Daseke, Inc. (NASDAQ: DSKE), the largest flatbed, specialized transportation and logistics solutions company in North America, lowered its full-year 2019 outlook specifically citing worse than expected results in its flatbed division.
In its second quarter 2019 earnings report, the carrier reported adjusted net income of $3.4 million in the period, or $0.05 per share, which was considerably better than the consensus estimate that called for a $0.06 loss.
Weakness in the flatbed market led the company to lower its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) forecast by approximately 17 percent on both ends of the range. The company now expects total revenue of $1.7 to $1.75 billion (prior guidance had been $1.8 billion to $1.9 billion) and adjusted EBITDA of $165 to $175 million (prior guidance had been $200 million to $210 million).
“While our Specialized segment continues to deliver strong performance amid loosening economic conditions, the market for our Flatbed solutions came in lower than we originally projected in the first half of fiscal 2019. As a result, we have adjusted our outlook to reflect today’s market conditions. We remain committed to capturing synergies throughout our operating companies, while seeking to lower our cost structure and de-lever the business,” said Daseke’s Chief Financial Officer Bharat Mahajan.
On the earnings call, Management said that it has factored “downward pressure” on rate per mile moving forward. The original full-year outlook called for a 2.5 percent rate increase, but with eroding flatbed market conditions management believes that rates will increase 1.8 percent on a year-over-year basis in 2019. With spot rates remaining below contractual rates, management believes that there is the likelihood for rate pressure to persist in the back half.
The lowered adjusted EBITDA forecast reflects lower rates and general cost inflation that will compress margins. Further, management is assuming a continuation of current macroeconomic trends through the remainder of 2019 as well as normal seasonal improvement as peak shipping season approaches. Lastly, management said that there will likely be a single-digit decline in the company’s truck count as they attempt to improve utilization.
In the second quarter, total revenue increased 20 percent year-over-year to $451 million, up 1 percent on an adjusted acquisition basis. Adjusted EBITDA was basically flat year-over-year at $46 million, down 16 percent when adjusted for acquisitions.
“Our unique and leading Specialized Solutions transportation segment delivered another quarter of consistent performance, which helped us overcome a softer environment in the Flatbed Solutions market and deliver 20 percent top-line revenue growth or nearly 1 percent on an organic, acquisition-adjusted basis,” said Daseke’s chairman and Chief Executive Officer Don Daseke.
Specialized Solutions revenue increased 29 percent year-over-year to $281 million. Revenue per tractor increased 13 percent to $64,600 as rate per mile was up 23 percent to $3.54. Adjusted operating ratio (OR) was 93.2 percent for the division, 150 basis points worse year-over-year.
Flatbed Solutions revenue increased 8 percent year-over-year to $175 million with revenue per tractor declining 7 percent to $42,400 and rate per mile moving 4 percent lower at $1.94. Adjusted OR was 95.5 percent for the division, 320 basis points worse year-over-year.
Management called out weakness in construction markets and for commodities like lumber, roofing and steel as well as a rate per mile declines as the reasons for underperformance in the division. They noted that one of their recent acquisitions was heavily exposed to the spot market, which magnified the decline in rate per mile.
The company also announced operational changes designed to provide “intelligent integration and efficiency.” Specifically, Daseke will consolidate some of its acquired operating companies, lowering its number of separately operated business units from 16 to 13. Also, the company will implement a variety of strategic initiatives throughout the organization. In total, these actions are expected to generate $20 to $25 million in operating income by fiscal 2021.
On the call, management said that the operational enhancements that will be made come after a long run of acquisitions. Daseke has completed 19 acquisitions, seven of which were completed in 2017 alone. The company has seen its fleet count climb from 60 tractors in 2009 to more than 6,000 today. Its revenue has increased from $30 million to potentially north of $1.7 billion, if management’s new guidance holds, over the same period. As the company has slowed its acquisition efforts, it will now focus more on improving the underlying operations of those acquired companies in areas like equipment utilization and yield management.
The operational enhancements announced in the earnings release formalize the company’s efforts that include the addition of a Chief Operating Officer at the beginning of the year and three new board members with “expertise in operations” in May.
Shares of DSKE are off more than 25 percent on the news.