Dynamex Inc. (DDMX) F1Q08 (Qtr End 10/31/07) Earnings Call December 6, 2007 ET
Kevin Unger - Director of IS and Corporate Support
Richard McClelland - President and Chief Executive Officer
Ray Schmitz - Vice President, Chief Financial Officer and Assistant Secretary
Robert Dunn - Sidoti & Company
Greetings ladies and gentlemen and welcome to the Dynamex Incorporated first quarter fiscal year 2008 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host Mr. Kevin Unger. Thank you Mr. Unger, you may begin.
Thank you Doug and welcome to this Dynamex conference call to review the company’s results for the first fiscal quarter of 2008 which ended October 31st 2007. Conducting the call today will be Rick McClelland, Chairman and Chief Executive Officer and Ray Schmitz, Vice President and Chief Financial Officer.
Before we start, let me offer the cautionary note. This conference call contains forward-looking statements that involve assumptions regarding company operations and future prospects. Although the company believes its expectations are reasonable assumptions such statements are subject to risk and uncertainty including among other things, the effect of the 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 and other Company communications.
With that stated I’ll turn the call over to Rick McClelland.
Good morning everyone and welcome to the call. I am very pleased with the financial results we achieved during the quarter. Our growth rate was on track versus expectations. Gross margin was on track, as was SG&A. Salaries and benefits as a percentage of sales increased a little but this was a result of a number of decisions made related to staffing increases that are helping us further accelerate our growth rate and enhance profitability. Our balance sheet remains very sound and strategic flexibility is a tenth. We continue to operate in an economy that’s a little hard to read or sort out. Issues like how long will the sectors that have been impacted continue to be impacted and are any new sectors going to become impacted?
It’s been a rough ride for many folks in the trucking and logistics space for some time now. Compared to this time last year, sales and earnings for those firms are down, almost across the board. Truckload arena, one of the top ten players has seen its stock rise since this time last year, the other nine have seen theirs go the other way, on average about 29% down. Stock prices of the top five players in the left truckload space are down on average about 37% and in the logistics space stock price of ten out of the top thirteen firms are down about 24% on average.
As well, a number of our direct competitors are struggling. Some are struggling significantly. From everything we’ve heard and read, the environment for the trucking and logistics area isn’t likely to improve before the second half next year, though it’s at times like this that you ask yourself, what’s hurting the other people and how are they likely to react? How can this environment affect us? Should we adjust our tactics or even our strategy?
Our view of things at this point is, steady as she goes, with one modification. With Dynamex, steady as she goes means the following five key things. First, it means that we are continuing to place significant focus on organic growth. Our stock has done well during the past year and moving up about 22% due to the growth of our top line and bottom line and due to our stock repurchase program.
Growth happened due to the size and exploitability of the distribution and outsourcing opportunity. By continuing to build awareness related to our outsourcing capabilities we are creating a market for our service versus having to increase share of an existing market that is negatively affected by a weak economy and a poor pricing environment.
Maurice Levy joined Dynamex about four months ago as Chief Operating Officer and has directed a lot of his energy towards enhancing our efforts in the sales and marketing area. Issues like structure, processes, reporting systems, new business targets, the existing account retention and development and territory size. Sales production is very strong and the team is more unified and focused than ever.
Second, steady as she goes means that as unique servicemen you have, and should continue to provide, optimal value for our clients and as we have seen, it performs well during most economic environments. Our market position in the same-day transportation and logistics space continues to be very strong. The vast majority of our competitors are local delivery service providers that offer local or regional same-day transportation services. Firms move documents, cancelled checks, packages on scheduled or on-demand basis.
In contrast, Dynamex offers same-day and on-demand services on a local basis but also intercity same-day air and ground services plus same-day distribution services for shippers that need to move hundreds or thousands of shipments to consignees on a same-day basis usually from a distribution center.
Our distribution service can be used by clients that have historically operated their own private fleets, though it becomes an outsourcing application for Dynamex that can take the form of a multi-route distribution network. Where shipment volumes fluctuate day to day, so does capacity or vehicles required. Or it can take the shape of a multi-route tailored solution that involves a specific number of dedicated vehicles and drivers each day. Shippers can use our distribution services for recurring scheduled requirements and use our on-demand services as spot capacity in order to deal with volume spikes so our sales people can tailor solutions for clients in this $15 billion market by bundling our services.
Dedicating the distribution components of our service menu have been strong drivers in our growth rate, growing in the mid teens year-over-year. Services are also a hedge related to our on-demand service. When we see a pullback in our premium price on-demand volume in a soft economy, our outsourcing services tend to take off. Because it’s at times like this that you tend to see an increased level of motivation on the part of CFOs and CEOs to reduce costs and enhance operating flexibility. Therefore they can become more open to the notion of killing sacred cows by outsourcing a private fleet they’ve operated for many years.
Third, we’re continuing to focus on network expansion. In addition to a unique and flexible service menu, a key point of differentiation for us versus the numerous privately held local delivery firms includes our national footprint, which gives shippers an important vendor consolidation opportunity as well as multi market reach with a single point of contact. It would have to happen today, now, that’s our space. Scheduled, or on-demand, locally, regionally and nationally throughout the United States and Canada.
Part of our plan to increase the size of our operating footprint, we signed additional franchises during the past quarter. As you can see in the press release, our value proposition is selling and includes our proprietary industry-specific technology and business processes, the ability to do work for our national accounts, and the ability to network and benchmark related to things like growth, diversification, structuring around new lines of business and cost management, etcetera. We’ve been marketing our franchise proposition for a little less than two years and have about doubled the number of locations in our network, so it’s been very, very exciting.
The local delivery industry is huge, and fragmented. There are well over 7,000 privately held local and regional firms and many are somewhat unsophisticated and suffering from the demise of the traditional on-demand market associated with lawyers, accountants, advertising agencies, and real estate. The owners of these small firms want to grow and we can help them do that. On the other hand, we have aspirations of continuing to dramatically expand our network; they can help us do that by becoming a franchisee, so this is a big win-win scenario.
Fourth, we have and will continue to protect our asset like model where the majority of direct costs are tied to, and fluctuate on sales. And fifth, we intend to remain very focused on the management of our direct costs and SG&A expenses. We made some gross margin progress due to an intense focus on direct cost reduction and there’s more to come. We’ve got our sights set on a 7% EBITDA ratio in the near to mid term and part of getting to 7% and beyond also involves leveraging our SG&A expenses over a larger base of business.
We have two targets if you will, direct costs and leveraging SG&A. We could be pushing the SG&A cost reduction envelope a little harder than we are right now, but we’ve decided to continue to build certain areas of the business in lockstep with our growth, such as sales and marketing capacity, operations people who are focused on route network design, and cost management. We feel like this is the right time to be focused on the mid to long term potential of the company versus maximizing short to mid term earnings.
We’ve already said the economy’s choppy, but earnings are growing, our business is expanding, our balance sheet is strong, our market position is great. This is the time to secure our position while competitors are distracted with other things. We believe the billion dollar milestone is in our future, and we need a solid and well positioned infrastructure in order to get there.
This “invest in the business” approach also touches our IT area. We have, and are continuing to make important strides in developing technology that will allow us to reduce costs, reduce our dependence on third party venders, add value to our clients, and further differentiate Dynamex from its competitors.
A strong point of focus here is tied to our distribution and outsourcing service. Once again these are the big growth engines of Dynamex. Our technology platform will allow our distribution and outsourcing clients to have shipment visibility from the time they leave their facility, shipments leave their facility or a Dynamex facility, right up until the time the shipments get to their client’s location, right down to the individual package. Our technology will allow these shippers to know the name of the person who signed for each shipment and view a digital copy of the signature using dxNow, our secure online tool.
Technology will allow our customers to see the location of each vehicle on each route using GPS technology. The technology will allow our clients to see the list of deliveries completed by each vehicle as well as the remaining deliveries. In other words, monitor the progress of a dedicated route on a stop by stop basis, in real time.
Our technology will allow our operations and engineering people to look for ways to streamline processes and ultimately save our customers money. For example, our technology initiative includes computerized route optimization, which helps us analyze complex delivery scenarios in a fraction of the time previously required.
Our people can quickly and accurately process tremendous amounts of data in a short time, such as shipment characteristics, target area of service, number of pieces and stops each day, the location of the stops, and the time the shipments will be available to load each day, and then our people can suggest areas where efficiency can be increased. We’ve helped many clients improve their service and lower their costs by diligently analyzing and optimizing all aspects of the delivery process, from structure of the delivery routes right down to the type of vehicle required.
With respect to our on-demand clients, we’ll soon be employing technology that will assimilate customer and driver activity, GPS location information and road network information in order to recommend the best available drivers, who are on-demand dispatchers, thereby maximizing service levels. The byproduct of the implementation of this technology is the elimination of a lot of paper, as we move more and more to data transmissions, so this approach is environmentally friendly.
Net result, our technology adds value, differentiates us, creates customer exit barriers, and will continue to help us make the most of our opportunity, especially when combined with our network, service menu, and the great people on our team.
The one slight change in our approach to the current market conditions is our interest level relative to acquisitions. The issue here is that while we have fared well through organic growth and expect to continue to do so, many of our competitors are finding the current marketplace very difficult. Some are being impacted by costs they can’t pass along to their clients, or are very tied to industry verticals that are being negatively affected by the economy. Some are still totally focused on the traditional on-demand market and finding it static and price sensitive. Some are just frustrated by a tight labor market. Bottom line, many owners are motivated to exit the business.
On our previous investor call, we noted that we were able to capitalize on this situation and closed four transactions. The companies involved were based in Kansas City, Dallas, and Western Canada, and ranged in size from $500,000 a year in sales to about $1.2 million. December 1st, we closed another deal in the Toronto market, with an annualized sales run rate in the area of $600,000. Our sense is that we should keep our antennas up in this area and carefully move ahead if we like the price and deal structure if the deal complements the current network and if we deem the integration risks to be low.
Targets we’re most interested in are small to mid sized firms, typically, but not always less that $2 million in annual sales and the deal structure needs to be performance driven, or inferno if you will, where the seller retains part of the risk if the deal fails to produce the expected results. Some prospects will likely come from our franchise marketing efforts. Owners we talk to about franchising will often agree that we can help them expand, but at the end of the day confess that they are tired or frustrated and really just want to exit.
Now, I don’t want to leave anyone with the impression that acquisitions will become our principle growth driver. Our big opportunity is selling into the network that already exists. But we have completed more than 50 acquisitions over the years, that’s five, zero, and we feel quite comfortable to reacting to any reasonable opportunity that presents itself.
So, the plan of attack remains largely unchanged. First, grow the business via a strong focus on organic growth, leveraging our service menu, geographic footprint, our people, and our technology, grow the network and footprint through franchising in order to fully capitalize on the regional and national account opportunity, maintain an asset light variable cost structure, aggressively manage costs, capitalize on well priced, low risk complementary acquisitions.
In other words, we’re not hunkering down here trying to get ourselves to the other side of a bad operating environment. The numbers are looking good, growth opportunities are there and they are significant. With this strategy, and more importantly the work ethic capabilities and the commitment of the people on our team, we are fully focused on continuing to build the best company in the same-day space, and the operational rhythm is real good right now.
I’ll turn the call over to Ray now for his review of our financial results.
Thanks Rick, good morning everyone.
Net income for the quarter was $4 million, $0.39 for diluted earnings per share compared to $3.6 million, $0.34 per share in the same quarter last year. The higher net income per share results from the additional operating income produced by higher sales, and a 4.4% reduction in the number of outstanding shares, reflecting the 621,000 shares that we repurchased during the last fiscal year, most of which occurred in the fourth quarter.
Sales were $112 million, 11.1% above the prior year. The core growth rate, the rate excluding the impact of foreign exchange and fuel surcharges, was 6.8%. As we stated on our last call, we expected the core growth rate this quarter, and next quarter, to be in the mid single digit range, with the core growth rate picking up in the final two quarters of the year. And in the first quarter, our core growth rate was 6.8%, in line with our expectation.
The gross margin percentage this quarter was 26.6% of sales, compared to 26.8% in the same quarter last year, reflecting the decline in on-demand sales as a percentage of total sales. The gross margin was in our target range of 26.5-27%, and we expect the gross margin percentages to be in the range for the remainder of this fiscal year, and be above the same quarters in fiscal year 2007.
SG&A expenses for the quarter increased $2.1 million, or 10.4%, compared to the same quarter last year. As a percentage of sales, SG&A expenses were 20.3%, compared to 20.4% in the prior year quarter. Approximately $2 million of the increase is attributable to the impact of additional personnel hired over the last 12 months, to support not only the current level of business, but also future growth, in addition to normal increases in compensation, and higher costs for employee benefits. As the core growth rate accelerates above the current level, the company expects to realize additional leverage from its relatively fixed cost infrastructure.
Net cash used in operating activities was $4.3 million for the quarter just ended, compared to $167,000 last year. An increase in accounts receivable, and the funding of accounts payable, primarily the July share repurchases, are the primary reasons for the increased use of cash this quarter. Of the $8.5 million increase in accounts receivable since July 2007, $3.1 million is attributable to the growth in sales; $2.4 million is due to the difference in the conversion rate between the Canadian and U.S. dollars with the balance due to a temporary increase in day sales outstanding. We expect the growth in accounts receivable to be more in line with year-over-year growth in sales by the end of the second quarter this fiscal year, taking into consideration the relative strength of the Canadian dollar. Reduction in accounts payable from year end is attributable to the share repurchases of $4.8 million that were transacted on July 30th, 2007, with a settlement date of August 2nd.
As to our outlook for ‘08, we continue to expect diluted earnings per share to range between $1.45 and $1.55. We expect the gross margin percentage to be in the 26.5-27% range for the full year. And we expect the effective income tax rate to be approximately 38% of pre-tax income. Year-over-year sales growth is expected to be in the 6-10% range, and just to remind you, fiscal year 2007 included approximately $10 million of one-time sales to a single customer that ended in the fourth quarter of fiscal ‘07. We exited one contract for $2 million because of price, and another contract for a similar amount was lost because the customer sold, both occurring late in the fiscal 2007 fourth quarter.
One last item before we open it up for questions. The second quarter of our fiscal year is generally the most challenging from a profitability standpoint, because of the lower number of business days in the quarter, the general slowdown in the on-demand business after the holidays, higher payroll taxes at the beginning of the year, and higher stock option expense for the annual Board of Directors Awards.
The second quarter of last year includes a one-time benefit from the settlement of prior year cross border charges between the U.S. and Canada that added $972,000, or $0.09 per share to income that obviously will not be repeated this year. If you are looking at our next quarter, you should factor this into your analysis.
This concludes my comments. Operator, we will now be glad to entertain any questions.
Thank you. (Operator Instructions)
Our first question comes from the line of Robert Dunn, with Sidoti & Company. Please proceed with your question.
Robert Dunn - Sidoti & Company
Robert Dunn - Sidoti & Company
This is a question about the franchising. You had five this quarter, is there any outlook in terms of the pipeline, how many we can expect, moving through this year, do you expect that rate to accelerate at all?
I don’t really have a projection on that. It’s very hard to read what happens on a month-to-month and quarter-to-quarter basis. I mean, I’m real, real happy with what we’ve accomplished so far, we’re feeling very bullish about the appeal to local owners. I think the program has long legs, but I don’t really have a number that I’d be comfortable giving you in terms of an outlook. That will probably change when we get a little more long in the tooth with the program, but right now it’s a little hard to read.
Robert Dunn - Sidoti & Company
Okay. Your comment about the acquisition environment, does that kind of imply that near term, the main use of cash is going to turn to acquisitions rather than share repurchases?
No, no. The majority of the deals that we’ve done in the last few years have been, what’s the word you like to use? Opportunistic. In the sense that the owner’s frustrated, wants out, and there’s limited, if any, cash at closing. And the first payments are typically due 90-120 days after closing, after we’ve collected the receivables from the business we bought. So, they’re designed to be very efficient in terms of cash.
Robert Dunn - Sidoti & Company
In terms of that percentage of revenue generated by that customer list, is it typical of the structure?
Robert Dunn - Sidoti & Company
Alright, one more. I noticed in the proxy statement last week that there was a change in control clause added to the compensation package. Was that due to anything specific, or is this kind of more general?
Robert, that was not a change in what we were doing, I mean, those changes to control agreements have been in place, it’s just that there’s additional disclosure requirements that you saw in the proxy. It’s been in our disclosure in the past, just not as robust as it was this year.
Robert Dunn - Sidoti & Company
Okay, great. Thanks a lot.
(Operator Instructions) Our next question comes from the line of [Clayton Ripley, with Bears Capital Management]. Please proceed with your question.
Yes, I’m sorry if I missed this, but did you give a number for CapEx, what you expect for the rest of the year?
Well, generally, our CapEx runs between $2 and $3 million, and we wouldn’t expect, barring any new leases where we have lessor financed improvements, which is required to be put in there now. But our general CapEx for, and most of this relates to IT infrastructure, is generally in the $2 to $3 million range, and we don’t expect that to be any different this year.
Okay. In regards to the on-demand business, it’s still declining. Do you have any sense of when and where the bottom of this might be? Is that just a product of the current economy? Will that come back up?
I think it’s partly a result of a soft economy. Our goal, frankly, is to grow that business. Grow it as a stand alone product for shippers that require emergency transportation services, and also, grow it by virtue of making sure that it’s always put up in front of our distribution and dedicated accounts, that require on-demand capacity as well as dedicated. So our goal is to grow that part of the business. We like that business, it’s a core confidency, we make money at it, and we can basically do it everywhere: air and ground, local and inner-city.
And that’s your highest margin business, isn’t it?
Well, it’s the highest gross margin business, but contribution to fixed overhead is common for all of the services. The on-demand business is high gross margin, but it’s transaction intensive, and there’s a lot more SG&A involved with that product than distribution and dedicated. So in terms of profitability or contribution to fixed overhead, we like all three services equally.
Gentlemen, there are no further questions in the queue. Would you like to make some closing comments?
No closing comments except thanks for joining us on the call, and we’ll look forward to talking to you soon.
Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.
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