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

Good morning, ladies and gentlemen, and welcome to Titanium Transportation Group's Third Quarter 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, November 10, 2021. A replay of this call will be made available until midnight on November 24, 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. Please go ahead.

Thank you, operator, and good morning everyone. Thank for joining us. With me on the call today is Titanium's CFO, Alex Fu; and COO, Marilyn Daniel. As a leading Canadian-based transportation company, Titanium has built a strong foundation. We have made significant investments that have allowed us to capitalize on a $1 trillion North American market. We've been exceptionally active and successful in transforming our business despite global economic challenges. Having completed our largest acquisition to date and the continued expansion into the U.S. has significantly expanded our current revenue and future revenue potential. I'm pleased to report that for the fifth consecutive quarter, Titanium achieved record revenue totaling $101.7 million. Notably, in the first 9 months of the year, we've surpassed historical annual revenues by delivering a record $288 million year-to-date. This is our second consecutive quarter of revenues in excess of $100 million and a particularly strong accomplishment for the third quarter, which is typically a seasonally weak quarter in the year. We continue to prioritize the health and safety of all of our staff and customers as we continue to actively monitor and manage evolving conditions relative to the COVID-19 pandemic. We also continue to see improvements in the operating environment and most regions have returned to activity levels at or above those enjoyed prior to the pandemic. The further easing of various restrictions is supporting a return to more normalized operating volumes. However, significant inflationary challenges and market constraints have contributed to a delay in margin improvements. Looking at our segments, both our Truck Transportation and our Logistics segment, combined, delivered strong top line growth, up 93% and EBITDA grew by 8% year-over-year. Truck Transportation revenue grew 55.7% to $42.8 million, up $15.3 million from a year ago. Throughout the quarter, we continued to digest the integration of ITS, and I can report great progress. With that, we achieved a number of significant integration milestones during the quarter. More specifically, in the quarter, we fully integrated and rebranded all equipment and systems. Most importantly, we have a wonderful staff and driver complement now empowered with the infrastructure and guidance Titanium has masterfully developed over the years. This will allow us to grow and leverage the potential of our new combined fleets. While costs associated with the acquisition and integration of ITS have eased from the second quarter, they remain above normalized levels. We do expect to continue to see margin improvements as operating efficiencies and synergies are realized. Revenue and EBITDA in the Logistics segment has materially exceeded year-over-year results, reflecting the significant contribution of our expansion of the U.S. Logistics business as well as strong organic growth of Canadian Logistics. More specifically, the Logistics segment delivered revenue of $59.4 million, up from $33.5 million a year ago. This is an increase of 128.7%. We remain highly confident in our U.S. strategy and plan to further expand our footprint with an additional operating location prior to the end of the year totaling 5 U.S. locations in just over 2 years, staying true to our target. EBITDA for the segment was down modestly from Q2 levels, reflecting some tightening of the market as a result of increased carrier costs. Typically, it takes 2 to 3 months for our pricing to fully reflect changing costs. So we expect margin performance to gradually improve through Q4 and Q1 2022. As expected, the operating environment continues to improve as challenges related to the global pandemic has associated measures to combat the pandemic continues to advance. While we expect to see further improvement as conditions continue to normalize, the improvement in pace of the progress will remain subject to the evolving pandemic response. I want to spend a minute on how Titanium is addressing emerging market conditions. Like many others, we're seeing the impact of general inflationary pressures and tighter labor markets. We're seeing some incremental pricing pressure and delays with respect to the availability of new equipment and maintenance expenses. However, Titanium remains in a relatively strong position with a flexible technology-based platform with a demonstrated track record of delivering for our customers through challenging conditions. We expect to manage these cost pressures with a combination of operational efficiencies, coupled with customer price increases. Against that outlook, we expect Titanium to continue to deliver additional growth and improve profitability through the balance of the year, and we now expect to exceed our guidance of $350 million in annual revenue for fiscal 2021. Turning to our operating results for -- financial results for the quarter, let me hand the call over to Alex.

Thanks, Ted. In terms of the quarter specifically, total revenue of $101.7 million was up from $49.1 million or 93.2% from Q3 2020. Record quarterly revenue was once again achieved through significant progress in both Titanium's operating segments. Consolidated EBITDA was $7.2 million for the quarter, up 7.8% from a year ago. Reported net income per share on a diluted basis was $0.03 for the quarter. The company declared a dividend of $0.02 per share. Turning to the segment. As noted by Ted, the Logistics segment delivered $59.5 million, an increase of 128.7% from the same time last year. The Logistics segment continues to benefit from our strategic investment in the U.S. market. In Canada, the segment enjoyed a stronger quarter as activities level improved, following several quarters of relatively depressed volumes. Segmented EBITDA came in at $3.4 million, up roughly $1.4 million from the same time last year. Turning to the Truck Transportation segment and as noted by Ted, revenues during the quarter were $42.8 million, up $15.3 million from a year ago. ITS contributed $14.7 million to revenue in the third quarter, the second full quarter of results for ITS. Segmented EBITDA was $4.6 million for the quarter compared to $5.1 million in Q3 2020, reflecting a decline in EBITDA margin from 19.8% to 12.2%. EBITDA performance continues to be impacted by the addition of ITS and costs associated with the acquisition and integration of the platform. We continue to expect improved profitability in the Truck Transportation segment as we achieve expected operating efficiencies and synergies. Reflecting this progress, relative to the previous quarter, EBITDA performance improved from $3.9 million to $4.6 million, and EBITDA margin improved 250 basis points from 9.7%. Turning to our balance sheet this quarter and consistent with our strategy, we continue to strengthen our capital position. Our debt-to-equity ratio is 1:1 as at the end of Q3, down from 1.14:1 as at year-end 2020. Given the strength of our capital position and our confidence in the earnings outlook, we maintain our dividend, declaring a dividend of $0.02 per share, common share. With that, I would now like to turn the call back over to Ted.

Thank you, Alex. So looking at the quarter and where we are year-to-date, we are very pleased. The integration of ITS is progressing well, and contribution has exceeded our initial expectations. That is a very strong result, and I want to thank all the team members that have contributed to making this a success. We are managing through the expected initial impact on margins and profitability. And as we complete the integration and capture the expected operating efficiencies and synergies, we're seeing the improvement in profitability, and we expect this to continue. Likewise, we are very pleased with the progress of our U.S. Logistics business. We have been very targeted in how we have invested in that segment of the business, selecting locations to establish operations in new regions with significant opportunity. The early success of our U.S. operations and achieving significant revenue and profitability is a strong demonstration of our team's ability to execute the strategy and support rapidly growing activity levels. Again, great success from our team. Furthermore, we are well-positioned and remain committed to our technology-based platform to work through various evolving market conditions. Investing in proprietary tech development and navigation tools is a differentiator for Titanium in the transportation industry. To close, we are very pleased with the progress we delivered this quarter and so far this year. Titanium remains in an excellent position to continue executing on both organic and inorganic opportunities as they present themselves. We remain focused, committed to continue to sustainably grow our business while positively influencing the industry as a safe and socially responsible business. I want to thank everyone on our team, both in the office and on the road for their commitment and dedication. Lastly, I want to thank all of our customers for trusting us with their freight. With that, I'll turn the call over to the operator and open the lines for questions.

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

Ted, you talked a little bit about the inflationary pressures that you guys are seeing, and that's hitting everyone in the marketplace, not just truckers. And I understand that rate increases are on the docket here. But I'm curious, when do margins start to normalize here? Is that something in Q1 where we can finally get back into your more normal EBITDA margin range of 15% to 16%?

I think, David, it's hard to commit to a time frame for a specific percentage. But you're absolutely right. I mean, with our navigation systems, basically, we've got one of the technological areas that we have very specifically focused on deep dive analytics. So clearly, we have the science to know exactly what needs to happen. So we are in the process as we speak, and we have been very, very, very involved and very progressively working with all of our customers with the mathematics of the conditions that we're dealing with at this stage. So I'm really glad that, obviously, inflation, that's a big issue. And it -- I think it hit everybody, kind of the entire business world very hard, very quickly. And it came a little harder than I think everyone probably expected it to and a lot -- at a much faster pace. And so what we're doing is, definitely, we are going to see increase in margins. We know what our target is. And you're going to see it definitely over the next 1 to 2 quarters.

And I guess based on your negotiations with your customers, how many of them have already committed to rate increases for next year? I'm just trying to get a sense on how much more work needs to be done to kind of get to that margin level.

I would say at this point in time, quite a few. It's -- I just think it's not very few, but it's not all of them at this point in time.

I'm just going to add to that, David. It's Marilyn. We are talking to our customers. Some customers are proactively even addressing us, worried about capacity issues in the upcoming quarter -- year I guess, now that we're looking ahead. So we are addressing the customers almost one by one. And the appetite out there is very expectant of pricing increases. Nobody is shocked and not a lot of pushback. I think now it's coupled with, okay, can you do it more than how much it is, no different than the way we buy our groceries today. It's where we buy it. We don't even look at the price anymore.

And I guess what that's concerned about is there capacity available? Are customers now more willing to walk into longer-term contracts as opposed to your typical 1-year freight rate agreements?

What's interesting is a lot of them are -- the longevity of contracts is not coming up in that context. At this point in time, contracts, it's a different sort of flavor in the discussions. The discussions more along the lines is, how long are you going to be able to hold this rate until you have to come back and ask me for another increase. And the conversations are basically -- I mean, we are doing everything we can to try and respect our customers' businesses. So we're not showing up and saying, hey, I'm going to give you a rate increase. And by the way, I know it's Friday afternoon and if you don't give me the rate increase by Tuesday morning, I'm going to pull my trucks. That's not happening. So we are working very closely and very respectfully with all of our customers to get through this and get them to understand that the ingredients have changed. But the thing is, is that we're not actually committing to the fact that this is over. We don't think it is, in fact, we believe that there may be more rate increases and they could happen several times over the next 1 to 2 years.

And then if I could just sneak one more in as it relates to your U.S. Logistics expansion. Ted, I think that 10 office goals, quite a number of years ago, and you're targeting to get to 5 by the end of the year, and that includes all the travel restrictions that were in place. So I do expect that to kind of pick up in pace next year. But is that 10 office locations still good guidepost, given how well the profitability and the revenue has been in that division over a short period of time?

Well, we're benchmarking sort of in increments of 5. So I'm basically saying, well, what can we, in terms of our leadership group, and how many times can I shove a cotton swab up my nose, basically in a short period of time crossing the border back and forth. So I'm hoping that eases up. But basically, we opened our first office early summer of 2019, if I recall, it was May. And so I think we're somewhere around 20 -- we're at around just short of 27, 28 months. And so we're going to more likely have 5 offices ideally before the end of the year. My goal is to sort of say, okay, well, if I can average approximately 2.5 offices per year, then what I think that that's a pretty reasonable number. That's saying, well, even if I'm down to 2, I'm at 5 offices every 30 months. I'm, in 2.5 years from now, at 10. And 5 years from now, I'm going to be at 15 offices and so on. So we believe it's a matter of continuing to just explore each area of the U.S. on a regional basis, get the right people. We have scalable technology that's been worked on over the last few years that's been developed. And basically, 5 offices over a period of every 2.5 years is pretty reasonable.

Your next question comes from Jean-Francois Lavoie from Desjardins Capital Markets.

So with respect to the guidance, you mentioned that you were on track to exceed the $350 million of revenue. But I was just wondering if the $33 million of EBITDA still stands for 2021. So any color on that one will be useful.

Yes. For us, we are keeping pace with the $33 million, and we were expecting to pass the $350 million depending on the rating environment for Q4, but the EBITDA stays.

Okay. And then coming back to the Logistics segment for the margin front. I appreciate the color you gave with respect to the inflationary pressure you're feeling with this segment. But looking at Q4, would it be fair to expect somewhat of an improvement, a sequential improvement in margin? Or this pressure even though you're looking to pass it along to your customer should still impact margin in Q4, and we should not expect any sequential improvement?

For logistics side, we should be able to recover some of that. It was a very sudden change in the market conditions for Q3. And we are expecting and we're seeing that the margins are scaling and trending back up.

Yes. So if you want to -- I'm going to just add to that. So essentially, carrier costs in a non-asset base, our asset-light divisions go up first. And then what happens is there's a tendency of, again, in a hyper-fragmented market, carriers will move their equipment from the lower-paying freight to higher-paying freight. And it happens rather quickly. So what will happen is carrier costs will drive the costs up to some degree, very quickly, very flexible economy from that perspective. And then it takes a few months, and then we adjust at the spot market level as far as our top line is concerned.

Okay. Great. That's good color. And then moving to the Truck Transportation segment, Marilyn. Looking at the performance of the legacy business in Q3, it appears that pricing was quite good at 6%. But volume was a bit weaker than we expected. So I was wondering so far in Q4, are you seeing volumes pick up with the busy holiday season coming up?

We are definitely in a very, very robust marketplace right now. The biggest issues we've had on the Truck Transportation segment is the inflationary pressure of all the costs from everything from maintenance and repairs to getting equipment to getting parts, trucks are in shops longer. And all of this came on pretty quickly and then markets opened up and the world started working again. It gave us different pressure points that came on very quickly. So on the trucking side, I'm very pleased and very happy with where we're at with volumes and I am seeing increases. Part of the volume adjustments, too, as a part of our sort of cleansing and restructuring with ITS, there's always some cleanup in that process, and that's a little bit part of it now kind of making sure we're at the quality level of freight.

Okay. Great. And then the final one for me. On M&A, Ted, I think you reiterated your desire for M&A. I was just wondering right now with the inflationary pressure you're seeing in the supply chain disruption, does it pause your appetite for M&A a bit, just while you're adjusting for this impact? Or you're still looking to resume M&A in the near term?

Absolutely. In fact, I get very excited talking about some of the ingredients that are happening economically right now. It's actually -- it's almost interestingly fun to live through this very, very dynamic and interesting times because there's some really amazing ingredients, in fact, that are causing, in fact, my excitement for, I think, the opportunities that are coming our way. And one of those ingredients is the fact that you have a very interesting situation here. You've got substantially increasing costs for new equipment. And that equipment right now is going to be supplied to the truck transportation industry, be it the tractor and the trailer components or parts of OEM purchases are being allocated to customers. You can't call up your Class 8 truck supplier and say I want 200 trucks next year, and they're going to deliver them ahead of schedule. You're going to call them up, and they're going to tell you, and they're going to say, okay, that's great. Now let me figure out whether you're going to get 100 or 120 or 80 of the 200 that you actually require. I recently spoke to one trailer manufacturer, and they said that they have over 5,000 trailers that are in demand, and they're not going to be able to deliver more than about 1,000 to 1,500 of those. So that is an amazing, amazing circumstance. And I think what's happening is COVID delayed, in fact, some replacement. And then now, I think there's a lot of smaller trucking companies that are going to really struggle to get equipment, used equipment is going through the roof, and interest rates are going to go up. So it's a combination of cost of capital and the nominal cost of the capital itself and the carrying cost of the capital. So those are going to make it, I think, very difficult for, I think, companies that don't have very strong balance sheets to be able to kind of reload the next few years of equipment replacements and that's going to present, I think, significant, significant opportunities for us. And I think it's going to be a challenge for others to be able to live through that. And it's going to be a big opportunity, I think, for Titanium to be able to take a look at good opportunities and give these people an opportunity to be a part, again, a part of our business.

[Operator Instructions] Your next question comes from [ Mike Holm ] with [ ACH ].

A lot of my questions have been addressed, but I just want to dovetail on the last person who was on the queue. You said you're holding your full year guidance for adjusted EBITDA at $33 million. That's correct?