After years of high growth, Daseke finds itself in need of a tune-up

Daseke affiliate E.W. Wylie

Appearing at a pair of investor conferences this week, Daseke’s (NASDAQ: DSKE) management team provided an update on its operational restructuring.

CEO Chris Easter

Daseke’s new CEO, Chris Easter, was enthusiastic about the progress the company has made on the first phase of cost-savings initiatives, which have only been in place a couple of months.

Easter said the entire Daseke team is “working hard to deliver value and help us transform this business and we’re just so excited about what we’re doing.”

Easter was named permanent CEO on Monday after filling the role for six months on an interim basis. Easter was asked to step into the temporary role after founder, chairman and former CEO Don Daseke stepped down abruptly in August.

Easter joined Daseke as the company’s chief operating officer, a newly created position, in January 2019, when the company first publicly announced its efforts to improve operations after a decade of acquisitions.

Easter’s experience includes more than 30 years of transportation and logistics operational leadership with the likes of the U.S. Army, Walmart (NYSE: WMT), Schneider National (NYSE: SNDR) and heavy-haul operator Keen Transport, for which he served as CEO from 2012 to 2017.

The first decade was all about growth

Approached by an investment banker friend in 2008 to take a look at a specialized trucking company that was available for purchase, founder Don Daseke realized there was no large-scale, publicly traded open-deck carrier. He quickly went to work identifying well-run flatbed carriers, often companies not on the market for purchase, for potential consolidation. The plan was to attract flatbed carriers to work under Daseke’s umbrella utilizing its bigger balance sheet and economies of scale, but to allow the management teams to stay in place and continue running their operations independently after acquisition.

In a decade of existence, Daseke has amassed quite the portfolio of flatbed companies. Starting with 60 tractors and $30 million in revenue, the company has grown to include 19 acquisitions representing 6,000 tractors and more than $1.7 billion in revenue.

Easter estimated that Daseke, which carries specialized and flatbed freight like heavy equipment for Caterpillar (NYSE: CAT) and the U.S. Department of Defense and aircraft wings for Boeing (NYSE: BA), accounts for roughly 3% of the 200,000 flatbed rigs on the road.

Image: Daseke Inc

While the rapid top-line growth brought the company to national prominence, the lack of integration or streamlining of operations during the buildup, along with a declining industrial sector and eroding flatbed market fundamentals, finally came to a head.

During its second-quarter 2019 earnings report, Daseke announced that it was embarking on an operational shakeup to lower its cost structure and de-lever its balance sheet, which had grown to include $635 million in net debt.

The news of the restructuring and the company’s lowered full-year adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) forecast, by approximately 17%, sent the stock on a downward spiral.

The reaction was visceral, with the stock gapping down 28% the first day. In the weeks that followed, shares of DSKE would lose more than half their value as investors came to grips with a full corporate overhaul signaling the acquisition story, a primary catalyst for the stock’s valuation, was on hold.

DSKE Stock Price Chart – SONAR: STOCK.DSKE

The second decade may bring acquisitions, but it’s all about operational efficiencies for now

The original plan was estimated to produce $20 million to $25 million in incremental operating income by fiscal 2021. But soon after Daseke retired, Easter upgraded the plan to an aggregate of $30 million in annual cost savings and pulled forward the target date. The company now expects to be operating at the new annual run rate by the time it exits the first quarter of 2020.

The biggest chunk of the overhaul includes the consolidation of separately run operating companies from 16 to 13. This initiative is expected to generate $19 million in annual savings. The remainder is to be generated from business-improvement plans ($7 million) and corporate restructuring ($4 million).

In the short time the plan has been in place, Daseke has removed tractors, trailers and staff. Speaking at investor conferences earlier in the week, management said that it has sold 326 tractors (8% of capacity) and 734 trailers (6% of capacity) that were underutilized. Easter said the company won’t hesitate to make further cuts to the fleet if they are unable to achieve the desired asset-utilization rates. Additionally, the company has eliminated 187 nondriver positions.

Easter cautioned that the $30 million in cost initiatives won’t translate into $30 million in incremental EBITDA as the removal of equipment represents some loss of business. However, he added that this is only the first phase of the company’s restructuring.

Preliminary results and 2020 outlook

In a Jan. 30 press release, the company provided better than expected preliminary fourth-quarter results. The carrier reported expected revenue of $400 million to $403 million for the period compared to the consensus estimate of $389 million at the time of the release. Additionally, the report stated that the carrier would see an adjusted net loss of $6 million to $2 million, or $0.09 to $0.03 per share, compared to analysts’ forecasts at the time that called for a $0.23 per-share loss.

Even though the company is still in the first innings of the turnaround, management is not satisfied with the recent operating performance. The company operated at a 99% adjusted operating ratio (OR) when the initiatives were launched, reducing that level to 97.1%, according to the company’s preliminary financial update.

Management was adamant that the 97% OR was “unacceptable in any market.”

The company’s 2020 outlook doesn’t call for a quick snapback in flatbed freight fundamentals. Management expects volumes to be flat year-over-year in 2020 and noted that there will be rate pressure in the first half of the year but that flatbed rates should moderate in the second half. Similar to the dry van truckload (TL) markets, management said that flatbed capacity is correcting lower to align with demand and all flatbed fleets are dealing with increased insurance costs.

Flatbed tender rejection rates have been at depressed levels for nearly a year. Lower rejection rates means carriers are more willing to accept the loads tendered to them by shippers under contract terms. This is indicative of excess flatbed truck capacity in the market.

Flatbed Outbound Tender Reject Index (USA) – SONAR: FOTRI.USA

Acquisitions on hold for now

When asked when the company might begin to pursue acquisitions again, Daseke’s VP of Operations Strategy John Michell said that they would like to be closer to a debt-to-adjusted EBITDA multiple with a two-handle than the current level of 3.25x. Daseke reported $700 million in total debt on the balance sheet at the close of the third quarter of 2019, the company’s last full financial filing.

The company’s leverage as defined by its debt covenants adjusts EBITDA for one-time costs.

Michell said that the company generated $114 million in cash from operations with $57 million in net capital expenditures (capex) during 2019, which only include one-half of one quarter of the operational cost savings. He said that including other annual payments of approximately $2 million in state and local taxes and $5 million in dividends, the company is currently in a position to de-lever the balance sheet by nearly $50 million annually.

That figure doesn’t include the annualized impact of the first phase of cost initiatives.

“I couldn’t be prouder of the team. I’m not a bit surprised at all by what we did in the fourth quarter and have been doing. I couldn’t be prouder, but none of us are satisfied. We got a ways to go and we’re deep in the business,” Easter concluded.