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

Good morning, and welcome to Titanium Transportation Group's Q4 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 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, March 14, 2023. A replay of this call will be made available until midnight on March 28, 2023. The 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. Please go ahead, sir.

Good morning. Thank you, operator, and thank you all for joining us. I'm pleased to report that Titanium delivered an outstanding fourth quarter EBITDA of $14.9 million. and a record-setting year with total full year EBITDA of $60.7 million, representing nearly double our results from a year ago. We delivered better-than-expected results with record annual revenues up 24% to $496.4 million, an improved efficiency as a result of continued commitment to growth, and our purpose-built technology, delivering an EBITDA margin of 14.2%. Our strong performance for the quarter and the year ended December 31 reflects our ability to execute on our growth strategy. This strategy was set in motion years ago with the commitment to scale our trucking and the logistics business in Canada as well as expanding into U.S. markets while continuing to execute on strategic acquisitions. Our management team being able to more than double the size of this company in just 3 years. Looking at our Trucking segment, we delivered revenue of $214 million, up $43 million or 25% year-over-year. This considers organic and acquisition growth following the completion of ITS and BSC with the latter contributing an incremental $6.4 million to revenue. Our results also demonstrate the benefits of the investments we've made in our technology and our team as we continue to leverage our newest best-in-class customer and supplier digital solutions. Our newly developed supplier solution tools and vetting systems allowed us to add thousands of partner carriers to our logistics database and service network. In addition, our proprietary third-party digital tracking app has had increasing success. Titanium Fusion, our proprietary software solution, along with our team of freight transportation experts delivered outstanding results, notwithstanding ongoing inflationary pressure on margins and supply chain challenges. Overall, our Logistics segment delivered $287 million in revenue for the year, an increase of $54.9 million or 23.6%. Canadian Logistics expanded its Windsor office location to include a logistics branch and added Montreal office locations late in the quarter. The increase in capacity allowed for an increase in segmented revenue for the year. However, looking at the fourth quarter, transactional volume and pricing softened due to lower consumer demand and the inflationary economic environment. This was the main factor behind the decrease in segmented revenue in Q4 versus the same time last year. Titanium's strategic investment in our U.S. Logistics segment has helped us significantly grow our market share and revenues. U.S. Logistics currently makes up more than 60% of our overall logistics business and contributed more than $174 million to our overall revenue in 2022. We continue to see significant opportunity for our growth in the U.S. marketplace. Last year, we completed the opening of our fifth office location in Atlanta. And more recently, in January of this year, we announced our 6th U.S. location in Fayetteville, Arkansas as part of our goal of building Titanium's business offerings in the U.S. market. We expect to continue to secure additional U.S. locations, growing our footprint and customer base with the addition of another 2 locations in 2023. With a disciplined management strategy while leveraging technology for efficiencies and innovation, the company delivered basic and diluted earnings of $0.56 and $0.55 per share, respectively, for the year, a significant increase from basic and diluted EPS of $0.13 and $0.12 per share earned in 2021. As we look forward to 2023, we expect to continue to navigate a challenging industry and economic environment. Our technology-focused platform is empowering us to deliver efficiencies in optimizing pricing, routing and load volumes in an environment of emerging pricing pressure and softening volume demand. Despite ongoing cost pressures, our modernized fleet, averaging a tractor age of just 1.5 years, along with the synergies and efficiencies realized through our recent acquisitions and helping to deliver stable margins and profitability. That said, we continue to expect the cumulative rise in interest rates in North America to moderate volumes and incremental pricing adjustments. In fact, we did experience these emerging trends in the latter part of 2022 and they have persisted in the early stages of fiscal 2023. Against this backdrop, we expect to continue to leverage technology to navigate evolving market conditions and with a strong balance sheet and cash position, we remain prepared for opportunities resulting from this economic situation. As such, we're providing our new 2023 full year revenue guidance range of $500 million to $520 million and EBITDA margin of 9.5% to 11.5%. With that, I'll turn it over to Alex for a more detailed discussion on our financial results for the quarter. Alex?

Thanks, Ted. This quarter, the company had record Q4 EBITDA of $14.9 million. Consolidated revenue for the quarter was $110.8 million. We are especially fond of our full year consolidated revenue of $496.4 million and full year EBITDA of $60.7 million as there are new milestones for the company. Looking deeper at Q4 segment performance. The Logistics segment delivered revenue of $61.1 million in the quarter, down roughly 10% from $68.2 million a year ago. However, EBITDA for the quarter improved to $6.6 million, up 36.4% from a year ago with an EBITDA margin of 12.2%, up from 7.6%. Turning to the Truck Transportation segment. Revenue during the quarter was $51.3 million, up 15.2% over a year ago. Segment EBITDA was $9.4 million for the quarter compared to $4.8 million a year earlier, as the EBITDA margin improved to 22.6% compared to 12.3% in the same quarter of 2021. The continued improvement in operating margins in the Truck Transportation segment is consistent with our expectations, following the integration of a sizable acquisition as we continue to deliver operating improvements and synergies. As Ted mentioned earlier, we have substantially completed our tractor replacement program with only a small portion yet to be replaced. As such, our expected CapEx for the upcoming year will be approximately $33 million, allocated primarily towards the replacement of the trailers. In spite of our aggressive equipment replacement program, our net debt-to-equity ratio remains below 1. Titanium's balance sheet and solid capital position continues to provide a strong foundation for our operations and allow us to consider potential acquisition opportunities. 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. I would now like to turn the call back over to Ted.

Thank you, Alex. Overall, despite the volatility in the market over the past year, Titanium's technology-based systems and experienced team has demonstrated our ability to deliver for our customers and to execute against our financial and strategic objectives for our shareholders. As I said in my opening remarks, we do expect some challenging conditions in the coming months. With that, we temper our 2023 outlook. However, I'm more confident than ever that we have among the best platforms in the industry to navigate these conditions resulting from our financial strength and clarity of strategic objectives. 2023 marks the company's 21st year and our eighth year in the public markets and time for a little reflection. In Q2 of 2015, we entered the public market on the TSXV with approximately $100 million in revenue, targeting to be a $500 million in annual revenue company. Today, we've essentially achieved that goal with the team we have built both in the office and on the road, our investments in technology and our customers who have confidence in our services. As such, this team has set its sights on becoming a significantly larger company. Our focus remains in continued expansion of our asset-light logistics operations, both in Canada and in the U.S. Lastly, we intend to grow our Truck Transportation segment with accretive acquisition opportunities. With that, I'll turn it over to the operator to open the line for questions.

[Operator Instructions] Your first question will come from David Ocampo at Cormark Securities.

I guess I just wanted to touch first here on the guidance. If I take a look at your Logistics division, I mean, that's 4 consecutive quarters where the EBITDA margin is north of 11%. But I think back into the guidance implies a bit of a falloff probably down to the long-term average. Is there any reason why I think it should fall back to that 9%? It sounds like you do have a better -- you're sourcing subcontractors a little bit better here. Just curious what your thought process is on how margins should trend in 2023, particularly for logistics?

So I'm just going to start off here by saying, generally speaking, in a looser market where you've got additional excess capacity, you're definitely going to see a little bit of pressure on margin percentage. But having said that, we are 60% top line an asset-light business. So we are, call it, majority a brokerage. And so it's a flow-through business from that perspective. So in a looser market, obviously, your spots are costing you less and therefore, your revenue, even though it's coming down to some degree, it's really a margin-based business, right? So...

So adding on to Ted's comment, if you take a look at our historical performance when there is a softer market, the swing the other way is substantial, it's almost 6%. However, like you said, we have better sourcing of our carriers. We have better system than we did before. We don't expect that margin to swing as far as it used to. But we do expect there will be a diffusion app will help us -- diffusion portal will help us mitigate some of that. But we will see some margin softening. That's typical of the market. But with our technology, we're doing our best to mitigate that. And we feel that with our guidance, we show that we're not going to be as elastic as before.

And I guess maybe if you take a look at January, February and even the first half of March performance, have you seen that margin compression already? Or is it something that probably occurs in the latter part of '23?

I mean, we see a little bit coming through same as in 2022 at the end of it, not a huge significant difference. But again, as Alex mentioned, the margin compression, it's a bit of a -- and Ted mentioned, it's a bit of a flow-through, right? You get that, you pay less, it kind of transfers through.

Got it. And then, Alex, for the revenue guide, does that include the 2 U.S. offices that you plan to build out in 2023?

It does include the 2 offices. We are -- again, like Ted mentioned, we do expect the 2023 market or at least part of it to be a little softer than 2022. But we are mitigating that softness that we expect with additional capacity. We're going to open up new offices. And in addition, our Montreal office and our Windsor office will be fully operational for 2023, so that we are going to mitigate it with volume.

A little bit of your offense is our best defense strategy.

Yes.

And when do you guys plan to have those 2 offices open? So I just have it correctly modeled?

Montreal, we're almost done. So probably within the next couple of months, we should see them in their final space and starting to ramp up hiring. Right now, they're [indiscernible] space, so they're a little constrained. So they're really just scraping the surface. Windsor has been ramping up, but is not quite where it should be yet.

And in terms of the U.S. offices, probably Q3, Q4.

Yes. Sorry, did you mean U.S.?

Yes, I meant the U.S. offices, but that's clear. Then, Ted, just on the M&A environment, I mean, what are you guys seeing out there in terms of multiples? And how much dry powder do you guys have available?

I'm just going to say that, generally speaking, it feels like we're a little back to a normalized M&A environment. Multiples, I would say I'm going to use the word normalized. Obviously, in early -- late 2021 and early 2022, things were, for lack of a better term, quite frankly, in the stratosphere. But I guess, to "financial terms, " money was free. And a year later, now money is not free anymore. So I think that we're kind of back to a normal environment, right, where you need to get like a real rate of return. And I think that, that definitely works itself into the mathematics of what I was used to traditionally normalize multiples in that type of environment. So pipeline is good on that level. So we're very confident in what we're going to achieve this year.

And in terms of our dry powder, so to speak, we -- I mean you can see it in our balance sheet, and you can see that we have facilities in play. We can easily do another ITS with very little impact to our financial statement.

And I guess, Ted, probably more of a broader question, but how are you guys balancing acquisitions versus buying back your own stock because you guys are trading in the mid 3x EBITDA range, if I take the midpoint of your guidance and I compare that to what you acquired ITS for, I think it was 4 or 5 times after even synergies. So just curious how you're balancing that thought process?

Yes, we purchased ITS for 5x pre-synergies. So I think we've got a really good rate of return on them. Having said that, it was a lot of work. But my team is fired up and ready to go. So we're pretty confident on that level. Having said that, I would say that we've been fairly conservative on the buyback only because we have kept the barn, say, full of dry powder for being able to execute on a transaction. And our -- I think to say that from a capital allocation perspective, we're looking at growth as our primary strategy. We seem to keep going back to that offense is your best defense. And that's kind of what we're in. We're currently in growth mode. We definitely want to execute on leveraging our -- the scalability of our technology and our platforms and all the investments that we've made over the years in our software and in all of our systems. So we feel that acquisitions are going to be an excellent place to allocate capital.

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

Congratulations for the quarter, especially in the current market environment. Yes. Just to come back on the previous question, could you provide some color about where do you see the greatest level of M&A opportunities? Is it more in Canada? Or is U.S. really where you focus on these days, Ted?

So in terms of, I guess, Canada versus the U.S., I think that because our economies are so tight in, I'm actually not really seeing a huge difference. Our pipeline is in pretty good shape, Benoit, I'm getting leads on a regular basis. So I think they're both pretty active regardless of whether it's -- call it, north of the border or south of the border. Right now, obviously, we're pretty excited to be able to look at either. We have the ability to execute on either a Canadian or a U.S. acquisition. So we're pretty open to either.

Okay. And could you remind us your comfort level when it comes to leverage in terms of net debt to EBITDA, whether it's 2.5 or 3? Or if you could remind us your comfort level, that would be great.

Our net debt-to-EBITDA target would be around 3%. We're comfortable with that number. And we usually measure it by our net debt to equity. That's where we're comfortable all the way to 3.5 on that. So that's also why we mentioned earlier that we have a lot of dry powder. We're ready to execute on a pretty substantial acquisition. And we're looking. We're looking like Ted said, we're looking in Canada, we're looking in the States. We're open to -- we're open to both sides because we now have the capacity and the platform to do so.

Yes, okay. That's a great question. And just to come back on your previous comment about the EBITDA margin for logistics for 2023, is kind of 8%, 9% kind of a good spot to expect for...

Yes, sorry Benoit, the 8% is where we're targeting. I mean typically, we've mentioned before 8% to 9% is our long-term target. With the 2023 market or at least when it is a softer market, it will be around the 8% and that we're targeting internally.

Okay. Perfect. And how should we be looking at the margins for truck transportation. Obviously, you finished 2022 with almost a little bit more than 19%, which has been a record performance. I'm just curious on truck transportation, where margins could be at for 2023?

We do expect the margins to come down a little bit only because we do expect there will be some retraction on the part that is not contract, which most substantially contracted rates in trucking. So we are expecting the drop to be near the 18%, 19% margin on truck. We probably won't see the record 22% that we were expecting that we saw in the last 2 quarters. But we are going to be healthy. It is going to be profitable, but we have to be expecting normalized margins.

Your next question comes from Gianluca Tucci at Haywood Securities.

And congrats on an exceptionally strong Q4. I'm just curious, in terms of the broader picture here in the marketplace, and all these macro headwinds that are persisting, like if you could dive a bit deeper into the pricing and the volume pressures that are expected for 2023 that are obviously embedded in your guidance range?

Look, it's kind of a big question. I mean, no different than anybody else's outlook, we expect 2023 to be somewhat challenging. I think what we're kind of sticking with is that while we see cost inflationary pressures, et cetera and cost of operating a little bit up from where we've been, we are working closely with our customer base. We do have a good relationship with our customers, especially the contract rate customers, where we're working through our serviceability and our ability to stay close to contract rates that we currently have in place. Most of our customers understand the market that we're in and understand that our costs are increasing as theirs are, and we kind of work through that together. When I look to 2023, I don't see a year of growing pricing. I see it rather stable for where we're at.