Roadrunner management: it's going to take some time to right this ship

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With a release of nine months’ of financial data all at once—but with some numbers still running late--the relatively new management team of Roadrunner Transportation made its first significant presentation to the investor community Monday.

There was no promise of a quick turnaround for the truckload, LTL and logistics company, which was rocked in the past year by a massive restatement of past earnings, the ouster of its management team and the significant investment of Elliott Partners to shore up its capital structure.

CEO Curt Stoelting, appointed CEO last spring just a few months after joining the company as President and COO, laid out a five-level plan to restore the company. Only one of those five—leadership and foundation—was recorded as completed last year, with some steps taken on simplification and integration, the second step.

Longer-term, Stoelting said according to a transcript of the earnings call: “The fix at Roadrunner is straight forward: hire the right top leadership team that sets the proper tone from the top and actively engages with our operating business unit leaders throughout the company; number two, build strong finance, IT and HR teams to change the practices of the past; and three, develop plans and strategies that will yield an improvement in return on invested capital and move our EBITDA margins back in line with industry norms. “

For example, Roadrunner’s truckload division had gotten diffuse and away from focusing on key lanes. But the division’s new management is looking to change, to “increase the density and really focus on our key metro-to-metro long haul ways which has always been Roadrunner strength. So, I think we’ve got a little diluted. We’re paying the price for it now. And that’s going to continue over the short run.” 

The call coincided with the company’s release of its earnings statement for the first three quarters of 2017. All had been delayed as the company attempted to clean up the extensive problems in its accounting which led the company to restate its earnings all the way back to 2014. In 2015, the company’s stock had reached more than $28. At approximately 2:30 p.m. Monday, it was $2.315, a drop of 22 cts on the day, about 8.85%. The 52-week low is $2.28.

The company said it is not ready to release yet its fourth quarter 2017 earnings, or its 10-K. However, it does expect to be caught up by the end of the second quarter.

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The conference call was somewhat surreal, in that in discussing market conditions, the management representatives needed to talk about the first three quarters of 2017, which are very much in the past and was a very different landscape than what is present today or even the fourth quarter of 2017. Mike Gettle, the president and COO, said the company’s Truckload Logistics segment faced a “difficult rate environment in the first three quarters of the year.” But in a nod to how things have changed, he added, “the rate environment improved in the fourth quarter and we saw rates transition from declining in the first three quarters of the year as compared to 2016 to increasing in Q4. And we are seeing an acceleration of that trend in 2018.”

Gettle and Stoelting both talked about a gradual shift in various operations at Roadrunner, with significant focus on the balance between using purchased transportation and independent contractors in its LTL activities, and a general lack of uniform practices.

A fragmented LTL operation

Gettle described the Roadrunner line-haul operations as having been “completely fragmented, with small teams of one or two people at each of our terminals. It wasn’t as integrated as it needed to be.” Terminals had no consistency of operations, and it produced “erratic results” that could not provide quick information to customers on the status of their orders.

The changes that need to go in place, Gettle said, are “far reaching,” and won’t be wrapped up quickly. The company has centralized the customer service team, and the line-haul operations also have been centralized through the company.

The company’s use of purchased power/purchased transport for its LTL division also was raised as a balance that needed to be fixed. Questioned by Stifel analyst Bruce Chan, Gettle said that fragmentation in the LTL business hurt its employment budget. Roadrunner is increasing the use of independent contractors (IC), he said, at the expenses of more expensive purchased transport.

Traditionally, Roadrunner had been a heavy IC user. “But as the market kind of loosened in ‘15 and ‘16, it was easier to go to purchase transportation,” Gettle said. “And I don’t think we were valuing the IC nearly enough and treating them well enough to keeping them in network and our IC ranks had declined. So, we’ve really worked hard to put in place a much more driver-centric culture.”

Additionally, by having a fragmented use of purchased transport, it wasn’t allowing Roadrunner to leverage its size. “So, now, we’re working on improving our relationships and having fewer larger relationships for that purchase trends and getting ourselves out of some of the spot market buys that we’ve been in,” Gettle said.

As far as the company’s customer base, CFO Terry Rogers said that despite all of the turmoil surrounding Roadrunner, “we have been able to retain customers throughout this period.”

Stoelting wanted to keep the focus on the long-term and stayed away from any sort of future projections, not surprising since the fourth quarter earnings are technically unknown. “Our plan is as we get caught up here in this quarter and throughout 2018, we’ll be in a much better position to provide more real time metrics,” he said.

Revenue for the nine months of 2017 was $1.53 billion, just 3.3% more than the corresponding period of 2016, supporting the idea that customers mostly stuck around.

The blizzard of earnings released are laden with impairment charges from cleaning up the accounting problems, both in 2016 and 2017. But in terms of how the company did free of those charges, it said that its adjusted EBITDA was $8.1 million in the first nine months of 2017, compared to $46.4 million for the corresponding period of 2016.