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

Good morning and welcome to Titanium Transportation Group's Q4 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, Tuesday, March 19, 2024. A replay of this call will be made available until midnight on April 2, 2024. 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. Throughout 2023, the transportation and logistics industry experienced unfavorable market conditions, which resulted in industry-wide reductions in volumes and transactional freight rates. Against this backdrop, Titanium demonstrated strong operational and financial performance while executing a strategic U.S. asset-based acquisition. The Oakwood, Georgia purchase provides a foothold for our continued U.S. expansion. In the fourth quarter of 2023, we generated $119.3 million in revenue, a 7.6% increase over Q4 of 2022, and $14.9 million in consolidated EBITDA, flat on a year-over-year basis. This is a testament to the company's structure of being almost equally asset- and asset-light based, resilient, disciplined management focused on operational excellence. On an annual basis, we delivered consolidated revenue of $438.7 million, an EBITDA of $52.9 million, and cash flow from operations of $40.7 million, making 2023 the second-best year in company history. We accomplished this strong financial performance while also returning $3.6 million to shareholders via dividends and buying back $2.6 million in stock. As a company, we continue to prove our ability to navigate challenging economic environments and the strength of the Titanium business tools. When comparing financial results on a year-over-year basis, it is easy to discount our performance, especially since 2022 was a record year. However, it is crucial to consider the significant headwinds that the transportation sector faced during 2023. While we're not immune to these challenges, I am proud of how the team proactively navigated through this environment to achieve stable results with a slight volume decrease. Our financial performance and prudent allocation of capital throughout the cycle supports and demonstrates our ability to execute on the growth strategy. As I've outlined on previous conference calls, our commitment to scale our business in the U.S. market will be the major driver for our next stage of growth. In 2023, we laid the foundation for this growth with the acquisition of Crane Transport, Inc. in Oakwood, Georgia. With approximately 200 trucks in its fleet, generating about USD 60 million in annual revenue, the addition of Crane expanded Titanium's service offerings to current and new U.S. customers while complementing our existing freight brokerage services. We expect Crane to be a core asset in our business and enable customers to access a comprehensive freight management offering, driving growth in Titanium's U.S.-based logistics business. Our team has worked diligently on the new brand integration since the closing of the acquisition on July 31, 2023. We're pleased with the pace of the integration of Crane's operations as it migrated onto Titanium's technological and financial platforms effective January 1, 2024. As highlighted during our Q3 conference call, we anticipate a temporary adverse effect on margins during the period of integration. This was reflected in the results of our Truck Transportation segment during Q4. EBITDA margins for the segment decreased by 3.5% compared to the same quarter in 2022 as a result of the ongoing integration and the negative impact from overall macroeconomic factors. Despite these temporary headwinds, our medium- and long-term outlook remains positive. Furthermore, we continue to strategically invest in people and technology. We consistently innovated and added new features to our best-in-class customer and carrier web-based portals, Titanium Vision and Titanium Fusion. Our team of freight transportation experts and data analysts developed new ways to augment our operations, which allowed us to control operating cost pressures and mitigate the macroeconomic impact to our business. All of these enhancements allow for scalable future growth while exercising prudent financial management, especially highlighted during periodic times of economic uncertainty. Now, turning to our segmented results. Our trucking business continued to drive growth. We delivered revenue of $67.8 million in Q4 2023, a 32% increase as compared to the fourth quarter of 2022. EBITDA margin came in at 19.1%, a decline from Q4 2022. As I mentioned previously, this was mainly due to the segment absorbing the majority of the integration costs from the acquisition of Crane as well as soft economic conditions. Annually, this segment generated $231 million in revenue, a 7.8% increase over fiscal year 2022. EBITDA for fiscal year 2023 came in at $38.9 million, an increase of 12.7% over 2022, with an EBITDA margin of 19.7%. Consistent with our commentary last quarter, the current freight environment impacted the Logistics segment of our business. Overcapacity in the industry and weak oil prices exerted downward pressure on transactional pricing. Additionally, transactional and contractual volumes decreased due to shifts in consumer behavior. Despite these pressures, Logistics generated revenue of $51.9 million and EBITDA of $4.7 million in Q4 2023. EBITDA margins for Logistics during the quarter were 9.9% in Q4 2023 compared to 12.2% in Q4 of '22. In Q4, pricing pressure was the main factor behind the 14.9% decrease in revenue. Despite revenue challenges, we're encouraged by the 9.3% volume growth year-over-year in Q4. This marks the second consecutive quarter where our team grew volumes organically, notwithstanding sluggish market conditions. On an annual basis, Logistics generated revenue of $212.4 million, EBITDA of $17.8 million, with EBITDA margin of 9.4%. Titanium's success is founded on the strength of our people, business processes and technology. With the acquisition of Crane as well as our developing freight brokerage offices, we remain focused on maintaining profitability while building toward our future growth. Moreover, we remain strongly committed to our goals of social responsibility through safety. As a testament, this year, for the second year in a row, we were a finalist in the Northbridge Transportation Safety Award and among the top 5% of the nation's safest fleets. In addition to social responsibility, this has real-world applications in terms of Titanium's profitability by driving lower operating rates. The headwinds experienced by the transportation and logistics industry in 2023, including overcapacity, the adverse effects of rising interest rates and increased operating costs have persisted in the first 2 months of 2024. Despite this, we believe that conditions will improve in the second half of 2024 and are beginning to see signs of improvement as excess capacity continues to exit the market. Irrespective of end market conditions, we remain optimistic that by drawing on our proprietary technology systems and experienced team, Titanium will continue to execute on our growth plan and deliver profitable organic growth in 2024. With a refreshed fleet and reduced capital expenditures, we expect to generate substantial free cash flow over the next 24 months. We strongly believe, as we always have, that a prudent capital management strategy coupled with good governance is the backbone to current and future long-term sustainable growth. As a result, we're introducing 2024 full year revenue guidance in the range of $490 million to $510 million and EBITDA range of 10% to 12%. Furthermore, as we have previously stated, we anticipate robust free cash flow for 2024 and 2025. Our capital allocation strategy prioritizes debt reduction while maintaining dividend payments and opportunistic buybacks of our -- via our NCIB. Our continued focus remains on scaling for future growth and generating long-term value for our shareholders. With that, I'll turn it over to Alex for a more detailed discussion of our financial results for Q4 and fiscal year 2023. Alex?

Thanks, Ted.

Take it away.

Thanks. In the fourth quarter of 2023, on a consolidated basis, Titanium generated revenue of $119.3 million compared to $110.8 million in Q4 2022, a 7.6% increase. We delivered EBITDA of $14.9 million, flat sequentially, with EBITDA margin of 14.2%. For the full year, Titanium recorded consolidated revenue of $438.7 million, with EBITDA of $52.9 million and an EBITDA margin of 13.8%. Diving deeper into segment performances, the Truck Transportation segment saw revenue of $67.8 million, an increase of 32.1% over Q4 2022 and EBITDA of $11.1 million, with an EBITDA margin of 19.1%. As Ted mentioned previously, it is important to note that these results are despite this segment having absorbed a significant portion of integration costs, totaling about $446,000, resulting from the acquisition of Crane Transport. We expect this to last for the next few quarters. On a full year basis, Truck Transportation generated revenue of $231 million, a 7.8% increase over fiscal year 2022, EBITDA of $38.9 million, an increase of 12.7% over 2022, with an EBITDA margin of 19.7%. The Logistics segment generated revenue of $52.0 million compared to $61.1 million in the comparative period. EBITDA was $4.7 million compared to $6.6 million in Q4 2022, with an EBITDA margin of 9.9%. Annually, revenue from Logistics was $212.4 million in 2023, with an EBITDA of $17.8 million and EBITDA margin of 9.4%. 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. To conclude, I would like to highlight that our focus is to deliver and continue to build a strong balance sheet as it will be vital as we navigate these economic headwinds. I would now like to turn the call back over to Ted.

Thank you, Alex. That's awesome. I believe that we entered 2024 from a position of strength and will now focus our free cash flow on improving our balance sheet following the acquisition of Crane. To reiterate, while we anticipate continued macroeconomic uncertainty for the first half of 2024, our expectation is that the market will improve towards the latter part of the year with reductions in capacity to the freight market, enabling additional organic growth and driving value for shareholders. That being said, Titanium is ideally positioned to weather these conditions and drive growth while the industry cycle turns. We strongly believe, as we always have, that a prudent capital management strategy is the foundation to future long-term and sustainable growth. With that, I'll turn it over back to the operator and open the line for questions. Thank you.

[Operator Instructions] Your first question comes from Steve Hansen with Raymond James.

This is Robert on for Steve here. Two quick questions from -- just first one is in the release, you guys mentioned signs of seeing excess capacity kind of exiting the market. Are you guys able to provide a bit more color on this? And at what level does supply have to get to kind of before we get back to normalization? And then secondly, correspondingly, are you able to provide a bit of additional color on kind of the end market side? And are there any specific regions or industries that have bounced back a bit faster than others?

Okay. So I think the first part of your question was kind of relating more towards what are the components that lead us to believe that capacity is tightening, correct? I'm just trying to wrap my head around that.

Yes, for sure. Correct.

Okay. So I recently looked at a stat, for example, on Loadlink, where the number of trucks-to-load ratio that was recently published came down from 4:1, which was a record, horrifying 4 trucks for every 1 load that it's kind of like this one little carcass where you've got a bajillion hyenas that are all trying to feed off this one little load. So it came down from over 4:1 to actually just over 2:1, which is really a great sign showing that there are more loads available on the spot market. So number one. Number two, you're seeing, obviously, record exits over the last few months, if you take a look at the FTR reports on net cancellations in the United States from a DOT perspective. Certainly, those are coming down quite quickly. And then even you're seeing fleets are shedding capacity by virtue of the fact that used equipment is a lot cheaper right now, so there's clearly less demand for equipment. So good, solid, different elements that are supporting that. So your next component, I think, in your list was, I think, relating to where do we see this, I believe, in terms of capacity. Do you mind actually just repeating the second part of your question?

Yes, for sure. I guess moving on to more end markets is, are there any specific industries or regions that have kind of bounced back faster than others and just any other commentary on the end market side?

I'll step up for that. It's Marilyn. So I'm not seeing anything drastic. We are seeing a turn in the flatbed region just a little bit more aggressively than we have all year, really. So we are seeing that a little bit. In general, the customer mood is seeing an increased restocking sort of position where we're seeing more normal volumes and cycles coming back up, where we've seen it very thin for the last little while, with a lot of customers living off already established inventory or overinventory that they had in their warehouses. So we are seeing a bit of a turn in that in terms of a more normal environment for volume of freight.

I'm not sure if we answered the entire question -- all the questions, but is there -- hopefully, is there more that we can assist with on that?

No, that should be all good.

Your next question comes from Yuri Zoreda with Canaccord Genuity.

So just a couple from me. First, on the trucking segment's EBITDA margin profile. It looked strong to me at 19% and higher sequentially despite your ongoing integration of Crane. So I was hoping you could speak further to the drivers behind that and your margin expectations for the first -- for the segment in the first half while the integration is still ongoing.

So margins for Q4 was slightly stronger than Q3. And that is a good indication. There is some drag with the integration cost from Crane. But overall, we're happy with the Titanium proper's performance. Our volume, like Ted said, it was only a very slight decrease while our pricing has remained pretty steady. We have put in some cost control to mitigate some of the cost increases, and some of the input cost has already come down, such as fuel with fuel pricing. So it has helped our margin profile a little bit with vehicle operating costs coming down. Looking ahead into Q1, we expect the margin to be a little pressed down because of the Crane integration, but we don't expect the market which has not yet recovered. But we don't expect that to be too -- that's going to affect Titanium trucking too much because we are not industry dependent on any one sector, but we are seasonally affected. So Q1 is usually our weakest quarter. So we will see margin pressed down a little bit during this quarter. That's our expectation.

I think that's a great point. Yes. The general seasonality is that Q1 is usually weak quarters, Q2 is strong. So...

Okay. That's great color. And just a second one from me. CapEx wise, it looks like $29 million, it was higher than what we had seen earlier in 2023 and where I had you. I might have missed something. But I just wanted to see if that was on Crane's fleet investments or other growth CapEx, and any color you could provide there. And as a follow-up, if your expectations for 2024 have changed on the back of that.

Well, thanks for that. And CapEx for 2024, as we indicated, is going to be around $10 million for the year. We're just refreshing some trailers. 2023 was bigger than expected, and that's because we were -- at the start of the year, we weren't sure if we were going to get the trailers that we needed to replace our older, aged trailers. We've mentioned in the first part of the year that we expected a certain amount. But if we can grab more trailers, we'll certainly do so because we need to catch up on that cycle. And I'm happy to say that in 2023, we were definitely able to catch up to the cycle. We have definitely spent a little more than what we anticipated at the start of the year, but that's not a bad thing because now our trailer fleet is refreshed as well. Next year, I'm only buying -- we're only buying 120 trailers. That's lower than what we anticipate on an annual basis normally. So that's where we stand on our CapEx. Both our truck and trailers is a newer fleet, and we are happy to be able to realize the benefits of our newer fleet going forward.

Your next question comes from David Ocampo with Cormark Securities.

My first question here is just on your guidance. I mean a margin profile of 10% to 12%, that's below even the margin that you guys did in Q4. That's before factoring in any synergies with Crane and a rebound in H2. So I'm just curious if there's any conservatism built into your numbers.

Again, we -- I think, most people are reasonably confident that this year is going to be a year of inflection. We are conservative, I would say, by nature, in terms of how we run the business, but we believe that given the existing circumstances, the range of 10% to 12% on the low versus the range of 10% to 12% on the high can be sort of the moving target, depending on when and to what extent we're going to see some an inflection, right?

Okay. And you gave some color on the Truck Transportation side in terms of margin profile as we head into 2024. Just wondering how that looks for Logistics because it does seem to be hanging in a little bit stronger than I expected in the high 9% range for the most recent quarter.

And I'll step into that, and maybe Marilyn can fill in the industry color a little bit afterwards. The margin profile for Logistics has been relatively strong. Part of that is our volume growth. So we were able to offset pricing decrease with more volume at a steady margin. So that's what's helping drive up the margin because we were able to recognize a little more volume from our new offices, which is exciting. And both Jacksonville and Arkansas is now fully functional. Happy to report that. And we continue to look for freight in different areas where we didn't have before, and some of them are higher margins than our existing customers. So that's one of the reasons why Logistics is growing. And another part of it is we're utilizing our tech. We're looking for areas where we can realize a better supply force, better margin profiles just in different sectors. And that's been a great help to our Logistics operations team to realize, like you said, the 9.9% and upkeep that margin profile.