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

Good morning, and welcome to Titanium Transportation Group Q2 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 today, Tuesday, August 13, 2024. A replay of this call will be made available until midnight on August 27, 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. The second quarter of 2024 saw persistent industry-wide pricing pressures, particularly in the full truckload segment. Muted economic activity overcapacity, inflationary input costs, geopolitical and end market uncertainties continue to impact freight demand and industry-wide volume. Despite these challenges, we prioritized our strategic plan and our focused on optimizing and working with the constraints of the current marketplace through our technology-driven navigation systems. This approach translated into solid results. Titanium generated $115 million in revenue, a 14.7% increase over Q2 of 2023 and a $10.2 million in consolidated EBITDA from continuing operations. It is important to note that Titanium's ability to generate consistent results despite challenging market conditions is a testament to our diversified business model and our team's operational strength. Now turning to our segmented results. Our trucking business continued to drive growth. We delivered revenue from continuing operations of $59.5 million in Q2 2024, a 20.7% increase year-over-year. EBITDA margin came in at 15.5%, a decline from Q2 of '23. This short-term decline in profitability can be attributed to 2 key factors. First, the segment continued to absorb the majority of integration costs from the acquisition in Oakwood Georgia during an environment of economic headwinds. While we're leveraging advanced in-house analysis to identify and harness synergies in areas such as asset tracking, safety, routing and asset utilization, some of these solutions have been slow to impact profitability. Secondly, the truckload freight environment continued to exert downward pricing pressures into the first half of 2024. In particular, the full truckload segment faced significant headwinds due to reduced end market demands, leading to a 6% decrease in pricing year-over-year in the Truck Transportation segment despite our efforts to shift capacity towards sustainable rates. Truck Transportation saw an increase in volume of 24%, primarily attributable to our Oakwood, Georgia acquisition. We're encouraged by these developments and are confident that increasing targeted volume will exponentially drive profitability once market conditions improve. Aligned with our previous commentary, Titanium's commitment to scale our business in the U.S. market will 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 Transport. As their operations were migrated onto the Titanium technology and financial platforms. This directly contributed to significant growth within our Truck Transportation segment. As discussed, we've been experiencing temporary adverse effects on margins during this period of integration. That continued into the second quarter of 2024. Looking ahead, we expect Titanium American Trucking 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. In addition to capitalizing on the benefits of our Georgia acquisition, we focused our efforts towards delivering sustainable long-term shareholder growth within this challenging environment. Hence, turning to the logistics segment, we generated revenue of $56.2 million, up 6.6% compared to Q2 of 2023 with EBITDA coming in at $3.1 million in Q2 of '24. EBITDA margins for logistics during the quarter were 6.2% in Q2 2024 compared to 8.7% in Q2 of 23, a 250 basis point decrease. I would like to highlight that even with persistent pricing pressures during the first half of this year, continued sales efforts ensured that both our operating segments recorded volume growth year-over-year. Logistics volumes improved by 22% year-over-year. However, soft consumer sentiment weighed on transactional pricing, offsetting the revenue growth for the segment to approximately 7%. We're pleased with the strong growth of our Logistics segment, and we remain committed to grow this asset-light segment regardless of market conditions, particularly in the U.S. freight brokerage market. In alignment with our strategic goals, we divested redundant assets in the first half of the year and continue to evaluate our business units, which resulted in reduced operations for specific geographic areas, reducing our asset offerings in these areas. This decision was driven by a thorough assessment of current profitability and future growth prospects. Through the reduction of underperforming assets, we are better positioned to focus on more promising opportunities and markets. More specifically, we continue to actively explore opportunities to monetize noncore assets, which will contribute to an accelerated reduction in our long-term debt. In terms of cost control initiatives, we were able to find efficiencies by centralizing certain operational functions. Our use of technology allows us to continue to pursue additional opportunities for efficiencies as we deploy technological investments in artificial intelligence and our processes. We believe that AI will have a significant impact on the industry. With a refreshed fleet and reduced need for capital expenditures, we expect to generate substantial free cash flow over the next 18 to 24 months. Additionally, we're focused on monetizing underperforming equipment, which will help us further reduce debt. Our priority remains on meeting the growing needs of our customers, scaling for future growth and generating long-term value for our shareholders. We're taking this opportunity to revise our 2024 full year revenue guidance range of $440 million to $460 million and EBITDA margins of 8% to 10%. With that, I'll turn it over to Alex for a more detailed discussion of our financial results for Q2 2024. Alex?

Thanks, Ted. In the second quarter of 2024, on a consolidated basis, Titanium generated revenue of $115.1 million compared to $100.4 million in Q2 of 2023, a 14.7% increase. We delivered EBITDA of $10.2 million with EBITDA margin of 11%. Diving deeper into segment performances. The Truck Transportation segment saw revenue of $59.5 million, an increase of 20.7% over Q2 of 2023 and EBITDA of $7.9 million with an EBITDA margin of 15.5%. As Ted mentioned, it is important to note that these results are despite this segment having absorbed a significant portion of continued integration costs resulting from our U.S.-based acquisition. We expect this to last for the next couple of quarters. The Logistics segment generated revenue of $56.2 million, an increase of 6.6% compared to $52.7 million in the comparative period. EBITDA was $3.1 million compared to $4.1 million in Q2 2023, with an EBITDA margin of 6.2%. As part of our ongoing capital strategy, we continue to take meaningful steps to identify redundant assets in our portfolio and proceed to divest of these assets. For instance, during Q1, we sold approximately 21 acres of unused land in Cornwall, the proceeds from these asset sales, along with the free cash flow generated from our operations will be directed towards reducing that. This disciplined approach to capital allocation underscores our commitment to strengthening our balance sheet and enhancing our capital position. By prioritizing debt reduction, we are ensuring that we have the capacity to invest in future inorganic growth opportunities and steer through current economic uncertainties. 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. I would now like to turn the call back over to Ted.

Thank you, Alex. With the backdrop of this prolonged freight recession, we are reasonably satisfied with the performance in the first half of 2024. While we are beginning to see signs that market conditions are moderating, it is difficult to predict when end market conditions will improve. Navigating this environment has been challenging, but we are committed towards executing our growth plan and focusing on factors within our control. Our continued investments in people and technology have laid a strong foundation for success. By complementing these investments with strategic asset divestitures and fleet optimizations, we are well positioned to navigate the road ahead with confidence and deliver long-term sustainable growth for our shareholders. With that, I'll turn it over to the operator to open the line for questions.

[Operator Instructions] The first question comes from Yurisleidy Zoreda with Canaccord Genuity.

Could you provide additional color on the puts and takes behind the 2024 outlook provision? And what is included in the guidance for the second half of the year in terms of capacity leading the market?

Capacity leaving the market is definitely in fact, that we'll cover in a second. The earnings outlook that we have basically outlines that we are relatively stable in terms of volume, with modest volume growth. But there is still a transactional pricing pressure. So that's why there's a slight decrease from the last guidance. Profitability does have a toll because of the market condition, and that's what's kind of built into the guidance. And I would like to handle the first part of the question, which is the capacity leaving the market.

Yes. So again, we -- so Yuri, we expected that capacity would have left -- more capacity we have left the market at this point in time. We -- looking at the charts, the numbers, the industry all the different indexes and so on. If you look at that, we're just not seeing capacity leave the industry as quickly as we anticipated. Normal cycles would have had a better Q2. And I think that if you're looking at Q1, Q2 of 2024, it wasn't the capacity that I think in -- when we were talking about 24 in 2023, we expected Q2 2024 to be better. And the capacity didn't tighten the way we expected it to. So obviously, now that's something that we're taking into account, and we're adjusting for that. So that's why we believe that the second half of the year is going to be necessary for that type of an adjustment. You want to... No, go ahead.

Yes, thank you. That's helpful. And a good segue, I wanted to know if any of that was related to what you're seeing for the Crane integration. In the MD&A, you mentioned it is progressing at a slower rate than originally expected. I think you originally completion was expected in Q2, perhaps Q3. So could you just update us on the status of the integration and time line?

Sure. So the time line is as we outlined in the MD&A a little slower than expected. And that's -- a portion of it is because we are working through some of the soft integration that we spoke of in previous quarters where there are synergies that need to be realized in it. And because the market condition is slower to realize -- and -- but we're still on track. We're still progressing. And Marilyn, we'll have better color on that.

So from a physical integration pace, we are -- we have recently just successfully finished all of our integrations back office, front office equipment, et cetera. So we are now fully on the systems from that perspective. Now the optimization phase of the work is really starting and getting deeper into some of the customer base and some of the pressures that are in the marketplace in the U.S. market. So to Alex's point, it took a little bit slower to kind of I guess, find the successes in the integration largely because the market was soft and softening as we were progressing through it. So we're fairly confident now that now that we've got our navigation tools in place, and we're working on the culture and performance of the company overall that we're headed in the right direction with certainty.

I think that what's actually exciting about it is that that's a very strategic purchase. It opens up a huge market for us. And so one of the challenges that we ran into was you're integrating at the same time that literally the last year, we're talking 4 quarters. I mean we bought this thing we closed August 1. So that was kind of the middle of Q3 of last year. And we're kind of -- we just hit that 1-year anniversary. So during that time, as we're integrating the pricing environment in the U.S. is imploding. And so I think that, that made it a very interesting, call it, project. Having said that, what's really exciting is that we are now done, and this is opening up a lot of opportunities for expansion, particularly on the holistic freight offering that we have, which will now leverage our logistics division for a more -- a broader customer offering.

The next question comes from David Ocampo with Cormark Securities.

I wanted to circle back here just on Yuri's questions as it relates to potential failures. I'm curious if you guys are starting to see more of these appear in terms of acquisition opportunities or maybe even when it comes to bidding on volumes?

Yes. We're definitely seeing shrinkage. Again -- so David, I do look at the indices. We are seeing every month, there is net negative authorities. So there is shrinkage. In addition, we are seeing some green shoots, which is kind of interesting. We -- obviously, Q2 wasn't the Q2 that we would have expected traditionally in a normal seasonal cycle. But having said that, there's certainly some green shoots in terms of opportunities. We're starting to see some sensitivity in the market, which is kind of interesting as well. So from that perspective, green shoots, we're seeing customers actually get a little bit more nervous about the capacity, which is good. They're realizing that what this abundant capacity that's out there is probably going to balance, and we're hoping that it's going to happen in the near term. There's an old saying, right, what's the solution to low prices, lower prices. So I think that that's going to continue to beat up the profitability of the truckload industry, in particular, and that's going to keep causing capacity to shrink. So from that perspective, that is definitely, call it, economics doing what it's supposed to do.

And I guess when it comes to your own rationalization, exiting markets that may not be getting the returns that you guys are looking for. Are you guys in the first inning, middle innings or even in the back half of the game there?

In terms of -- are we talking divestitures?

Yes, your own personal divestitures are exiting markets that you don't think is attractive anymore.

I definitely -- I wouldn't -- I think we're in the third, like in innings 7, 8, 9 here. But having said that, we're not done. I mean, we're continuing to evaluate where we should be allocating our capital and we're making those decisions. And we believe that we're going to make the right decisions both in the short term and for the long term of the industry. The long term of the company relative to the industry and relative to where our strengths line where we're able to generate the best rate of return for our shareholders. So in terms of making those decisions, yes, we're definitely looking at our capital allocation strategy at this point in time.

I would say that when we're looking at that exiting marketplaces, or product lines that we're into now is a choice in the moment. We are -- we do have the ability to pivot very quickly that way. So I don't want to make it sound as though anything is a forever choice in terms of what we're looking at. And in terms of redundancy in the moment, we are able to identify and execute on whatever decisions or adjustments need to be made to address those available redundancies that we come across. It's just a matter of timing.

And then when I look at your deck, you guys still have 20 to 25 logistics offices in the U.S. as your target. Maybe you could walk us through some updated time lines around that and maybe even the potential revenue and EBITDA contributions, just given what we're seeing in the market today.

Yes. So actually, we are -- as you all know, we are 50% of our top line, roughly 50% of the top line is a brokerage, and that is an area that we're very good at. In fact, we have a significant amount of technological strengths as well as a broker. We are continuing to grow that product line. Brokerage grew both quarter-over-quarter and year-over-year in terms of volume. Our sales departments are doing a fantastic job. Offense is your best defense in this case. So having said that, we're going to continue to grow. We actually should have at this point in time, announced our next office, but we did run into a little bit of a delay with a landlord that we are working with. They ran into some issues and that sort of caused a little bit of a delay in terms of the process. We've got 2 management teams, in fact, ready to go for 2 more offices. So we're already working on that. So the growth will continue, in particular, in our brokerage.

The next question comes from Gianluca Tucci with Haywood Securities.

If I could just ask firstly on your volumes, nice growth on the volume side of things. I'm just wondering if, Ted, can you impact that a bit for us? Is that growth mainly onboarding new customers or expanding existing relationships?

It's primarily new, but it is both. So our existing relationships, which we're mostly a CPG company. We're not really luxury items. So our existing relationships continue. There is some slight growth there, but obviously, our existing customers are currently also in the maintenance mode for the most part. But what we are seeing, for the most part, is a lot of new business as well. So that, great question, by the way. I really appreciate it because there is a lot of excitement, as you can tell. A lot of our growth is from new customers, which this is all grassroots. I mean this is the stuff that's going to give us that next stage of growth as soon as things even just slightly tighten, we're going to see the benefit of our systems kick in and be able to leverage that exponential growth. So that's why we believe that a lot of these new customers that are on board are going to benefit from Titanium. And it's also indirectly an indicator that they're not happy with their existing supply base. So that's why we are excited about the fact that the majority of that is new and a little bit as well of opportunities that we leverage from the new Crane relationships, right? So you've got sort of several very positive ingredients that are intrinsic in this equation. And especially the new business, our new relationships through the Oakwood acquisitions, technology, efficiency, AI that we're currently looking at. And all of that is going to provide for a very high ROIC run rate of returns as soon as things tighten.