Some highlights from the third quarter earnings report of flatbed consolidator Daseke (NASDAQ: DSKE).
–It is taking a break from acquiring companies. Daseke has bought seven companies since last July. Don Daseke, the company’s chairman and CEO, said in the company’s earnings release that while Daseke remains “committed to an opportunistic M&A strategy and our pipeline remains robust, we do not anticipate any further transactions for at least several months as we continue to focus on integration and organic growth.” In the conference call with analysts, company president and director Scott Wheeler echoed that when he said the company has “not seen a diminution of our appetite for high quality companies. It’s just we thought now is an appropriate time to focus on a little bit more of assimilation and digestion…maximization is the word I’d use.” Daseke would be returning to M&A activity “at the appropriate time,” Wheeler said.
–Equity markets were not impressed with the earnings. Just before the close, Daseke stock was down about 7.4% to $5.61. But it had been as low as $5.33 earlier in the day. SeekingAlpha reported that the company’s net income of 1 ct per share missed analyst estimates by 3 cts, which off a 4-cent estimate is a lot.
–One analyst on the call got to the root of the problem. After sorting through eye-popping numbers for revenue growth–up 99% on the back of the acquisitions–acquisition-adjusted EBITDA and revenue were both up around 17-18%. For a company with a long-term debt to capitalization ratio in excess of 50%, according to CFRA, and significant interest expenses, EBITDA will be a better judge of how the company is doing rather than its net income that is shouldering significant interest payments, $11.8 million in the quarter. The analyst asked about cost pressures that might slow that EBITDA number as it tries to climb to a growth rate greater than revenue. Wheeler said that driver wages would be the “number one” cause of that, “as there continues to be a fairly fierce battle for driving talent, and we intend to outperform in that battle.”
–On the issue of debt, Bharat Mahajan, the company’s CFO, said current debt levels are well within the company’s debt covenants. The current leverage ratio is 3.4X EBITDA, and the current covenant is 4.25X EBITDA, dropping to 4X at the end of the first quarter of 2019.
–Daseke officials did tout the results of a pilot program in the Pacific Northwest to pay drivers on the basis of a salary and performance bonuses on top of that which could tack on as much as $20,000 to $25,000 in compensation. Wheeler said in the areas where the pilot program is being implemented, driver turnover is at 62%, “which is quite respectable by industry standards, and it is a number that we continue to focus on and improving.” As a result, the sector that is running the test has 97% of its trucks seated. Wheeler said the company did have some concerns that with some part of compensation guaranteed, there might be a drop in productivity, but productivity has increased. He added, however, that it was not the type of program that could easily be implemented across-the-board in the company and that some of its divisions would have a different set of issues that would make it difficult for adoption.