Dynamex, Inc. F3Q08 (Qtr End 4/30/08) Earnings Call Transcript

Jun. 5.08 | About: Dynamex, Inc. (DDMX)

Dynamex, Inc. (DDMX) F3Q08 Earnings Call June 5, 2008 11:00 AM ET

Executives

Kevin Unger - Director of IS and Corporate Support

Richard McClelland - President and Chief Executive Officer

Ray Schmitz - Vice President and Chief Financial Officer

Analysts

Robert Dunn - Sidoti and Company

Clayton Ripley - Bears Capital Management

Christina Whitehead - Thompson Davis

Adriano Almeida - DGHM

Operator

Greetings and welcome to the Dynamex Inc. third quarter 2008 earnings conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation (Operator Instructions). As a remainder this conference is being recorded. It is now my pleasure to turn the call over to Mr. Kevin Unger. Thank you Mr. Unger, you may begin.

Kevin Unger

Thank you Claudia and welcome to this Dynamex conference call to review the company’s results for the third fiscal quarter of 2008 which ended April 30, 2008. Conducting the call today will be Rick McClelland, Chairman and Chief Executive Officer and Ray Schimtz, 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 risks 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 and other Company communications.

With that stated I’ll turn the call over to Rick McClelland.

Rick McClelland

Thanks Kevin. Good morning everyone and welcome to the call. I am going to lead off with a few comments and then turn the call over to Ray for his analysis of the quarter. This past quarter was challenging on a number of fronts. We had to deal with the effects of an economy that has negatively impacted a number of our existing customers during the quarter; those customers were selling less and therefore shipping less.

We also had to deal with severe weather that produced record snow falls in a number of our market areas. This resulted in the lost of one and more revenue days in certain locations during the quarter. We don’t normally talk much about weather issues, but what we saw in this past quarter was way out of the ordinary.

For example, in one of our markets in Eastern Canada we have received 11 feet of snow in the second half of the quarter, other locations in Central and Eastern Canada received 3.5 feet to 4 feet of snow during the same period. Early in March Central Ohio received about 2 feet of snow and in all cases, the precipitation did not play out over the course of a few weeks. It came in the form of two or three major storms, significantly affected our operations.

Our year-over-year sales results were also impacted by a big temporary injection of revenue in Canada last year that did not recurred this year and finally a new provincial holiday was declared in Canada that’s known as Family Day and that basically shut down most of the country for a day.

These factors muted our sales results year-over-year, but the external factors that negatively impacted us were unavoidable and I think we made the best of a bad situation. Excluding the effect of the one-time revenue spike in Canada last year, we continue to grow Dynamex in spite of a pretty soft economic environment and all things considered I am pleased with the top-line results.

During the quarter we continued to successfully manage thorough the unprecedented environment related to fuel costs. I am please to report today that our pricing processes and disciplines are working. Our operations teams did a great job on the cost management side of the house, our gross margin ratio held at about the same level as last year even though the increasing fuel surcharge created negative pressure.

We improved our other direct cost category and our SG&A ratios by about half a point and overall operating income increased by 11%. The results for this quarter put us in a position to achieve our annual guidance of $1.45 to $1.55. As a result of our positive operating results, cash flow remained strong during the quarter and we took advantage by recently repurchasing 105,000 shares of Dynamex’s common stock while remaining debt free.

So, while certain factors during the quarter muted our short-term growth rate, we did not let that affect our focus related to cost management nor did those short-term factors diminish in anyway our mid to long-term growth opportunity. In my view the outlook for Dynamex remains very positive. During the quarter we saw a strong momentum related to the number of new accounts we got closed and the pipeline remains strong.

We are rapidly approaching the end of our fiscal year and therefore part of management’s attention has been pointed at our annual budget process. This of course involves reflection on the recent overall momentum of the business and the outlook for the near term and beyond. This year’s budget process is of particular interest to me because of the $0.5 billion annual sales run rate milestone at hand.

I can remember attending a planning session with our management group in Chicago a few years back when we threw down the goggling on the $500 million mark. At that time I think most of us felt like this was a big goal. Some likely felt that it was a maybe goal. I doubt anyone thought it was inevitable or in the bag and that in part is because some of us were around back when Dynamex was a $15 million Company. Between then and now we've seen the fax machine and then email impact the business as well as the IPO era and all the related carnage associated with the integration of numerous, rapid fire acquisitions.

While we’ve adopted pretty well to change, we don’t take anything for granted. One of things I like best about Dynamex is the “put your head down and run hard” mentality and that’s exactly what we did after that meeting in Chicago and here we are at the threshold of the target we set. So, I am very proud at what our folks accomplished. It all reminds me of one of my favorite quotes that goes “we must maintain unwavering faith that you can and will prevail in the end regardless of the difficulties and at the same time have the discipline to confront the most brutal facts of your current reality whatever they might be.”

I think that quote is a good characterization of the personality of Dynamex and the people that make it go everyday. With all that in mind I think it's appropriate to spend some time talking about the billion dollar company that we are now focused on building; talk about why we think that can happen, or overall tactical approach and some of the things we think this should mean to our investors.

I am going to comment on four main issues or themes; first, the revenue streams or revenue engine that are going to get us there; second, what the network will look like; third, the operating disciplines that are going to make this happen and fourth, observations that management has related to our longer-term financial outlook.

With respect to the revenue engines a big part of our growth strategy continues to involve our pursuit of the fleet outsourcing opportunity. We are experiencing good growth in this area and I think this positive momentum will continue if not improved. The cost of fuel increases, private fleet operating costs also increased and the motivation to look at alternatives like outsourcing comes by.

The client’s objectives counteract the affects of rising fuel costs and while we can't reduce the cost of fuel, we can often operate routes for shippers at a lower overall cost, because shippers can use our unique service management that offers scheduled and on-demand capacity, they can take advantage of our route optimization technology, our innovative vehicle mix options and all along with the combination of full-time and part-time routes. So, we’re experts in the last mile routing game and we bring franchise.

The weak economy also helps us secure outsourcing clients. We are often, exactly what the doctor ordered because by outsourcing shippers that are impacted by the downturn can often reduce costs, enhance their operating flexibility, focus more on their core business by eliminating the operational distraction of running a transportation entity and they maybe able to liquidate rolling stock and deploy the capital elsewhere in the business.

There is something of an irony here in the sense that the combination of rapidly rising fuel costs and a weak economy represent big negative challenges to many firms in the transportation industry, some that has a well approved leasehold in my opinion, but these same issues are increasing the size of our opportunity and the motivation of perspective clients to entertain our value proposition.

We have solid outsourcing solutions for shippers, we have a sales team with the necessary confidence and competence were proprietary technology that adds important value and it’s evolving all the time and our growing customer portfolio enhances our creditability in the market.

On a quarter-to-quarter basis the revenue growth associated with our outsourcing service can be a little lumpy because the sales cycle can sometimes be a long one, but its worthy efforts since client relationships in this area tend to be very sticky and it’s worth the effort because of the size of the overall opportunity. According to the commodity flow survey from the US Census Bureau private fleets operate almost four out of every five trucks on the nation’s roadways, so this is a very big opportunity for us and we are in hot pursuit.

Another revue engine involves migrating overnight shipment activity away from the large international carriers by providing shippers with a more flexible same-day solution, with shipments that stay within a short radius of their distribution centers. They are giving their inter-city and local shipments to the global package carrier’s; shippers can give us the local traffic today and we’ll deliver today.

This allows the shippers to provide their clients with better service and more flexibility and this model minimizes the risk of damage shipments and misdirected shipments associated with large sortation centers. This is another big market. We have had success with this application in a variety of industry verticals and we are just scratching the surface of the opportunity in my opinion.

Another revenue stream involves offering large regional and national shippers or a branch network allowing them to consolidate their local transportation vendor base. Our national foot print has always been a strong selling feature for accounts using our outsourcing and distribution services, but during the past quarter we also secured business on a national basis from a number of clients that will take advantage of our On-Demand capabilities.

The On-Demand service was our original revenue engine and it continues to be an important part of the value proposition we offer shippers, especially those who want a bundled solution that involves fixed or schedule route capacity, but also On-Demand capacity to address volumes spikes or unexpected emergency situations.

Most of our client that use the On-Demand service use it for short-haul ground requirements, but our operation staff can handle any type of emergency transportation requirement; that might mean local or inter-city or it might mean air or ground capacity and it sometimes involves a combination of both. For example about four weeks ago our Halifax branch received a call from a client that had to respond to a mechanical failure on an offshore drilling platform. A repair part, weighting about 1100 pounds had to be moved from Norway to Eastern Canada on an ASAP basis.

Dynamex charted a jet, in this case the Gulf Stream Three and when the flight arrived in Halifax from Norway we had a full size cargo van positioned on the tarmac at the airport. The van was used to take the part to the ultimate delivery location. Based on the current price of crude oil, for each 24 hour period that our client was without the part they anticipated a loss of hundreds of thousands of dollars and start to stop we required 18 hours to complete the task.

Another revenue stream involves partnering with global and the transportation and logistics firms that require a same-day transportation component as past of a multi-model solution. Rather than say no to an opportunity they can accept the work and outsource the requirement to Dynamex. So, we are well positioned to take advantage of this large organic growth opportunity that involves the market for outsourcing, part of the overnight carrier market, the opportunity tied to the national accounts and the opportunity to partner with large Domestic and International logistics companies.

As the economy continues to sputter and as fuel costs continue to rise this business becomes more challenging and frustrating for many owners of delivery companies in our large and fragmenting industry and so we expect to grow Dynamex by continuing to purchase customer lists from owners who want to exit the business and by franchising with owners who want to stay in the game but do so with a strong partner. This is one way we are going to continue to expand the overall network into our geographic reach.

So, I will make way now and talk a little bit about what we expect the network to look like as we get closer to the next sales milestone. The location and rate of customer list acquisitions is difficult to predict. We’re in the market and in Canada and the US in terms of deals, but we’re selective and usually opportunistic.

If we like a deal in terms of revenue quality, the people, the price and the deal structure we are good to go in just about any market. The deals we have done has typically been small; $1 million in annual sales or so, but nice tuck-ins nonetheless and with respect to the franchisees it’s easier to be a little more specific about our ultimate expectations.

We currently operate a total of 62 company-owned business centers in 42 markets and in launching the franchise initiative 24 months ago we’ve been focused on the remaining top 230 markets in North America. We have made good progress and have added 46 additional locations and recently added some additional franchise sales resources and that should increase our production to 30 to 40 new deals per year, but the bottom line is we are in the process of taking the overall networks from a 108 locations to 230 locations over the next 48 to 60 months.

Well we have a view related to the number of additional markets and the location of the additional markets. It’s not exactly clear how the franchise sales activity will affect the royalty stream, here is what I mean. Of the 46 current franchise locations 26 were existing businesses that converted to a Dynamex’s franchise and began generating royalties once the integration process was completed which can take about 9 to 120 days.

The remaining 20 existing franchise locations were start-ups. A number of these locations are now active and some seem to be active and will therefore produce limited amounts of royalty revenue for us until we begin to build a larger customer base, but both conversions and start-ups are good franchises for us; the only difference is conversions bring in immediate royalty stream, whereas the royalties and start ups is deferred, but both mean another flag is planted, both represent additional growing operational capacity, both represent network expansion and better coverage for our national accounts and both will produce an ongoing and growing royalty stream.

So, when we think about the next milestone which is double the size of the business we get very focused on execution. We know the market segment opportunities are there, we built the business in Canada over a long period of time with a $200 million run rate and the US economy and the US opportunity is ten times the size. The business in the US is the same business, the cost structure and earnings quality is comparable in terms of branch performance. We know our tactics are working, we see it every week, we see it every month's.

The result of our efforts in terms of compound annual growth rate over the past five years has been 11.8% and 12.85% over the past three years. We expect that kind of top-line momentum to continue over the long haul, so we don’t feel like this is about, if we can do this. We think it’s about how, we think it’s about execution and with that in mind I want to shift gears and talk about the operating discipline that are going to make this happen and there are five areas of focus.

First one is management of the existing sales territories and the existing account base. This involves issues like managing, retaining and growing existing sales areas and client relationships and the client relationships that we have as most of you know are local, regional and national.

Second area of focus or discipline involves the ongoing development and leadership of the local or national sales organization, the people that are growing the business. This involves our recruitment processes, induction of new people and performance management systems related to everyone that's in the local account groups and the national account group.

Third discipline involves managing capacity and quality. What this means is staying in front of the wave as it relates to pickup and delivery capacity we need to have it when we need it and where we need it. It’s a bit of an art, bit of a science and a bit of a critical discipline.

The fourth area involves the training and development or the human resource side of our growing business. DXU our online university plays a big part here and we developed many industry specific and service specific business processes over the last 20 years and more and more of them are now online for new and tenured people on the team. In addition to the training and development area we are also focused on success in planning in order to keep up with the anticipated growth rate of our business.

The fifth and final area involves managing direct costs. We've secured a large amount of fleet outsourcing and distribution business over the past few years and this business tends to have a lot of moving parts. Cost areas like driver cost, sortation and sometimes line-hauls or shuttles that move traffic to and from cross stock locations and client distribution sites.

Managing these costs on a daily basis is essential and in part our cost management process includes a daily P&L for each major account at each business center. This means that our local GMs have visibility on the sales and major cost lines for each major account, which gives them the ability to react quickly if volume and / or costs get out of line on any particular day. We are in a position to act that day, any day of an event rather than having to wait for month in P&L that provides only aggregated sales and cost data for the entire branch.

So, there is a lot’s of managerial blocking and tackling going on everyday related to these five areas both in terms of execution and ongoing process development. I thought you’ll find that interesting. These are the things that we are focused on as we look forward to continue to growth and now that we’ve covered the revenue engines that are going to drive the growth and what the network will look like and the operating disciplines, I will touch on in general and investor guidance.

Everything we have been talking about, in my mind means that we believe we have a long runway and that our long-term growth rate will be in the 10% to 12% range, some years that maybe higher than that some years lower. We also believe that 10% to 12% top-line growth rate should translate into EPS growth of about 15%. We have a single-digit share of $15 billion opportunity; we are well positioned to take advantage of it; we have great operating people, great geographic coverage that’s expanding, we have unique service menu and the balance sheet looks great. So, this is a long-term story not a quarter-by-quarter story.

Finally, before I turn the call over to Ray I would like to comment on our new Director. I’ve know Craig for about eight years. We worked on a number of projects when we was running Greyhound here in Dallas. He has been the CEO and CFO of a Public Company. He spent many years working in the transportation industry in North America. He’s done some work in the M&A area and the same day local delivery industry. He is a successful and proven leader and I couldn’t be more excited that he has joined the team.

Now, I will turn the call over to Ray now for his comments.

Ray Schmitz

Thanks Rick and good morning everyone. Net income for the quarter was $3.8 million, $0.37 diluted earnings per share compared to $3.5 million or $0.32 per share in the same quarter last year. Results this year were negatively impacted by two relatively large adjustments; first, a customer in Canada filed for protection from his creditors resulting in an additional bad debt expense of some $300,000 over what we would normally expect.

The increased reserve for workers compensation claims for years prior to 2001 were $180,000. Those adjustments reduced diluted earnings per share by approximately $0.3, absent those adjustments operating income would have been 20% higher than the prior year. A reasonable follow-up question to the bad-debt write-off in Canada might be that this potent to trend or is it more of an anomaly; we think it is the latter.

During this quarter we made considerable progress in reducing outstanding receivables from the January levels. 70% of our sales were to regional and national shippers that use us on a multi-market basis. We've seen no significant changes in the payment patterns from those customers. We believe that bad-debts for the full year will be inline with our normal percentages between one-tenth and two-tenth of 1% of sales excluding the Canadian account.

Sales were $113 million, 9.1% above the prior year. Core growth rate in dollar sales the rate excluding the impact of foreign exchange and fuel surcharges was six-tenths of a percent. This quarter had eight-tenths of a business day less than the prior quarter, so on the sales per day basis the core growth rate per day was a negative six tenths of 1%.

As Rick indicted in his comments lower delivery volumes from certain large clients, severe winter weather conditions in parts of the US and Canada and the new holiday in Canada negatively impacted sales growth. The year-over-year comparison was also impacted by approximately $5.1 million in sales to the single Canadian customer made on the internal basis in last year's quarter. Excluding those sales the core growth rate per day was 4.8%. Looking forward, keep in mind that last year's fourth quarter includes $3.7 million in sales to the same customer and those sales ended during that quarter.

Our gross margin percentage was 26.2% of sales compared to 26.4% last year. The margin this year was negatively impacted by the bad-debt and workers compensation adjustments I referred to earlier. The gross margin percentage was below our fiscal year 2008 target range of 26.5% to 27% but we expected to be in that range in the fourth quarter of this fiscal year. SG&A expenses for the quarter increased $1.5 or 7.1%. As a percentage of sales SG&A expenses were 20.2% compared to 20.6% in the prior year.

Approximately $1 million of the dollar increase is attributable to the stronger Canadian dollar with the remainder due to the additional personnel hard over the last 12 months to support not only the current level of business, but also future growth in addition to normal increase in compensation and a higher cost for employee benefits. As the core growth rate accelerates the company expects to realize additional leverage from its relatively fixed cost infrastructure.

Net cash generated from operating activities was $6.4 million down from the $7.6 million generated last year for the first nine months of the year. The lower amount this year resulted from higher cash taxes of $2.5 million, the payment in August 2007 for share repurchases consummated in July 2007 and the benefit last year from less role financed leasehold improvements, all of which were offset by the reduction in working capital required to finance accounts receivable compared to the prior year.

We purchased 105,800 Dynamex common shares in May, 2008 at an average cost of $24.06 per share. Management intends to continue to purchase shares from time-to-time using available cash or temporary borrowings from the bank facility. We currently have a $19 million balance in our current authorization for share repurchases.

Moving to the outlook for all of fiscal year 2008, we expect diluted earnings per common share to range between $1.48 and $1.52. In the middle of the range that we first disclosed last September of $1.45 to $1.55 per share and that we affirmed each quarter thereafter and finally we expect year-over-year sales growth be in the 10% to 11% range based on the current Canadian and US dollar exchange rate and with fuel prices remaining at current levels in the fourth quarter.

As to our outlook for fiscal year 2009 and beyond we intend to limit our comments to expected top-line and bottom-line results and as Rick said in his comments we expect 10% to 12% top-line growth over the longer-term which equates to a 15% increase in net income. Finally for your information we are moving the time of our call from 10am central time to 9am central time beginning with the next quarterly conference call which will be held on September the 18, 2008.

This concludes my comments. Operator we will now be glad to entertain any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from Robert Dunn with Sidoti and Company. Please state your question.

Robert Dunn - Sidoti and Company

Hey, thanks for that. I thought Rick your comments were very helpful. Just kind of a housekeeping thing; the $5.1 million in project from the prior period was that in schedule distribution?

Ray Schmitz

Yes, it was.

Robert Dunn – Sidoti and Company

Okay and the $5 million in business that you walked away from the fourth quarter of last year because it wasn’t profitable enough, do you remember what bucket that came out of?

Ray Schmitz

That should have been scheduled in distribution also I believe.

Robert Dunn – Sidoti and Company

Okay. Relative to the guidance I know there is a slight sequential decrease in the per day rate; is there any vertical -- specifically you are seeing any material, that it’s beginning to weaken relative to what it was doing in the first half?

Richard McClelland

I don’t know that there is any leakage on any vertical that we are aware of. Although there has been some -- the economy has had some impact on some of our larger customers on the same store basis, but we have been able to replace that revenue with new locations, but I don’t think its and any particular vertical. We are not impact a whole lot by the housing industry; we are not in the automotive business, not a great deal, so we are in verticals. There has been some in retail, but that would be the one area where we would have the largest impact I would assume.

Robert Dunn – Sidoti and Company

Okay and sort of on the margin side, the target rate is 26.5 to 27. I remember a few back on the second quarter conference call. You went a bit further and actually said that you are looking for year-over-year gross margin improvement in the back half. I mean you take out that bad debt expenses, the workers comp will grow; that was actually true in this quarter. You mentioned that the bad debt was going to be anomaly. I was kind of just wondering if that was an intentional back away from that statement and if so are you expecting some sort of ramp in SG&A or depreciation?

Ray Schmitz

No, no I don’t think that our comment should have guided anyone in that direction. We are expecting to be in the range that we said 26.5 to 27 in the second quarter.

Robert Dunn – Sidoti and Company

I mean that one statement about the year-over-year improvement in the back half, I mean do you think that’s still holding through or?

Ray Schmitz

I believe that would hold true, yes.

Robert Dunn – Sidoti and Company

Okay and I guess some of the franchising its helpful with the breakout, but think maybe can we get a general sense on maybe what the average revenue per location is currently…?

Richard McClelland

It would be north of $1 million a location. We've got a small group of mid-size locations and a small group of sort of industry typical locations and a few start up side. I am struggling here because I don’t have the number at the tip on my fingers here or tip of my tongue I guess it is. It's a ballpark a little north of $1 million in terms of revenue per year.

Robert Dunn – Sidoti and Company

Revenue per year from all 46 or is that the average revenue per location?

Richard McClelland

Let me think. It’s not going to be per location because some of the locations are start ups and the revenue per year is zero right now. So what we would expect to see over the longer-term from these individual locations that we talk about for franchisees that we would move towards that $1 million mark of revenue per year. Today we are not there and because we have a number of locations that are in the start up mode and we have some operating locations and today that number is below 750,000 per location mark, but as we grow that business we would expect those numbers to move up and we are trying to convey that today do not expect that the loyalties from those locations to immediately be the 5% or $752 million per location.

Robert Dunn – Sidoti and Company

Okay, it’s helpful. Just one last thing; acquisitions, are those backed into that long-term guidance that you gave?

Ray Schmitz

Generally it is, yes because we expect to have some customer acquisition list and what we are doing on a go forward basis. Those numbers are not significant generally to our growth rate, that’s just part of what we did.

Operator

(Operator Instructions) Our next question is coming from Clayton Ripley with Bears Capital Management.

Clayton Ripley – Bears Capital Management

First if you could give me just a little bit of color on the two franchises that were terminated. What happen there and how long -- I guess do you give them before you decide to give up on that particular franchise?

Richard McClelland

In both cases I just think we got to a point where we did not think that we were going to accomplish the objectives that we have for that market with the entity that we signed up with and just decided to end it and restart it at some point in the future with the new partner and there is no real norm in terms of how long we take. I mean you work with someone for a period of time and at some point you get to a point where you feel confident about the direction or you don’t. So, I think situations like that are going to happen from time to time. It did come as a particular surprise. I think that we had good success overall and we want to make sure that the people that we’re partnering with are vigorous and ambitious and that’s really it.

Clayton Ripley – Bears Capital Management

So it’s more of a product of the people involved and not the market. Those markets are still part of your 230 that you want to go after?

Richard McClelland

Absolutely, not to do with the market.

Clayton Ripley – Bears Capital Management

Okay, and where those conversions or startups?

Richard McClelland

Both of those were startups; neither one had started operations and that was part of the decision making process, is that they had not started operations.

Operator

Our next question is coming from Christina Whitehead with Thompson Davis. Please state your question.

Christina Whitehead - Thompson Davis

I just had a couple of quick questions. the bad-debt that you spoke of in Canada, where is that on the P&L; it sounds like it was in other direct costs?

Ray Schmitz

That’s correct.

Christina Whitehead - Thompson Davis

Okay and then secondly, the revenue growth that you are suggesting in the fourth quarter and the profits you are suggesting, about $0.40 to $0.43 per share, sort of implies a big increase in salaries over 10%, is there something unusual going on in the fourth quarter or am I looking at that incorrectly?

Ray Schmitz

I don’t think that you are looking at it incorrectly. There are things that happen in the fourth quarter; we trued-up bonuses, they have more days in that quarter and so the interplay and all of those, the number that we are looking at in the bottom-line -- I don’t want to get tied up in my shoe laces here. I want to you look at the bottom-line and the top-line and that’s what you need to concentrate on. The pieces in between can change, so we are comfortable with what we are telling you for the fourth quarter in the earnings per share at the bottom-line.

Operator

Our next question is coming from Adriano Almeida with DGHM. Please state your question.

Adriano Almeida - DGHM

My first question is on this customer that filed for protection. I assume they are going to continue to be a customer, right?

Richard McClelland

Yes, they are and under the bankruptcy laws in Canada, we get paid very quickly for the work that we continue to do for that customer.

Adriano Almeida - DGHM

Okay, so there are going to be new payment terms going forward?

Richard McClelland

Yes, sir.

Adriano Almeida - DGHM

Now the fact that you wrote-off these receivables; I am just thinking, is this one of those situations where the accountants would have forced you to do that so you went ahead and did it or is it -- I mean how do you feel about your ability to collect this money?

Ray Schmitz

When someone files bankruptcy and gets protection from their creditors for what’s occurred at a point in time, generally in most cases you don’t get a lot of that and we don’t expect to receive a significant part of that $300,000.

Adriano Almeida - DGHM

Okay, now going forward its realistic to temper your expectations from that particular customer, right since they are filing it's probably because you are not doing so, well?

Ray Schmitz

Well when you have a company that is having cash flow problems and their liabilities exceed their assets and then you relieve them of that liability on a go forward basis, they generally can operate in this basically and in pretty much the same fashion that they were before, so that’s a pretty good customer for us and we would expect to have payment terms where we would have little exposure going forward if they continue to have those same issues.

Adriano Almeida - DGHM

Okay, another subject; just to guess if you guys are willing to do this for me. The 4.8% organic revenue growth that you quoted in your release; what do you think that would have been if the weather had been the same as the prior year?

Richard McClelland

I don’t want to…

Adriano Almeida - DGHM

Okay, fair enough. No, I just -- if you are willing to do it, I tired. The other question just thematically, why has an On-Demand weakened more? I mean because usually we would associate this point in the cycle kind of the recession that On-Demand -- wouldn’t you expect it to be a weaker?

Richard McClelland

I personally think to an account this is conjuncture, but I think it's got something to do with how the economy has hurt certain industries a whole lot more than other industries and as Rick pointed out a little earlier in his comments, we are not big players in construction area, we are not big players in the automotive area and I think the bottom line is that a lot of the industries that we generate On-Demand revenue from have not been impacted as bad as other industries.

Adriano Almeida - DGHM

Has the financial exposure you have in there be impacted?

Richard McClelland

Not sure, I understand the question.

Adriano Almeida - DGHM

That the On-Demand business you do with the Bear Stearns of the world? Has that seen an impact? Because you do some of that business right, not as much as Velocity, but you do some On-Demand core year business for financial institutions?

Richard McClelland

Not very much. That’s not a big place for us at all.

Ray Schmitz

One another things here just to point out is we’ve added some customers, On-Demand customers on a national basis that we’ve added over the last quarter. So, that has strengthened the On-Demand and part of the On-Demand increase is also attributable to the fuel surcharge because they are under the same fuel surcharge mechanism that the other customers that we have are and so a combinations of the fact that we have added some new customers, that we have the fuel surcharge and quite frankly when we look back at the last recession and all of the On-Demand business that went away that we thought that was permanent, it didn’t come back, but we think this is really truly emerging transportation and it hasn’t been as impacted this much this time as it was in the 2001, 2002 timeframe.

Adriano Almeida – DGHM

Okay; you had another subject here. On the owner operators, there has been a lot of talk about all these trucking failures and people just leaving the business, the truck brokers talk a lot about that. It made me wonder is there -- your thriving, your business model is thriving; is it the case where the owner operators are participating, are they thriving as well, are they doing well or are they getting squeezed?

Richard McClelland

Well, absolutely they are participating. The fuel surcharge mechanism is in there to protect the drivers. So, the fuel goes up, they get paid more and more to offset their costs and so they have not been squeezed out of the business, no and they are not having the same issues that the independent truckers are having because they are getting a fixed price for the work they do and they are not participating in the fuel surcharge increase.

Adriano Almeida - DGHM

Okay. Final one, just on the franchise model when you talk about -- first of all, is it the right way to think in terms of revenue per location? Is that something we are going to be talking about say a couple of years from now?

Richard McClelland

Yes absolutely. We will be talking about the average revenue per location and the royalty stream from that. At this point we are in the start-up mode in some and others, they where operating at the time that we signed them up, but it takes as Rick said 90 to 120 days to get all the processed done and get the royalty stream and to recognize the franchise there and when you have a startup, the time is extended and so at this point because we have a combination, we’re working through that and as it grows, we will get more and more information in that area.

Adriano Almeida - DGHM

Okay, now given that these -- I am thinking like two years out; these are average revenue per location coming in, in the form of royalties, but aside from some initial time you spend installing your system and training people. These things are basically running on their own costs and on basically auto pilot is it safe that the royalties come in and the bulk of it drops to the bottom line?

Richard McClelland

We think so. I mean there are going to be some ongoing cost. You have to have personnel to manage a group of franchisees because of the things that we do for them, to help them and we think that level should be one person for every approximately 15 franchisees and so there is an element of cost that’s added, but we think the bulk of that in incremental revenues should go to the bottom line.

Adriano Almeida - DGHM

Okay, so let say you are talking this $1 million per location. It won’t take too long before this franchise piece is 10% of your revenues, is that correct?

Ray Schmitz

No, that is not correct. It’s $1 million in revenues if we get a royalty on 75% of the million dollars….

Adriano Almeida - DGHM

I see, okay. The numbers you are quoting is the actual revenue of the franchisees; it’s not your royalty?

Ray Schmitz

That’s correct.

Adriano Almeida - DGHM

That’s I guess what I wanted to clarify otherwise we would be looking at some massive numbers here.

Operator

Gentlemen, there are no further questions at this time. I would like to turn the floor now back over to management for closing comments.

Richard McClelland

Thank you. Thanks for joining us on the call everyone. We will look forward to talking to you in September and have a great day.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and we thank you for your participation.

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