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

Good morning, and welcome to Titanium Transportation Group's 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 today. Please note that this call is being recorded today, July 31, 2023. I would now like to turn the 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. I'm pleased to share an exciting chapter in Titanium's growth history: the acquisition of Crane Transport for a total consideration of USD 53 million. As you have seen in this morning's press release, Crane Transport is a family-owned business and operates out of Oakwood, Georgia specializing in reliable full truckload freight transportation services. Crane generates approximately USD 60 million in annualized revenue and operates approximately 200 trucks based out of 2 terminals in Georgia and Alabama. Their main terminal being Oakwood, Georgia, which is about 30 minutes from our logistics location in Atlanta. We believe that this strategic acquisition will provide Titanium with the necessary assets in the U.S., enabling customers to access a comprehensive freight management offering, driving accelerated growth in the Logistics business. At Titanium, we have a proven history of strategic acquisitions contributing to sustainable long-term growth. Today's announcement is particularly significant as it marks our first U.S. asset-based transaction. This is a strategic move that not only expands our asset footprint, but strengthens our position in the market and enhances our capabilities to better serve current customers and help to acquire new ones. We see Crane Transport's full truckload business as highly synergistic with our existing network, immediately adding capacity and valuable new customer relationships and an excellent fit from a cultural point of view. The U.S. marketplace continues to present a significant growth opportunity for Titanium. The acquisition of Crane allows us to expand this presence further through a terminal in Alabama and our second terminal in Georgia. This contributes directly to our goal of building Titanium's business offerings in the U.S. market. Additionally, Titanium will also acquire the real estate, 2 terminals each with about 11 acres of land. The locations are strategically located in Freight Alley. Freight Alley is identified as North Carolina, South Carolina, Tennessee, Georgia and Alabama. Interesting to note that within Freight Alley, transportation represents a significant portion of this region's economy. We expect the integration phase to last about 12 months and be accretive once completed. In addition to the acquisition, we'd also like to take this opportunity to provide an update on our 2023 full year guidance. Based on the current economic environment and the company's outlook for the remainder of the year, Titanium is providing the following updates to its guidance, which include the partial year contribution from Crane. Consolidated revenue is expected to be between $450 million to $470 million compared to the previous expectation of $500 million to $520 million. The change in revenue is being driven by a reduction in fuel surcharges due to decreases in fuel prices and modest volume as well as transactional pricing contraction from recessionary market pressures. Adjusted EBITDA margin, 10.5% to 12.5%, previously 9.5% to 11.5%. To conclude, this acquisition is further evidence of Titanium executing on its strategic plan and building a strong foundation for future growth. With the addition of Crane Transport, we see multiple near-term opportunities to enhance profitability, including access to the interstate freight market as well as long-term opportunities to optimize equipment and technology towards continued growth. Crane Transport is viewed as an excellent fit for Titanium from a strategic and cultural perspective. By leveraging the strengths of both companies, we aim to immediately add capacity, build upon valuable customer relationships, and benefit from the knowledge of existing experienced staff in the U.S. The Crane acquisition allows Titanium the opportunity to enter the U.S. interstate economy and will continue to build shareholder value. We look forward to embarking on this journey with Crane and unlocking new possibilities for growth and success. 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 Genuity.

Maybe we can start with guidance here. If the transaction is included for roughly half the year, then your guidance really is closer to like $410 million to $430 million on revenue. Can you maybe help us understand how that breaks down between fuel and volume?

Let's just jump right into the gauntlet. So let's start with this year's outlook for Titanium proper. We -- so we've seen consistency with volumes so far this year, and we highlight that in the first quarter that the volumes dropped about 10%. So with that, it's still consistent in Q2, and we were originally looking forward to Q3 and 4 recovery, but it seems like that's going to be a little more delayed. So we are anticipating 10% drop throughout the year. That's number one. Number two, we talked about fuel pricing. Before fuel pricing was estimated to be an increase for 2023, but that also turned out to not be the case. Fortunately, fuel price decrease also means that we are saving on fuel costs as well as largely a pass-through. So what you see is that revenue drop, but our costs also dropped. So that's why you see there is an EBITDA margin increase instead.

Yes. So we like to look at half our business as a broker and focus more so on margin rather than revenue.

Right. Perfect. And then in terms of the deal accretion, you kind of mentioned that will be accretive post synergies. And I think that implies kind of $2 million to $3 million of synergies kind of created. Maybe help us understand where those are coming from?

Yes. So I'm going to say, timing-wise, systems-wise, we are going to look at the next 5 to 6 months. So then in the next 5 to 6 months, we'll have the systems integrated. And then the 6 months beyond that will be kind of all of the low lying fruit in terms of all the details that are going to be involved in executing on improvements in synergies, profitability, optimization, et cetera.

It's Marilyn. So there's 2 sectors really to the idea of an integration. One is the physical rebranding and all that, which will happen likely within the first 6 months. And then the optimization portion of it, which is the real synergistic benefits that you have as a bigger group that will go through, including optimization of lanes and routes with customers, which were definitely in consideration when we were viewing due diligence materials on Crane. So we see that as being sort of in steps between the physical integration and optimization, which has historically been the way we've done all of our acquisitions and the results that we've seen.

All right. That's awesome. Congrats again.

Thank you. I'm just going to add on there that the assets really launched our ability to promote our logistics business as well in the U.S., especially.

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

Maybe you guys can touch a little bit about the fleet, that 200 trucks. Maybe you could talk about the age, if you need to spend any additional capital to kind of get that in line with what the base Titanium trucks are doing today in terms of technology or whatever.

Yes. So of course, we're a little unique on the technology. I'm just going to jump all over that. So technologically, we're far more advanced than Crane. They are a good company. But again, I mean, setting the bar as high as we do is a little unique. In terms of their equipment, our equipment is uniquely new now. Remember that the average age of our truck is around 1.5 years. So that is a little bit -- I think that's way above industry standard. But having said that, their average age of their trucks is actually quite reasonable. It is well within range and we have almost no -- there's almost no requirement for truck replacements at this time.

Got it. That's good to hear. And then maybe you could provide a little bit more financial details around the margin profile of Crane. Is it kind of in that low mid-teens and you see kind of gravitating up to kind of where you guys are today in that high-teen range over the next 12 months. It's just a better way for us backing into kind of the EBITDA multiple you guys paid for as well.

Yes. So they're definitely not at the same as Titanium proper, which is about 18% to 20%. They're about any -- it's 14% to 15% adjusted EBITDA margin. So there is room -- like we said, there's room for synergies and there's room for improvement. And that's where our tech and our operational focus is going to be and to integrate and then to create that synergies with the 2 companies.

Got it. And Ted, maybe you can walk us through the bidding process. Was it competitive? And does this essentially consume most of your time for the next 12 months, so we shouldn't expect any additional acquisitions on top of this?

It was marginally competitive. I wouldn't say it was terribly competitive. It wasn't a bidding more circumstance, if that's what you're wondering. There was both buy side and sell side involved. But ultimately, there were others that were interested. But ultimately, we were the best buyer for various reasons. We're a good fit, and they're a good match for us. We're a good match for them. We have a lot in common on a lot of different levels. And we believe that there's a lot of -- we have the ability to go in there and kind of modernize the technology in terms of opportunity. I think there's a lot of companies out there that buy that don't -- it's not their style. It's not what they're good at. They have other strengths. So we have the ability to go in and take an opportunity that's got low lying fruit from a technological perspective and really use that for navigation and optimization.

Your next question comes from the line of Benoit Poirier from Desjardins Capital Markets.

Yes. Congratulations for the announcement this morning. Could you talk maybe about the opportunities to strengthen your brokerage operation following the fact that you will now have about 200 trucks in the U.S. You've been talking about the ability to double or triple the size of the company once you have the proper foothold, and I'm just wondering whether this rationale is still true in light of the acquisition of Crane.

Benoit, yes, you're exactly on the money. That was a large motivation for us when targeting an acquisition in the U.S. on the asset side for sure. We have experienced that exact uptick in Canada and expect an even bigger uptick in the United States. It's by no chance that we also have a logistics office in Atlanta, which is about 30 minutes from this new acquisition in Oakwood, Georgia, so which makes it very opportunistic for us in terms of being able to leverage our existing relationships and develop new ones. Customers today are looking for overall solutions, so being able to satisfy them from both an asset side and the brokerage side, especially in today's soft logistics market is very important. So this is a very strategic opportunity for us.

Okay. And could you maybe discuss about the customer base, whether it's similar with Titanium Transportation or there's a list of new customers? And if there is any big concentration in one or a few so?

So that's the really exciting part. There is very little overlap. It is mostly new customers, ironically, in the same regions that we travel, but they're largely all new for us, which is also a key factor in this choice of acquisition.

Okay. That's great. And from a leverage standpoint, could you maybe provide some color about where your financial leverage will be following the acquisition? And maybe your ability to perform another one in 2023 or probably it's starting to digest and maybe a little pause will be needed in the short term?

In the short term, we will be about 2.5. So the very near term in the next 2 quarters probably not going to be engaging in anything unless we raise capital. So -- but we will be recovering that very quickly. So within 3 quarters, we'll probably back down to 2 to 1 or maybe lower than that. So we are ready, within a year, we'll be ready for another one if we need something.

So Benoit, this current, yes, this current stock price is not conducive to do a raise. But again, given our profitability, we have to wait to reload, then that's what we'll do.

Okay. And just in terms of timing for, let's say, taking the opportunity to leverage your brokerage operation, how long does it take to start to engage discussion to really strengthen the logistics business in the U.S. on the back of this acquisition.

Sorry, you're asking a timing question?