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

Good morning, and welcome to Titanium Transportation Group's First Quarter 2023 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, May 16, 2023. A replay of this call will be made available until midnight on May 30, 2023. The details of the replay can be found on Titanium's 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. Despite challenging economic conditions, I'm pleased to share that Titanium delivered another profitable quarter, generating $106 million in revenue and $12.6 million in consolidated EBITDA. The market trends we saw in the latter half of 2022, including increased levels of inflation, supply chain challenges, rising interest rates and geopolitical turmoil continued in the first quarter of 2023. These trends also impacted the transportation industry. We observed a softening demand for freight services, stemming from changes in consumer spending habits and some balancing of overstocked inventory from the prior year. At Titanium, we have always believed that during difficult times, we should be opportunistic and continue to pave the road for future growth. I believe the success we achieved in 2022 and the first quarter of 2023 is a direct result of the opportunistic investments in assets, technology and people that we made in prior cycles. Although 2023 may not be a year of rapid growth, we believe the economic environment will present disciplined and experienced operators such as ourselves, opportunities to make prudent investments which will translate into sustainable long-term growth for our shareholders. On a consolidated basis, we generated revenue of $106 million, EBITDA of $12.6 million and EBITDA margin of 13.8%, an increase of 230 basis points from Q1 of 2022. This demonstrates our continued ability to execute on our growth strategy and commitment to improved efficiency, delivering strong and consistent margin growth. Looking at our Trucking segment. We delivered revenue of $51.6 million, up 4.5% year-over-year and 52% EBITDA growth. We were able to utilize our technology-driven navigation tools to optimize our pricing strategy, which resulted in a year-over-year increase in segmented revenue. We do not expect the growth trend to continue into the remainder of the year, but anticipate continued control of our operating cost to maintain high levels of profitability in this segment. The results in the Trucking segment 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 allow us to add thousands of partner carriers to our logistics database and service network. Our Logistics segment, which tends to be more sensitive to market conditions, face substantial pricing pressure and demand normalization during quarter 1 of 2023. We generated revenue of $56.2 million and EBITDA of $4.6 million. While we do not expect the quality of revenue to return to the elevated levels in early 2022, we're comfortable with the margin performance that we're currently able to achieve. We continue to see significant opportunity for our growth in the U.S. marketplace. During Q1, we announced our sixth 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, allowing us to grow our footprint and customer base with the addition of another 2 locations in 2023. Seven years ago, we outlined a bold strategy to achieve $500 million in revenue. Over the past few years, we scaled our trucking and the logistics business in Canada and expanded into U.S. markets while continuing to execute on strategic acquisitions. We ended 2022 with $496 million in revenue, achieving the goal we set in 2016. As we look forward, we are confident that Titanium can become a $1 billion business, and we're focused on executing on our strategy while navigating the current economic environment. Our technology intensive 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. For the second quarter of this year, we cautiously expect a more tempered marketplace. 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. We maintain our 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 of our financial results for the quarter. Alex?

Thanks, Ted. In the first quarter of 2023, on a consolidated basis, Titanium generated revenue of $106 million compared to $136 million in Q1 2022. We delivered EBITDA of $12.6 million compared to $13.9 million in Q1 2022 with EBITDA margin of 13.8%, an increase of 230 basis points. Diving deeper into the segment performances. The Truck Transportation segment saw revenues of $51.6 million, an increase of 4.5% and EBITDA of $8.7 million, an increase of 52.4%, with an EBITDA margin of 20.3%. 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. The Logistics segment generated revenues of $56.2 million compared to $87.9 million in the comparable period. EBITDA was $4.6 million compared to $9.2 million in the comparative period with an EBITDA margin of 9.3% compared to the 11.5% in the same period. Titanium's balance sheet and solid capital position continued to provide a strong foundation for our operations and allow us to consider potential acquisition opportunities. During Q1, we bought back [ 72,275 ] common shares under our NCIB and we're actively evaluating potential acquisitions 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. To reiterate, for the remainder of 2023, it is likely that the North American economy will continue to face strong headwinds, which will undoubtedly cause turmoil within the transportation industry as well. During times like these, we are pleased to have delivered a profitable quarter. Titanium's technology-based systems and experienced team delivered quality service to our customers and executed against our financial and strategic objectives for our shareholders. Titanium is poised to not only navigate our core business through these challenges, but we expect to capitalize on potential accretive opportunities should they arise. Our investment in our proprietary technology and people allow us to approach difficult times with cautious optimism. With that, I'll turn it over to the operator to open the line for questions.

[Operator Instructions] Your first question comes from the line of Matthew Lee from Canaccord.

I'd like to maybe start on the margin side. Year-over-year, you're up 690 basis points despite revenue coming down. Can you maybe help put in perspective the drivers of improved profitability between price optimization, fusion and internal initiatives?

Of course. So for sure, and Marilyn is going to jump in later with some of the operations side. In terms of the margin improvement, one of the biggest factor is that we have a -- our technology allows us to navigate the current environment and really its last year's environment to optimize our pricing strategy to our customers and to our suppliers, so that we're able to realize that difference in the margins. So with regards to that, Marilyn will be more -- would be more into the operations side.

So on the logistics side, basically doing more with less, I guess, is the message that we've been able to do. And part of that comes from the technology we've used in vetting our carriers and getting relationships with the partner carriers that we use to ensure that our margins are where they should be. On the trucking side, obviously, we don't look at the margins as much. And on the trucking side of things, we've been able to leverage our contractual rates with our customers to keep them as stable as possible.

Yes. And again, we keep pushing our technology, which adds to the efficiency. Obviously, our Titanium Fusion carrier portal is one of the -- sort of one of our largest innovative components of our future in terms of growing our margins on the logistics side. So that's also a critical component that we keep investing in.

Great. That's great color. And then in terms of guidance, it remains the same, which implies some steady ramp up at the remainder of the year, particularly from logistics. Are there any particular things you're seeing in the market currently that gives you some visibility into that?

Can you -- sorry, Matt, can you just clarify that again? Do you mind just rephrasing that, if you don't mind?

Yes. So you have a $500 million guidance for the year and revenue for the Q1 is obviously lower than that run rate. So there's a bit of a ramp up that's being required to hit that. And is there anything that you're seeing in the market that gives you some confidence in your ability to ramp?

Yes. Of course. Okay. I totally get what you're saying. So I think -- I mean we'll definitely will split it into a couple of components. Currently, right now, you're seeing actually more net cancellations of authorities under FMCSA, then you've got issuances. So obviously, there's already a trend of, call it, tightening in the marketplace. So we do expect that this year we'll have, I guess, call it, traditional seasonality, i.e., first half is typically not as good as second half. I mean, the last few years with COVID, obviously, there was no such thing as seasonality, it was absolute turmoil. But we do believe that second half is going to be better. And the other thing is that if you split our 2 businesses in half or well, 60% brokerage, 40% assets, the assets tends to be more sure and steady in terms of revenue predictability. But the brokerage, the revenue is kind of a rough number in the sense that it's more of a cost plus, right? Revenue is more of the result of the margin, if anything. So it's more of a bottom-up approach. So that's where I think it's a little bit of an estimation. But yes, I think it's definitely there's some plausibility to it.

Some of our confidence also has to be in the fact that we are continuing to open our logistics offices, and that will add to some of our growth that we expect in the second half, barring any potential acquisition opportunities, but just our organic growth. We expect that to continue to allow us to grow in the second half of the year. I think it's also important to note that there's some of the tightening in the carrier base, which will help margins as well. Just as a matter of fact, I think it was reported in FreightWaves' SONAR that 9,000 carriers in the U.S. exited the market between January and March of 2023. So it's -- there are some changes from year-over-year for sure in terms of where the marketplace is. So yes, we continue to grow our offensive strategy in terms of growth that will help us in the second half.

Your next question comes from the line of David Ocampo from Cormark Securities.

I just wanted to follow up on Matt's lines of questions as it relates to margins, but maybe ask it from a different angle. If I take a look at your operating margins and your EBIT margin in logistics, that's a non-asset-based business. But if I take a look at the margin, it's actually higher than your trucking business, which requires capital. So if I'm looking further out, do you expect the truck transportation margins to eventually exceed logistics, especially in the context of your larger Canadian peers that are able to get a 10-plus percent EBIT margin?

Well, our current model is, we provided a little bit of an insight previously into our current model. Our Logistics side, we anticipate that our EBITDA will be -- or anywhere from 8% to 9%. That's the -- that's our target until we scale further ahead and our trucking is anywhere from 18% to 19% in EBITDA. And then like you said, we have the depreciation. We have a [indiscernible] EBITDA. But that's how the business is operating because we have such an asset-heavy side to the trucking side of our business. We don't expect that structure to change too much, especially not this year. But going forward into the future, because we are a full truckload haul in our trucking side, we don't anticipate that our structure to change until we change our product lines either.

If you keep a high proportion of logistics, like the proportion of lower EBITDA, obviously, is going to have an impact on percentages. But I mean, as Alex said, logistics is really essentially a zero DAI business. So being non-levered, asset-light, you're going to get that kind of mix in the calculation, right? If we are virtually 100% trucking, we'd be at 20% margin, but then you'd be -- obviously, be killing that from a cash flow perspective once you're done with DAI at that point in time, right?

Yes. I guess I was talking more from the EBIT perspective, still after depreciation. Just trying to understand how you guys are -- is there a pathway for you guys to get closer to, say, TransForce's Truckload division, which is 17% EBIT margin versus your 5% EBIT margin business?

Yes, I would say different product mixes. We're straight up truckload. So -- as far as I'm concerned, I think anywhere from 18% to 20% is a good target for us on a pre-DAI. On a post-DAI, I think what's going to happen is that you're going to see an increase in the DA over time because as trucking companies replace equipment, which is now far more expensive, depreciation is going to go up, no matter what. And right now, I still -- I know that there are still fleets that are out there that are still struggling to get equipment because most of the OEMs right now are basically sold out for 2023.

Yes. That makes sense. And then, Alex, on the net debt levels, I mean, it's gone up over the last 2 quarters or so. Maybe you can give an update on your maintenance CapEx on a go-forward basis because it's been running closer to north of $30 million on an annual basis.

Of course. So we have -- we've kind of substantially replaced our truck fleet. So we are kind of done with that side of the replacement cycle. Unfortunately, trailers, we're still facing supply chain issues, so we have not caught up quite yet with our trailer replacement. We are getting a lot more trailers this year. So fortunately, we are most likely going to be caught up by the end of the year. And then going forward, our maintenance CapEx we've disclosed before it's about anywhere from $20 million to $30 million, depending on asset prices and also if we need to expand our fleet and such.

I think it's also [indiscernible] our fleet, sorry, is rather refreshed at this moment with an average age of our tractors now below, what is it?

1.5.

1.5 years on our tractor and our trailer ratios are coming [indiscernible] 3.5, 4, something like that? So, majorly...

Yes. So we're actually in really great shape in terms of the fact that pretty much every single one of our trucks is quite new. And so from that perspective, we're in really good shape to continue to service the market.

Yes. So increased CapEx would be, I guess, for growth.

Okay. That makes a lot of sense. And then my last 1 here is, we've seen some of your Canadian counterparts get a little bit more active on M&A. What are you guys seeing out there in the marketplace? And then balancing that against where your stock is trading at today, how do you compare that getting active on M&A versus being more active on your NCIB or even issuing a substantial issuer bid?

Yes. So I mean, -- to some degree, capital allocation question, right? Are we buying or are we going to -- are we going to keep hitting the max on our NCIB. Our NCIB -- I mean we might as well get that out of the way. It's not a lot of money because our limit is quite low, quite frankly on a daily basis. So it's really practically a rounding error. But I mean we're doing -- we might as well max out. It's like maxing out your [ RSP ]. So at this point in time, obviously, that's one little thing. But in terms of sort of the M&A environment, let's just kind of hit the big one that really excites me. What's really interesting right now, David, is that I think that the mathematics is starting to really embed itself in the reality of what's happening. And that's the fact that let's say, everybody out there can assume a 5%, 6% cost of borrowing. I mean you go buy a house today, it's going to cost you 5 -- somewhere in the range of 4%, 5%, 6% depending. So that's just your cost of capital. On top of that, I'd like to make my shareholders a little bit of profit from a cost of investing. So you're really looking at least a 10%, 11%, 12% minimum rate of return. And so using now a year ago, you were into the mid-single digits. Today, you're into the low to mid-double-digit requirements. And that's just because the cost of capital has gone up. So we know that, that is going to impact multiples. And there is obviously no other result that's going to happen, but the fact that multiples are going to have to come down as a result of the mathematics of the borrowing environment. And so I'm actually pretty excited about the fact that I do believe that there's going to be opportunities. And that, as always, we've been looking -- we continue to look, we continue to deep dive. We've been acquirers and not volume acquirers, but we're strategic acquirers. So we continue to execute on that strategy.

And can you tease what kind of multiples you're seeing out there? Is it closer to where you bought ITS at 5x or multiples even below that now?

Yes. I mean, I think, again, it depends on the circumstance. But yes, generally speaking, we are back into the normal ranges of where we've traditionally seen multiples can be anywhere. I mean it can be as low as 4, but that's a little unusual and it's really more dependent on the circumstance, but you're kind of averaging into that 4% to 6% range depending.

Your next question comes from the line of Gianluca Tucci from Haywood.