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

Good morning, and welcome to Titanium Transportation Group's Q3 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, November the 15, 2023. A replay of this call will be made available until midnight on December the 6, 2023. 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. The third quarter of 2023 marked a continuing turbulent period for the North American economy and our industry. Freight transportation faced substantial headwinds, including the adverse effects of rising interest rates, surging operating costs, persistent high inflation, overcapacity and global geopolitical conflict. Furthermore, freight volumes weighed down contractual and transactional freight rates. Against this backdrop, I'm pleased that we delivered another profitable quarter, generating $112.7 million in revenue and $13.5 million in consolidated EBITDA, a testament to the company's resilience and financial navigation systems. In addition to these results during the quarter, Titanium was able to take significant strides towards sustainable growth through the completion of the acquisition of Crane Transport. As mentioned on our previous conference call, the acquisition expands our service offerings to current and new U.S. customers and complements our existing freight brokerage services. With approximately 200 trucks in this fleet, generating roughly USD 60 million annually in revenue, we expect Crane to be a vital asset as we build a solid foothold for our U.S. expansion. Since closing the acquisition on July 31, 2023, our team has worked diligently on the new brand integration, which includes new authorities and systems. We expect this to last the new few -- the next few quarters, which will have a negative impact on margins. In the third quarter, on a consolidated basis, we generated revenue of $112.7 million, EBITDA of $13.5 million and EBITDA margin of 13.6%. We are pleased with these profitable results at a time when many companies find themselves unprepared to manage and in some cases, struggling to remain solvent. On a segmented basis, our trucking business continued to perform well. We delivered revenue of $62.4 million, a 13.6% increase when compared to the third quarter of 2022. The third quarter results were impacted by current economic conditions with volumes for the quarter down about 9% year-over-year and freight pricing also down nearly 8%, with a decrease in fuel surcharge being the main contributing factor. EBITDA margins came in at 18.9% and a 4.2% decline from Q3 2022. This was due to the segment absorbing the majority of integration costs from the acquisition of Crane. In addition, soft economic conditions also put significant pressure on our segment's margins. Although profitability of this segment tightened, we strongly believe that these are natural growing pains as we already -- as we ready the company for the next stage of growth and remain focused on controlling our operating costs to maintain strong levels of profitability in this segment for the remainder of the year and into 2024. As I mentioned at the start of the call, the current freight environment impacted the Logistics segment of our business. Despite these pressures, we performed in line with expectations, generating revenue of $51.5 million and EBITDA of $4.5 million. The pressure on pricing accounted for the entirety of the segment's 13.6% [ decrease ] in revenue as well as offsetting the 6.1% in volume growth achieved by our dedicated team. EBITDA margins for Logistics were 9.7% in Q3 2023 compared to 11% in Q3 of 2022. Overall, we are pleased that this segment was able to grow organically through its new locations despite unfavorable economic conditions. This is consistent with our core strategy of developing sustainable growth platforms across the entire company. Titanium's success is founded on the strength of our people, business processes and technology. With the acquisition of Crane as well as our new freight brokerage offices, we remain focused on maintaining sustainable profitability while building towards our future growth. We anticipate continued macroeconomic uncertainty for the remainder of 2023 and ideally positioned to weather these conditions and drive growth when the truck transportation industry cycle turns. During the second half of 2024, we expect the market to improve with reductions in supply to the freight market and enabling additional organic growth and driving value for shareholders. As a result, we revised our 2023 full year revenue guidance range to $430 million to $450 million and EBITDA margins 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. Alex, take it away.

Thanks, Ted. In the third quarter of 2023, on a consolidated basis, Titanium generated revenue of $112.7 million compared to $113.4 million in Q3 2022. We delivered EBITDA of $13.5 million compared to $15.5 million in Q2 2022 -- Q3 2022 with EBITDA margin of 13.6%. Diving deeper into segment performances, the Truck Transportation segment saw revenue of $62.4 million, an increase of $13.6 million -- 13.6% over Q3 2022 and EBITDA of $10.1 million with an EBITDA margin of 18.9%. As Ted mentioned previously, this segment absorbed a significant portion of integration costs resulting from the acquisition of Crane Transport. We expect this to last the next few quarters. The Logistics segment generated revenue of $51.5 million compared to $59.6 million in the comparative period. EBITDA was $4.4 million compared to $5.8 million in the comparative period with an EBITDA margin of 9.7% compared to 11% in the same quarter in 2022. Titanium's people, processes and technology provide a solid foundation for our operations and platform for our future growth. Given the strength of our business and our confidence in the earnings outlook, we maintain our dividend, declaring a dividend of $0.02 per common share. Before I turn the call over back to Ted, I would like to highlight that we demonstrated the results of our strong capital allocation strategy by closing the acquisition of Crane without a capital raise. We believe in a strong balance sheet, which will continue to be our focus as we navigate these economic headwinds. I would now like to turn the call over back to Ted.

Thanks, Alex. Good job. For the remainder of 2023, we expect that the North American economy will continue to be impacted by below-trend demand, elevated inventory levels and overcapacity in our industry. 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'll unlock future logistics growth as we remain well positioned to capitalize on customer opportunities when the cycle turns. I would like to add that we are in full swing of integration and conversion of Crane to Titanium's proprietary processes and the new branding of Titanium American Trucking. We are very pleased with the process and excited to welcome staff, drivers and customers to the new direction and service offerings. Our diverse customer base and product lines provide us with consistency during turbulent times, we are confident that we will 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 it over to the operator to open the line for questions. Thank you.

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

I appreciate the commentary on the revenue contribution from Crane, but I was hoping you guys could also speak to the margin profile. And on top of that, if you're seeing anything that could make the integration process a little smoother or bumpier versus your 12-month integration process?

Okay. Great. Thanks for asking, David. I'm going to actually -- Alex is going to take this one.

Okay. So the margin profile, like we explained when we originally acquired Crane, their margin profile is not to the same level as Titanium. So we are working to integrate that. One of the questions that may come up is that we're expecting Titanium's margin to drop on the Trucking segment, and it may not drop as much as anticipated. And that's because there's only 2 months of Crane, which is the lower margin profile, a couple of points lower than Titanium. And we have recognized some cost savings in the quarter, thanks to running our fleet better, and Marilyn will jump into that later. But overall, we're expecting the margin to slip a little bit more because there are transaction costs that's going to come into play in Q4, in Q1 of next year. So that's going to happen. This -- in this quarter, we only have about $500,000 of transaction costs because it's still really early in the earnout transaction -- sorry, integration costs because that's still really early in the integration. But as we go on and we incur these costs over the next few quarters, we are going to see some margin compression. But past that, we're expecting our integration efforts and getting on to our Titanium platform that the margin is going to turn around for Crane as well. And now I'll pass over to Marilyn to maybe talk about some of the integration.

Sure. David, just to clarify which -- what part of the integration process would you like to have information on just sort of where we are so far.

Yes, where you guys are so far and if they're on track for that 12-month target.

So yes. So actually, we're well underway. There's been a great team to work with from a human capital point of view. We've been very fortunate to have a good group to work with. We are deep in the process of rebranding and retooling as we normally do, changing authorities and so on. We expect our go-live date to be January 1 for physical integration and rebranding of all trucks and drivers, et cetera, in the normal course. From that point, we move to fleet optimization stage, which we expect to take the better part of 1 to 2 quarters at least to kind of work through and optimize our -- I guess, our synergies between the company and opportunities created. Crane has a new set of customers for us to work with, which is a growth area for us. There's a little overlap, but not a lot in terms of customer base, but product lines, definitely significant overlap. So we have an opportunity to really leverage that. So the 12-month target of our usual turnaround phase, we are on track for, and we're excited to work with the team this year.

That's great. And then maybe for Ted. I mean, if I take a look at the Truck Transportation's margins before you even completed ITS, it was in the mid-teens. And if I look at the post-integration phase, you guys were able to push margins into the low-20s. I understand that part of that is supported by a pretty good market environment, but some of it is probably attributable to some scale. So I was just curious if you're able to get the scaling benefits from Crane's that you guys are separated by a border there.

Yes, absolutely. I mean we've always been a cross-border carrier. So this is nothing new to us. We have always experienced both markets. They are different. If you look at, for example, a local domestic Southern Ontario market is extremely different in terms of how it operates versus a, call it, a short -- short to medium to long haul environment in and out of the U.S. and throughout the U.S. So we're very experienced with that. We've definitely a high-teens target. We -- we also will benefit here from economies of scale. And one of -- there were only 200 trucks and our purchasing power as well will provide far more discounts on numerous levels. Our cost of operations is also a lot more efficient. And that's kind of counterintuitive if you think about it because overheads in the Canadian market are actually higher than the U.S. So we've got kind of 2 double positive [ Vinnies ] that we're going to be able to actually scale from in this environment.

Your next question comes from the line of Matthew Lee of Canaccord.

Maybe we can sort of the housekeeping one on margin guidance. Am I just correct to assume that that's not management definition of EBITDA margin in the context of it includes fuel cost and fuel revenue?

It does.

Okay. That's helpful.

Yes.

And then maybe just a follow-up on David's question. I mean, can you help me quantify the impact of the integration cost in the quarter, maybe as a percentage point or dollars? And then do you feel like Q3 margin in trucking are kind of a bit of a floor in that business or typically, more pressure coming?

I'll -- the second part of the question, I'll let Marilyn jump in. So transaction costs -- sorry, integration costs, like I said, we're still early in the stages, we're well underway, but we haven't incurred a lot of the cost yet. So this quarter, we have about $500,000. We are expecting quite a bit more in the coming quarters. As we move the trucks over, we got retail -- in retail, there's a lot of physical cost that comes with not computers and whatnot. But for now, we've $500,000, and a lot of it is -- we -- when we evaluate a new business, there are some inefficiencies that goes with the start of the integration. So that's what we're incurring right now, such as elevated borrowing costs from Crane themselves that we could have cut. But right now, we have to keep some of the other stuff includes insurance and whatnot. So there are pieces that will disappear in a quarter or 2 that currently, we just have no choice to carry on.

Okay. So I think to elaborate on that, when we originally bought Crane, we basically told the market that it's roughly somewhere around the 13%, 14% EBITDA. It is not technologically advanced purchasing power when it comes to things like fuel and insurance and so on, you know what, they don't -- they didn't get the critical mass that we've got the ability to do that. In addition, the navigation systems that we're going to be implementing that are going to go live Jan 1 and onwards are going to provide significant guidance in terms of both daily, weekly, monthly, et cetera. So from an IT and IS perspective, those are huge tools for us. We're extremely technologically advancing compared to, I would say, 90-something percent of companies that are out there. So from that perspective, we'll definitely see a significant lift. So yes, there's maybe a little bit of initial cost in terms of implementing some of these processes and streamlining of everything over the next few months. But once we get everything on our navigation systems, we believe that this is a tremendous opportunity. It's going to open up a huge market. The U.S. is almost $1 trillion market. It is absolutely incredible as to how many thousands of customers you can obtain in the U.S. that have 10x, 15x, 20x the amount of revenue that your small to midsized Canadian company would have. So from that perspective, we're actually -- we're very excited on that level. We should really see some economies of scale in the -- probably after Q1 of next year.

Okay. But is it fair to say that on an EBITDA margin basis, kind of Q4 and Q1 will kind of be similar or lower than Q3 was?

I would say given the fact that this year has been a pretty soft year, I think that Q4, we're going to sort of broach that subject. I'd say Q4 is going to be, in general, given the circumstances of the market, it's going to be more of the same. Q4 is generally not a good quarter from a seasonality perspective. It might even be a tiny bit lower, but it's been a soft year. And Q4, of course, you're absorbing in Canada in October, you're absorbing Canadian Thanksgiving in November, you're absorbing American Thanksgiving, and in December, we're absorbing the Christmas and New Year holiday season. So generally, Q4 is really not a great quarter for anybody quite frankly, it kind of has this busy little spurt in the middle just to sort of help out in the retail environment, but other than that, it's got a lot of challenges. I'd say Q1 as well is never a great quarter from a seasonality perspective just because you've got January and February, and there isn't a lot of good retail, things generally are soft. That's from a seasonality perspective. Now layering on top of that, the cyclicality aspect of what's going on, you've got, I think in general, regardless of what's going on in regards of the strategy that we're implementing, Q4, Q1 are generally not good quarters. But with the technological investments and the strategic investment that we've made with Crane in Georgia, we believe that we're going to see significant benefits from this acquisition.

I'll also add just from an operational point of view in terms of Q1, especially. So once our integration, our physical integration and rebranding is really complete by January 1 or shortly thereafter, our push really is on the customer expansion. So we've already been meeting with customers that are new opportunities for Titanium with not just interstate freight, which Crane has been moving historically, Crane did not do any cross-border freight or any Canadian freight prior to Titanium, where many of these customers have those opportunities for us. So we expect the first quarter to be a farming time for us with our customer base to be able to leverage that. So it's not just a -- I wouldn't just look at the quarter from a revenue perspective, it's also a ceding ground for us.

Okay. That's perfect. And then maybe just lastly, in terms of your Miami location, I know it's a bit early, but I mean directionally that also is kind of performing as you'd expect?

It's Jacksonville.

Sorry.

All right.

I wanted Miami, but -- so it's Jacksonville.

Go ahead.

Yes, Jacksonville is going really, really well. In fact, we're very excited. The -- we're like 90% done with the leaseholds, and we're starting with the interviewing process, and we are very excited that before the end of the year, it's going to be basically fully ready to run both physically and technologically. And we should start seeing growth quite albeit, I just said Q1 is never a great quarter, but that's a great time to go and look for people because everyone else is also slow so -- usually. So it's a good time. We're going to be hiring more and more people starting January and onwards, and we'll definitely see growth, and it is a growing town, it's a growing state. So we're actually really excited, and there's actually a Crane customer that's in Jacksonville as well. So we're definitely leveraging those relationships. So there's a lot of really great overlaps here.

That's great. Sorry about the Miami thing. I think I just had the holidays on my mind.

Well, put a smile to our face too, it's all good.

Yes. Fair enough. Take care.

Our next question comes from the line of Gianluca Tucci of Haywood Securities.

If I can start off by asking about your margins. I'm wondering if there's anything in particular that you're doing on the trucking or asset-light [ reservation ] front in the context of the market environment we're presently in right now?

So definitely, we have a lot of cost control measures, like we said, right now, the market is soft. So we can -- we have to do what we have to do. So there's a lot of cost control measures. We have recognized a lot of savings on our fleet operation cost that by just looking at some of our navigation system, and we found areas where we could improve on with a temporary move on at least to drive that or to maintain that margin on Titanium proper. You know that Crane is going to be a little different in terms of the margin profile. So there's a lot of that. Some of the savings that we recognize is completely -- it's a little out of control, fuel pricing, we have mentioned a couple of times that FSC has come down. That's one of the main reasons why our revenue was down. But that -- the good side of that is our fuel is also down. So there's a part saving on that end as well. Yes. So we do have savings on stuff that we can control and stuff that we can't control that drives the margin where it is. We are happy to pass that margin. But one of the big things is that Crane is only 2 months in, so we don't have a full quarter margin profile with Crane in there. And as we incur more integration costs, that's going to drive [ that 100 percentage ] as well. And then I'll just turn -- I'll pass it off to Ted to talk about how we are able to maintain our...

Yes, I mean, we -- yes, we've got also some variable costs in the mix, in particular, you've got all sorts of cost structures that can scale up and scale down. Even -- I mean I just want to add one thing, for example, we've got a very new fleet, just first cycle back to trucking, a lot of the fleet has been refreshed. We don't have -- our average age of our truck is like 1.6 years now. I mean, 90-plus percent of our trucks are under warranty at this point in time. So we also have a very high cost control right now in R&M. So that's a really big one. So we do have a lot of areas where we've got cost of scale up or scale down relative to the market. Our technology gives us a lot of navigation and because the tech is very, very dialed into minute-by-minute transactions, and it gives us a lot of navigation, we're able to make decisions very quickly. Our margin profile is based on a lot of technological navigation. I mean it's -- think of it as our daily minute-by-minute navigation, our GPS navigation of where we're going, like GPS in your car, GPS in your plane, it's very robust from that perspective. So I think that gives us a lot of, call a lot of power from -- sort of from a profitability perspective and giving us the ability to weather the storm on a profitable basis given the circumstances, I think it's really -- it's more exciting than anything else in the sense that I know that as soon as the cycle turns, and it is in the process of shrinking right now. I mean if you look at the stats of your net new authorities on a monthly basis, the report that comes out, and we all look at them, whether it's FreightWaves or FTR or any other publications, we look at net new, and it's, of course, every month now you've got negative net news, so the market is shrinking. At a certain point, it's going to hit an inflection. As soon as it hits that inflection and you know what, our systems are just going to kick into overdrive and it's going to be a complete reversal of what's going on. As soon as that happens, you know what, I mean, people are going to see it coming.

Right. Yes. No, I totally hear you and I concur. And it's great to hear that the integration plans with Crane are on track and according to plan. I think Marilyn touched on this, but can you speak to the early new revenue opportunities you're seeing by having hard assets in the U.S. now? Are you at a point to be able to quantify a pipeline of new business opportunities at this point?

Certainly, as we've said from the beginning, having assets on the ground in the U.S. is definitely a market opener for us, just as it was for us many years ago, when we started with our Logistics business and then added assets to the mix, that is certainly an opportunity. In these times that are unfortunately less robust. Having assets on the ground is definitely a key conversation piece with customers. So it is definitely an opportunity for us. And we do see it as a significant growth opportunity for us, both on the brokerage side with the opportunity coming from it and on the asset side.

Okay. And I appreciate that context. And like with all the capacity adds coming offline, particularly in the U.S., have you been able to capture some of that market share at this point or is it still too early to say?

It's still very early. We're just focusing now on their existing customer base, which is good and just leverage the information we have on that. We're just putting in our tools, so that's part of it. Once we have complete visibility of all operations, like with most smaller companies, there's a lot of offline paper processes that we need to automate and we're going through that right now. That's why I always kind of look at it as there's 2 stages, first is sort of your integration and that is your optimization. Once we get to the optimization stage, which will be in Q1 for sure, that will be where we really start to see a benefit.

And for Alex lastly, can you update us on your CapEx plans for the next 12 months?

Yes. So very excited to share that our fleet, our truck side at least is completely done, where you can see from our MD&A as well, we're not buying. We don't plan on buying any trucks next year. So -- and trailers, we have caught up entirely, and going forward, it will just be maintenance. So you see that there's $170 million so far, and that's probably going to be the number for next year. Our fleet is pretty new, and that also reflects on the cost control because the R&M like Ted said is significantly lower. So we will maintain the fleet that we have now and just replace trailers on a needed basis. And that's it. So that's [ $14 million ] next year or in the next 12 months. And as needed, we'll probably do another [ $14 million ] a year after. Maybe we'll go up to 200 trailers, maybe 250 trailers, so it won't be too significant.

That's great color [indiscernible].