suspended the share repurchase program.

At this point, I will turn the call back to James for his closing comments.

James Welch

Thanks, Ray. I believe Dynamex has a great potential for the future. I've been in front of existing, new, and potentially new customers recently, and I'm more confident than ever that Dynamex has the right kinds of solution for this particular space or piece of the supply chain distribution process that our company serves.

And from what I have observed, Dynamex has the ability to create great customized solutions, and operationally execute to provide high levels of service and quality. In this particular economic environment that we're in, I believe that there are potential customers who would like to get out of the transportation or distribution business by outsourcing their fleet operations. Either they don't want to deal with trucks, maintenance, employing drivers, paying benefits or work comp, or just managing the distribution of routes.

At Dynamex, we can take these challenges that our customers have, and in many cases handle their distribution requirements better than they can. And this is why I believe Dynamex has a great future.

As we go through the third quarter, we will remain focused on our sales effort as well as being aggressive with our cost management efforts, while seeking ways to become more efficient. Lastly, we will complement our sales strategy, while seeking out new opportunities with our corporate development efforts.

That concludes our comments. Operator, we will now turn it over to you to entertain any questions. Thanks.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We have our first question from the line of Robert Dunn with Sidoti & Company.

Robert Dunn – Sidoti & Company

Hi, good morning.

James Welch

Good morning.

Robert Dunn – Sidoti & Company

I was wondering just what sort of outlook for us Depot [ph] is baked into the guidance?

James Welch

The guidance that we put out is – on our last conference call and our last press release, we said that there were probably in the neighborhood of 25% reduction in the overall business with Office Depot, and we think that's the – that there has been no change in that and that is baked into our outlook.

Robert Dunn – Sidoti & Company

Was that kind of the run rate you saw in the current quarter?

James Welch

It was a little higher than that in the current quarter. Some of the changes that we have renegotiated had not taken place until the beginning of this quarter, but, you know, we expect to be able to replace any downtrading with Office Depot and others with new business.

Robert Dunn – Sidoti & Company

Okay, great and you know in terms of the acquisition opportunities, you know, are you seeing just more smaller deals come across your screen or is it, you know, now you are starting to see some larger deals, can you just talk about the environment.

James Welch

I will make a couple of comments, and then Ray may want to add some. We are seeing a variety of prospects but it is kind of interesting. It is like their own two different ends of the spectrum, either the companies that are fairly financially distressed, and perhaps not the kind of company that we want to entertain acquiring or they are fairly successful companies, but they seem to have a little higher selling price than what we think a company is worth in this particular environment. So, it is kind of interesting how we are seeing two extremes, and Ray you might want to comment on that.

Ray Schmitz

I agree with James’ comments, you know, we are seeing opportunities of different sizes. We haven't looked at anything really large but anywhere up to $15 million and down is, you know, the range that we see, and lots of opportunities out there.

Robert Dunn – Sidoti & Company

Okay, thanks very much.

Operator

Our next question comes from the line of Clayton Ripley [ph] with Bears Capital [ph].

Clayton Ripley – Bears Capital

Hi good morning.

James Welch

Good morning.

Clayton Ripley – Bears Capital

I wonder if you could, any color you can give on any litigation update on California would be great.

James Welch

Well, the only change that came up, it is in the 10-Quarter, as we updated some of the timing of some of the hearings and things that are going on. There really has been no change since the end of the year in that litigation. We are simply updating the ongoing activity. The hearings and when we have to have depositions done and things of that nature. There has really been no significant change in that litigation.

Clayton Ripley – Bears Capital

I mean when is – from the last Q or from the Q that has yet to come out again.

James Welch

Q is out.

Clayton Ripley – Bears Capital

Oh it is.

Ray Schmitz

No it isn’t. It will be filed this week, I'm sorry.

Clayton Ripley – Bears Capital

Okay, okay.

Ray Schmitz

Or early next week, but there is really no change – any significant change in what we had in our last filing.

Clayton Ripley – Bears Capital

Okay, and then I was wondering if you could explain, I know you have said this before, but maybe kind of the difference in your suit in the FedEx versus Estrada suit. If could give us any guidance on, you know, why you think yours is maybe a little bit different situation than that?

Ray Schmitz

Well, you know, we've talked about this before. I think the issue with FedEx is the amount of control they exercised over their independent contractors. That is a big contention from the IRS and from State agencies is the amount of control you exercise over those individuals, and I think they took it further than they probably should have. It is a different model from ours, and we think that we have treated our independent contractors appropriately and that we should be okay in that area, although you never can say that everything is going to be okay.

Clayton Ripley – Bears Capital

All right, okay. And then what percentage of your business are you currently in the healthcare market, and then where do you see that going forward. Is that growing, is that, you know, an encouraging part of your business, if you could just speak a little bit to the healthcare side of your business.

Ray Schmitz

Well, the healthcare side of the business is in excess of 15%. It is growing. We are adding additional locations, we – different customers and that is an area of focus of our company, and we will continue to focus on the healthcare. We like that space, lot of baby boomers and that industry is just going to grow. So that is an area of extreme focus. James, you want to say something?

James Welch

Oh, absolutely. That’s going to be a key to one of our futures. Ray said there are 63 million baby boomers that are going to retire at some point, stock market may keep some of this from retiring earlier than others, but over time, no one can escape the age fact. So, we believe that that's a big part of our business going forward and I'm impressed with some of the things that I have already seen in our capabilities of handling nuclear medicine. Some of the different aspects of how we manage the hospital supply chain, and you will see us ramping up our sales effort particularly in this space moving forward. We think we will get at it. We think we can grow this business. We get tremendous feedback from the customers that we are serving that I think will help propel us as we get new business. We are exited about it.

Clayton Ripley – Bears Capital

Okay. And then what is the total reserve? I know you added 800,000 to your reserve for doubtful. But could you – do you have the number, the total reserve right now?

Ray Schmitz

$1,689,000, it is about 3.5% of our receivables.

Clayton Ripley – Bears Capital

Okay. Okay, thank you very much.

James Welch

You are welcome. (inaudible).

Operator

(Operator instructions) Seeing as there are no further questions. Are there any – actually we just have one question that came in from the line of Christina Marsh [ph] with Thompson Davis.

Christina Marsh – Thompson Davis

Hello, good morning.

James Welch

Good morning.

Christina Marsh – Thompson Davis

I'm calling in for David Campbell, and I just had one question regarding your on-demand business. Usually that is pretty cyclical. It finally went down this quarter, which is usual in a downturn, but is that mainly due to the economy or accounts lost?

Ray Schmitz

That down – I mean the reason it is down is twofold. One is the foreign exchange. There is a big difference in that rate in Canada and Canada has more or higher component of on demand in the US, and it also has fuel surcharge in it. So, you have to consider both of those issues when you're looking at year-over-year comparisons in this kind of a market.

Christina Marsh – Thompson Davis

Okay, great. Thank you very much.

Operator

Seeing as there are no further questions, I like to turn back to management for any concluding remarks.

James Welch

As we said early, we certainly appreciate you taking the time out of your schedules to listen to our call, and we look forward to the third quarter call. Thank you very much.

Operator

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation.

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