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

Good morning, and welcome to Titanium Transportation Group's Q1 2024 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 Tuesday, March 19 -- Tuesday, May 14th, 2024. A replay of this call will be made available until midnight on May 28, 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. During the first quarter of 2024, unfavorable market conditions persisted within the transportation logistics industry, muted economic activity, overcapacity, inflationary input costs, geopolitical and market uncertainties continue to impact freight demand and volume. I'm pleased to share that our team was able to successfully navigate through these disruptive industry conditions and deliver another profitable quarter. In the first quarter of 2024, we generated $115 million in revenue, an 8.3% increase over Q1 of 2023 and $9.5 million in consolidated EBITDA. As outlined on our previous conference call, we had anticipated these market conditions, and our diversified business model positioned us well to steer through them. Once again, these results reiterate Titanium's proven ability to deliver consistent results through an unrelenting focus on operational excellence, prudent capital allocation and a strategic model of almost equal asset and asset-light business segments. Turning to our segmented results. Our trucking business continued to drive growth. We delivered revenue of $59.6 million in Q1 2024, a 15.5% increase year-over-year. EBITDA margin came in at 12.6%, a decline from Q1 2023. As I mentioned previously, this 570 basis point decline in EBITDA was mainly due to the segmented -- the segment absorbing the majority of integration costs from the acquisition of Crane, as well as soft economic conditions. We expect to see growth in the second half of the year. The current freight environment continued to exert downward pressures on the Logistics segment of our business. Despite these unfavorable conditions, Logistics generated revenue of $56.2 million, flat compared to Q1 of 2023 with EBITDA coming in at $3.1 million in Q1 2024. EBITDA margins for Logistics during the quarter were 5.5% in Q1 of '24 compared to 9.3% in Q1 of '23, a 320 basis point decrease. I would like to highlight that even with continued pricing pressure during the first 3 months of the year, our team was able to grow volumes organically across both our segments. Truck Transportation saw an increase in volume of 23%, mainly attributable to the acquisition, which offset losses in volume due to strategic pricing decisions. On the Logistics side, volumes increased approximately 28% year-over-year. Our growth, notwithstanding economic challenges is not only a testament to the strength of our technology and people, but it's a reminder that we are uniquely positioned to take advantage of an eventual market improvement with the foundations we have built over the years regardless of economic conditions. Speaking of foundational platforms, Titanium's commitment to scale our business in the U.S. market would be the major driver for our next stage of growth. As of Jan 1, 2024, we started to see the benefits of our acquisition of Crane, as their operations were migrated on to the Titanium technology and financial platform. This directly contributed to significant growth within our Truck Transportation segment. As discussed, we anticipate a temporary adverse effect on margins during this period of integration, which was experienced during Q1. Looking ahead, we expect Crane to be a core asset in our business and enable customers to access our comprehensive freight management offering driving growth in Titanium's U.S.-based logistics business. In addition to capitalizing on the benefits of our Crane acquisition this quarter, we have directed considerable focus to identifying innovative solutions to achieve profitability within this environment. As we evaluated pricing concessions requests from our customers, we opted to remain committed to responsible rates to operate in this environment, which resulted in a loss of unprofitable volume. Furthermore, through advanced data analytics, we purposefully allocated capacity to sustainable or flexible markets. Overall, Titanium's steadfast commitment to deliver sustainable and profitable growth is the driving force behind every action we took during the quarter and continues to be our top priority, as we navigate this market. Despite the current economic challenges, we remain focused on strengthening our foundation of people and technology, all while enhancing our capital position. We're also committed to operating responsibly, whether through sustainable contractual pricing or unyielding fleet safety standards. Our capital allocation strategy prioritizes debt reduction, while maintaining dividend payments and opportunistic buybacks via our NCIB. Our continued focus remains on scaling for future growth and generating long-term value for our shareholders. With a refreshed fleet and reduced capital expenditures, we expect to generate substantial free cash flow over the next 18 months to 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 and profitability. Due to significant pricing pressures from ongoing adverse economic factors, we're revising our 2024 full year revenue guidance. New range is $470 million to $490 million, and our EBITDA margin target percentage has remained the same. Despite market conditions with the acquisition of Crane, as well as our developing freight brokerage offices, we remain resolute in preparing Titanium for future growth. We also anticipate the addition of at least one more brokerage office this year. With that, I'll turn it over to Alex for a more detailed discussion of our financial results for Q1. Alex, take it away.

Thanks, Ted. In the first quarter of 2024, on a consolidated basis, Titanium generated revenue of $115 million compared to $106 million in Q1 2023, an 8.3% increase. We delivered EBITDA of $9.5 million with EBITDA margin of 8.2%. Diving deeper into segment performances, the Truck Transportation segment saw revenue of $59.6 million, an increase of 15.5% over Q1 of 2023 and EBITDA of $7.5 million with an EBITDA margin of 12.6%. As Ted mentioned, it is important to note that these results include the segment having absorbed a significant portion of continued integration costs resulting from the acquisition of Crane. We expect this to last for the next few quarters. The Logistics segment generated revenue of $56.2 million compared to the same period last year. EBITDA was $3.1 million compared to the $4.6 million in Q1 2023 with an EBITDA margin of 5.5%. During the quarter, we took meaningful steps to identify redundant assets in our portfolio. These measures include the sale of about 21 acres of unused raw land in Cornwall, which closed earlier this month. This aligns with our capital allocation strategy, reinforcing our commitment to strengthen our balance sheet, rapidly paying down debt and improving our overall capital position. 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 we have a strong balance sheet, which will continue, as always, to be our focus, as we navigate these economic headwinds. I would now like to turn the call back over to Ted.

Thank you, Alex. Despite industry-wide challenges, Titanium delivered a profitable first quarter. 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 shareholder value. Navigating this environment has been difficult, but we have demonstrated that we have the right management team in place to execute our growth plan and take advantage of end market weakness. For the remainder of the year, we will remain focused on continuing to grow and diversify our customer base, leveraging the strength of our U.S.-based footprint, utilizing technology to strategically allocate capacity and continuing to deliver sustainable and profitable growth. With that, I'll turn it over to the operator to open the line for Q&A.

[Operator Instructions] Your first question comes from Yuri Zoreda with Canaccord Genuity.

So first, just on Logistics. I think you called out some potential margin compression in the last call, but I was a bit surprised by the magnitude compared to past quarters and given where spot freight rates are. So I was just wondering if you could provide any more color on the drivers -- or any other specifics behind that margin weakness?

Okay. So I'm glad you asked that. There's -- let's start -- a couple of things, right? We're going to start with the fact that there's a lot of pressure on pricing, a lot of competition out there right now. The pricing pressure is significant. And there's -- in a way, there's more pricing pressure than there is at this point in time and there's less movement at the carrier level. So there is a little bit of margin compression, number one. Number two, we're also dealing with the fact that there is an element of fixed costs in a brokerage formula. We do a really great job balancing fixed and variable, but there is an element of that. And the other thing is that we're actually still in growth mode. So albeit we're profitable, it's a little compressed. But what's really -- in a way, I'm kind of glad you asked this because I'm actually excited to answer this question because we're in growth mode in Logistics. So we are in the process of adding actually not reducing certain headcounts in particular. And those are headcounts that are going to be in -- that are involved in increasing volume, increasing growth building out new or additional offices this year. So we're actually a bigger broker today. In fact, we're a bigger company today than we were a year ago. Our brokerage has grown by over 22% in volume year-over-year. That's incredibly exciting. And as soon as things turn, that's going to explode.

Okay. Yes. That's quite helpful actually. And then, I think just shifting gears a little bit. I'd just like to ask about the overall dynamics that you're seeing so far in Q2 compared to Q1. Of course, you mentioned pressure, but I just want to know how that's playing out? And also, on the pace of the sequential margin improvement that you expect to see, given that you kept the margin guidance unchanged. So how do you see that playing out throughout the rest of the year?

Sorry, I just -- I'm trying to clarify the question here. If you don't mind, you're talking about the economic pressures of the pricing environment that we're currently in?

I'm talking about the dynamics in general in Q2 compared to Q1. Like sequentially, volumes, pricing, do you see -- are you seeing the same types of pressure? And then what does that sort of imply given the unchanged margin guidance for Q2 and the second half of the year?

So, good morning. Yuri, it's Alex. So obviously, we -- with our EBITDA margin unchanged, we do expect an EBITDA improvement over time. Q2 remains a little soft. It's comparable to -- it's a little better than Q1. However, our volumes like Ted said continues to be strong. We are expecting that in later half in the year that the margin will climb, so that we will be within the 10% to 12% range. That is our expectation going forward. If it's a Q3 or Q4 recovery at this point, it's difficult to tell.

I'll just add a little bit to that. In terms of our second half expectations of the year, we expect to continue to see capacity exiting the marketplace. We know that we'll have an effect on the current pricing market. We are hearing from our customers, who have also been down in volumes that they expect to see increased productivity in the second half of the year as well. So we're sort of aligned with that, and we've been very cautiously watching our customer volumes, as we go through that. But there is a little bit of a shift already in terms of telltales for the second half of the year in a positive way.

Your next question comes from Benoit Poirier with Desjardins.

Yes. Just on the contract rate front, are you seeing competitors being more aggressive than expected and undercutting the market? And when would you expect contractual rate to increase? Or maybe it's more a 2025 story?

I mean, nobody has a complete crystal ball. But I think we have seen some of that neutralize a little bit already. I think some of the, we'll call it, hypercompetitive undercutting of rates seems to have softened just a little bit, and part of that is, again, because a lot of the carriers have hit bottom, and the exits are starting, we'll call it, a bit of a purge is already underway. I don't think it's as far out as 2025. 2025 will be a continuation of the same story in terms of a realignment of shipper and freight markets, et cetera, with their carriers. But in terms of pricing in the current RFQ marketplace, it is neutralizing a little bit already.

Okay. Okay. That's great. And when we look at the integration of Crane last quarter, you mentioned that it was to continue the -- until the end of the second quarter 2024. We didn't see any mention at the MD&A. Any update on the integration of Crane?

So the integration of Crane is still ongoing. We didn't specifically mention the margin compression or how much of a -- quantify it because it is now in the second phase of the integration, where we are done the physical part. We're into the culture and optimizing the lanes and routes. So that takes time, and the cost is a little more harder to separate. But we are seeing a margin compression. And of course, the market as well doesn't help during this time. But we are expecting it to finish second quarter and third quarter this year. We are expecting that this will be a huge benefit to Titanium once it's completed, especially when the market conditions improve. And we are very excited that we -- Crane is now within our portfolio. And I'll pass it off to Marilyn for...

I'll say that we are on track as expected to our plans. As Alex mentioned, our integration physically was completed at the beginning of this year, 2024. I mean, we're in that optimization phase. We have now had the opportunity to get in front of a lot of new customer base in the United States, adding our names to RFQs and business opportunities that we expect to see our rate of return on, hopefully, by the second half of this year and certainly into the future beyond that. Remembering that Crane was a large door opener for us into the U.S. marketplace, both on the asset and on the brokerage side for exposure and leverage to some of our current accounts, some of the accounts we acquired through Crane and now new opportunities that we're getting into that we -- was a barrier for entry for us without having the assets in the U.S. So we're very excited to see, where Crane moves along. And it's completely on schedule for where we -- for what we had set up for.

Okay. In your -- sorry, Alex.

No, it's okay. I was just going to say it's purely a strategic acquisition, right, in terms of the fact that we're going to be cross-selling and that there's going to be holistic offerings that are going to augment significantly just the purchase itself.

Okay. That's great. And last one for me, in your MD&A, you mentioned committing to $8 million in CapEx towards the purchase of 100 trailers. You did about this figure in Q1. So does it mean that you're mostly done for the year? And also wondering, if you have any other underutilized assets you could monetize?

Well, as we continue forward, we are going to continue to evaluate underutilized or redundant assets in our portfolio. I can't say that we will or we will not divest of any of them going forward. One of the things that we are looking at, for example, is our trailer pool. As we refresh them, we're also looking for older excess-aged redundant assets. On to our CapEx, we are substantially completed in Q2. We have completed our refreshment cycle. So there are some CapEx in Q2. But going forward, that would be -- we're not expecting any additional capital expenditure unless the market requires us to.

Your next question comes from Steve Hansen with Raymond James.

Perhaps a naive question, so I apologize. But I just wanted to ask a bit more about the pace of the Crane acquisition and integration, particularly in the context of a softer backdrop. But I have to imagine that on the one hand, perhaps it highlights some of the cost redundancies a little more easily with a softer backdrop, but then at the same time, it might also make it harder to generate the revenue synergies on the other side. So just wanted to understand that dynamic a little bit and how you're thinking about it from -- I think you referenced already the physical side has already been done, now you're moving on to the more intangible stuff, but maybe just a bit more context around how you see that in the -- the integration in the context of a softer market.

Yes. So it's actually a very good point, and I appreciate you phrasing it that way. It is always easier to integrate a company when you've got tailwinds. And in this particular case, we're integrating, and we're dealing with a situation, where you've got headwinds. And that's one of the challenges. So one, you're looking at optimizing now, you're looking at making a company more efficient. But you're doing it at the same time, as you've got headwinds throughout an integration process. So that is definitely more challenging. However, again, having said that, we've got really good navigation systems. We have great technology. So one of the things that we're able to do is we're able to move them over our platform, do the analytics, use our boards, use our navigation tools and work through the circumstances and as well, not just the tech, but the tech and the right people in place, so that as soon as there is an inflection, we're able to take advantage of the opportunities. Again, for us, we offer a more holistic type of product. It is both asset-heavy and asset-light, so we're able to package that up and then that's kind of what we're moving that environment too. So it's not just trucking terminal in Georgia. It's essentially having both the ability to leverage our assets and our non-asset-based business throughout essentially the eastern seaboard and the rest of the United States. And that's kind of the way we're navigating through this cyclical component or cyclical time given the timing of the acquisition, right?

That's super helpful. And just to go back to one of the comments earlier about capacity starting to purge or get vacated from the system. I mean, are you seeing that in any specific market that you're covering in from your geographic standpoint or customer end market? I'm trying to get a sense for whether it's equally spread that purge or if it's isolated to some markets versus others or how you see it across your territory?

So it's -- from what I can see so far, what we can see so far, it's not necessarily geographical nor is it product line driven. It seems to be rather general across the board. As you know, when COVID was a thing, there was a huge amount of entrance into the marketplace, both in Canada and the United States. If you could buy a truck, you were in trucking. And then that is the sophistication required to operate a transportation company is now coming to fruition and reality for most of these carriers. So we're seeing that across the board. I don't think I'm seeing anything specific to [ reflect that or heat services ], et cetera. It seems to be rather generalized. I would say the provinces and states that it's most expensive to operate in, so Northeastern United States and your Ontario, Quebec part of Canada, where we focus in seems to be a little bit more harder hit largely because it's a little more expensive to operate.

Your next question comes from David Ocampo with Cormark.

Ted, when I look at your margin guidance, I mean, 10% to 12%, you guys kept it despite the weakness that we saw in the quarter. I guess, I'm curious, what do we need to see in the marketplace today for Titanium to come closer to that 12% margin? And I guess, on the more negative end, what needs to happen to see that 10% print?