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

Good morning, ladies and gentlemen, and welcome to Titanium Transportation Group's Q3 2020 Earnings Conference Call. [Operator Instructions] On today's call, we have Ted Daniel, President and Chief Executive Officer; Alex Fu, Chief Financial Officer; and Marilyn Daniel, Chief Operating Officer. 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, November 11, 2020. A replay of this call will be made available until midnight on November 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.

Thank you, operator, and good morning, everyone. I'm pleased to report strong financial results for the third quarter of 2020 despite uncertain economic environments. I'm also pleased to announce that with our Q3 results, we have initiated a quarterly dividend amounting to $0.02 per common share. Over the years, we've built Titanium on a solid foundation, allowing us to produce sustainable profitability and generate positive free cash flow regardless of the prevailing economic conditions. The announcement today reinforces our confidence in our business model and builds on our balanced approach to capital deployment. Returning capital to our shareholders by way of a dividend does not distract from our pursuit to grow organically and through accretive M&A, as well as make opportunistic share repurchases, all while maintaining a strong balance sheet. Looking to our third quarter results. We reported our highest ever quarterly revenue in Titanium's history, coming in at $52.6 million for Q3 2020, up 23.2% year-over-year. Our operating discipline focused on cost control, while leveraging our in-house purpose-built technology allowed us to once again report a profitable quarter. On an adjusted basis, excluding the subsidies we received from the Canadian emergency wage subsidy program, consolidated adjusted EBITDA was $5.5 million or an 11.1% EBITDA margin. Once again, we retained a solid balance sheet with ample amounts of liquidity for the third quarter. This not only allows us to navigate through the current uncertain environment, but also provides us with significant dry powder, allowing us to capitalize on acquisition opportunities when they arise. Turning to our segmented results. Volumes overall continued to improve throughout July, August and September, with pronounced growth beginning mid-August and throughout September. As such, we witnessed strong volume growth in our truck transportation segment for the quarter. Additionally, as capacity tightened throughout the quarter, we saw improved pricing, particularly in the U.S. This positive volume and pricing dynamic resulted in the trucking segment reporting its second highest quarterly revenues in its history. This complemented with strong cost containment measures resulted in the segment reporting strong profitability. Moving to the logistics segment. We reported strong results in the third quarter. Our U.S. operations dominated the segment over the period. The teams at our head office in Charlotte, North Carolina and Nashville, Tennessee, which opened at the start of the third quarter of 2020 have produced results beyond our internal projections and have already contributed meaningfully to the bottom line. This is a testament to our ability to execute on our U.S. growth plan. To date, both our Charlotte and Nashville locations have exceeded expectations by a large margin. As such, we expect to build on our success as we look -- as we will look to open additional locations in the U.S. over the coming months. While the Canadian U.S. border remains closed, we are actively looking to accelerate our presence south of the border, given the significant growth potential in a very large and fragmented market. As I have mentioned previously, the U.S. market offers excellent risk versus reward, given the asset-light nature of the business model. The technological platform that we have built to date affords us the ability to seamlessly and strategically penetrate geographical markets with limited capital investment. From an organic growth perspective, the U.S. logistics business offers the best risk-adjusted rate of return. While we did not close on an acquisition this quarter, however, we continue to be active with Left Lane Associates. And as such, our M&A pipeline is very active. We are currently engaged in discussions with a number of prospects. Given the strength of our balance sheet and continued strong free cash flow generation, we are in an ideal position to take a -- to undertake a transformational acquisition or multiple tuck-in acquisitions. As always, we will only look to pull the trigger on acquisitions that are accretive and will build long-term shareholder value. With that, I'd like to turn it over to Alex, to go over our financial results.

Thanks, Ted, and good morning, everyone. Before I go into detail, I'd like to mention that when I speak to our results on an adjusted basis, they exclude subsidies provided under the Canadian emergency wage subsidy program. Turning to our results. On a consolidated basis, we reported revenues of $52.6 million, up 23.2% year-over-year compared to revenues of $42.7 million reported this time last year. The improvement year-over-year was due to the growth in our U.S. logistics division as well as an increase to the demand for freight, particularly south of the border. Adjusted EBITDA for Q3 2020 was $5.5 million, while our adjusted EBITDA margin was 11.1%. This excludes an approximately $1.2 million benefit from the Canadian Emergency Wage Subsidy program, and this compares to the EBITDA of $4.5 million, representing an 11.4% margin in Q3 of last year. On a segmented basis, truck transportation revenues were $27.5 million compared to $27.3 million in Q3 2019. The 1.9% year-over-year increase in revenues reflects an improvement in volumes. EBITDA for the third quarter on an adjusted basis came in at $4.5 million, representing a 17.4% margin. This compares to EBITDA of $4.2 million or 16.6% of segment revenues in Q3 2019. Our truck transportation segment benefited from higher volumes as well as effective cost control. Moving on to our logistics segment. Revenues for Q3 was $26 million. This compares to $16.7 million in the comparable period last year, reflecting a 55.5% increase year-over-year. Adjusted EBITDA came in at $1.4 million or 5.8% of revenues for Q3 2020 compared to EBITDA of $800,000, representing a 5.3% margin same period last year. As Ted mentioned in his earlier comments, the segment benefited from the significant expansion of our U.S. logistics operations as we opened our second location in Nashville, Tennessee at the start of the quarter. On to our balance sheet and liquidity position. During the third quarter, we deployed $4.2 million towards rolling stock purchases to replace old trailers. We have also committed to purchase 70 new power units, amounting to $12.8 million during 2021. Overall, our net debt position stood at $57.1 million at quarter end, while our net debt to equity ratio remained unchanged at 1.26:1 compared to Q2 2020. We retain ample liquidity with cash of $2.9 million and over $33.6 million of undrawn credit facilities. As Ted mentioned, we announced a quarterly dividend of $0.02 per common share, commencing with a payment on December 15, 2020, to shareholder of record as at November 30, 2020. Based on our current share count, this amounts to approximately $725,000 per quarter. Given our free cash flow profile, we are ideally situated to execute both on our organic and inorganic growth objectives, all while returning capital to shareholders by the way of dividend. With that, I'd like to turn the call back to Ted for closing remarks.

Thank you, Alex. As Alex and I mentioned, we are in excellent shape financially to execute on our organic and M&A opportunities. We continue to assess M&A opportunities and will remain patient until the right opportunity presents itself. 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 the call up to questions, I would like to once again thank our team members everywhere, both in Canada and the U.S. for their hard work during these unprecedented times and thank all of our customers for trusting us with their freight. With that, I'll turn back the call to the operator for questions.

[Operator Instructions] Your first question comes from Benoit Poirier of Desjardins.

Congratulations for the very impressive results. And obviously, very strong performance for the logistics division, nice great ramp-up of the new locations. So I was just wondering if you could provide more color about the ongoing expansion strategy in the U.S. I know the plan is to open about 5 locations over 3 years, 10 over 5 years, but could you accelerate the U.S. expansion strategy given the favorable market conditions you're currently experiencing?

So in terms of the expansion in the U.S., we've already done -- obviously, okay, the two offices. We did Charlotte, we did Nashville. And again, if it wasn't for the border shutdown, given the pandemic, we probably would have already had our third location already open. But we are, at this point in time, actively working on the third location. We're very excited that -- we're very hopeful. Everybody's heard on the news that hopefully, there's a vaccine coming shortly. So hopefully, things will be a little bit easier in terms of crossing the border. But yes, our goal is to open up 3 locations, hopefully, before the end of 2021. So 3 additional locations in major cities.

And when you look at the market dynamics for U.S. logistics, is there something nonrecurring in the current environment, given the inventory replenishment opportunity in the U.S.? Or does the market continue to support sequential growth for this business?

Yes. So because -- I mean, to some degree, it's such a monstrous gigantic market that, in reality, I mean, what do we need? We need a fraction of a fraction of a percent and that's still going to have a major relative impact on the size of our company. So if buy -- we set up and establish 3, 4 more offices with our current models, add that revenue to our existing model will have significant growth on a non-levered basis. But I think you mentioned nonrecurring versus recurring expenses to set up the offices? Is that -- or is it more nonrecurring Ben, that you --

Maybe a nonrecurring impact from what's happening because of the favorable conditions that might not be so…

Right, I see what you are saying.

Over a longer term.

Yes. I…

[indiscernible] answer.

Yes, go ahead, Marilyn, it's fine. We know what the answer is, so -- at this point in time. Go ahead.

Yes. So there was no real anomaly for us in terms of revenue growth in the U.S. It was leveraging existing business that we had that we entered into the U.S. marketplace a little bit more strongly. But there was no real anomalies that we could say won't happen again. In fact, on the contrary, I believe that the U.S. market continues to tighten. I believe that economic situation will have an increasingly tightening of the marketplace. There have been no real regulation changes or significant changes in the U.S. in this period that would have affected us as we saw largely in 2018, if you remember, there was none of that with this quarter, for sure.

And when we look at the trucking segment, could you talk maybe about the contract rate renewal in the quarter. Any indication for Q4 and 2021, what we should expect in terms of contractual rates?

Sure. Right now, in terms of what we're seeing is a lot of stability on the contract rates and slight increases. We expect 2021 to be a uptick on pricing, definitely on the contracted rates, largely because we're seeing the indicators in our logistics side, as we always do, that's kind of a telltale for us. We are seeing customers question what's happening next year. There's a lot of uncertainty, as we all know. So there is a lot of discussions that we -- RFQs are coming in largely, and the expectation is either steady or slight increases.

Now word on the Street, it's somewhere around 3% to 5%.

Yes.

So there is some definitely concern on the part of the customers to lock in.

And when we look at your M&A pipeline, you mentioned, great color on the call, could you maybe reiterate some regions that you would favor, where you would prefer to realize acquisition in the current context? And maybe your comfort range in terms of net debt-to-EBITDA in light of the current market conditions?

Net debt EBITDA versus the vendor or overall in terms of our entire company on a post-acquisition basis?

Post-acquisition basis for the overall company, your comfort range in terms of leverage ratio, net debt-to-EBITDA yet, yes.

Okay. So in terms of acquisition, right now, we've got sufficient dry powder to execute on any acquisition that kind of fits, a typical, let's just say, standard, more or less a revenue versus EBITDA model, where there's going to be a certain amount of debt on the balance sheet for some equipment that they still haven't paid for. We could -- anywhere from $100 million to $130 million, $140 million in top line. So our dry powder could definitely purchase a very, very, very sizable trucking company. Having said that, it could be one big purchase or it could be several plug-ins. But in terms of also our ability to generate additional debt, we are comfortable, obviously, with a 3:1. But again, that would -- I mean, you know, obviously, our approach, our methodology, if we were to re-lever in order to do this type of an acquisition, obviously, we would have to have a plan in mind, knowing that, well, okay, we're going to lever up but then how do we lever down again, make sure that we can pay this down fairly quickly with a substantial free cash flow generation plan. In terms of region, I would say, again, our preference is to stay with the areas that we have a comfort in, which is our background, geographically, Ontario, Montreal, those areas. We're very, very comfortable, obviously, in those areas. We're not -- if you're asking if we're -- we would consider the U.S., we would definitely consider U.S. as well. I mean, we're not saying no to that, in other words.

And congrats, by the way, for the dividend introduction. Just wondering what would be the kind of a targeted dividend payout ratio going forward? How do you look at -- basically at the dividend policy going forward?

Alex can take this one.

So our dividend policy is for the first year, we will hold steady at the current rate. We are evaluating the payout ratio because we are a growth company. We don't really -- we don't really want to disclose that at this current moment because we -- there is a lot of factors in play, especially with 2021 coming, there's a lot of uncertainties, but we will be holding steady at the very least of current payout rate.

And last one for me. Alex, do you expect to receive any benefits from the Q's in Q4?

Very minimal. With the change to the rules for [ Q's 2.0 ], it's a lot stricter to receive the benefit. So we are not expecting a material amount in the last quarter for 2020.

Your next question comes from David Ocampo of Cormark Securities.

I wanted a follow-up on Benoit's great question. You guys provided some pretty good guidance there. But with that in mind, are there any incremental costs that you guys are seeing that may come to fruition, like higher driver costs, higher insurance costs that may erode that 3% to 5% benefit?

I can speak to part of that question. In terms of increased insurance costs, we are actually not experiencing that as a uniqueness in our business. Insurance rates have gone up across the industry very significantly this year. I'm told anywhere between 12% and 30%. We're definitely seeing the impact on acquisition targets for sure. But at Titanium, we have an agreement with our insurance providers for sharing telematic information that keeps our insurance costs down. So from that perspective, we're in really good shape. Ted, I don't know if you wanted to speak to the other question.