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

Good morning, ladies and gentlemen, and welcome to Titanium Transportation Group's Q1 (sic) [ Q2 ] 2022 Earnings Conference Call. 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 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, August 9, 2022. A replay of this call will be made available until midnight on August 23, 2022. Details of the replay can be found on our website under the Investors section. I would now like to turn call over to Titanium's President and CEO, Ted Daniel. Please go ahead, sir.

Good morning, and thank you, operator, and thank you all for joining us. Titanium delivered an exceptionally strong performance and generated noticeably improving profitability in the first half of the year. The quarter highlighted the progress of our focused growth strategy, strong operational execution as well as deliverables in financial technology and analytics, which included continued pricing realization as we navigated a fast-changing environment and through macro challenges. I am extremely pleased to report that Titanium achieved another record quarter, delivering $136.2 million top line. This is a 35.1% increase from the same time last year. Our consolidated Q2 EBITDA was $16.3 million, an increase of $8.6 million or 111% from a year ago. Despite cost pressures that continue to persist, our ability to quantify pricing pressures while focusing on productivity and technology allowed us to deliver efficiencies, which resulted in both operating segments achieving increased EBITDA margins and profitability this quarter well above expectations. Looking ahead, with our current year-to-date revenue of $272.1 million and EBITDA of $30.3 million, we're well on our way to exceeding our previous full year guidance. With the numbers show -- while the numbers show success, it is important to note that we continue to make excellent progress against our operational objectives. As always, we demonstrate that we are capable and experienced that value-added acquisitions, building long-term growth platforms and the results speak for themselves. As a result of our continued investment in technology, I note that this quarter's performance was driven by strong financial and navigation tools resulting in improved profitability across both the Logistics and Trucking segments. In Trucking, we are delivering synergies and operational improvements following our 2 most recent acquisitions and is now reflected in the improved profitability of the Truck Transportation segment. We continue to focus on technology-driven efficiencies and culture. Additionally, in the quarter, we received some of our long-awaited new trucks and trailers. As noted last quarter, the industry continues to experience inflationary pressures from higher operating costs, including fuel, equipment and labor. We have been transparent with our customers and together worked to optimize pricing strategies. On the Trucking side, we expect margins to remain steady as nothing has changed in the areas affected by inflation. With our diverse customer base and truckload commodities, we expect to see some shift in consumer spending and expect the second the year to reflect nothing more than traditionally slower quarters. Looking at logistics, as discussed last quarter, spot pricing softened during the quarter, impacting brokerage on both sides of the border. However, we're pleased to see growth during this quarter in our Canadian brokerage and increased volumes in our U.S. offices. Further, we continue to deliver against the strategic buildout of our U.S. logistics footprint with plans well underway to establish at least 1, maybe 2 additional offices before the end of this fiscal year. We're incredibly proud to deliver these results in what we could continue to describe as challenging industry operating conditions. We note that while disruptions in supply chains are easing, conditions have yet to return to pre-pandemic normalcy. We expect this environment to persist through the back half of the year and likely into next year. Titanium remains exceptionally well positioned to navigate this market with our solid balance sheet and scalable technology. We have clearly demonstrated our ability to respond effectively to the needs of the business and our evolving customer demands. Lastly, I'm pleased to report that Titanium delivered record quarterly EPS of $0.17 per share on a fully-diluted basis exceeding expectations. With that, I'll turn it over to Alex for our financial results.

Thanks, Ted. The second quarter results reflect another record achievement for Titanium. Turning to the segments. The Logistics segment delivered revenues of $78.6 million in the quarter, up from $57.7 million a year ago, an increase of 36.2%. EBITDA margins for the quarter improved from 8.7% a year ago to 12%. As a result, the segment delivered $8.4 million in EBITDA, a record for second quarter performance, up from $4.7 million in Q2 of 2021, representing a 78.7% increase in the contribution from the segment versus the same time last year. Turning to Truck Transportation. Revenues during the quarter were $58.6 million, a new record for the segment and up $13.8 million from a year ago, reflecting an increase of 30.9%. Segmented EBITDA was $9 million for the quarter compared to $3.9 million, another new record for the segment and more than double the EBITDA performance in the same quarter a year ago. EBIT margin improved to 18.8%. That is up from 13.4% last quarter and up from 9.7% in Q2 of 2021. These improvements are in line with our typical results after realizing material synergies following our integration from our acquisitions. In terms of financial strength, we continue to strengthen the balance sheet during the quarter. We further reduced our debt-to-equity ratio to 0.94 at the end of Q2, down from 1.13 as of December 31, 2021. 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, and as Ted previously mentioned, an earnings per share $0.17. I would now like to turn the call back over to Ted.

Thanks, Alex. Q2 was another very strong quarter for Titanium in both our Logistics and Trucking segments in Canada and the United States. Our recent investments are helping to deliver strong top line growth, and we clearly now delivering on the improved profitability through our use and development of technology as well as strong operational management. In terms of outlook, industry conditions remain somewhat unsure. Inflationary pressure on major input costs, including the price of fuel, driver wages and rising prices of tractors and trailers are expected to persist across the industry. We are confident in our team and our ability to execute in any environment as we demonstrated over the years and no different this quarter in the first half of the year. We continue believe that Titanium is well positioned to respond effectively to evolving customer needs and market conditions. Macroeconomic conditions continue to affect supply chains, and we do believe there is a change in consumer spending more reflective than a slowdown. I again draw attention to the commodities moved by Titanium and the diversity of business. As mentioned earlier, assuming some moderation in the balance of the year from our recent pace of growth, Titanium remains well on track to exceed the full year guidance set at the beginning of the year. Accordingly, we've increased our revenue and EBITDA guidance to between $460 million to $480 million in consolidated revenue and $45 million to $50 million in EBITDA this year. Lastly, with a solid balance sheet and disciplined focus, we remain committed to exploring further only accretive, value-added acquisition opportunities should they arise. With that, I'll now turn it to the operator to open the line for questions. Thank you.

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

Guys, I just wanted to confirm very quickly that you think that the Trucking EBITDA margins stay in the similar range? Did I hear you correctly there?

Yes, that's correct. The -- yes, the trailer kind of require that so.

Yes. So when I take a look at your EBIT margins and subtracting D&A, it is up to a new high watermark of 6%. But if I compare that to Logistics, which is asset-light and doesn't require any CapEx, it's at 12%. So with that in mind, do you think you guys can increase the return of your trucking assets beyond the 6%, especially when I benchmark you guys against other Canadian truckers who typically garner an EBIT margin of north of 10%?

One of the things that we do quite well. It's kind of hard to gauge exactly where we're going to end up. But one of the things that we do well is continuous improvement and we continue to invest in technology. So we're going to keep working towards as much efficiencies as possible. And again, improvements putting in a lot of integrations and so on. And so we're definitely going to keep working towards continuous margin improvements.

Yes, that's very helpful. And then just shifting over to logistics. We did see a sequential decline from the Q1 on the revenue line, but the EBIT margins still hung in at 12%. It was 11.5% in the previous quarter. And I think you guys were always guiding to 8% or 9% on normalized numbers. So how does that guide post change just given what you guys were able to do with the sequential decline in revenue? And I know you guys are getting more scale, so maybe that number gravitates a little bit higher from here.

No. I think the 8% to 9% -- the 9% is probably a good mark for the guidepost and that shouldn't change. The reason why we have such elevated margins in the first 2 quarters is the markets, the market condition allows for that in the first half of the year. We're expecting that to fall back normalized to where we expect to be 9%. But we are working very hard to also realize efficiencies within our own processes to maybe hopefully move that guidepost down the line.

There's not much seasonality too, right, David? We're experiencing a year that has a little bit more, call it, traditional seasonality, which is, in a way, it's kind of nice to see things are, to some degree, coming back to normal. Typically, Q2 is your best quarter. And then Q3, Q4, you're absorbing some summer elements. And of course, Q4 has the month of December, which has a certain amount of slowdown towards the end of the month.

That's helpful. And then kind of what I'm hearing on the call, everything seems positive. Trucking, margins hanging in there. Logistics, hanging falling back down to 9%. But if I take a look at the midpoint of your guidance, it does suggest if I compare H1, H2, it should decline by around 50% at the midpoint. So just curious if there's a lot of conservatism baked into these numbers, and we should almost consider the 45 to 50 as low-hanging fruit.

I think that we're taking an approach of confidence and I guess we're cautiously optimistic. Remember that in brokerage, top line isn't necessarily bottom line in the sense that it is, to some degree, a cost-plus business. There is more of a spot market in brokerage than there is in trucking. Trucking is primarily a contract-based business. So it's very much so a very, very, very sure and steady business. So from that perspective, top line may come down, but we believe that we were able to navigate through our systems. We're able to navigate that very quickly. And so that's why we've got, I think, a number that makes sense to us and one that we're comfortable with.

Your next question comes from Benoit Poirier of Desjardin.

Yes. Congrats for the good quarter. Just to come back on the EBITDA margin for the Trucking segment, just want to reconcile what drove the strong EBITDA margin. Obviously, there are some comments about market conditions. But given that it's mostly contractual, I'm just wondering your -- what drove the significant increase in EBITDA margin in the quarter?

Well, we're darn good at what we do. But I'm going to let Marilyn jump all over this one.

Benoit, it's a couple of things. So one, remember that we're now fully digested with our ITS acquisition. So we were able to kind of perfect our performance in terms of the utilization and conditions within that we're operating in within the group. So we're able to really, really work on our synergies and optimization there. And then, of course, pricing was a factor in there as well. So yes, we have contract rates. Some of the contract rates were increased during the quarter necessarily. So we did get an effect of twofold: one was on the pricing; and two, was on the optimization we were able to sort of perfect in the quarter.

Okay. Okay. That's great color. And for the second half, obviously, you're posting a cautious picture given the behavior of the consumer. But what are the metrics that makes you confident that the EBITDA margin will decline in the second half or as the first question, you're kind of overly conservative at this point? I'm just curious to know more details on your confidence that EBITDA margins will soften in the second half versus the first half.

We're being a little bit cautious in terms of looking at the outlook. I mean nobody really knows exactly what's happening from a macroeconomic point of view. So we're being a little bit cautious on that way. But then I kind of stress the markets that we're in, the Titanium being a truckload tariff of consumer goods and packaging CPG product lines and our diversity of customer base really sort of leaves us in a good position even if we have a traditionally slower quarters for the second half of the year. So why do we say the EBITDA margin will go down? We're just a little bit cautious in terms of what we're looking at in terms of our customers and our consumers' spending. So that's why I think we're being a little bit conscious going forward. And maybe, Ted, you've got some more color on that.

I think to some degree, Benoit, right, we all have a little bit of this may be feeling of being a little bit jittery with all of the media that's out there in terms of what people are saying in terms of concerns, recessions, et cetera. We don't really know. But on the other hand, we know that we've got a company that is approximately 60% top line is asset-light, extremely malleable, very flexible, very agile. So we are very confident that we can work through potentially any of those type of challenges. And of course, the market that we're in, as Marilyn said, in terms of truckload are primarily consumables that are required just for, for the most part, people's just basic needs. And so that's why we do have confidence, but at the same time, we're again confidently cautious.

Okay. And in terms of the acquisition of ITS and B&S Cartage, what would be the revenue contribution from those 2 acquisitions in the quarter, Alex?

I'm going to let the numbers guy in, right?

So I mean we have disclosed the BSC numbers in our financial statement. In terms of the ITS numbers, I -- last -- ITS is fully integrated, and it was integrated as of Q2 2021 as well into our financial statement. So any point, any revenue on that point is really organic growth. So I don't think disclosing that number really has much value to -- value added to on your comparison.