Triumph Financial, Inc. (TFIN) Earnings Call Transcript & Summary

Good morning. It's 9:30 in Dallas, and we're ready to get started. Thanks for joining us this morning and for the interest in our second quarter results. We're glad you're here. With that, let's get to business. Aaron's letter last evening outlined an outstanding quarter. We saw material expansion on our core initiatives against the market backdrop that finally gave us some tailwinds. The positive momentum is palpable, and the results of that are visible in Aaron's comments in the shareholder letter. That quarterly shareholder letter published last evening and the quarterly results will form the basis of our call today. However, before we get started, I would like to remind you that this conversation may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no public obligation to publicly revise any forward-looking statement. For details, please refer to the safe harbor statement in our shareholder letter published last evening. All comments made during today's call are subject to the safe harbor statement. With that, I'd like to turn the call over to Aaron for a welcome and to kick off our Q&A. Aaron?

Good morning, everyone, and thank you for joining us. Before we begin, I'd like to welcome Ben Volkwyn, our Head of Enterprise Data and Intelligence, who is joining us for today's discussion. I hope you'll ask Ben more questions than me because his accent is certainly more pleasing to listen to than mine. In the Q&A on the last earnings call, I referred to the freight market with the statement that the market may be changing. And as we sit here today, I think I can say definitively that the market has changed. We are in a different market. And this market is good for many, but it is also difficult for some. And we tried to explain that in the letter we published yesterday. And so I would say if you look through the noncore expenses and the noise in the quarter, what you will find for Triumph is a business model that is performing materially ahead of its recent history. And more importantly, to me, we are seeing validation that our value chain is working and delivering what its promise to the market. And so with that brief introduction, I will turn the call over for questions.

We will now move to our question-and-answer session. [Operator Instructions] Our first question will come from Joe Yanchunis with Raymond James.

So in the shareholder letter, you noted that the original 4Q '26 EPS target of roughly $0.50 to $2 run rate assumed average transportation invoice prices of about $1,800. So based on the sensitivity you've previously provided, today's 2,200 invoice environment seems to imply an incremental $0.20 to $0.25 a to that quarter, on top of that guide. So 2 partners here. One, is that the right way to think about your outlook? And two, aside from higher noninterest expenses and a slower contribution from the Intelligence segment, what are some of the other things that have changed that would impact this outlook since you originally provided it?

So Joe, the way that you characterize the impact of invoice prices is solid. We do have about a $7 million annualized pretax income change for a $100 change in invoice prices over the course of the year. So that math is pretty straightforward. So yes, I believe that you've characterized that correctly. As far as the other things that might impact the outlook going forward, it's really -- obviously, any changes in invoice prices would be the biggest mover. But the core trends are pretty well in place. I think that the continued momentum of our penetration in sales is kind of what drives us from where we are today through the rest of the year. Shouldn't see a whole lot of volatility in expenses beyond what we've already called out. We are continuing to seek ways to get more efficient, looking for about $98 million in the in the current quarter in Q3 and -- excuse me, 99% in Q3 and about 98% in Q4. Beyond that, you can just expect us to continue to maintain that discipline going forward.

Okay. I appreciate that. And now I want to shift everything a little more strategic question. So Amazon, they've been steadily expanding Amazon Freight recently introduced Amazon supply chain, bringing together all these logistical capabilities under the single platform. As Amazon continues to build a more integrated logistics ecosystem, how do you think about the potential impact on the brokered freight market? And does that represent a competitive threat to Triumph over time? Or could it ultimately create additional opportunities for your payments and intelligence platforms.

Yes. Great question. And I think that there are several people in the market who actually move freight who are better equipped to speak to whether Amazon is truly a competitive threat to the established brokerage community or not, so I will defer to those experts. What I would say is Triumph moves data and money. And last time I checked, Amazon, just like anyone else, needs somebody to move money on their behalf when they hire a carrier to run for them. So if somebody is going to be active in brokered freight, we're going to be talking to them and trying to meet their financials, their liquidity and their data needs. And our view on that doesn't matter whether it's Amazon to name on it or any other broker. We're going to give them our best efforts to help them achieve their business goals.

Your next question will come from Timothy Switzer with KBW. .

Good to hear. Is there any update on the 20% transportation revenue growth year-over-year you guys are expecting for Q4. I mean it seems like you'll at least easily beat the factoring mid-teens guide you guys gave. So just curious on if there's any updated numbers you can provide on that.

Well, Tim, I would say the most updated numbers I could give you, you can find in the shareholder letter. And one of the things I wanted to point out in that letter is roughly, if you were to just pull apart the increase in invoice sizes we've seen as a result of supply constraints. I peg our organic growth in the mid-teens, like pretty much right on par with what we told the market, our North Star metric was for transportation revenue growth. So my own view is that we are organically growing across almost all of our segments by deepening our relationships with existing customers, delivering more value to them, therefore, delivering more value to us. . And I think most encouragingly, and I would not miss this by winning new business, especially in our factoring business, and you're talking about winning new customer relationships in a marketplace that is shrinking, that should not be overlooked. So put all that together, that mid-teens organic core growth that we held ourselves accountable to. Add on top of that, the market forces as a result of what's going on in the Middle East, supply reduction as a result of litigation, legislation, regulation, all of these things, and that's how you get to that 30% growth. So it's very difficult for me to see how we won't eclipse the growth target for transportation revenue growth by a material amount at the end of this year. Some of that, I think, we deserve credit for because of what we've done. Some of that appropriately, we should point out the market has changed. But one last thing I'll leave you with. The market was never going to stay at $1,800 invoices in perpetuity because the input costs for carriers have gone up so much, they could not earn their cost of capital. Now I'm not smart enough, and I don't think anyone at this table is smart enough to have predicted for you absolutely when that was going to change. We just knew that the market would change. And what's gratifying for us, I can speak for me. What's gratifying for me is that we built a business model that we believed would do very well when the market normalized and return to what I believe is equilibrium. I don't think we're anywhere close to even where we were in 2021 if you inflation adjust those numbers. But the business model is working largely as we predicted. So I gave you a lot there, but I just want you to understand that we're organically winning business like we called our shot we would do. And then undoubtedly, we're benefiting from normalization of the market.

Okay. Yes, that was very helpful. And then I had a few on loan pay looked like some great trends there, especially revenue per active carrier getting really close to that $750 million number you guys have talked about. If I recall, I think you guys are kind of trying to finalize some new features and products within load pay by the end of Q2, and then you're going to start pushing for growth that product even harder than you have been. Can you update us on are all those features in place? And should we expect an acceleration in growth now in that business? .

Absolutely. And we're really proud of the work that we got done in the first half of the year. We've added the ability to do factoring, banking, integration with fuel and some of our intelligence all within a single tool for our carrier population. And we've seen that, as you mentioned, come through in both the account growth numbers and revenue per account and what's really fun for the team to see is that our revenue is growing faster than our account growth. And so there's a lot of things build on. As we look into the back half of the year, we think we are uniquely positioned in 3 ways to keep winning share. right? We have distribution that's unparalleled based on the number of carriers that we touch across our entire payments network. We have integrations across 400-plus brokers, making load pay the best place for carriers to come receive payments. And last but not least, we differentiate ourselves in our economics by being a bank at the end of the day. So we're really confident about the back half of the year, and we think we're going to see trends continue in the way that they are.

Okay. And if I can get 1 more on the expense outlook. Just given some of the noise with the incentive accruals at the end of the year. If we put those aside, like how should we think about the outlook for '27? Is it down from that $98 million with more cost saves -- or is there going to be a modest growth from that? Just kind of hard to tell if all the incentives going around.

Sure. It likely trends a little bit higher. I would tell you that any incentive accruals that hit in the back half of this year would reset at the beginning of next year. So the bar will get reset higher than it was this year. So any incremental incentive payments that we have next year would have to be because we outperformed our targets next year. But we do always have compensation resets and so forth. -- and there will be a lot of churn underneath the surface as we're looking to deploy resources into the most effective areas. But I would expect those numbers to trend modestly higher next year.

And just to add on to that, I think it's appropriate analysts, investors focus on expenses, and I completely understand that. What I'm focused on is operational leverage. So if expenses increase next year, that can only happen if we grow revenue more than expenses. And we have generated a significant amount of expense savings over the last few quarters as we've really doubled down on efficiency and technology deployment and streamlining the things we're doing. . But we have intentionally taken some of those savings and redeployed it into a stronger sales organization and into other things we're working on that we believe over the long run will create more investor value. So as we get to the back half of this year, we'll start getting more explicit with you on what we expect expenses to look like for the year 2027. I completely agree with Brad. I think that those expenses will be slightly up. Underneath that, a lot of things are happening. There will be material expense savings in places and there'll be investment in other places. But as importantly or I think more importantly is each of those North Star metrics has in it an idea that it's not just revenue growth, it's also margin expansion. And so we're going to only deploy those dollars if we think that we can grow margin and revenue and ultimately push that to the bottom line for the benefit of our investors. So I hope that helps. That's at least how we think about using the resource that we have of expenses and really using it as an investment to create shareholder value.

Your next question will come from Matt Olney with Stephens.

Eric, similar to your last point, I want to ask more about the factoring business. And the operating margin there looked great this quarter. But as you mentioned in the letter, much of that's from the improved invoice pricing. Where is the company as far as moving down this cost structure with technology? I'm trying to appreciate that, that longer-term margin could be quite a bit better than your goals if this higher invoice pricing continues and the cost structure improves?

Yes. So if you're asking from an enterprise technology and efficiency standpoint, I would say we're in the early innings of a game, we never intend to end, right? I mean if you think about Triumph's journey, and Matt, you've known me for a long time, you've known this company for a long time. we've generally been pretty good at growing revenue, being creative, at least compared to -- if you set our peer group as banks, which I'm not sure is exactly where our peer group is. And what you've seen in this down cycle, if you just go back, think about '21 and '22, the market is incredibly demand-driven. We're making a significant amount of money. We're investing in things and then all of a sudden, the music stopped, and you saw all those shareholder letters. And what we said was the plan was to stick to the plan. We were going to focus on value delivery to our customers. What I should have emphasized more at that time, what I should have understood more at that time is not just using technology for the offensive application. I mean you have to do that. Your audit product has to be great. Your payments product has to be great. Intelligence has to be great. But to make yourself more efficient internally. And I would say for a season, that was lower on the priority list. That is no longer the case. I expect you will see the organization and Kim's leadership in factoring continue to drive automation which not only increases the number of invoices per FTE, therefore, creates operating leverage but also improves the customer experience because you got to put the customer at the center of this thing. So -- all things being equal in what is a cyclical business, as you all know, I would expect margin to continue to increase because we will get more efficient. We have a playbook we can run, all things being equal, I would expect revenue in factoring to grow because we have a great sales team and as has been alluded to already here, the best distribution platform in the marketplace for both our own business and factoring as a service. So 40% is a great place to be. And you cover other finance companies like the 40% is an exceptionally high operating margin in a business like this. I want to finish with one last thing because I think it's very germane to that. I want to see factoring get above 40% and stay there, which would be a 5% to 7% return on average assets and that's tremendous, and that's very profitable. But I also want to point out, and this is really important for long-term investors. There is more to factoring than the revenue that it generates. -- factoring and I didn't maybe used to think that way, but factoring is now the entrance into the Trump transportation technology platform. And so these factoring customers now are becoming load pay customers, equipment finance customers, intelligence customers. And that is a change that 12 years ago, when we got into this business, that's not exactly how it was thought about, but it's how we think about it now. And so I think you'll both see margin expansion in that segment, but you'll also see the intangible benefits across the enterprise. So I hope that helps.

Yes. Great point. I appreciate the color on that. And then switching gears over to the banking segment. Aaron, I can't help myself. I have to ask what the banking segment. We saw some nice positive trends in the second quarter, and it seems like it was, in some ways, the opposite of what we saw last quarter when the revenue trends declined. Coming into the year, I think we assume the banking segment would be stable with less volatility, but it's been the opposite so far. It's been more volatile than we expected. Any more color on kind of what we saw in the second quarter and were expectations of this segment from here?

Yes. So I view the second quarter is a quarter of progress for us, not a quarter of volatility. We had to do some things in the second quarter. We earned some new business that might have looked like volatility in the results. But as we set the stage for the third quarter and fourth quarter, we've created some additional efficiencies. We feel really good about the business we put on the books and our deposit -- our core deposit costs continue to be very stable. So I think the outlook is pretty smooth from here.

Your next question will come from Eric Bedell with Bloomberg Intelligence. .

Thanks for having me. I was wondering if we could just unpack the factoring segment a little more, particularly within invoice size. And could you tell us a bit about how much fuel surcharges changed the price of the average invoice in the quarter.

-- do you want to take that one? Or do you want me to take it I think you should answer it.