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

Good morning, ladies and gentlemen, and welcome to Titanium Transportation Group's Quarter 2 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 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, August 11, 2021. A replay of this call will be made available until midnight on August 25, 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. Please go ahead.

Good morning, and thank you, operator, and thank you all for joining us this morning. With me on the call today is Titanium's CFO, Alex Fu; and our COO, Marilyn Daniel. I'm pleased to report that for the fourth consecutive quarter, Titanium has posted a new record revenue coming in at $100.8 million, surpassing the $100 million mark for the first time in our company's history, a significant milestone for Titanium as we move forward building on our leadership position in the North American transportation and logistics industry. This achievement further reflects Titanium's focused strategic investments and growth opportunities. Record quarterly revenue was achieved through significant progress in both of Titanium's operating segments. Truck Transportation reported revenues of $44.8 million, an increase of 83.8% compared to the same prior year quarter. Logistics reported revenue of $57.7 million, reflecting a nearly fourfold increase over the second quarter of 2020. In the Truck Transportation segment, the acquisition of the ITS Group, which closed on February 1, contributed $15.9 million in revenue this quarter. The Logistics segment, the largest driver of our exponential growth to date, is the direct result of our focused investment in the U.S. market. Our performance reflects growing operations in Charlotte, Nashville and Chicago. We also continue to see overall increased activity levels in the U.S. freight markets. Consolidated EBITDA was $7.7 million in the first quarter, up -- in the second quarter, up 45.7% from a year ago. The results of the second quarter continued to be impacted by the costs associated with the integration of our acquisition of ITS. This included complete relicensing of equipment and migration of systems, staff restructuring and upgrading of digital infrastructures. The importance of this $2.5 million investment is critical for the fundamental navigation of the business to allow for future financial success. Consequently, EBITDA in the Truck Transportation segment was down during the quarter due to the acquisition of ITS. We expect these costs to normalize as the year progresses. I'm very pleased to report the integration is on track and the expected realization of operating synergies is tracking to plan. In fact, backing out integration costs, trucking remained on track for profitability expectations. At the end of June, we welcomed the last of ITS' trucking terminals onto the Titanium platform. This achievement allows for a single integrated real-time view across Titanium's entire platform, including the newly acquired ITS business. The integration will support increased fleet efficiency, optimization and deliver incremental cost savings. We confidently expect to deliver improved profitability in the Truck Transportation segment throughout the second half of the year. Now moving on to our Logistics segment. EBITDA was up substantially, reflecting the success of our investment in the expansion of the U.S. Logistics business. The U.S. expansion plan has been an excellent opportunity for Titanium. We remain optimistic that we'll be able to open at least 2 additional freight brokerage locations before the end of the year. While our U.S. Logistics business continues to deliver significant growth and U.S. activity levels are expected to remain robust, we expect some moderation to a more sustainable pace. In Canada, the Logistics segment continues to improve, delivering increased revenue and profitability despite relatively soft market activity levels. Here too, we expect conditions to improve gradually as the year progresses. In terms of the operating environment, conditions are, for the most part, improving, although progress remains uneven across certain markets. This reflects, in part, the ongoing government-led measures to combat the COVID-19 pandemic. In the U.S., a number of markets have returned to or have exceeded pre-pandemic levels of activity. Key Canadian markets are experiencing some improvements as well. We remain a -- we maintain a constructive and positive outlook for the balance of the year as economic conditions are expected to continue to improve. However, the pace of improvement is likely to be impacted by the evolving response to the COVID-19 pandemic across various governments. With that, we have increased our 2021 revenue guidance to reach $350 million for the balance of the year. Now before turning the call to Alex, I'd like to add that none of this would be possible without the continued dedication and focus of our team. So I'll now turn the call over to Alex to touch on our operating results for the quarter. Alex?

Thanks, Ted. As Ted mentioned, overall, the operating environment is generally improving, and we look forward to continued growth. In terms of the quarter, the combined Logistics segment delivered revenues of $57.7 million, up from $14.7 million a year ago. Segmented EBITDA came in at $4.7 million, a new record for the division and up substantially from last year. Within the segment, our U.S. freight brokerage division delivered revenues of $39.4 million. We will continue to expand this business with 2 additional offices by year-end. Turning to the Transportation segment. Q2 saw record revenues for the business of $44.8 million, up from $24.4 million from the same time prior year. The ITS acquisition contributed $15.9 million to revenue in the second quarter, which was the first full quarter of results including ITS. Segmented EBITDA was $3.9 million for the quarter compared to $5.1 million in the same quarter a year ago, reflecting a decline in EBITDA margin from 22.2% to 9.7%. The decline in EBITDA margin reflects primarily the anticipated impact of the addition of ITS and the onetime associated integration costs of $2.5 million during the quarter. In addition, overall, we are experiencing increased operating cost consistent with industry market conditions. Furthermore, we are seeing tightening of capacity in the U.S., resulting in upward pressure in rates. In Canada, activity levels remain relatively flat, although the outlook is for conditions to continue to improve as the year progresses. To sum up, we are very pleased with the company's performance and significant achievements, including meeting our integration deadlines with respect to the integration of ITS. Turning to our balance sheet. This quarter, we once again continued to strengthen our capital position. We reduced our debt-to-equity ratio to 0.96 at the end of Q2, down from 1.14 as of December 31, 2020. Given the strength of our balance sheet and our confidence in our earnings outlook, we maintain our dividend, declaring a dividend of $0.02 per share -- common share. In closing, I would just like to echo Ted's comments. We know how challenging conditions have been over the past year personally and professionally for all of our team members, and these results would not be possible without their continued commitment to supporting our company's goals. With that, I would now like to turn the call back to Ted.

Thank you, Alex. Overall, this quarter, we are very pleased with the company's performance. The Logistics business continues to grow, and we remain very focused on our efforts to establish additional offices in the U.S., executing on our proven platforms. On the transportation side, the acquisition of ITS was significant in terms of the resources and capabilities it added to our bandwidth. And we are seeing that in the overall revenue pickup and increased market share. This strategic acquisition, once synergies and optimizations are realized over time, will be a strong contributor to the overall profitability and growth of the company. This acquisition and the rapid integration is a testament to Titanium's outstanding team members who work tirelessly to execute in all areas of the business: systems conversions, back-office restructuring, staff management, training, relicensing, equipment and maintenance and more. Titanium's scalability and technology-focused platforms, together with our outstanding team members, were really highlighted throughout this quarter. Upon fully digesting our last transaction, Titanium is in excellent shape for executing on both organic and inorganic opportunities. To close, I want to again thank all of our team members and a special thanks to all of our customers for trusting us with their business. With that, I'll turn it over to the operator to open the line for questions.

[Operator Instructions] And our first question comes from J.F. Lavoie from Desjardins Capital.

So it appears that the ITS integration is progressing quite well with adjusted EBITDA margin, excluding nonrecurring costs, reaching close to 16% in Q2. So would it be fair then to expect that margin from the Truck Transportation segment in the second half will go toward this 15% to 16%?

It's going to take -- I would say that's a gradual improvement now. So really, if you think about it, stage 1 of a transaction, you evaluate for the first 1 to 2 months, and then you have to execute on the actual integration, putting everybody on the same platforms. And so now effective July 1 and onwards, the entire fleet is on our systems. And so now what I would say is we're kind of into phase 3, which is again, this is now the synergizing and the optimization and rationalization of every component of the navigation of that business at this point in time. So yes, I agree with you. I think that number is very achievable. The question is, how quickly are we going to get to that? And I believe that, that's really a day-to-day, week-by-week gradual process. It's just that's a steady incline from now on, and I'm seeing that every day. So I would say, definitely, that's a sure and steady incline at this point in time over the next 2 quarters.

That's great. And on the nonrecurring integration costs, are you seeing -- I know the integration is progressing very well. But do you expect more of these nonrecurring costs in the second half? Or all the costs have been incurred so far?

It's Marilyn. We have incurred the bulk of the integration costs that are onetime. Whatever is leftover is comparably very small. The refleeting, rebranding, repermitting, retraining and so on is done and complete. There may be some ongoing repairs and maintenance-related type things or minor issues to adjust, but nowhere near the cost that we've incurred in this quarter.

Okay. Great. And then talking about seasonality for ITS, the business generated about $16 million of revenue in Q2 versus about $80 million of annualized revenue once you acquired the business. So just wondering how much revenue does ITS generally produce in the second half? And just wondering if there's a discrepancy between Q3 and Q4 in this COVID environment.

Yes. So basically, there's, I would say, a slight rationalization. There's a small component of the overall revenue, customer mix that we actually shifted over to our Logistics division. And as well, from the point of view of rationalization, like there's going to be a small component as well where we're going to take a look and say, "Okay. This doesn't really fit our lanes" or "It doesn't fit our model or whatever." And from that point of view, so there's always going to be a little bit of a rationalization.

In addition, during this quarter, with our transition and integration, we had days where we had the fleet grounded as we were doing changes to the equipment and driver training. So we certainly didn't maximize on all the freight available to us. It was just part of the cost of the integration.

Okay. That's great color. And then last one for me. I know in the past, the border restriction with the U.S. has been a challenge for opening new location in the U.S. for the Logistics segment. So with the border now reopening, would it be fair to expect those locations to be open, let's say, in Q3 with a gradual ramp-up in Q4, it will be more a Q4 story?

No. We believe that there's a high likelihood that we're going to be able to achieve 2 more offices before the end of the year. And in all likelihood, you're going to see 1 -- the first of those 2, hopefully, very soon.

[Operator Instructions] And our next question comes from David Ocampo from Cormark Securities.

Yes. It was pretty encouraging to see freight rates up in your Truck Transportation business by 5% in the quarter, but that still lags the U.S. rates that we're seeing. They're pretty strong double digit here. But when you kind of look to the upcoming rate-setting season, how are your discussions with customers? Is that double-digit increase a possibility as we head into 2022?

David, it's Marilyn. Yes, we are seeing definitely an appetite for price increasing across -- price increases across our customer base discussions this year are very different than what we've had last year, thankfully. So definitely, pressure is there. In some cases, double digits are happening. I wouldn't say that's necessarily across the board. But yes, we are seeing significant increases in rates going forward.

Okay. And then Ted, I think you commented earlier that you expect some moderation of the Logistics revenue. But when I take a look at it, like on an annualized basis for the 3 offices that you have, it's -- the revenue is closer to CAD 50 million. And I believe your guidance was, I think, USD 25 million, so quite a wide spread there. Should we expect that to gravitate towards the USD 25 million? Or is the USD 25 million more guidance for the 10 offices that you plan to open by 2024?

Yes. So I think that you're closer to probably the right number on an average basis because your -- I mean our first office was -- our first 2, 3 offices were very successful. But I think once you kind of get into sort of some of the smaller regions, you're not going to see every single office is going to explode into something absolutely gigantic. So there is going to be some moderation. So again, I still sort of use the average of about $25 million for office only because, again, you're going to get into some regionalization. But I mean, to me, that makes a lot of sense, right? So there's going to be certain cultures, certain tendency of just certain volumes of certain customers and differences in density as well and volumes of lanes. So that's where -- yes, I think it's still -- I still prefer to use that as a sort of a baseline. And then I mean, if we can do better, then that's great.

No, that makes perfect sense. And then longer-term-type question, and we've talked about this in the past, but when you compare yourself against the larger truckers in Canada and you take a look at their EBITDA margins, they're closer to 20% and some even above that number. So I'm just wondering like, you guys have historically operated in that 16% range. What's it going to take for you guys to bridge that gap? Is it another acquisition? Or do you feel like you can reach -- potentially reach those levels with the operating footprint that you have today?

Yes. I think that, to some degree, it depends on the product mix that you're at, and it depends on the type of equipment that you're in and it depends on your mix of company driver versus owner-operator. If you've got a higher owner-operator mix, then you're going to end up with a lower EBITDA because part of the cost of the truck is above the line. So I think that, to some degree -- I mean I think 20% is achievable, but I think it's more a matter of that sort of in ideal conditions where you've not done any acquisitions and you're focusing entirely at that point in time on just pure, pure optimization rather than working on bringing another acquisition up to that level. So the question is, where do you balance, right? If you want to stop doing acquisitions, yes, I think it's achievable because you're constantly innovating and we're developing all sorts of efficiencies and integrations and automations where you've seen our tech team. But again, it's also a matter of balancing the mix and balancing at what point in time do you not want to do an acquisition. I think we're very good at acquisitions, in fact. And so I'm kind of excited to -- I mean I know you're going to ask the question, but I am actually excited to get this one done. And I think there's other opportunities out there at this stage, and we're kind of looking forward to getting to the point where we're going to be able to look at the next one. So...

You just took my next question, but maybe I'll follow-up on that. How much dry powder do you guys have now and your willingness to lever up the balance sheet? Just trying to get a sense there.

It's Alex. So obviously, in the MD&A, we've disclosed that we've kind of used up our acquisition line for now, but we -- you can also see that we do have a lot of cash in play that we can definitely use to buy, maybe not an ITS, but definitely a smaller acquisition. We have -- we definitely have dry powder. We can get something that's maybe half the size of ITS comfortably without running into any covenants or any banking issues. Past that, we'll have to look for other avenues where we can generate that cash flow.

And we do have a follow-up question from J.F. Lavoie from Desjardins Capital.

Yes. So staying on the topic of the M&A. Ted, I was just wondering if you could talk about the pipeline of opportunities you're seeing these days. And what -- in the seller's expectation in terms of multiple, do you see expectation being reasonable and conducive for further M&A in the near term?

So actually, there is quite a bit of activity out there, and we have recently, in fact, signed a number of NDAs reluctantly. But you know what, I just -- I can't resist. So it really intrigues me. But what's really interesting though is yes, there is -- I'm getting the feeling that there's a slight upward pressure on multiples. And I kind of understand why, but I don't think it's a matter of performance. I think it's a matter of just, again, lack of drivers, driver shortage and a lack of equipment. So what's interesting is, I think a lot of that is driving the fact that companies are willing to pay more money in order to be able to just get equipment and drivers in the acquisition. And I think that we all pretty much know what's going on as well with real estate. So it's really -- it's all about the hard assets and the drivers in terms of really generating what is that -- those ingredients together equal capacity. And that's going to be a major issue in the next, quite frankly, 12 to 24 months because of the backlog of components and everything, the shortage of semiconductors. It's not even a matter of getting build slots. Every OEM out there is happy to quote you, quite frankly, prices that are anywhere from 10% to 25% more than what they were a year ago, but it's just a matter of when is the equipment going to get delivered. And it's not even a matter of if there's going to be delays, it's a matter of how many delays are you going to get until you finally get delivery. As well, what's interesting is, I mean, equipment is all going up like crazy, right? So I think that's why multiples are going up. It's just because buyers and sellers know what's going on at this point in time.

Okay. That's interesting. And it's probably a segue into my last question on CapEx. I know, as you said, there's a lot of uncertainties with the deliveries or trucks these days. So what are you expecting for the second half of the year with the ongoing chip shortage? And is there some deliveries that will slip into 2022 that we should be aware of?

So we've got -- we've ordered 80 trucks. In fact, we've actually secured more build slots than that. But if we can get the 80 delivered this year, I'll be thrilled. So that's, yes, pretty much the sort of the way things are going now with equipment manufacturers.

Yes. And of the 80 trucks, have you received so far in the first half of the year?

None. Of the 80 that I just told you, that's incremental. So we haven't received any of them. And so there is a schedule that I've gotten from our OEMs in terms of when they're expecting to build them. But again, every single time that they're trying to build trucks, there's always some sort of a component that's semiconductor-driven that -- and a lot of these are replacements. So that's going to help. Right now, we have -- we've got some trucks that are coming in. But right now, again, the issue is that it's a matter of when certain components that are going into these trucks is going to be ready. And it's interesting as well, I'm getting a lot of sort of half promises even from our trailer suppliers saying, "Well, we're willing to build trailers for you next year, whether it's 200 or 300 or 400 trailers." But they're basically saying, "We don't know if we're going to be able to get to these in Q1 or Q2 or Q3 because we're not sure when certain components are going to be available." And so their suppliers aren't committing.

Yes. That's very interesting. So it probably makes sense on the M&A, like you said, the valuation going up a bit. But at the same time, capacity is pressured so there's a...

Yes. I mean every other day, you're reading a story about the big auctioneers out there, how they're all having record weeks because the pricing for used equipment is insanely expensive now compared to where it was a year ago.

That's great. Congrats for the integration of ITS.

Thanks.

Our next question comes from [ Mike Cohen from APH ].

I'm going to segue off that last question, my phone just went off. I mean with so much uncertainty in terms of when you get new equipment or new trucks and the idea that maintenance repair and overhaul is going to become very important over the next 12 to 18 months emerges. And so can you give us some more color, I guess, for lack of a better phrase, on how you do your maintenance repair and overhaul to keep those trucks, maybe pushing them a little bit beyond their estimated useful life?

Yes. So actually, a good question. We actually have systems and we use analytics to do a lot of that. So we keep a very close eye on our reporting, our databases. We do predictive analysis. There's a lot of financial analysis that goes into it using the databases. We have categorization of certain expenses as well. So we do have -- think of it this way as kind of a hierarchical database in the R&M space. So we have a lot of analytics actually that we're going to be using in order to kind of push things, like you said, a little bit beyond what we would expect to be sort of that initial useful life before you get into some really large repairs on trucks. And trailers, they seem to be rather even. I mean trailers aren't as complicated a piece of equipment as trucks, so they tend to be a little bit more sure and steady. I mean if you look at a van, it's quite simple. If you replace tires and brakes, that's 95% of what you need to do for the first 10, 12 years of a trailer. So that tends to be a little bit more straight lined.

Also [indiscernible].

Yes. We did take delivery of approximately 40 trucks in the first half of 2021. So we did very carefully and methodically make some decisions to which trucks needed replacement. As well, the ITS fleet wasn't -- it wasn't horribly old. It was -- it is in decent shape. One of my motivations though at this point in time to replace and to both grow organically in trucking but also replace more trucks in the next 12 to 18 months than I originally anticipated is the used truck market. Right now, it's an extremely opportunistic time to work that differential. So it's a really fantastic time. I do feel that the ITS fleet needs to be replaced a little bit sooner than Titanium's, so we are in good shape that way. But again, it's a very interesting time in terms of the used versus new pricing, minus, of course, of course, the differential between the R&M versus the warranty. So from that point of view, we're actually really interested in working those numbers.

Maybe we'll see a new -- a third segment reported called truck arbitrage.

Yes.

Yes. Yes.