Ultimately, as management representatives said on the company’s recent earnings conference call, Roadrunner’s fate will boil down to the success of a coming recapitalization of the debt-heavy/equity-near-invisible balance sheet.
The conference call, according to the transcript supplied by SeekingAlpha, was unique in that there was just one conventional analyst—Bruce Chen on Stifel—and two unidentified questioners who focused mostly on the company’s recapitalization.
When the rights offering was announced in September, it involved the ability of existing shareholders to purchase new shares. Roadrunner CEO Curt Stoelting revealed on the earnings call that about 900,000 rights will be issued to acquire shares at 50 cts per share. Elliott Management, which owns all the company’s preferred shares—which would be extinguished by the capital raised in the rights offering—has agreed to “backstop” the offering so that all the new shares would find a buyer. Elliott already owns a little less than 10% of the company’s equity.
Elliott’s purchase of $540 million in preferred shares in 2017 gave a cash infusion to the company which had just undergone a major accounting scandal that has led to indictments of former corporate officers.
One of the unidentified analysts on the call questioned whether with the stock less than 50 cts at the time of the call—it has moved higher than that since—there would be adequate buyers for the shares. He was a shareholder who appears to have not read prior documents, because the Elliott Management backstop would be the ultimate buyer. “I think all those questions can easily been answered if you just refer to our public filings and especially the proxy statement,” Stoelting said.
More specifically, another unidentified analyst asked whether asset sales rather than a recapitalization would be “in the best interest of common shareholders.”
Stoelting said alternatives to the recapitalization had been looked at but the company still concluded that the rights offering was the best way to go. There is no repayment requirement on the preferred stock until 2023, he said.
“There are significant benefits to aligning all of our shareholder interests and simplifying our capital structure and eliminating the high interest cost of the preferred stock,” Stoelting said. “It also allows us to address perceptions about the business, especially from customers and vendors caused by a low valuation of the common equity as the preferred increases, the common goes down, and that is explainable, but it takes a lot of time to explain, it's not a normal capital structure for a public company.”
(At several points during the call, it was noted that the company’s common share price is the mirror image of the preferred shares. As the latter rises, the former falls. Interest rates on the preferred shares are well into the double digits.)
The earnings call took place against a backdrop of a quarterly earnings release that showed some positive news, but with many troubled areas as well, paarticularly its LTL unit which is undergoing a realignment of strategy.
Total revenue was up 6.9%, to $536.6 million from $521.4-million. The revenue increases posted by most trucking companies this quarter were generally a double-digit percentage gain.
Roadrunner posted a net operating loss of $10.8 million for the quarter compared to operating income in the third quarter of 2017 of $11.3 million, though both quarters were impacted by charges (this year) and gains (last year). The company’s net loss was $41.6 million compared to a net loss of $10.1 million last year, with those interest payments tied to the preferred stock cited as the key reason for the loss. But adjusted EBITDA was up to positive $4.5 million compared to negative EBITDA of $4.6 million last year.
Stoelting said despite that, with the recapitalization, Roadrunner views itself as on target to reach aggressive goals. For a company so laden with debt, net income figures often reveal little about the underlying operations, where EBITDA offers better perspective.
Stoelting went through the three main units of Roadrunner, Truckload, LTL and Ascent, its logistics arm, projecting out future EBITDAs for each of them. “If you kind of sum up all those expectations, I think you can do the math yourself, but it would result in EBITDA of somewhere in the $60 million to $65 million range in 2019 and somewhere in the $100 million to $135 million range in 2020,” Stoelting said.
Stoelting conceded that Roadrunner had not been “ready” for the strong freight market of the past year, because its financial turmoil, among other things, left it with inadequate or aging equipment. Although that is changing, the CEO said the company is not banking on a continued strong market to lift its fortunes. “We have forecasted kind of steady, actually slightly down rates for 2019, certainly no improvement” he said. “And then we have forecast in 2020, some natural declines, especially in truckload rates.”
However, those numbers do not apply to LTL, Stoelting said, where the company expects to be in line with projections of an approximately 5% rate increase for 2019, and a “wait and see” forecast for 2020.