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

Good morning, ladies and gentlemen, and welcome to Titanium Transportation Group's Q1 2022 Earnings Conference Call. On today's call, we have Mr. 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, May 17, 2022. A replay of this call will be available until midnight on May 31, 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, Mr. Ted Daniel. Please go ahead.

Good morning. Thank you, operator, and thank you all for joining us. We are extremely pleased to report a very strong start to the year. Titanium delivered a record $136 million in revenue for the first quarter of this year. This reflects the benefits of our focused investments in the company's core businesses, coupled with successful management and strong organic growth. We continue to realize the benefits of our ongoing investments in technology as both operating segments delivered improved EBITDA margins and profitability this quarter. Strong revenue and efficiency improvements this quarter resulted in a record bottom line with quarter earnings per share of $0.13 per share on a fully diluted basis. With a very strong start to the year, we expect to meet or exceed our full year revenue and adjusted EBITDA outlook, confirming our expectations for another year of strong growth for Titanium. The company continues to execute on its strategy of continuous organic and inorganic growth consistently over the past several years. We've maintained a clear focus on key priorities to continue value through technology. We continue to execute on our core trucking and logistics business to better the customer experience and improve efficiencies. We've built a scalable, robust platform through the use of innovative technologies. Our asset-light growth in the U.S. and our ability to integrate value-add acquisitions has led to the company's successful transformation over the past few years. Now before we dive into the results, I'd like to spend a few moments highlighting some recent advancements and strategic initiatives in our technology platform. We recently announced that Titanium was a key contributor to a new and improved technology partnership between BlackBerry and ISAAC Instruments, a leading driver-centric fleet in-cab communication and ELD provider. Titanium was integral in developing this partnership and integrations between the ISAAC Trucking operating system and BlackBerry's Radar trailer tracking, 2 important systems for Titanium's fleet management. We're very proud to be the first fleet in North America that has deployed the newly integrated solution for our entire fleet trailers and tractors, a tangible first in the industry. A key focus of our technology and innovation is to drive organic growth with strong financial navigation and efficiencies. We built a robust internal technology team that has been developing systems to connect our businesses. More importantly, our team is leveraging our data science and large databases to create and deliver solutions and insights for our customers, carriers and employees to enhance decision-making and profitability. We've made excellent progress advancing strategic technology initiatives, and we're excited about our recent launch of 2 new products developed by our internal development team. In early April, we launched 2 new proprietary products to further enhance our logistics services. We successfully launched the Titanium Carrier Portal with intelligent capabilities, and we launched a newly redesigned version of Titan's mobile app, which is now available in both iOS and Android. The app allows for third-party tracing with partner carriers, creating full transparency for our customers. We believe our freight tech allows us to punch well above our weight class and further enhance our growth potential. Turning now to our first quarter results. We've experienced excellent growth and improved profitability in both operating segments. As mentioned, total Q1 revenue of $136 million was up $50.3 million or 58.7% from a year ago as we successfully improved performance of our Truckload business. Necessarily, we obtained customer price increases and strategically refocused capacity. The Logistics segment contributed approximately $88 million in the quarter and continues to benefit from our strategic investment in the U.S. logistics business, where we have opened 5 locations in just under 3 years, the most recent being this quarter in Atlanta, Georgia. The company's investment in technology and efficient platforms enabled us to scale easily and meet the increased demands. We expect this to continue. We're now seeing these scalable benefits manifest into stronger margins and increased profitability in our U.S. segment. Likewise, in our Canadian business, we've continued to see an increase in transactional volume demand. Consolidated quarterly EBITDA was $13.9 million, an increase of $6.4 million or 85.2% from a year ago. EBITDA margin improved to 13.4% from 11.8% in Q1 of 2021. EBITDA performance continues to improve as we realize operating synergies and productivity improvements from the acquisition of International Truckload Services just over a year ago and the most recent acquisition of Bert & Son's Cartage. Our advanced data navigation ensures our pricing strategy reflects rising costs and incorporates fuel surcharges where necessary. This remains an ongoing evaluation in real time. As noted, last quarter, and looking ahead, the general operating environment continues to experience inflationary cost pressures from higher fuel pricing, increased repairs and maintenance costs as well as increased downtime. Macroeconomic volatility, the residual effects of COVID-19 on the labor market and the prospects of war have certainly disrupted more than just the supply chain. In response, we continue to focus on technology to increase productivity and efficiencies. Additionally, we are starting to see the arrival of new equipment that has been significantly delayed from last year. The new equipment will help to reduce downtime and repair costs. Currently, there is a 1-year backlog for new equipment. Thankfully, in anticipation we placed orders last year. We're seeing early slight indications of some softer consumer trends emerging, although to date, industry load volumes remain generally healthy. Against this backdrop, Titanium remains exceptionally well positioned to navigate these conditions with our solid balance sheet, scalable technology and experienced and dedicated team. For the coming year, we expect to deliver between $450 million to $470 million in top line revenue and between $38 million to $43 million in EBITDA. Lastly, we remain committed to exploring further acquisition opportunities as they arise in 2022. Turning our operating results for the quarter, let me hand over the call to Alex, our CFO. Alex?

Thank you. To echo, Ted, first quarter results reflect a record achievement for Titanium and a very strong start to the year. Turning right away to segments. Logistics delivered revenue of $87.9 million in the quarter, up from $47.5 million a year ago, an increase of 84.9% and record quarterly revenue for the segment. Similarly, Logistics delivered a record $9.1 million in EBITDA, up from $4 million in Q1 of 2021, representing more than a twofold increase. We continue to see significant opportunities in our U.S. logistics business and announced our next U.S. office in Atlanta, Georgia in March of this year. Overall, we are very pleased with the division's Q1 performance, delivering $54.9 million, up 69.6% in Q1 of last year. While we do expect the spot market to normalize in the year, we are expecting our volumes to grow as we add more capacity into the division. As part of the growth strategy, we plan to add an additional 2 offices to our U.S. footprint in 2022. Turning to the Trucking segment. Revenues during the quarter were $49.3 million, up $10.1 million from a year ago or an increase of 25.9%. Included in this increase in 3 months of revenue in the acquisition of ITS, whereas prior year only included 2 months, the difference was about $5 million. Also included was approximately $1 million in revenue earned from the acquisition of Bert & Son's Cartage on January 1, 2022. Segmented EBITDA was $5.7 million for the quarter compared to $4.2 million in the same quarter a year ago. In reviewing the balance sheet, our capital position remains strong, with our net debt-to-equity ratio at 1.12, a marginal improvement in December. Looking ahead, we are committed to $41.3 million in capital expenditure in the next 12 months, primarily to replace aged equipment. In addition, we are expected to realize $5.8 million in proceeds from the sale of aged equipment. Given the strength of our capital position and our confidence in our earnings outlook, we maintain our dividend, declaring a dividend of $0.02 per common share. I would now like to turn the call back to Ted.

Thank you, Alex. Q1 was a very strong start to the year for Titanium. In both our logistics and trucking segments, our recent investments are helping to deliver strong top line growth with improving profitability. In the early part of the year, severe weather and border blockades negatively impacted freight volumes. We're experiencing some cost pressures, but in both segments, we're seeing favorable opportunity to pass through needed price increases, which should continue to support margins as the year progresses. Our logistics spot market, we see some early signs of a softer rating environment, which may have an impact on margins going forward, although we currently continue to see relatively strong activity levels. Our advanced freight tech platform allows us to pivot swiftly and maintain profitability. These dynamics, while they require our attention and focus, they are what we consider to be a part of the natural dynamic of the industry. Titanium continues to adjust and respond to market dynamics and to capitalize on opportunities for profitable growth. As we progress through 2022 with our strong freight tech and relentless innovation, we expect to deliver another year of profitable organic growth with additional upside from the potential to pursue accretive opportunities. I want to thank everyone on our team for their hard work and dedication. With that, I'll turn it to the operator to open the line for questions.

[Operator Instructions] And your first question comes from Benoit Poirier from Desjardins.

Congrats for the good quarter. Could you maybe provide start -- to provide some color about the overall trucking environment? And where do you see some softer consumer trends?

Yes. So from the trucking segment, for sure, it still tends to be a very good truckers market for us. In terms of trends, not really sure where the market entirely is going. As usual, our diversity in terms of our customer base and product line sort of protects us as we move forward. So we feel very confident that we are well positioned into the rest of the year.

Okay. Okay. Perfect. And when we look at Logistics, I think the 13.4% EBITDA margin is a new record level. And obviously, we are going -- it seems that we are going to softer spot market environment. So just wondering what drove the performance of the logistics in Q1? And how sustainable is the 13 -- the 11.5% margin is sustainable?

So certainly, the market condition right now with the pricing and inflationary cost is what's rolled up the prices and our revenue. So that -- the 11.5% is most likely not sustainable. We are expecting it to be normalized. Where are we going to end up with, that's hard to say given the current marketing environment, but we are confident that we can maintain what we used to have, which is about the 8.8% to 9% range.

Okay. Okay. That's great color. And could you remind me, Alex, how much of your truck transportation or your total exposure to the spot rate? I know it's mostly contractual rates, but I would be curious to have whether the mix has changed between contractual and spot rate.

On the trucking side, it's all contractual. We don't have much on the spot market in terms of our trucking segment. Our logistics is a combination of both contractual and spot. I think we have a good chunk of spot freight, but I think we're -- I don't know if we've got an exact calculation at the moment.

90% contract in our trucking. So that gives us a certain level of stability. And then on the logistics side, we -- usually, I think we're somewhere in the range of 50:50. It does fluctuate a little bit, but that's -- you're not 90:10.

Okay. Perfect. Okay. That's great color. And just in terms of M&A, it seems that you're quite confident to achieve more M&A opportunities this year. Could you talk whether the softer market environment provides you more M&A opportunities and whether you're starting to see greatest activity these days?

At this point in time, it's kind of hard to guess. We're always looking for accretive acquisitions. So I know that 2021 was a really strong year for a number of -- for a lot of carriers. Rates were very favorable. So at this point in time, kind of hard to say, right? It's going to be tough. But definitely, we're always looking for good fits, for value-added acquisitions and ones that make a lot of sense to our shareholders, so.

Your next question comes from David Ocampo from Cormark.

I just wanted to touch first on the truck transportation margin profile. It had a pretty decent sequential improvement over the Q4 and Q3. And I think you guys previously noted that you kind of foresee this division getting up to kind of that 16% margin range. What's the time line to get there? And are there any risk for that 15% number?

Our goal is to get it to that higher percentage range this year. And the reason being is because the cost of equipment and interest rates are going up. So it's a necessary requirement in order to start covering the more expensive equipment and more expense of interest. So from that point of view, it's almost like -- if you think about it, it's almost like an immediate requirement. But obviously, as you know, it takes a little bit of time to work through these processes, given the fact that truck transportation is a segment that is largely driven by contractual rates. Obviously, the requirement for higher percentages at the EBITDA level is driven by an inflationary component at the equipment and the interest rate component. So that's kind of the goal.

Yes. And rates are typically set, I guess, once a year. So if you continue to see inflation here, are you able to go to your customers and get maybe perhaps 2 or 3 rate increases in the year depending on what happens with inflation?

We're actually seeing contracts on shorter basis terms now. They vary from anything from 1 month, 3 months, 6 months, 1 year. We're definitely seeing customers working with shorter contracts this year. However, because we've been in such extreme times, it's not atypical to review with customers mid-contract term if there's significant changes in the cost of operating. So we've had to do that on a number of occasions throughout the last few months.

And Marilyn, if you're able to disclose, I mean, it did seem like we got off to a pretty tough start to the year. So was the latter parts of the quarter at a significantly better margin than, say, January?

Definitely, definitely.

Yes. And to very quickly just to summarize that January was pounded by weather. So even if you have strong rates, if you're not able to run your miles, it doesn't matter what the rates are. And then February was blockades. So again, that was very challenging. So certainly, you can -- obviously, we can conclude that the second part of the quarter was much better.

Okay. And then I just wanted to kind of move back to your annualized guidance or your annual guidance. It was maintained. You mentioned that you should at least be able to meet or potentially even exceed that. But everything that I'm hearing on the call today, improvement in truck transportation, there might be some progression in logistics, but you might be able to pick up some more volumes and you're potentially going to open up 2 new locations this year. Is there a significant degree of conservatism baked into that guidance, because it does seem like even if you take a number and annualize it, it's going to come in well above your targeted range.

Yes, I think that -- I wouldn't say significant. I think that we've -- we feel comfortable with the numbers that we have at this point in time. And I think that one thing is for sure, I don't think anyone out there right now would disagree if I'm going to say that everyone, to some degree, has concerns with the current economic and political uncertainty. So as far as we feel the numbers right now makes sense to us.

Does that make sense?

I guess not.

Yes, that makes sense. And Ted, just for clarity, are the 2 offices included in that number?

No. The existing number is without any additional U.S. locations.

[Operator Instructions] Your next question comes from [ Mike Cohen from ATH ].

Just a few of my questions have already been asked. So I just wanted to ask about CapEx and updated CapEx. I noticed that in your MD&A compared to your last filing, you've got another 50 power units planned, so $41 million in CapEx, I guess, committed over the next 12 months. Is that correct?

Yes. So we're still getting 2021's orders into 2022, which is incredible. OEMs are promising the equipment within a matter of 6 to 9 months, and it takes more like 12 to 15 months to get equipment. There's constant delays that just seems to be the climate of the existing sort of delivery environments. And that's across the board regardless of which OEM you're dealing with, whether it's a truck or a trailer. So I think, Alex, you can give him some additional numbers. Go ahead.

So in comparison to our last disclosure, there was a lot more uncertainty in Q4 in terms of when we're going to get the equipment. So far this year, we received about 60 and 60 trailers. That's all from our 2021 orders. We are expecting and we're in constant communication with our OEMS to try to get more equipment in. And we are more confident now to say that we should be able to get the 150 and 250 trailers within the year. We want more, but so far, that is the most realistic target that we're going to have.