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

Good morning, ladies and gentlemen, and welcome to Titanium Transportation Group's Q4 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 today's call is being recorded today, March 9, 2022. A replay of this call will be made available until midnight on March 23, 2022. Details of the replay can be found on our website under the Investors section. I would now like to turn the call over to Titanium's President and CEO, Ted Daniel.

Good morning, and thank you, operator, and thank you for joining us to discuss fourth quarter results and our outlook for the full year 2022. With me on the call today is Titanium's CFO, Alex Fu; and COO, Marilyn Daniel. We ended 2021 on a high note with fourth quarter results that caps a year of records and transformational achievements for Titanium. I'm proud to report we achieved the highest full year revenue in the company's history at just a sliver under $400 million, that being roughly double the $200 million in revenue achieved in 2020. Our results for 2021 were above expectations, which I'm proud of, but equally important is that we're also well ahead of our growth plan targets that we set 3 years ago. This success, despite a continued challenging environment, as a result of our focus and execution on delivering organic growth, our disciplined approach to acquisitions, U.S. expansion and our ongoing commitment to productivity and efficiency with investments in technology. I'm very pleased to announce that for the fourth quarter of 2021, Titanium delivered another record quarter with revenues of $111.3 million, an increase of 69.1% over the fourth quarter of 2020. Without a doubt, our continued success would not have been possible if not for the steadfast commitment of all our team members, whose focus on our business and support of our customers' needs is critical to delivering our results. 2021 was a challenging environment for most industries as the pandemic and associated restrictions continue to impact the economy and operating conditions. Titanium's focus on building a robust and versatile platform supported our ability to successfully navigate the challenging environment, support our customers and deliver strong organic growth. In addition, notwithstanding the environment, we executed on our acquisition growth strategy, closing the largest transaction since our inception with the acquisition of International Truckload Services. More recently, we announced the acquisition of Bert and Son’s Cartage, supporting our ability to continue to execute on strategic targets that support our rapidly growing footprint. Throughout 2021, we successfully invested in the development and expansion of our U.S. Logistics business in key markets, capitalizing on access to the North American supply chain demand. We successfully added 2 new operations, including dedicated teams with local expertise in Chicago and Denver, expanding our U.S. freight brokerage platform to 4 markets. In addition, last week, we announced the start of our fifth U.S. operation in Atlanta, Georgia, as we continue to expand with our U.S. rollout. Our strategy and execution delivered a year of significant growth. The Trucking segment posted revenue of $44.5 million in the fourth quarter and $171.2 million for the year, representing a 66% and 61% growth, respectively. For the fourth quarter, ITS contributed $15.8 million of revenue to the segment with a total for the year of $60.9 million, reflecting only 11 months of operations. In the Logistics business, fourth quarter revenue of $68.1 million was up 68.6%, while full year revenue of $232.3 million is up for more than twofold from $99 million in 2020. With the strong performance across our business and our acquisition full year 2021 adjusted EBITDA was $31.3 million, up 35.5% from 2020. This is net of absorbing $2.5 million in direct acquisition-related expenses mainly in the second quarter, which are nonrecurring. Excluding these direct acquisition-related costs, adjusted EBITDA was $33.5 million, in line with our expectations. EBITDA performance continued to be impacted by the addition of ITS and costs associated with the acquisition and integration. However, performance has improved over the last quarter as the integration of the business advances and efforts to realize cost savings, improve productivity and deliver results. The industry is bearing cost pressures from higher fuel and operating costs with some supply chain constraints, delaying the supply of new equipment. We continue to address these challenges with ongoing focus on productivity and efficiency in our operations as well as efforts to pass through appropriate price increases to customers. Most customers understand the current realities of the marketplace, and we continue to work constructively and transparently to achieve fair outcomes and support our growing customer base. While the fourth quarter reflects some of these efforts, most pricing activity takes effect with a lag, and we would expect to see more progress in the first half of 2022 results. Turning to the integration of ITS. Most of the major systems integration milestones have been achieved with good success. We continue to work to upgrade the equipment consistent with the broader higher fleet standards at Titanium. However, as mentioned, we are experiencing some delays with respect to equipment deliveries. As a result of good planning, we are on target to receive over 100 tractors and about 250 trailers before the end of this year. As we look ahead to 2020, a number of challenges continue to confront the industry -- sorry, 2022, a number of challenges continue to confront the industry. We remain vigilant in managing the uncertainty resulting from the pandemic and macroeconomic challenges with industry-leading navigation tools. The economy continues to evolve with respect to significant inflationary pressures and ongoing challenges in the global supply chain. Titanium remains exceptionally well positioned to navigate these conditions with scalable technology-based platforms and deliver logistics solutions for our customers, coupled with an experienced team. As Alex will discuss in a minute, we continue to manage our pricing proactively with our customers to address evolving industry costs, supported by the efficiency of our transparent platforms. Overall, Titanium is well positioned to leverage our capacity and expertise as we move through 2022. We believe our investments in people and technology allows us to continue to drive organic growth, even in challenging conditions. For the coming year, I'm pleased to report that we expect to deliver between $450 million to $470 million in top line revenue and between $38 million to $43 million in EBITDA. In addition, with a solid balance sheet and disciplined focus, we remain committed to exploring further acquisition opportunities as they arise in 2022. Turning to our operating results for the quarter and review the numbers in more detail, I'll turn the call over to Alex.

Thanks, Ted. Our fourth quarter results reflect a strong finish to a very successful year for Titanium fueled by organic growth and acquisitions. Both operating segments reported significantly higher revenue and EBITDA for the quarter and the full year. Total quarterly revenue of $111.3 million was up $45.5 million or 69% from the year earlier quarter. Record quarterly revenue was again achieved through significant progress in both of Titanium's operating segments. Consolidated quarterly EBITDA was $8.8 million for the quarter, up 35.3% from a year ago. For the full year, total revenue of $399.4 million was up nearly double from the $200.7 million in 2020. Full year EBITDA of $31.3 million was up 35.5% from $23.2 million reported in 2020. Reported net income per share on a diluted basis was $0.04 for the quarter and $0.12 for the year. Turning to the segments. Overall, the Logistics segment delivered revenue of $68.1 million in the quarter, up from $40.4 million a year ago, an increase of 68.6% and a record for the quarterly revenue for the segment. The Logistics segment continued to benefit from both our strategic investment in the U.S. Logistics business and our success in the Canadian operations. The U.S. Logistics segment contributed $44.6 million to revenue in the quarter compared to just $24.2 million a year ago. The Canadian operations also delivered improved results during the back end of the year. Ongoing economic recovery and gradual easing of COVID-related restrictions supported increased activity levels. As a result, the Canadian segment saw revenue increase by 45.5% to $23.6 million from $16.2 million in 2020. Segmented EBITDA for the quarter came in at $4.8 million, up roughly $1.6 million from a year ago. We've executed well on our strategic decision to invest in our U.S. Logistics business, and we expect the segment to continue to deliver strong growth in 2022. Turning to the Truck Transportation segment. Revenues during the quarter were $44.5 million, up $17.7 million from a year ago also a record for the quarterly revenue for the business. Segmented EBITDA was $4.8 million for the quarter compared to $3.8 million in the same quarter a year ago, with EBITDA margin of 12.3%. 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 common share subsequent to the fourth quarter. I would now like to turn the call back over to Ted.

Thank you, Alex. 2021 was definitely a transformative year for Titanium. We made significant progress in our strategic build-out of our U.S. Logistics platform, which we plan to continue to grow. We successfully completed the acquisition and integration of the largest acquisition in the company's history, and we continue to deliver organic growth in our core platform as the operating environment recovered. Titanium is entering 2022 with excellent momentum on solid footing. Both our Trucking and Logistics businesses in Canada and the U.S. are well positioned to benefit from the expected continued recovery in economic conditions and easing of operating restrictions. By all accounts, there is significant backlog in the global supply chain, which should continue to support robust demand for Logistics and Transportation services. Titanium is empowered and equipped with the tools to address cost challenges as we continue to deliver for our customers. With our people, technology and robust platform, we expect Titanium to punch above our weight class and deliver another year of profitable organic growth in 2022, with additional upside from the potential to pursue additional accretive opportunities. We want to thank everyone on our team for their continued focus, and I want to thank all our customers for trusting us with their business. With that, I'll turn it over back to the operator to open the lines for questions.

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

Ted, my first question is on the fuel price environment. I understand you guys have surcharges in place. But is there a lag in there where you could see a bit of a headwind either in Q1 and Q2? Or how does that dynamic play out as the year progresses?

Yes. There is a lag. So what happens, for example, is if fuel is increasing, then the fuel chart that customers use, let's say, in their contracts. And you really have to split this question into the 2 segments, right, into Logistics, which is more driven by the elasticity of the spot market versus a contract environment, which is in Trucking, which tends to be a little bit more stable. So I mean, dealing with the contractual side, you've got fuel tables. And some customers have fuel tables that are -- whether it's 70% of FCA or 30% of DOE or whatever, and it's based on prior month's average published whatever price of fuel, et cetera, et cetera. So there is -- there's certainly a lag and of course, what we're doing is we're addressing that by having regular at this point in time, technologically, we're all over that on a progressive basis so that we're giving ourselves the buffer in order to address those issues very quickly. In addition, you still have some customers that like all-in rates. So obviously, now those customers are being approached on a regular basis far more frequently. The Logistics market is extremely elastic at this point in time. So you tend to look on a more all-in basis on that level. So it's the overall all-in rate to the customer and then the overall all-in rate to the carrier.

Okay. That's helpful commentary. And maybe, Alex, in the MD&A, you guys noted that pricing is up, I think, 11% in the quarter. Just curious how much of the breakdown of that was from fuel? And maybe for Ted, where do you kind of see pricing increases trending for this year on a fuel basis?

So definitely, a big portion of that is fuel. There are some rate increases that happened during Q4. We -- about 1/3 of it is fuel and the rest are pricing increases. And you will see a lot more of that in 2022. With the fuel increasing rapidly in the first quarter, I would say, expect a larger portion -- well, I wouldn't say a larger portion, but definitely the same ratio going forward in the quarter at the very least. And I'll turn it over to Ted for the outlook on a fuel.

Yes. So I mean, we -- some of us remember $1.47 a barrel. And again, I mean it is a bit of a crystal ball, but -- do I think it's going to go up to $1.50, $1.60, $1.70, I don't know. I mean it's -- I think it's hard for all of us to say, where is fuel going to go, and we're all going to have to deal with those issues. And I think that the breakdown historically for us has been about 1/3 fuel, but getting into a more current -- getting into kind of more of the current environment, we've already built into some of our pricing at this point in time, the substantial increase -- for example, for the price of trailers. In the last 12 months, trailers of -- 12 to 18 months, the cost of trailers have doubled. And I'm sure that's not news to anyone at this point in time. So just the basic cost of purchasing the trailers doubled. In addition, we're in an environment, contrary to the last 10, 15, 20 years, we're now into an environment of increasing interest rates. So I think that the compounding components, the increase in the price of fuel is going to impact the fact that it's going to cost a mechanic more money to get to work and go and repair the truck. So he'll have to get a raise. And so the hourly rate of the shop will go up. So it's that kind of exponential impact that I think that we're all going to feel. And that's where we're staying extremely close on a regular basis using our technology to monitor exactly where we're at in terms of our costing. So it is a very complicated situation, and that's why we're seeing this sort of circumstance. So for sure, we're monitoring it. And unfortunately, but that is the reality. Fuel is a pass-through and it will unfortunately hit the consumer, the price of products.

All right. And for Truck Transportation, based on your guidance, it does seem like there's going to be a pretty good improvement on the margin profile there. How would you break up the split between your pricing increases and just better operating performance out of ITS?

I would say somewhere in the range of about 50-50. So I think that we know that ITS was a single-digit underperforming EBITDA that is unsustainable in virtually an entirely asset-based environment. You need to have a much higher EBITDA. Obviously, our goal in Trucking is about 16% -- 15%, 16% EBITDA. So their EBITDA was below 10%. It was single digits, and that needed to be addressed. Of course, no sooner than 4 or 5 months after the purchase, inflation started to kick in and that made life kind of sort of a double whammy complication. So having said that, at this point in time, the bulk of our -- sort of our improvements are now going to be not just improvements in efficiencies and just trying to get new equipment as quickly as possible and so on. We've -- we're going to be creating now also improved -- well, we're going to have to have improved margins because the cost increases are taking effect or price increases, really.

I'm just going to jump in for 1 sec. It's Marilyn. I think if you look historically for us, it's typical that a turnaround has many sort of stages and our integration stage is physically over and are working with human capital, I guess, working with our people takes a little bit longer to really realize the synergies and the optimization. And that's the stage that we're at right now, which is exciting for us, and we see positive results.

Okay. And then last one here before I hop back in the queue. Alex, what's the CapEx requirement for this year for the 100 tractors, 250 trailers?

So we disclosed about $32 million committed. Obviously, we want all of it, but with various supply chain issues. So if we can get more, it will be even higher. But so far, we are committed for $32 million.

Your next question comes from Benoit Poirier of Desjardins Capital Markets.

Yes. Just looking at the revenue contribution from ITS, it seems to be closer to $20 million versus the $14 million, $16 million at the time of the acquisition, is the $20 million a good run rate for ITS in terms of revenue?

Sorry, $20 million for ITS?

We have $15.8 million for the quarter.

You're talking per quarter, yes. No, you're more -- it's more of a $15 million per quarter for ITS.

Okay. Okay. Perfect. And could you break down the expectation when we look at the outlook for 2022 between Truck Transportation and Logistics from a revenue standpoint?

So we're expecting the breakdown to be around the same as the current year, which is about [ 45 ] Trucking and [ 55 ] Logistics.

Okay. Okay. That's great. And -- when we look at the EBITDA for Truck Transportation, obviously, you came in at 12.3% below what we should consider a normalized level. What about the expectation for Truck Transportation in 2022? Is 15%, 16% is achievable?

Yes. Well, we are aiming to reach 15%, 16%, 17% by the end of the year. The progress we'll have to see because of the inflationary increases currently, but we are passing some of that through like Ted and Marilyn mentioned. So our final goal is about 15%, 16% or 17% around that range. So where we end up, it's going to depend on how quickly we can get back on to that normalized percentage.

See, Benoit, it's not a matter of whether or not we're passing along these increases. What's happening is that you go to a customer and as respectfully as possible because we're all -- I'm going to use something probably nobody wants to hear another millions of time, but we're all in this together, but now we're on this together economically. And the bottom line is that you go to a customer and you say, "Look, guys I got no choice. I've got to give you this x percent increase, whether it's 7% or 12% or 13% or whatever the number is appropriate for that -- those lanes or that particular circumstance or whatever. So you go to the customer, you give them a rate increase. And then 3 months later, all of a sudden, there's some other increase that was unanticipated or an announcement that tires are more money or all of a sudden, you're getting -- there's a surcharge on new trucks effective 3 weeks from now delivery and onwards. It's just there are surprises now that are coming so rapidly that you can go to a customer and give them a double-digit increase, and it could be obsolete in 3 months. And so it's not for a lack of mathematics. It's certainly for not for a lack of knowing exactly what our, call it, a bill of materials of turning it higher. But it's for the fact that things are just so rapidly changing that our goal is to hit 16%, 17% EBITDA. But there could be more chasing going on this year, which is definitely going to be out of, I would say, everyone's control. And so all we can do is because of our technology, we're able to monitor our performance on a daily, weekly basis at this point in time, and that's how aggressive we are with the situation in terms of monitoring it. So that's why we feel that we're going to be well equipped to be able to address the situation. We have -- we're extremely confident that we're going to hit those targets. But again, there are some, let's just say, macro risks. Our tech tools certainly help navigate the situation.

Okay. And could you talk about the integration of B&S Cartage and also the current EBITDA margin contribution?

Yes. Actually, Marilyn is going to talk about it, but I'm just going to start by saying it's a great little consolidation acquisition in Branford, and we're very pleased to have had the opportunity to bring those operations together there. So I'll let her have some more detail on that.

We actually -- it's a small acquisition for us after experiencing ITS. It was easy, to be honest. The Bert and Son's Group has been transitioned to Titanium already. As of March 1, we have everything branded Titanium, and we have on boarded all the staff, et cetera. So we've already made those transitions. We've reached out to customers. We are already operating as Titanium out of our Brand [indiscernible] terminal. More strategically, we actually consolidated another terminal that we were operating at with through ITS that we were able to get out of the agreement we had with them for leasing purposes and integrated that whole group into this new location that we now own. The properties is just under 8 -- just under 8 acres, and serves us really well with an on-site shop that we have that we have tenanted. So -- it's worked for us that way. And as far as the physical integration, it's done. Now we're just working on the normal sort of soft work that needs to be done just with people and systems and customers and optimizing the customer base that Bert and Sons has. There was a little bit of overlap with customer base, but there's also new customer base there that we're working with now and expanding on. So it's been a very good acquisition for us.

Very, very productive -- we've all really enjoyed this process.

Okay. And for logistics, still a desire to add 2 new locations in 2022. Is that a fair statement?

Yes.

Yes. That's the goal.

Okay. And last 1 for me. If we look at M&A, obviously, going through some integration right now, but would it be fair to expect a pause until later part of 2022 or still pipeline pretty robust and willingness to do that?

Yes, I wouldn't say that there's a pause. I'm always looking. And I think that with our technology, we're ready at this point in time. We have a very scalable business. We have a fantastic technology department. And our team here is ready to roll up their sleeves and execute at any given moment. So between our proven systems and our people here, we've got an amazing, call it ability. We've got an amazing ability between people and tech that can execute at any time. So I'm always looking. But it's just -- it's a matter of being disciplined with the criteria and making sure that we're buying something that is going to contribute shareholder value. As Marilyn said before, sometimes you buy something that is a better deal. As you can see, the goodwill, it's in the notes, the goodwill on the ITS acquisition is very minimal and it required a fix up, but it's definitely going to prove -- for the lack of a better term, it's going to pay dividends for years to come. So couldn't read.

Your next question comes from [ Mike Holm ] of [ ATH ].

Good joke, Ted.

So I won't put my day job.

A few questions for me, if you would. I'm just trying to understand a couple of things a little bit more deeply. So can you remind me -- I'm just trying to understand revenue attribution or the increase in revenue and how to think about that. So can you remind me again when ITS closed?

February 1.

February 1. Okay. So 11 months contribution. I think you just said to a prior person on the call that it's at a run rate of about $16 million in revenue. Is that right?

$15 million, $16 million, and that's before rate increases.

Okay. Okay. So there's more than likely rate increases there on that base yes. So is it fair to say then that the remainder, which is the majority of revenue was really just price increases on existing business. I mean I don't think your volume of business changed that much on the existing fleet. Is that the right way to think about it?

More or less, yes, it can't because real estate, Trucking is kind of like real estate on wheels. I mean it's geometric. So from that point of view, you've got a box that has a length with a height limitation. So we added some new customers. And we are obviously making now the decision in terms of -- in terms of, well, who gets the space. We have no choice. We've got to go for the rate increases at this point in time in terms of the fact that it's more a matter of who's willing to pay for space that just costs more money now to produce, right? If I think of that real estate as the widget, well, you know what, that widget cost more money now to produce.

I think the other thing.

No, understood. Yes. Understood. -- there's finite capacity, and it is exactly like real estate. So I get that. I just wanted to make sure there wasn't anything I was missing on that. So very -- a lot of price taking. So let's move on then to how that flows through it. I guess when I look at your guidance on revenue and adjusted EBITDA. That would imply for 2022, an 8.8% EBITDA margin. Correct me if I'm wrong, but that's my back of the envelope here. So I was...

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