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

Good morning, and welcome to Titanium Transportation Group's Q2 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, August 15, 2023. A replay of this call will be made available until midnight on August 29, 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 the difficult economic environment, I'm pleased to report that Titanium delivered another profitable quarter, generating $100.4 million in revenue and $12 million in consolidated EBITDA. These results underscore the quality of our operations and our unwavering commitment to driving profitability throughout the economic cycle. As highlighted on our first quarter conference call, the North American economy remained affected by the market trends we saw in the latter half of 2022, including elevated interest rates, persistent inflation, and post-pandemic supply chain challenges. These factors collectively resulted in decreased freight volumes and exerted pressure on pricing in the second quarter of 2023. Despite challenging conditions, we delivered profitable growth in our Truck Transportation business, with EBITDA increasing 20.6% for the 6 months ending June 30, 2023. On a consolidated basis, we generated revenue of $100.4 million, EBITDA of $12 million, and EBITDA margin of 13.6% during the second quarter, while our consolidated EBITDA margin expanded 100 basis points in the first half of 2023. These results, within an environment where many are struggling to stay in business, demonstrate our continued ability to execute on our strategy and commitment to improved efficiency and margin growth. On a segmented basis, looking at trucking, we delivered revenue of $49.2 million, a 15.9% decline as compared to the second quarter of 2022. This is mainly attributable to current economic conditions, with volumes for the quarter down by about 9% year-over-year, with freight pricing also down nearly 8%, and a decrease in fuel surcharge being the main contributing factor. We increased EBITDA margins from 18.8% in Q2 of 22 to 21.1% in Q2 of 2023, as a result of our continued focus on controlling operating costs, maintaining high levels of profitability in this segment. Turning to our Logistics segment, we faced pricing pressure and moderate demand normalization during the second quarter. We generated revenue of $52.7 million and EBITDA of $4.1 million. During the quarter, volumes were down by about 4%, while transactional pricing pressure accounted for much of the 33% decrease year-over-year. These consistent results have positioned Titanium well to not only weather the current economic environment, but also opportunistically grow our footprint when it is prudent to do so. During Q2, we announced our 7th U.S. brokerage location in Jacksonville, Florida, as part of our goal of building out Titanium's business offerings in the U.S. market. Jacksonville has a strong manufacturing sector with proximity to the I-95 and I-10 corridor, making it an ideal location for expansion. By leveraging our technology and systems, in addition to low startup costs, we expect our U.S. brokerage expansion to drive strong return on invested capital and organic growth. Expanding our presence in the U.S. is a key growth driver for Titanium, and we look forward to continuing to secure additional strategic U.S. locations over the next 12 months to 18 months. Subsequent to quarter end, I'm excited to remind everyone that we announced the acquisition of Crane Transport. This was Titanium's third acquisition in the past 3 years and marked the largest acquisition in our company's history, with approximately 200 trucks in its fleet generating about USD 60 million annually in revenue. We see Crane Transport's full truckload business as highly synergistic within our existing network, immediately adding capacity and valuable new customer relationships. This strategic transaction will allow us to expand our reach into the U.S. asset-based market and complement our existing freight brokerage services. Integration of Crane will likely take approximately 12 months, and we expect profitability to shrink temporarily as we work on optimizing Crane's operations and integrating our technological platforms into the acquisition. Against this backdrop, we expect to continue to leverage technology to navigate evolving market conditions and drive growth. We maintain our 2023 full-year revenue guidance range of $450 million to $470 million, and EBITDA margin of 10.5% to 12.5%. With that, I'll turn it over to Alex for a more detailed discussion of our financial results for the quarter.

Thanks, Ted. In the first quarter of 2023, on a consolidated basis, Titanium generated revenue of $100 million, compared to $136.2 million in Q2 2022. We delivered EBITDA of $12 million, compared to $16.3 million in Q2 2022, with EBITDA margin of 13.6%. Diving deeper into segment performances, the Truck Transportation segment saw revenue of $49.3 million and EBITDA of $8.9 million, an increase of 0.2% with an EBITDA margin of 21.1%. The continued improvement in operating margins in the Truck Transportation segment is consistent with our expectations, following the integration of recent acquisitions as we continue to deliver operating improvements and synergies. The Logistics segment generated revenue of $52.7 million, compared to $78.6 million in comparative period. EBITDA was $4.1 million, compared to $8.4 million in the comparative period, with an EBITDA margin of 8.7%, compared to 12% in the same period last year. Titanium's balance sheet and solid capital position continues to provide strong foundation for our operations. 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. Furthermore, as part of our capital allocation strategy, we repurchased 403,000 shares during the quarter, bringing our total share repurchases under our current NCIB to 475,000 shares. I would now like to turn the call back over to Ted.

Thank you, Alex. For the remainder of 2023, we expect that the North American economy will continue to be impacted by below-trend demand and elevated inventory levels. Despite these challenges, Titanium will remain focused on servicing our customers, investing in our technology and people, efficiently managing our expenses and driving profitability. With the closing of our recent acquisition, we will unlock future logistics growth. We are well-positioned to capitalize when the cycle turns. While our diverse customer base and focus on essentials and the CPG industry provides us with some insulation during turbulent economic times, we are confident to continue to capitalize on opportunities and make prudent investments, which will translate into sustainable long-term growth for our shareholders. With that, I'll turn over the call to the operator to open the line for questions.

[Operator Instructions] Your first question comes from Matthew Lee with Canaccord.

Yes. Maybe we can start on the EBITDA front, particularly in terms of trucking margins, which were a bit better than we would expect. Can you maybe help us understand what's driving that margin improvement year-over-year and maybe talk about the sustainability of that before perhaps considering the impact of Crane?

Yes, you're right, Matt. It's Alex. One of the main factors is that we were able to realize some synergies as we did in Q1 with regards to our acquisitions, and we've done a great job replacing our trucks. Some of our fleet operating costs have come down. Fuel also remained to be down in Q2 in terms of fuel pricing. It's recently gone up, but in Q2 it was down. So all-in-all, we had great cost control measures on top of a commodity price and a fuel price being down that's what drives the margin improvement. As well, obviously, one of the things that's near and near to us in terms of our future, as well as our innovation and our technology. We use technology heavily to navigate the business. So we're very quick to be able to respond to our existing economic conditions, and we're able to maneuver the fleet and call it, pivot for lack of a better term as quickly as the various sectors that we're in change in terms of demand.

And then maybe just an update on the early innings of Crane. Has it kind of been what you expected going in? And maybe have you had a chance to talk to some of your bigger U.S. customers on the potential for expanded relationships now that you have asset-based trucking?

It's Marilyn. So definitely an exciting time for us. We are, I wouldn't say surprised, but pleasantly comforted that the team we have acquired in the U.S. is an exceptional team. So we're looking forward to growing with them. Access to our large sales staff that we have already in the U.S. in our brokerage level -- in our brokerage offices, as well as our sales people in our Canadian offices, allows us to leverage the assets in the U.S. significantly. Our existing customers are now just being -- I mean, it's only been 2 weeks, so we're now just reaching out to our customer base and Crane's customer base as well, which is a new customer base for us largely, so it's a world of opportunity that way. And being able to sort of, now that we have increased capacity for them on the asset side in the U.S., as well as our brokerage services and technology and integrations that were not previously available to Crane's customers, we're happy to see where we are right now. So, so far, the first couple of weeks have gone very well.

Your next question comes from David Ocampo with Cormark Securities.

I just had a couple of quick accounting questions. Maybe Alex can answer them, but if I take a look at the gain on the sale of PP&E, that's been consistently running at around $1.5 million a quarter, and that does look like it's 30% above or 40% above the best position of PP&E. So, is this kind of a good run rate going forward? And does that sort of suggest that you guys are over depreciating your assets? Or it's just the market's pretty strong for used vehicles?

So, the market -- because now we're in a period where we're replacing our trailers. So trailer market remains to be pretty strong. The truck market has definitely gone back to a near 2019 levels, so you're looking at used truck pricing really falling off since 2022. Trailer prices remain to be pretty strong, and we're in the period where we're replacing trailers. That's why you see that gain. But we are seeing that market also start to slide as well. So I'm not expecting that to be the run rate. I would say our historical run rate, we're going to get back to that pretty soon. And we're also near where we need to be in our annual replacement, so you can see that our CapEx is starting to normalize as well.

Yes. Got it. And then the last one's just on working capital. If I take a look at the last 5 quarters, it's been a release of working capital. What's driving that? Is it better collection processes with your clients? Any call on that would be helpful.

So, definitely, we have done a lot in our accounting front in terms of utilizing our tech to drive better collection processes. We have made a lot of strides in building up that team as well, and we have been very successful in collecting. And, of course, some of it is also utilizing our tech and working with our customers to say, hey, can we do something to increase the efficiency in both your payables and our receivables? And we have done a decent job at working with some of our customers and partnering up on that front to create better solutions as well.

Do you expect more capital to be released here or just maintain its status quo at current levels?

We are getting to the point where it's our average term. So it's going to be tougher to get that last part. It is my goal to drive that even further down. But I think right now where we're at in terms of our DSO and our collectability, that's where we should be. With that said, with Crane, that might increase temporarily.

Your next question comes from Steve Hansen with Raymond James.

You said you want to perhaps talk about some of the early macro indicators you're watching in your business over the last couple of months. I'm just trying to get a sense for where we're at in the cycle here, whether it's spot rates or contractual rates. I mean, are you seeing any signs of sort of troughing as we move through this period here? There's been some early indications, I think, in a few different spots, but it's not been informed. I'm just curious about your thoughts around how you see the -- where we are in the cycle?

Yes. Actually, I do like to look at some of the kind of the big macros. I'd like to look at one of the big macros I'd like to look at actually is the price of used trucks. That's one that I tend to like to follow. I do use FreightWaves SONAR. I think they have a really great platform and they have hundreds of indices, but there are a number that I look at. And of course, like a lot of -- I mean, you do take a look at things like the outbound tender rejection indexes and the volume indexes and so on. What's interesting is that I am seeing over the last few months, if you take a look at the used truck pricing indicators, used trucks have gone from kind of the mid-2022, we're at a record high, almost double or triple what they were selling for the prior year. And then now, they're down to prices that are comparable to some of the recessionary years going back as far as 2013, in fact. So what's really interesting with that is that that is indicating in a market where 80-something percent, according to the ATA, of U.S. trucking companies have less than 6 trucks. If you're looking at essentially very low demand for used trucks with very high supply, that's clearly an indicator of macro shrinkage. I mean, there is no other way of explaining basic supply and demand. So I really believe that that's one of those things that's telling us we are in a shrinking capacity as well. If you take a look at the slides from the various institutions, whether it's FreightWaves or FTR, or any of the other macroeconomic indices out there, the statistics site net revocations are in a negative, so meaning that you have every month now more cancellations for authorities than you do new authorities, again, under FMCSA and so on. So those are all indicators of shrinkage. How long it will take to get to now a rather than call it a shipper market, a supplier market, that's TBD, right? But other than that, though, definitely, there's a lot of different indices that are indicating shrinkage.

Capacity is still coming out in other words. In the large bankruptcies that have been starting to surface here, is there any direct implications for your business, be it on the asset side now or perhaps cross-border? Just curious how you think about that helping the industry or perhaps offering some opportunity?

If you're looking at the people side, we're definitely seeing a higher volume of applicants for any of our job vacancies, whether it's on the road or in the office. So definitely, that's nice to see that it's sort of it's a little bit of a better market. You're getting some good volume of applications, which is great. Other than that, I'm just not really seeing the spot market improve at this point in time from that perspective. But I don't see it shrinking either. So what's interesting is that it is flatlining where it is, and that is kind of a positive.

I can add a little bit on that, too, in terms of our customer base. So what we're hearing from some of our customers is their normal cycles for production are now once again starting, where has been sort of in a hiatus for the last little while, catching up on oversupply in their warehouses, et cetera. So we're starting to see that normalized just a little bit now.

And just one last one, just on the brokerage expansion, Jacksonville that you've highlighted as a new strategic location. Can you just remind us on the longer-term targets? And I'm just curious if you've got the next 3 locations already mapped out and what sort of is the -- what moderates the pace that you decide to open those new locations?

So to some degree, it's obviously -- well, it's a number of components, but it's the who and the where. So we usually prepare for the most part, and we groom the people that are going to be running those offices. And as well, we like to take a look at regions that are strategic in terms of our opportunities and our customer base.

So I can add to that. So like we've said before, we like to promote from within and groom our staff as they expand into new locations. That's part of the appeal. So we do have 2 already in the works for next year that we are -- our people are prepared for. It's just a matter of timing and location finalizing. So that is still definitely on our radar. Leaving just one more to kind of work through to hit our 10 target by the end of 2024.

Your next question comes from Michael Kypreos with Desjardins.

Maybe just on your comment that profitability could shrink temporarily due to the integration of the acquisition and trucks transportation. Maybe just on the 18 to 19% EBITDA margin that you had previously disclosed for the year and also that you posted 20% plus in the first half. So maybe just what are you thinking in the second half in terms of margin here with the acquisition integration?

So 18% to 19% is what we target as trucking. And right now, obviously, being 21% with some of the favorable pricing, it's good for us. We don't expect that to continue as well. We think even without Crane, we would probably normalize back into the high 19s range. So with Crane now, obviously, the integration is going to drag down the EBITDA margins a little bit. We're probably looking at mid-teens. That's probably what I would consider to be reasonable during an integration phase. And that's probably where we're going to end up.

And maybe just a quick one on CapEx. You invested quite a bit in the quarter. Do you still expect $30 million over the next 12 months?

Well, yes, because we said $30 million over the next 12 months. That was at the start of the year. So our trailer replacement cycle is still going on. We are not spending $30 million in the next 6 months, which is 2023 balance. So -- but going forward, we still need to replace trailers. So we're getting into our normalized replacement cycle. It's a steady stream of trailers coming in. Of course, there's a little bit of trucks in there, which once that goes away, it's going to drop down our CapEx going forward. So I'm not expecting that to continue into the next 12 months. But we are going to see trailer replacements to be pretty steady.

Your next question comes from Ben Jekic with PI Financial.

Just in terms of logistics office in the U.S., is it fair then to assume you're still with 1 more location in 2023 and then 2 more in 2024?

Most likely, we're not going to announce another opening this year, because we're probably going to focus on the integration and the expansion, the growth of our most recent 2 offices. Between Arkansas and Jacksonville, we're going to focus on their growth. We're also going to focus on the integration of Crane to prepare for future opportunities. 2 to 3 will be announced next year. If we don't do 3 next year, it will be 2 and 1 in Q1 of 2025. So it's give or take a quarter, more or less on track. The goal is to get Crane integrated and then move on to other opportunities. Given the current economic circumstances, opportunistic growth at this point in time is, I think, makes a lot of sense right now in order to prepare for the next turn -- call it turn in the cycle.