Titanium Transportation Group Inc. (TTNM) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Titanium Transportation Group's Q4 2019 Earnings conference call. Thank you for standing by. [Operator Instructions] Before we begin, I would like to remind everyone that certain statements made on this call today may be forward-looking. In that regard, please refer to the risk factors and cautionary provisions outlined in the press release issued by the company yesterday as well as the filings made by Titanium on SEDAR. Please note that this call is being recorded today, March 11, 2020. A replay of this call will be made available until midnight on March 25, 2020. Details of the replay can be found on our website under the Investors section. I will now turn the call over to Titanium's President and CEO, Ted Daniel.

Good morning, and thank you, operator. Joining me on today's call is our CFO, Alex Fu; and our COO, Marilyn Daniel. Overall, we are very proud of our fourth quarter results. We reported our highest Q4 revenue in Titanium's history, remained profitable and continued to reduce net indebtedness despite challenging market conditions, which persisted throughout 2019. This positions us very well to succeed and grow our business both organically and inorganically as opportunities present themselves. To put our results into perspective, we note that the North American freight demand remained soft and pricing remained under pressure throughout the fourth quarter. In comparison to Q3 2019, freight demand remained relatively stable, while capacity began to tighten, and we expect capacity to exit the market in 2020 given prevailing market conditions. Reportedly, and important to note, orders for Class 8 trucks dropped dramatically in February 2020, marking the lowest level for orders in the month of February since 2010. According to FTR, orders were already at replacement levels for the past 4 months. But now carriers are, by necessity, putting off replacing older trucks. Additionally, in Canada, we expect capacity to tighten even further as electronic logging devices become mandated in June 2021 and mandatory entry-level training becomes federally regulated. While an important for the industry -- while an improvement for the industry, it will raise barriers to entry, putting upward pressure on costs. In general, it is becoming increasingly more difficult for trucking companies to compete in this increasingly complex industry. With this backdrop, we believe the M&A environment is becoming more attractive, which presents potentially more growth opportunities for Titanium. Moving on to organic growth. We successfully launched our U.S. logistics business with the opening of our first brokerage location in U.S. head office in Charlotte, North Carolina in May 2019. We experienced significant growth in the U.S. office during the fourth quarter as we ramped up operations. The investments we have made in innovation, technology and people, allowed us to hit the ground running as our U.S. operations contributed $3.7 million to the top line during this quarter. We are extremely pleased with these results as they surpassed our internal projections, and we are seeing a continuation of this success in the first quarter of 2020. Earlier this week, we announced that we are continuing to execute on our U.S. expansion strategy, opening a second brokerage location in Nashville, Tennessee. Our Nashville office is expected to be fully operational in the second quarter of this year. We're very excited to expand our U.S. logistics business as this presents a significant growth opportunity for Titanium. We are no stranger to the U.S. logistics industry, having significant experience serving customers on both sides of the border. I would highlight that currently, 2/3 of our business is conducted to and from or within the U.S. and based on strong relationships with our U.S. clients and strong U.S. leadership, making Titanium a go-to transportation company. Overall, we expect our U.S. logistics business to continue to contribute positively in 2020 as we continue to expand with additional locations south of the border. Moving to our Truck Transportation segment, we witnessed modest weakness in volumes and rates in the fourth quarter. As I've pointed out before, our Truck Transportation segment has limited exposure to the spot market as this segment is largely reliant on contract rates. While we witnessed some modest decline in revenues on a year-over-year basis, we remain disciplined in executing our business model as we are always focused on customer service, relying on technological innovations, deploying value-added products and services, putting us ahead of the competition. Additionally, we are utilizing our solutions to improve operational efficiencies and control costs. While the industry as a whole has witnessed upward cost pressures, our technological advancements have allowed us to improve the fuel efficiency of our fleet and mitigate increases to our repair and maintenance costs using predictive analytics. We believe our technological investments position Titanium as a leader in an evolving industry, which is increasingly more complex as customers demand increased transparency and connectivity. Before I turn it over to Alex, I would like to provide an update on our acquisition strategy. While we didn't execute any transactions this past quarter, we remain committed to seeking out accretive acquisitions to accelerate our growth. The strength of our balance sheet provides us ample dry powder to consummate a larger transformational acquisition, which is our preference. That said, we remain diligent in assessing acquisitions and will only act if we are able to meet our internal accretion and return targets. Overall, we believe the current economic environment is presenting interesting M&A opportunities. With that, I'd like to hand it over to Alex to go over our fourth quarter financial results.

Thanks, Ted, and good morning. On a consolidated basis, revenue for the fourth quarter of 2019 was $43.3 million, representing our strongest Q4 revenue in company's history and the highest quarterly revenue that we have generated in 2019. I'd like to point out that on a seasonality perspective, we traditionally witnessed moderate demand in Q4. So we are very pleased that Q4 revenues exceed expectations. On a comparable basis, Q4 2018 revenues were $42.7 million. On a year-over-year basis, the increase in revenues can be attributed largely to the performance of our logistics segment as we saw a modest contraction in revenues in our Truck Transportation segment. Consolidated adjusted EBITDA for Q4 2019 was $4.5 million, representing an 11.2% EBITDA margin compared to $5.8 million and a 14.8% margin in Q4 2018. The contraction in EBITDA margins year-over-year can be attributed to lower revenues being spread over a fixed cost base in addition to initial costs related to the launch of our U.S. Logistics business. On a segmented basis, Truck Transportation revenues came in at $26.3 million for Q4. This compares to $29.2 million in Q4 last year. EBITDA was $4.1 million or 16.7% of revenue for 2019 Q4. This compares to $4.7 million or a 17.4% margin in Q4 2018. The reduction in revenues and EBITDA can be attributed to weaker freight volumes and a modest contraction in rates in comparison to last year. Logistics segment revenue was $18.1 million in Q4 2019 compared to $14.8 million in Q4 2018. EBITDA was $847,000, representing a 5% margin or $1.5 million and a 10.7% EBITDA margin in comparable quarter last year. The increase in expenses and subsequent margin compression on a year-over-year basis can be attributed to the ramp-up in our U.S. logistics operations. For full year 2019, we reported consolidated revenues of $167 million, with Truck Transportation revenue coming in at $110.2 million and Logistics revenue coming in at $61.8 million. This compares to full year 2018 consolidated revenue of $184.8 million, Truck Transportation revenue of $113.6 million and Logistics revenue of $75.7 million. EBITDA for 2019 was $18.5 million, representing an 11.9% margin, which compares to $24.1 million and a 14% margin in 2018. We once again generated solid free cash flow in the fourth quarter. Free cash flow for -- of $3 million was generated in Q4 and totaled $20.8 million for the full year. We remain diligent in paying down our indebtedness and opportunistically repurchased our shares during the quarter. As it relates to our balance sheet, over the course of 2019, we deployed $17.7 million of capital towards principal and interest repayment to reduce our indebtedness. As such, our net debt-to-equity ratio improved to 1.63 from 2.03 at the end of last year. We feel the strength of our balance sheet ideally positions us to be agile as we navigate the current North American freight environment. At these levels, we are positioned to capitalize on our organic and inorganic opportunities when they arise. With respect to our share repurchases, we bought back 282,300 shares at an average cost of $1.30 per share during the fourth quarter. This brings our total share repurchases for the year to 714,100 shares at an average price of $1.28 per share. We will continue to monitor our capital allocation as we look to deploy capital towards ventures that yield the highest risk-adjusted rate of return. With that, I would like to turn it back to Ted for closing remarks.

Thanks. As Alex pointed out, we continue to remain financially flexible as we have significant dry powder to deploy towards organic and inorganic opportunities, both in the U.S. and in Canada. We will continue to grow in a disciplined manner, prioritizing shareholder value. As always, we are unwavering in delivering profitable and sustainable growth and creating both short-term and long-term value for our shareholders. Before opening up the call to questions, I would like to once again thank our team members everywhere in every position, both in Canada and the U.S. for their hard work this quarter, and thanks to all our customers for trusting us with their freight. With that, I will turn the call back to the operator for questions. Thank you.

[Operator Instructions] David Ocampo with Cormark Securities.

Alex, I appreciate the color that you had on in terms of the volume and pricing environment. But when I think about the 9% decline in Truck Transportation revenue, how much is allocated to pricing and how much is from volume?

With regards to the Truck Transportation, the decrease in -- the 9% that you talked about, it's largely pricing decrease instead of volume decrease. There is a portion of it that is volume decrease because we did have a slight contraction in Q4. If I had to put a number on it, it will probably be around 75% of it is pricing decrease while the 25% would be the volume decrease.

Okay. That's great. And kind of when I look at pricing today based on everyone that's reporting, it looks like it's down to the start of the year. How should I think about pricing going forward? Because I know some of your competitors have indicated that you should expect a stronger H2, but that was before the coronavirus hit. So I was just wondering how I should frame that.

David, it's Marilyn. In terms of pricing on a go forward, we're seeing rather stable marketplace for pricing in our Q1 bid process. We still feel that the second half of Q2 will bring in a stronger pricing market. In terms of the coronavirus, again, in certain conditions, it's actually good for business; in some cases, bad for business. I think overall, our elasticity and our diversity in our business kind of protects us somewhat. In the short term now, we're actually seeing the effect of the coronavirus in a positive light.

Okay. That's great. And kind of shifting gears here to Logistics. I think you guys previously indicated that the first office was supposed to generate $10 million to $20 million of annual revenue. Is that kind of the same kind of guide point for the second facility?

Yes, we are on target. In fact, we're exceeding expectations with our first office, which is one of the reasons why we're very excited for the second office to open. So yes, we're definitely very confident in those numbers.

I think it's also important -- sorry, important to note that we opened our Charlotte office in May, but we really only got everything really up and running and into our permanent location about August?

September.

In September. So it actually did very well in a very short period of time.

And in terms of margins, are it -- is it very similar to your kind of Canadian facilities?

At the start, it wasn't because there was a need to really build up the business down south. But in the recent months, we have seen that the U.S. margins and Canadian margins are quite similar and some months actually exceed Canadian. Obviously, it's still too early to tell because it does fluctuate quite a bit, but we are confident that once it's started and up and running, it will be similar between the 2.

And Alex, can you quantify kind of the start-up cost? I imagine it's very little given that it's mostly just people cost and office expenses?

Yes. With our additional offices, it will be just salaries and office costs. At the start, we had -- obviously, being our first office, we had to set up a lot of the administrative and authorities. But once that's running now that we have all the additional office, the only thing that would be increasing is basically our office lease and office start-up costs and then just salary.

Benoit Poirier with Desjardins Capital Management.

Just for -- looking at the Logistics segment. When we look at the Logistics, you report about 5%. How should we be thinking about the impact of opening the first and the second one? Is the 5% kind of a good run rate to use in 2020 given you'll be working through ramping up the second facility?

Yes. Yes. We believe that -- yes, we can achieve at least the 5%, if not improve on that because you don't have the same fixed cost opening up multiple offices at this stage. Opening up a second, third, fourth, fifth office, it's all primarily plug-and-play equipment. And it's basically you're increasing just margin at that point in time, contribution margin. There isn't a lot of G&A involved in that. So over time, the economics and the really, let's say, the critical mass of growing a brokerage, you're going to improve your EBITDA, in fact, significantly. We experienced that here when we grew our Canadian logistics, right? There gets -- there comes a point where the critical mass far exceeds the G&A exponentially. So we believe that that's an excellent business model, and we're actually really excited about opening up not just Nashville but hopefully other offices over the next couple of years.

Yes. No, that's great. And given that -- Ted, given now the first facility is kind of exceeding expectations, would it be fair to expect maybe another opening, let's say, in 2020? Or maybe could you talk about the pace of locations that could be open going forward?

Well, if all goes well with this office over the next couple of months, hopefully, we can have it up and running by -- maybe by June-ish, I would say, because it all depends to some degree on the speed at which the leasehold of the office can be completed. And that's, of course, you're dealing with contractors. So given that, that takes us to roughly the middle of the year, yes, our goal is to try and get a second office opened for 2020 before the end of 2020. So that would be -- that would take us to 3 by the end of 2020 in total.

Okay. So probably, in terms of announcement, a third one could be announced later in 2020 but probably no big impact given it would be a very early. Okay, okay.

That's right.

Yes. Okay. Excellent. And from -- in terms of M&A, obviously, you mentioned a preference towards larger M&A. You have a very strong balance sheet at year-end. So would it be fair -- or could you comment maybe about the target companies? Is it still in the range of 200 to 400 trucks? Or could you even look at some larger size acquisition given your very strong balance sheet at year end?

Right. Yes. So we actually have done the math at this stage. In Q3, we're 200 to 400. I would say now after Q4, with the balance sheet ratios that we currently have, we could hit somewhere around 500 trucks. So we could effectively buy a company that is mathematically up to about the same size of Titanium. Titanium is almost 500 trucks. So we could buy another company that's also 500 trucks, which means we could technically double in size. We could double our trucking company with 1 acquisition and still stay within balance sheet financial covenants.

Okay. And given, right now, there's kind of some softness in market conditions, what would be your comfort range in terms of net debt/EBITDA, if you would, let's say, make a big move?

Again, 3:1, that's kind of the comfort zone. Even if we went slightly over that, I'd be comfortable under the right conditions. I think that all depends on the opportunity, right? If it's the right opportunity, the right acquisition and it's the right fit, and then if we can see synergies with the right circumstance, then we could go over knowing that the strategy of purchasing that company would generate a debt repayment on a post-acquisition basis.

Okay. And of course, just quickly, the net debt-to-EBITDA is without the effects of IFRS 16. So we moved to $30-some-odd million regarding to that.

Yes. Okay. Got it. And looking at Truck Transportation, could you comment a little bit about the growth expectation for 2020? Maybe also in terms of CapEx, how many trucks could you be able to -- would you be able to secure, let's say, in 2020 and how we should be thinking about CapEx and maybe growth expectations for this segment?

Yes. So our sales team, they're pounding the pavement hard. There's a lot of activity going on there. So we're very confident that we are budgeting at this point in time, anywhere from 25 to 30 company trucks, and we'll be able to confidently grow that. And usually, when we grow company trucks, we like to grow by the same number in new operators, so the equivalent. So in other words, if we're going to grow by 25 to 30 company trucks, we're also -- we also believe that we can grow by another 25, 30 owner-operator trucks. So that's approximately some -- or anywhere from, let's say, really a minimum of 40 to 60 trucks of growth organic this year in the trucking space.

Could you remind me how many trucks did you add on both side in 2019, Ted or Marilyn?

Yes. In 2019, we bought approximately 19 -- what did we buy, about 19? Or was it 23?