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

Good morning, ladies and gentlemen, and welcome to Titanium Transportation Group's Q1 2021 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 Operation Operating Officer. Before we begin, we 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 filings made by Titanium on SEDAR. Please note that this call is being recorded, May -- today, May 12, 2021. A replay of this call will be made available until midnight on May 26, 2021. 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. Good morning, and thank you all for joining us. With me on the call today is Titanium's CFO, Alex Fu; and COO, Marilyn Daniel. We had an exceptionally strong start to the year. We achieved significant growth and financial milestones as we executed on our strategy to become a leading technology-driven transportation company in North America. The ongoing global COVID-19 pandemic continues to impact our business and operating conditions. Titanium continues to demonstrate its robust resilience as a recognized essential service. I'm very proud to report Titanium delivered a record quarter of consolidated revenues of $85.7 million, a 93% or $41.4 million increase over last year. We also delivered strong EBITDA of $7.5 million and a 65% improvement year-over-year. We successfully completed a transformational acquisition with the addition of International Truckload Services Group, which closed on February 1. Titanium -- ITS Group has been our largest acquisition positioning Titanium among the largest Canadian-based transportation companies in North America. The integration is proceeding well and in line with our expectations. As Alex will discuss in more detail in a moment, we did see a decline in EBITDA margins, primarily as a result of the addition of ITS and the associated costs during the quarter. The EBITDA impact resulting from this transaction is expected to normalize as the year progresses. The presynergy impact on margins was anticipated as ITS operated at a lower EBITDA margin, and we incurred upfront costs associated with the acquisition, closing and integration of the operations. We have already realized synergies and completed a number of major objectives, including integration and rationalization of the ITS service operations, initial investments in equipment and importantly technology support and staff training and onboarding. The reception from staff and customers has been highly positive. While ITS has an excellent base of business, the operations were lacking some needed investment and focus on technology and operations management. This is exactly the areas Titanium shines and excels in. Overall, we are pleased with this transaction and confident we're on track to deliver on our expectations. Turning to our business south of the border. Our strategic decision to enter the U.S. 2 years ago has yielded strong results. EBITDA this quarter in the Logistics segment was up substantially, reflecting the success of our investment in the expansion of the U.S. Logistics business. The U.S. Freight Brokerage market continues to be a substantial component of our growth; the addition of one new office in Chicago during the quarter as well as continued strong organic growth, a generally strong market and our ability to gain market share has contributed to the success of this segment. Currently, we operate 3 offices in the U.S.: Charlotte, Nashville and Chicago, with the expectation of adding 2 additional locations before the end of the year. Our Canadian Logistics segment also grew by 14% in the quarter, year-over-year, and an impressive demonstration of their ability to adapt and perform in challenging conditions. Finally, we further improved our capital position, raising a total of $25 million at $3.75 per share in an equity raise in the quarter. We have a very strong balance sheet, able to withstand challenges, allowing us to capitalize on organic and inorganic growth opportunities. As reloading dry powder relates to our M&A strategy, we continue to assess opportunities while remaining disciplined in our approach. As always, we will only look to pull the trigger on acquisitions that are accretive and will build long-term shareholder value. Overall, a very busy and very successful first quarter for Titanium. As we discussed last quarter, we entered this year cautiously optimistic. There's growing confidence that the worst of the impact of the COVID pandemic is behind us. The pace of the recovery and improvement is somewhat uneven. However, in select U.S. markets, conditions have experienced significant economic recovery to levels at or above those enjoyed pre COVID. In Canada, conditions remain challenging, and a number of markets continue to experience suppressed levels of activity. However, we expect operating conditions to normalize over the coming months as authorities gradually reduce COVID-related restrictions. Like everyone on this call, we remain hopeful that we will continue to see conditions improve as efforts to combat this pandemic build momentum. Against this backdrop, I again want to thank all of our staff and drivers, with a special welcome to the newest members of our team from ITS. Conditions have been uniquely challenging for everyone, but through your efforts and commitment, we've demonstrated our ability to adapt and deliver on our commitments to all our shareholders. I'll now turn it to Alex to discuss our operating results.

Thanks, Ted. I would also like to express my sincere thanks to our -- all of our team members for their exceptional dedication and efforts over the past year. Turning to results. Consolidated revenues for the quarter were $85.7 million, of which $12 million were attributed to the ITS transaction. Consolidated EBITDA was $7.5 million in the first quarter, up 65% from a year ago. Net income per share was $0.03 for the quarter, up from prior year levels. Now looking at the segments. The Logistics segment delivered revenue of $47.5 million, up from $18 million a year ago, largely driven by the rapid expansion and growth of our logistics freight brokerage in the U.S. Logistics EBITDA came in at $4 million, up 619% from the same time prior year. Within the segment, our U.S. Freight Brokerage business delivered revenues of $32.4 million, and our Canadian freight brokerage delivered $15.2 million, both an increase from Q1 2020. Turning to the Truck Transportation segment. Q1 saw strong revenues of $39.2 million, up from $27.6 million a year ago. ITS contributed $12 million to revenues in the first quarter. As the acquisition closed on February 1, Q1 results included 2 months of the ITS operations. Segmented EBITDA was $4.2 million for the quarter compared to $4.4 million in the same quarter a year ago, reflecting a decline in EBITDA margin from 17.4% to 11.8%. As Ted mentioned, the decline in EBITDA margin primarily reflects the impact of the acquisition and the associated costs during the quarter. In addition, the EBITDA margin was also somewhat negatively affected by rising operating costs. Volumes and pricing remained soft relative to pre-pandemic levels. The expectation is that the conditions will improve with the eventual removal of COVID-related restrictions. Turning to our balance sheet, this quarter, we continued to strengthen our equity position. We reduced our debt-to-equity ratio from 1.14 as of December 31, 2020, to 1.01 at the end of this quarter. Given the strength of our capital position, we remain confident in our earnings outlook, maintaining the quarterly dividend at $0.02 per common share. I would now like to turn the call back to Ted.

Thank you, Alex. With a strong finish to the first quarter, we remain highly positive that we are on track to achieve the annual guidance we set out at the beginning of the year. We continue to deliver strong growth and proof of strategy in our expanded Logistics business, and the prospect for further growth and expansion remains strong. Our trucking segment performed well in a challenging environment. This segment will benefit from an economic recovery, which we are cautiously optimistic is underway with the rollout of vaccinations. As a business, we are prepared and confident to execute in that environment. ITS is a significant addition to our business and it is expected to be a strong contributor to our profitability as we apply strong operational management and implement our innovative technology. Looking ahead, we are well positioned in a multibillion-dollar North American transportation industry. We have a proven platform, leading with our approach and custom-built software and use of technology creating clear competitive advantages. As a result, Titanium thrives in times of accelerated disruption. With that, I'll turn it to the operator to open the line for questions. Thank you.

[Operator Instructions] Your first question comes from the line of David Ocampo from Cormark Securities.

Your U.S. Logistics division continues to fire on all cylinders here. And when we take a look at your guidance, I think it's $25 million per office. And given the context of you guys generating $32.5 million of revenue this year, that number does seem fairly light. What are you going to need to see to move up that yardstick? And then probably more importantly, are there any risk of that falling off a cliff similar to what we saw in Canadian Logistics back in 2019?

Yes, very, very interesting. So we do think about that all the time. I think that what you're dealing with in the U.S., however, is a far larger market. The U.S. is, I wouldn't say it's 10x our Canadian market. I would gather to say it's probably 15x to 20x our market. And so we're such a small sliver of that market and we have such great tech, and we have great people down there, that we continue to just kind of use offense as our best defense, and we continue to just kind of pound away at that. I'm already working on our next 2 offices. We're working through those processes. We believe that there's a lot more sustainable as a result of the fact that it's such a gigantic market and such a huge amount of opportunity. But what's going to continue to drive the circumstance in the U.S. is that there's a huge backlog of, call it, general macro capacity. The backlogs of containers at ports, there's backlogs of components, there's backlogs of parts, microchips. There's a backlog of new drivers entering the industry just because a lot of schools have struggled over the last 12 months. And so having said that, even just building new trucks and trailers is a challenge. So I don't think that capacity is going to, all of a sudden, rightsize that ship anytime soon. So yes, we believe there's certainly like a lot of sustainability in that kind of offense is your best defense approach.

And just to add to that, David, in terms of the cliff that we saw in 2018, conditions are different and similar at the same time. However, the biggest difference, I think, is our expansion into the U.S. has levered off our experience in the Canadian logistics market, both on a technology basis as well as a customer basis. So our U.S. growth has not been sort of fluky, for the lack of a better term. It's been rather calculated and levered on existing customer relationships. So we've actually gotten very good traction and momentum and have very strong leads into new markets as well, with expanded growth through more offices in the U.S. that we are strategically working with our partners to get to.

As a follow-up to that, Ted, what's the time line on the 2 offices for this year? Is it something that occurs Q3, Q4?

Yes, so we're hoping to -- so over and above Nashville, Charlotte and Chicago, we're hoping to open 2 more offices this year. I would say, yes, the goal would be to get the next one hopefully announced in Q3 and then one more in Q4. What's kind of slowing that just slightly, I would say the challenge is crossing the border. So if I need to get down there at a certain stage, I mean, there's only so much that people can do on virtual video calls. Obviously, coming back and then having to augment my trip with an additional 2 weeks of quarantine is -- it's a little tricky.

So referring back to your first question as well. That's why our guidance is $25 million per office because there is going to be -- we expected a slowdown for the second 2 office, so you have to even it out. Because you're right, if you look at just strictly our first 2 offices' performance, you're looking at far more than $25 million per office. But you have to consider that the second 2 offices are -- second 3 office or the 3 offices after won't be as quickly up and running.

All right. Okay. And then maybe circling back on your guidance here. If we take a look at the Q1 and annualize that number, and that number doesn't include a full quarter of ITS or Chicago running at a full run rate on calculating revenue north of $340 million. So is there a lot of conservatism built into your guidance? And does that include the 2 extra offices this year? Or that's -- should we just look at as additional gravy?

It's kind of hard to say, David, right? So I think that we kind of look at that number and say that's a number that we're comfortable with. We're not -- we don't want to unnecessarily overpromise either, and we're not trying to underpromise necessarily. We're just trying to look at a number that we think is reasonable at this point in time. Yes, certainly. I mean if things work out, then I would say plan for the worst, hope for the best, I guess, and keep putting all -- sort of all our strategies in line with what we do best, tech and people. And if these things work out, that's great. Again, we're not sure how restrictions are going to be handled at this point in time in Canada. We're certainly -- I mean, we're still struggling with numbers. We don't know when the border is going to open up. So those are somewhat of unknowns, and that's going to, again, make it a little bit more challenging. So that's why we're kind of just sort of working with the number that we've got. But again, that number does not include the 2 additional offices. That is our goal. But I mean, I can't provide guidance for something that I have no guarantee for the fact that it may or may not happen. It's definitely a strategy, yes. Perhaps 2 extra offices versus what we've provided in guidance, it would be -- there's definitely a component of gravy in that.

And then finally, and just a quick one for me here. Alex or Ted, if you can -- or for as much as you can, can you point out what the total integration costs are for the quarter? I just want to get a rough sense on what the negative impact was in Q1 and potentially the degree of cost that should leak into the Q2.

So at this point in time, we're still, to some degree, evaluating, David. And it is ongoing. So there are definitely some costs involved in streamlining certain processes and investments that are being made in terms of also synergizing us, certain -- in particular, I would say, just processes that can also be technologically improved and to some degree, centralized.

And in terms of looking into the quarter and how the EBITDA margin was affected, you can refer to our previous acquisition where there was margin dip for sure after an acquisition, and this is consistent. Obviously, ITS is a little bigger so that -- it's going to take us a little more time to digest the acquisition. But we are working. We're firing off on all cylinders, we're making progress in our integration. And these 2 quarters will be a little bit of a dip, maybe perhaps even Q3, simply because this is a large acquisition. And they have a different cost structure than us, and we need to take the time to digest and rightsize and correct some of the things that are going on.