Reorganized, loss-making Roadrunner gets funding

Reorganized, loss-making Roadrunner gets funding

An infusion of cash from a rights offering helped Roadrunner Transportation Systems survive. Now it needs to complete an ongoing restructuring. Photo credit: Roadrunner Transportation Systems.

 

After a sweeping, two-year reorganization that culminated in a rights offering that effectively transferred its ownership last month, Roadrunner Transportation Systems is a leaner, if not yet more profitable, business. Data released Tuesday show Roadrunner’s net loss jumped 82 percent to $165.6 million in 2018 and more than doubled in the fourth quarter to $58.4 million.

That’s the base the company’s new majority owner, activist investment firm Elliott Management, and the Roadrunner executive team will have to build on as they work through a five-step recovery plan that is still only on its second step, according to data filed with the US Securities and Exchange Commission by Roadrunner before its earnings announcement.

For shippers, the good news is that Roadrunner, the 15th-largest truckload operator and 18th-largest less-than-truckload (LTL) carrier in the United States last year, is still rolling, unlike at least one smaller LTL operator, New England Motor Freight, which shut down last month. Roadrunner mostly uses owner-operators to provide LTL and truckload capacity.

“We continue to see our business grow,” said Curt Stoelting, CEO. Comparable revenue, excluding the sale of one business unit, he pointed out, increased 9.5 percent in 2018 to $2.2 billion. “As we’ve stated in the past, during a turnaround period there are always some bumps along the way,” Stoelting said. But the company “has a positive financial outlook.”

In the fourth quarter, however, Roadrunner saw overall revenue drop 1.6 percent to $551 million, as decline in LTL and truckload revenue offset higher third-party logistics revenue. The LTL revenue drop was expected; Roadrunner is still rebalancing the business through planned reductions in service areas and “pricing discipline” to build density in its biggest lanes.

“Lower shipment counts were partially offset by higher rates and average shipment size which yielded an increase in revenue per shipment,” the company said. In the truckload and express (TES) division, lower revenue was tied to lower air and ground expedited revenue at subsidiary Active On-Demand, although over-the-road truckload and intermodal services increased.

Logistics a bright spot

The company’s third-party logistics division, Ascent, was the star of the quarter, increasing revenue 12.6 percent, with international freight forwarding driving growth thanks to higher rates and volumes, including the acceleration of some shipments ahead of US tariffs that were expected to hit at the start of 2019. Those tariffs have been delayed.

For the full year, Roadrunner’s truckload and logistics businesses were profitable, with truckload revenue up 13.2 percent and Ascent’s business growing 14 percent, excluding the sale of logistics subsidiary Unitrans in 2017. The TES unit reported higher rates across all units and strong volume in air and ground expedite during a banner year for trucking.

Roadrunner Freight, the LTL unit, lost $27 million on $452.3 million in revenue in 2018, compared with a $26.6 million net loss in 2017. Higher truckload rates that benefited TES actually hurt the LTL operation, which relies on owner-operators and thus faced higher purchased transportation costs, particularly in the first half of 2018 as spot rates soared.

“Our strategy at Roadrunner Freight is to focus on our core competency as a metro-to-metro long haul carrier,” Mike Gettle, president and chief operating officer, said during an earnings conference call transcribed by Seeking Alpha. The unit is reducing its pickup and delivery footprint to remove “unprofitable areas” and is focusing on strategic lanes and shipment reliability, he said.

Roadrunner’s target is to see the LTL unit at a break-even or slightly profitable point by the end of the year. “We are taking a very long-term view here,” Stoelting said. The new management team, led by Roadrunner Freight president Frank Hurst, is “really building [the LTL carrier] from the ground up terminal by terminal, lane by lane, customer by customer,” he said.

The company will have the financial runway to do that thanks to the completion of its $450 million rights offering and recapitalization plan last month, Stoelting said. In the offering, Roadrunner sold an aggregate of 900,000,000 new shares of common stock at the subscription price of $0.50 per share, with 90.4 percent of its shares owned by Elliott Management.

Elliott, run by billionaire Paul Singer, is an activist investor with approximately $34 billion in assets under management and a history of investing in distressed companies such as Roadrunner and turning them around, often by forcing significant reorganization. That effort is already well under way at Roadrunner, which has streamlined and sold subsidiaries.

The company’s troubles came to light in early 2017 after “accounting discrepancies” were uncovered, which forced Roadrunner to recall and restate earnings reports from 2014 through the third quarter of 2016. The company last year said an internal investigation found it had overstated net profits from 2011 through the third quarter of 2016 by $66.5 million.

The accounting discrepancies triggered a financial implosion, but the root cause of Roadrunner’s troubles was the way it handled a series of acquisitions that made it, for a time, the fastest-growing trucking business in the United States. Roadrunner completed more than 25 acquisitions of non-public companies “without some basic tools,” Stoelting said last year.

Elliott is likely to provide whatever tools Stoetling needs to finish the reconstruction of the company. Elliott has been “very supportive of the plans that we put in place and also challenged us to think about things differently,” Stoetling said. “So, I think overall it's a very good relationship. … They’ve absolutely opened doors and created opportunities for us.”

The company is still winning contractual LTL rate increases, with an average fourth-quarter increase of 7.8 percent and a first-quarter gain “a couple of points below that,” Gettle said. Roadrunner Freight, shippers have told JOC.com, was often a lower-priced carrier than asset-based competitors, which may give it more leeway to raise rates from a lower base.

US economic growth may be slowing, but Stoetling believes that’s to Roadrunner’s advantage. The company’s LTL unit “on a historical basis has done well in I’d say softer economic markets,” he said. “In those markets shippers are looking to optimize their freight spend and we can be part of that. It also helps that truckload spot rates are down because it’s an input cost.”

Contact William B. Cassidy at bill.cassidy@ihsmarkit.com and follow him on Twitter: @willbcassidy.