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

Good morning, and welcome to the Titanium Transportation Group's Q3 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 we begin, I would like to remind everyone that certain statements may made on this call 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. I would now like to turn the conference over to Ted Daniel. Please go ahead.

Good morning. Thank you, operator, and thank you all for joining us. I'm pleased to report that Titanium has delivered another quarter of strong results. 2022 Q3 results were the highest third quarter revenue and EBITDA in the company's history. For the quarter, consolidated EBITDA was $15.5 million, more than double the results from the same time last year. Revenue for the quarter was $113.4 million, up 11.5% year-over-year. Overall, EBITDA margin of 16% was up from 7.8% from the same time last year. With a disciplined management strategy and leveraging technology for efficiencies, the company delivered EPS of $0.14 on a fully diluted basis, up substantially from $0.03 per share in Q3 2021. We achieved these results notwithstanding some evolving challenges in the marketplace, a testament to the flexibility and adaptability of our technology-based platforms and ambitious and committed operating teams. During the quarter, the industry continued to experience inflationary pressures on input costs, including fuel, wages and equipment. Additionally, as expected, the rising interest rate environment has had a dampening effect on consumer demand and for freight and logistics volumes. The result has been lower freight, traffic and lower demand for logistics support and the emergence of some industry-wide pricing pressure, which we saw late in the quarter, particularly in our U.S. markets. Looking at the trucking segment, we responded effectively to these rapidly changing conditions through a combination of focused strategy on pricing optimization, which supported strong revenue growth and the continued realization of post-acquisition synergies and productivity improvements around our integration of ITS and Burton Sun's Cartage. The result was further improvement in the operating margins for the segment. In our Logistics segment, our U.S. business was impacted by some pricing pressures in the industry, along with some excess capacity emerging amidst softening demand for freight volumes. As a result, revenues from the U.S. Logistics segment were down 16.7% year-over-year. Despite the reduction in revenue during the quarter, margins remained strong, and logistics ended the quarter on solid footing. We continue our focused strategy to invest in and grow our asset-light digital logistics business. We have continued to quickly scale in the U.S. and grow our customer base as a result. With a larger footprint, we have been able to grow our customer base while leveraging new and emerging offices in the near future to offset potential further pricing headwinds. We are pleased to announce that recently, we opened our second and third Canadian logistics offices, one in our existing Windsor terminal and the other in a newly established Montreal location. These new offices are already starting to produce good results. Looking through the balance of the year. We expect some less than favorable market conditions to persist, and we will navigate effectively. Against this backdrop, we still expect to deliver solid profitable results in the final quarter of the year as Titanium has demonstrated a track record of effectively responding to evolving market conditions, driven by our experienced and dedicated team and our best-in-class technology. Notwithstanding some of the pressure noted, we have delivered improved profitability year-to-date. In turn, we're maintaining our full year revenue guidance range of $460 million to $480 million, and we are expecting to exceed our previous existing full year EBITDA guidance. With that, I'll turn it over to Alex, our CFO, for a more detailed discussion of our financial results for the quarter.

Thanks, Ted. Looking at our year-to-date, the company has earned revenues of $385.5 million with a corresponding EBITDA of $45.8 million, representing a 13.7% margin. This ultimately translates to a record $0.45 earnings per share. For the quarter, revenue was $113.4 million, and EBITDA was $15.5 million and a $0.14 earnings per share. Starting with the Logistics segment. The segment delivered revenues of $59.6 million in the quarter, up slightly from the same period last year. Our EBITDA came in at $5.8 million, reflecting an 11% margin, a significant improvement from the reported EBITDA of $3.4 million a year ago. Turning to the Truck Transportation segment. Revenue for the quarter was $54.9 million, up 28.5% over Q3 2021. Segmented EBITDA was $10.4 million for the quarter, a significant increase when compared to the $4.6 million as reported a year earlier. Also relevant, segmented EBITDA margin improved to 22.9% compared to 12.2% in the same quarter of 2021 and up from 18.8% last quarter. The continued improvement in operating margins in the Truck Transportation segment is consistent with our expectations, following the integration of our most recent acquisitions as we continue to deliver operating improvements and synergies. In terms of financial strength, we continue to strengthen our balance sheet during the quarter. In addition to our positive operating results, we have been successful in monetizing excess aged equipment as the demand and market for used equipment was very strong. Capitalizing on what we recognize as an opportunity, we are able to realize significant free cash flow as we renewed our equipment. As a result of our capital allocation strategy, the company's working capital position has improved from $4.1 million at the start of the year to $39.6 million this quarter. Additionally, we further reduced our debt-to-equity ratio to 0.76% at the end of Q3, 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 an EPS of $0.14 on a fully diluted basis. Overall, another consecutive strong quarter. With our solid capital position, we are comfortable with our ability to navigate through any potential economic challenges. With that, I would like to turn the call back over to Ted.

Great job. Thank you, Alex. We continued to deliver strong financial results while focusing on operational improvements. Our experienced management team continues to develop and build a robust and progressive technology-based business. While our Q3 results were impressive, we remain vigilant and well positioned as indicators suggest that the North American economy is likely to slow over the coming months. We anticipate that there will be downward pressure on freight and logistics volumes, and we have seen the emergence of some downward pressure on spot rates in recent months, particularly in our U.S. markets. As we continue to execute on our business strategies as established over several years, Titanium is well prepared to adapt to changes in economic conditions. Additionally, we remain well prepared to execute on M&A opportunities that are synergistic and accretive should they arise. Through our commitment to technology, we have established a track record of being able to pivot quickly to support our customers in evolving market conditions. We have and expect to continue to deliver solid financial and operating performance and to create sustainable shareholder value. With that, I'll turn it back to the operator to open the line for Q&A.

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

Ted, I think in the MD&A on the conference call, you called out that you began to see pressures kind of towards the back end of the quarter. I was wondering if you can quantify how much stronger the first few months of the quarter were relative to September and if October is showing more deterioration from the September levels.

So the comment refers more to really just economic conditions that we are experiencing. However, you're talking about October at this case? Or are you talking about July versus September?

Yes, July versus September and how those…

Funny enough, they were all very steady. Actually, for us, they were all very steady in that we do have actually a fairly diversified customer base that is actually primarily in CPG. But as you know, in brokerage, to some degree, if capacity loosens, costs go down and then revenues adjust accordingly. I mean, in that respect, I am cautiously optimistic in that we had actually 3 months that were very, very, very similar to each other.

And into October, it's kind of the same?

Yes, pretty much, we're actually seeing more of a steady market. Obviously, the downward pressures are, again, the overcapacity to some degree, south of the border, but it's -- brokerage is a margin-based business. So if carrier costs go down, then revenues go down on a relative basis. And you just kind of work with work with the economic up or down adjustments.

And then 2 Canadian logistics offices went up in the past week. Is this a pivot in strategy and kind of what kind of revenue and EBITDA can we expect from those 2 new offices? Is it similar to the guidance that you provided for U.S. offices? I think it was $20 million to $25 million? Or is it smaller in nature?

So actually, the 2 offices in Canada, I think they're really more of a kind of a little side, call it, a side hustle. And the reason being is because, obviously, our strategy is to grow our platform in a very large U.S. environment. But we already own the Windsor terminal. So we added that because it was extremely opportunistic for us. And the other thing is that the opportunity to open up Montreal, which is a very, very large market as well, we'll do very well. So Windsor will do well, but of course, it's already in the Ontario market that we already have some business. Montreal will do much better because it's more of a full-blown expansion. So from that perspective, we're taking advantage of areas where we've got -- we've just got natural opportunities.

And then my last one is on truck transportation. The margin profile has inflected to a new level that we haven't seen in the past. And I think you talked about bridging the gap between you and your larger Canadian counterparts in the past by just getting more scale. So do you guys believe that these margins are dependable at these levels? Or if we do see any freight softness, things should taper back probably to that 18% range that you've guided to in the past?

So 22.9% -- so it's Alex talking. 22.9% is great, but we don't believe that this is a long-term sustainable margin. We do believe that it's going to normalize a little bit. The number that we gave last quarter and we'll give again at the 18%, 19% market is probably where we target. And we have recognized a lot of efficiency and synergies over the year to get to that point because traditionally, we were at the 16%, 17% mark. We have definitely renewed our equipment. We have a better utilization to our navigation tools. We have done a lot internally to realize so that we can realize that 18% to 19% margin.

Your next question comes from Gianluca Tucci from Haywood Securities.

I just wanted to ask you how you're thinking about 2023 right now in the face of some headwinds on an economic front and pricing pressure as you're seeing and given your asset light approach and focus right now, what's kind of your thought process for next year, Ted?

So again, I know this is probably the most overused term in the second half of 2022. I'm going to start by saying we are cautiously optimistic. We are very, very steady in terms of our -- the type of customer base that we have, the diversity, a lot of CPG and so on and so forth. So kind of the sort of stuff that I would say is, to some degree, recession proof. We're not industry or commodity dependent. Having said that, we are very confident in that we believe, to some degree in economic forces. If interest rates continue to increase, they're really just going to start to push inflationary cash flow that's required to run the business for each and every transportation company out there. We are asset based on that level. So if it costs more money to buy a truck and it costs more money to finance that truck at some point in time, something has to give. So I believe with our strong balance sheet, it's going to be very opportunistic. So maybe the first half might be a little bit of an adjustment, perhaps Q1 might be a little bit of softness just in terms of the transition. But then, of course, economic pressures are going to push rates back up -- and we do expect the second half to probably be, again, actually a lot better, I think, than people would expect.

Okay. That sounds good. And I guess for Alex, on your CapEx plans for the next 12 months or for 2023 giving that CapEx number for us.

Well, we've disclosed in our MD&A about $31 million. The factor that would move that number up or down is the amount of trailers that will be available in the upcoming year. So we have mentioned that our truck replacement has done pretty well, and we're expecting 100 trucks coming in. So we are expecting a lot more trailers to come in because we still need to replace some of our aged fleet. That will drive how much we're going to spend next year. But so far, we're expecting around $31 million in the next 12 months.

Okay. And then just lastly, in terms of the margins, I think you had mentioned Ted and Alex, that you expect the margins on the trucking side to kind of trend a bit lower in the coming quarters in the face of some headwinds. Is that correct?

Maybe a little bit of tapering back. Yes, I think that Alex mentioned, I think kind of a high teens environment. is very reasonable. And again, that's really just the sort of the economic cycles. I think that might just run you through really the seasonality from that perspective. And again, if you put the 2 together, I just sort of want to add to Alex's point on equipment. Right now, equipment is still on an allocation basis. You can ask for 100 trucks, and they'll say to you, look, I can only give you 60 then that's all you're getting. We're kind of lucky because we have buying power at the truck level. Trailers is a little bit more tricky just because it's a much larger, broader base market. So I think from that perspective, you've got forces heading in one direction, but then you've got a lack of equipment on the other. So some really very interesting components that are moving the needles very quickly.

Your next question comes from Benoit Poirier Desjardins Capital Markets.

Just with respect to your revenue guidance for the year, it seems that revenue is expected to drop in Q4. Assuming that you would hit the high end of the range, Q4 could be down almost as 15% year-over-year. So could you provide more color on which segment would drive the softness in Q4?

So yes, based on our guidance on revenue, we are expecting revenue to normalize a little bit in Q4. One part of it is seasonality. Q4 is generally a lower trending quarter, notwithstanding the growth we've had in the last 2 years because of the U.S. logistics side. But we are expecting a little bit of a normalization there because of seasonality. The other point that we were making earlier is that we are seeing some downward pressure on the U.S. side as well. So that's going to drive the revenue and our costs, both lower in --we're expecting that both to drop in Q4.

And looking at Logistics division, the revenue were flat year-over-year, while the EBITDA margin increased from almost 6% to 11%. What was the main driver? And could you maybe break down the performance between U.S. logistics against [indiscernible] logistics during the quarter?

So essentially, what you've got is you've got some critical mass, and you also have technology involved in that. And you've got a growing team as well. And I think that our logistics team is actually doing an excellent job using more sophisticated tools as well to broaden both our customer base and our carrier base. So I think that's a big part of it. And so they're creating more efficiencies. And again, I think using technology is a big one. Don't forget, we launched a new app earlier in the year, our new and improved versions of our apps. So that, I think, plays a role into it as well.

Just to add a little bit to that, Benoit, as well, in terms of margins. Our U.S. division is maturing over the last few years. So our carrier relations in the U.S., having us work a little bit better with them and having access to a broader base of carriers that we've been developing over the last few years, particularly, has definitely helped in that area as well.

And how should we be thinking about the margin profile going forward, assuming a softener economy? You've been discussing about the 9% EBITDA margin sustainable in the longer term? Is the 9% still a good number to use?

Yes. This quarter, we definitely still see some tightness in the U.S. market earlier. So we were able to achieve that 11%. But on a long-term basis, the 9% would be where we are targeting, unless we pass our critical mass in which case, then you will see higher margin, but 9% is where you should start.

And obviously, when you talk on the truck transportation, you're mostly exposed to contractual rates. But given the softening in stock rate that you started to receive some inbound calls from clients looking to renegotiate your contractual rates? Or is it still sticky these days despite the softer market environment?

We're finding that the rates are still fairly sticky at this stage. Everyone is a little concerned about next year. Again, as Ted mentioned, cautiously optimistic. From our side of it, on the asset side, with the Truck Transportation segment, we are seeing things remain rather steady.