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DSKE: Daseke reports another strong quarter; management increases guidance for revenues & EBITDA

08/13/2018
By Steven Ralston, CFA

NASDAQ:DSKE

READ THE FULL DSKE RESEARCH REPORT

SUMMARY OF RECENT EVENTS

‣ On August 9th, Daseke (NASDAQ:DSKE) announced financial results for the second quarter ending June 30, 2018.
     • Total revenues increased 91.0%, primarily due to recent acquisitions. Excluding the effect of the acquisitions, total revenues increased 12.6% as fuel surcharge, freight and brokerage revenues increased 42.5%, 7.2% and 18.5%, respectively, as the company benefited from a favorable rate environment and the implementation of operational improvements.
     • Revenues by segment: Flatbed Solutions +87%, Specialized Solutions+95%.
     • Adjusted EBITDA increased 90.9% to $46.318 million compared to $24.265 million in the second quarter of 2017. Acquisition-Adjusted EBITDA was $48.1 million
     • Weighted average shares outstanding increased 90.9% from 37,945,310 to 60,558,956 shares.
     • Management’s 2018 financial guidance was increased.
          ◦ Management now expects total revenues to grow to approximately $1.55 billion, up from prior guidance of $1.35 billion.
          ◦ Adjusted EBITDA is anticipated to increase to approximately $170 million, up from prior guidance of $150 million.
In order to receive the maximum incentive in 2018, the company must achieve pro forma Adjusted EBITDA of $170 million and a share price of $14. Daseke already achieved the Adjusted EBITDA goal with a $185 million run rate (2Q 2018 Earnings Presentation, page 24).
‣ Daseke is benefiting from initiatives aimed at improving operational effectiveness.
     • Operational organization consolidated into regional/end-market structure: Southeast, South/northeast/commercial glass, Texas/Midwest, West and High Security Cargo.
     • Consolidation of operations: two operations were combined with anticipated revenue and cost synergies of at least $2.5 million over the next 12 months.
     • Business unit turnaround through the closure of several facilities and the disposal of costly equipment resulted in a $1 million increase in EBITDA.
     • In May 2018, created Fleet Services Department to focus on helping improve economies of scale in the areas of purchasing, equipment optimization and maintenance to reduce operating expenses and improve operating margins.
‣ Recent Mergers/Acquisitions
     • Merger with Builders Transportation Company closed on August 1, 2018.
          ◦ BTC is a flatbed hauler (with over 350 trucks and nearly 500 spread-axle trailers) that primarily serves the eastern two-thirds of the U.S. and transports metals (coil steel, wire products, structural and sheet steel, aluminum products, cast iron and steel pipe) and building products.
     • Merger with Kelsey Trail Trucking closed on July 1, 2018
          ◦ Kelsey is a tuck-in for Big Freight, expanding the company’s Canadian footprint especially with regional deliveries from the Toronto area up to northern Ontario and into Quebec and especially with B-train operations. A B-train is comprised of pup trailer joined by a fifth wheel onto the lead trailer. Kelsey Trail has 80 late-model tractors and 90 sets of 5-axle B-trains (32 ft. lead trailers with 28 ft. pups).
     • Merger with Aveda Transportation and Energy Services closed on June 6, 2018.
          ◦ Aveda serves the oil and gas industry with specialized transportation services, primarily rig moving and heavy haul services, with about 1,300 pieces of equipment valued at approximately CAD$114 million or US$90 million. 2017 revenues were CAD$199.6 million (US$155.7 million) that generated CAD$15.9 million (US$12.4 million) in Adjusted EBITDA.



View Exhibit I

‣ The company has been very successful in raising capital to help fund its growth initiatives, including the company’s consolidation strategy.
‣ The flatbed trucking industry continues to benefit from the economic expansion exemplified by rising flatbed rates. However, demand for over-dimensional loads (specialized services) has not yet improved as projects related to large capex plans industrial activity stimulates the manufacturing, construction, building, aerospace and energy industries in North America. Also, an increase in infrastructure spending to upgrade the nation’s roads and bridges should benefit Daseke.



View Exhibit II

‣ Daseke Inc. continues to be the major consolidator in the highly fragmented open deck trucking space.

Second Quarter 2018 Financial Results

On August 9, 2018, Daseke Inc. reported results for the second quarter ending June 30, 2018. The company reported total revenues of $376.9 million, which increased 91.0% from $197.3 million in the second quarter of 2017. The increase was primarily due to recent acquisitions. Excluding the effect of the acquisitions, total revenues increased 12.6% as fuel surcharge, freight and brokerage revenues increased 42.5%, 7.2% and 18.5%, respectively, as the company benefited from a favorable rate environment and the implementation of operational improvements.

Revenue generated by the Flatbed Solutions segment increased 86.6% YOY to $162.2 million, primarily due to the acquisition of TSH & Co. Excluding the effect of the acquisition, revenue increased 12.4% (or $10.73 million), primarily due a 46.2% increase in fuel surcharges and a 9.3% increase in freight revenue.

Revenue of the Specialized Solutions segment increased 95.0% YOY to $218.4 million, which was primarily due to seven acquisitions (Moore Freight Services, Roadmaster Group, R&R Trucking, The Steelman Companies, Schilli Transportation Services, Big Freight Systems and Belmont). Excluding the effect of recent acquisitions, revenue increased 14.4% (or $16.2 million), primarily due a 41.0% increase in fuel surcharges, a 7.3% increase in freight revenue and a 26.1% increase in brokerage revenue.

Salaries, wages and employee benefits expense increased 55.7% (or $32.4 million) to $90.6 million, primarily due to recent acquisitions. Excluding the effect of acquisitions, salaries, wages and employee benefits expense increased 5.6%, primarily due to increased employee and driver compensation. Total fuel expense increased 53.2% to $31.4 million, primarily a result of higher fuel prices and as a result of recent acquisitions. Operations and maintenance expense increased 39.7%. Purchased freight expense increased 185% to $141.6 million, primarily due to acquisitions. Excluding the effect of acquisitions, purchased freight expense increased 21.4%.

The company reported net income attributable to common stockholders of $22.2 million (or $0.20 per diluted share) versus a loss of $5.80 million (or $0.15 per diluted share) in the second quarter of 2017. Weighted average shares outstanding increased 90.9% from 37,945,310 to 60,558,956 shares.

Adjusted EBITDA increased 90.9% to $46.318 million compared to $24.265 million in the second quarter of 2017.



View Exhibit III

Management’s Guidance for 2018

Management raised guidance due to an improved outlook for 2018, including a strong industry environment with tight capacity and improving rates. Total revenues are now anticipated to grow to approximately $1.55 billion versus the $846.3 million reported in 2017. Adjusted EBITDA is anticipated to increase to approximately $170 million compared to $91.9 million in 2017. Prior guidance was that total revenues would expand to $1.35 billion and Adjusted EBITDA was anticipated to increase to $150 million. Capex is budgeted to be approximately $90 million, which includes the capital expenditures already spent by the newly acquired companies.

Initiatives to Improve Operational Effectiveness

On May 14, 2018, Daseke announced the formation of Daseke Fleet Services, a new department to help support the company’s growing scale by improving the economies of scale in the areas of purchasing, equipment optimization and maintenance. Based in Phoenix, the Fleet Services Department will focus on supporting Daseke’s operating companies through “lifecycle management of revenue equipment including maximization of national purchasing power, enhanced maintenance programs, strategic disposition of assets and high-level warranty management.” Three veteran executives (Brett Thompson, Erek Starnes and Gloria Pliler) have been tapped to support the effort.

RECENT MERGERS/ACQUISITIONS

Builders Transportation Company

On August 1, 2018, Daseke acquired all of the outstanding shares of Memphis-based Builders Transportation Company (BTC) for $53.8 million, which consisted of $32.9 million in cash, 399,530 shares of DSKE (valued at $3.4 million) and the assumption of $17.5 million in debt. BTC is a flatbed hauler (with over 350 trucks and nearly 500 spread-axle trailers) that primarily transports metals (coil steel, wire products, structural and sheet steel, aluminum products, cast iron and steel pipe) and building materials for companies like Alcoa, American Cast Iron Company, ABB, Tenaris, IPSCO, MRC, Gerdau, Arcelor Mittal and US Steel.



View Exhibit IV

BTC primarily provides flatbed transportation services in the eastern two-thirds of the U.S. and has received Carrier of the Year awards from several customers. During the 12-month period ended June 2018, Builders Transportation generated an estimated $72.4 million in revenues and $9.7 million in Adjusted EBITDA.

Kelsey Trail Trucking (tuck-in for Big Freight)

On July 1, 2018, Daseke acquired 100% of the outstanding shares of Kelsey Trail Trucking. With locations in Saskatoon (Saskatchewan) and Innis (Ontario), Kelsey will tuck into Big Freight, which is headquartered in Steinbach (Manitoba). Kelsey Trail Trucking provides coast-to-coast flatbed hauling and operates a regional fleet that makes deliveries from Toronto area up to northern Ontario and into Quebec. In addition to coast-to-coast truckload and LTL services, Kelsey Trail is the largest dedicated B-train operator in Canada. A Canadian invention, a B-train is comprised of pup trailer joined by a fifth wheel onto the lead trailer. Kelsey Trail has 80 late-model tractors and 90 sets of 5-axle B-trains (32 ft. lead trailers with 28 ft. pups). Synergies are expected, including the ability of Kelsey to utilize Big Freight’s facilities in Manitoba (in Steinbach and Winnipeg) and Big Freight having access to Kelsey’s new 42,000-square-foot facility north of Toronto.



View Exhibit V

Aveda Transportation and Energy Services



View Exhibit VI

On June 6, 2018, Daseke merged with Aveda Transportation and Energy Services (TSX-V:AVE) by acquiring all of the outstanding common shares of Aveda for US$27.3 million in cash and 1,612,979 shares of DSKE (worth$15.3 million) and paying off $54.8 million of Aveda’s debt. The total consideration was $117.8 million. Aveda shareholders had the option to receive payment in DSKE stock, cash or a combination thereof. Also, Aveda shareholders will receive an additional cash payment of up to CAD $0.45 per AVE share at a later date (aka an earn-out based on EBITDA).

Aveda provides specialized transportation services (primarily rig moving and heavy haul services) to the oil and gas industry. Aveda serves seven major U.S. oil basins from 15 locations in Alberta, Texas, North Dakota, Pennsylvania, Ohio and Oklahoma with about 1,300 pieces of equipment, (approximately 430 tractors, 660 trailers and 200 light-duty trucks valued at approximately CAD$114 million or US$90 million. 2017 revenues were CAD$199.6 million (US$155.7 million) that generated CAD$15.9 million (US$12.4 million) in Adjusted EBITDA.



View Exhibit VII

Daseke Inc. is the major consolidator in the highly fragmented open deck trucking industry. The company has grown significantly through a series of mergers over the last 6 years. Having become a publically-traded company through a merger with a SPAC (Hennessy Capital Acquisition Corp. II) in February, Daseke is poised to benefit from the improvement in flatbed line-haul rates that began in December 2016. The company has announced of 11 mergers/acquisitions since May 2017, demonstrating that Daseke is the leading consolidator of premier open deck trucking companies.

Indicated Target

Based on comparative analysis that utilizes the valuation metric of EV/EBITDA, an average industry multiple indicates a share price target of $15.70.

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