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

Good morning. It's 9:30 in Dallas, and we're excited to chat with you this morning. Thank you for your interest in Triumph, and thanks for taking the time to join us to discuss our fourth quarter and full year 2021 results. With that, let's get to business. Aaron's letter last evening, discuss the quarter's results and introduced a new segment. We are excited about many things happening at Triumph now, but probably most excited about the opportunities we see developing from the density established in our network. We are helping America's truckers get paid with greater speed, accuracy and transparency than was ever possible before, and we're allowing our partners to benefit from our transportation technology investments. That quarterly shareholder letter published last evening and our 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 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 that 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?

Thank you, Luke, and thank you all for joining us today. As always, I hope that you found the shareholder letter valuable, both in looking back at 2024 and also looking ahead into the future. I am sure some of our announcements in the letter will generate many questions, so we will get to those quickly. But before I do, I want to say just a couple of things. Touching 50% of all brokered freight transactions in the United States is a big deal. It's worth celebrating. Eclipsing over $100 billion in total payments since we created our Payments segment is also a milestone worth celebrating. And it's those milestones and all that went into doing those things that has paved the way for where we go from here. It puts us in a position to help the freight industry transact confidently. That is our brand promise. And then we know that if we do that with ever-improving offerings, that our investors are going to be rewarded, our team members will share in this success because our customers will be delighted, and that's the work we're excited to do. With that, we look forward to taking your questions.

[Operator Instructions] Our first question will come from Timothy Switzer with KBW.

Now that we have entered 2025 and have a line of sight into which partners will be online this year, how much volume they will bring, are you able to provide some kind of quantified ranges around what payment volume will look like towards the end of the year and the associated pull-through to revenue on that? Or perhaps like a broad range on what the growth inflection looks like in the back half of the year, particularly with CHRW coming online?

I'll take that, Aaron. And I think what is the most important metric to keep measuring and keep track of for the payments volume growth success is that of the market share. And so as we said in the letter, we've eclipsed the 50% market share goalpost. And now we've moved that out for ourselves. And our goal at the end of this year is to be at 60% to 65% of market share, and we have a clear line of sight into that. The other metric to look at is to continue to watch EBITDA performance and improvement as we will continue to improve those metrics throughout the year as well. Certainly, revenue associated with some newer deals will be in the second half of the year and new products. So yes, you'll look for that to be weighted there. But again, EBITDA improvement and 60% to 65% market share. Anything you want to add to that, Aaron?

Yes, I think it's a great question. Melissa hit on the things that we would call knowable. Like these are things we have enough history to predict and say with specificity. But I think what's embedded in your question, and it's a question, frankly, I'm interested to see. It was just yesterday that our partner, C.H. Robinson, actually began the rollout of this marketing campaign of Robinson Financial, which we're tremendously excited to support behind the scenes because that's what we are, as it relates to the market behind the scenes. And so they're reaching out to thousands of carriers on a rolling basis. Now what the pull-through will look like from that in adding new Factoring-as-a-Service customers to Robinson Financial, which we support behind the scenes, and the pull-through will look like on adding new LoadPay customers is impossible to tell you. What I can tell you this morning is in the Slack channels that we all monitor in real time with just what went out yesterday, there's been an explosion of activity, but you can't build a trend line off that. So I've said and I've tried to make it clear, the way we structured our deal with our partner, we want Robinson to be exceptionally successful in this. And for them, success means improving the carrier experience. And of course, that means monetizing it. But the way our deal with them works is we chose to take our opportunity, the financial incentive for what we're doing, on the back end. Like we're going to see -- as we grow revenue through this density gain in FaaS and LoadPay and the things we're doing around it, you'll start to see that in the back half of the year, but it is way too early to tell you what that's going to do to EBITDA margin or revenue growth, we just don't know. What I would point out to you is despite the fact that we're making all the investments required to do those things right now, our EBITDA margin is still improving. So we're trying to be really thoughtful about this. And we're really excited about the future, and those 2 things have to live together. That's the tension between being profitable in the present and preparing for an exciting future. So that's how we think about it. I hope that gives you the color you're looking for.

Yes. No, that was really helpful. And Aaron, I was also -- your comments in the shareholder letter, which was really helpful, it's great, about how AI and machine learning models have kind of reduced the value of network transactions for factors. Are you seeing any other areas where AI or other technology advances are maybe impacting your value proposition elsewhere or like the moat you have in some of your products?

Yes. Great question. And so just let me unpack that a little more, and I know other payors will touch on this, and so I don't want to put it all out there now, but let me unpack that a little bit more, just so you're clear on -- there's 2 forces that are at work when we talk about the monetization and the adoption of network transactions. And those 2 forces were things I didn't fully understand in Q3 of 2023 or even beyond, when we conceptualize this idea that we need to connect payors and payees, and that thesis is entirely right. But the specifics of how we're going to monetize this was precisely wrong, but directionally correct, right? Like the value was there, but there's 2 ways in which the value is migrating from where we thought we would realize it to another area. So the first thing, and just before we get into AI and ML, one of the things we've learned and like mea culpa, right, like we want you to understand this, is we built a pipe of structured data about this big. And when you look at the legacy software that most factors used, they can ingest it in a pipe about that big. And that's just the technical debt that happens when you use an off-the-shelf product that's several years old, even if you've built technology around it. And dealing with technical debt, that's a problem all companies who touch technology deal with and asking factors to modify their product, a core operating system they don't even totally control in a 3-year down market was a tall ask, right? So if the pipe that they can ingest the data we give them is not as big, then the value proposition to them is different. So that's one thing. That's a learning. That's what we've learned from this, that network transactions are valuable, just not quite as valuable as we thought. The second piece, which is more what we've lived on our side of the transaction, is this concept of what can a model trained on all of our historical data do without a human. And 3 year -- or in 2023, I did not see it. It has been remarkable to see. We are purchasing 75% of our invoices for our small carriers, and that's going to move upstream, too, with what's coming, without a human being ever touching it before funding. Like that did not exist in 2023 and certainly, not before that. And what we learned is structured data is helpful in that there's lots of ways that's helpful, but that the model is so good that even when it doesn't have structured data, it can make very accurate, better-than-human accurate decisions. And so as we extrapolate broadly to what we're working on, and we haven't talked about this a bunch with you all, but what Melissa and her team are working on is what we call touch-free processing. So I know people don't live this every day, but if you just visualize it, if on the broker side, and that's the payor, that's the person who owes the money, if our audit product and our audit and payment feature put together can process an invoice and tell and decide for the broker, based on rules that they set, that, that invoice is appropriate for payment without a human being touching it, the audit system is -- the audit process goes from days to seconds. On the payee side, if the instant decision model with all that we built into it can make -- look at historical predictions for this carrier, this account letter and these things, and in seconds, decide this is probably a good invoice, and then those 2 systems can touch each other and say, if we present this invoice to you in this way, would it be approved? And the system on the other side says, "Yes, it would be approved." Like that's a quantum leap forward. That is AI and ML changing how network transactions work, but it's still that very thing. It is a network. But the technology has moved so far so fast -- but yes, it's changing. I don't know that -- I don't know how to speak to our moat, so to speak. I think we have the most sophisticated product in the market on the factoring side. I think we -- our product on the broker side is highly sophisticated, and we have the integrations, we have the customer trust to go do this. So the world is changing, right? Like it changed from what I thought a few years ago, and we try to lay that out in the letter so investors can understand. And you can also understand how we're working to be part of the change and not disintermediated by it.

Our next question will come from Matt Olney with Stephens.

I want to dig more into the Intelligence segment that you discussed in the letter. I'm curious, within this new segment, kind of what's the go-to-market strategy for this initiative? Who are the clients you're going to be targeting? Are they existing or new clients? And how will you target these customers? And I'm just trying to get a better idea of kind of what the revenue ramp could look like for this segment over the next few years.

Yes. Totally understand that question, Matt. So the customers that we are going to start with are largely the 560 TriumphPay customers that we currently serve. Now it will expand beyond that. But I've said to you before, the top 1,000 freight brokers control 90% of the $110 billion broker truckload market. So the people we will be taking this out to will either already be a Triumph customer or they will certainly know our name because we touch everybody in broker -- frankly, in all of truckload. The reason we're doing it is because some of our largest customers have said to us, "Hey, there are some data things we would like to get from you. And we would like to get it from you because, number one, you are not going to end up being a competitor. You are a bank, you are not a brokerage, you don't move freight, and some of the data providers in this industry have -- they don't have neutrality, but you have neutrality. And so we trust you with our data. We would like for you to give it back to us in a way that helps us run our business more efficiently." "And the second thing is we would like to consume this data from you because you have more of it than anyone. You pay more truckers than anyone." Everyone knows that. They see that. They see what we touch. "And then we would like to consume this data from you because you have precision in your data. You actually have what was paid, not what was asked, not what was claimed, not surveys, like payments don't lie." And so for those 3 reasons, which I put in the letter, that is why the customers came to us. So what do we do with that? Well, we already have the data. I mean not all of the data, but we have a lot of data in what we ingest because of the services we provide to our customers. In order to be transmitting hundreds of millions of dollars a day, you need real, actionable data, and you better understand that data, and we do that. And so now we are layering on top of what that data set we have, technology, such as the ISO acquisition, which takes the data they have, data we have and creates quantitative scorecards that we can give back to our customers and that they can give to their customers, so everyone can have clarity on how is a carrier performing. And for a broker, that's a big thing. They want to know how a carrier is performing for their own benefit. And they also want to know what is their scorecard for how are they doing for their shippers. Again, it's the data we already have. You're just layering the technology and some of the decisioning things that have been built on top of it. So our gross margin coming out of the gate in our Intelligence segment is well over 90% because we're not buying that data from anyone. Like we -- it's our data. We do a ton of work to get it because we have to in our Factoring and Payments segment. So it's taking what we already have and curating it and anonymizing it and positioning it in a way that our customers who already use us for other products can make their businesses better. That's why we did it. It was an ask of an existing customer base. Surely, this will allow us to expand in brokerage. And eventually, we may sell this to people who are not in transportation for other reasons. But today, our focus is, what can we do to make brokers better and give more transparency and get carriers paid more quickly? That's who we're serving. That's who this segment was built for.

And Aaron, just to follow up on that, as far as the revenue kind of ramp within this segment, is that something we should be expecting anything material in 2025? Or is this something that may not ramp until the next few years?

The million -- the multimillion dollar question, I mean -- I'm always about it should happen now, but let's just look at things. We have set out -- let's look at it like in the broader context. What we are doing right now as a company is we have a core community bank that we are -- that we run, that is designed to be run with stability and efficiency, and we have a pretty mature factoring business, and we take all of the revenue that we generate from those 2 businesses and increasingly from our payments business. And our goal is for our transportation-related businesses to generate over $1 billion in revenue. By what time, I can't tell you precisely. Today, if you just use exit 2024 run rate metrics, we generate $210 million, so 21% of our way to our goal. And $150 million of that on a run rate basis comes from Factoring, $60 million of it on a run rate basis comes from Payments, and almost none of it comes from Intelligence. And if you look at that $1 billion, you can kind of divide it into 1/3, right? We could be more precise, but I'm not going to be more precise. But Factoring, there's a $300 million to $400 million market opportunity. Payments is actually bigger than we thought when you add LoadPay in. Even though we were wrong on exactly what network transactions would be, I still -- I think Payments has grown because we figured out how to pay carriers and monetize that flow and data and -- I'm sorry, and the exchange fees. And then that leaves us with this Intelligence segment, which is a whole lot of blue ocean there, right, that we only generate less than $1 million of revenue through some existing partnerships. That needs to grow. I think you will see revenue in 2025 grow, but of course, the denominator over which it's growing is very small. It won't be meaningful in 2025, and I would hope towards the back end of 2026, it will. The key to understand is the building blocks are already here. We just have to make sure what we take to the market is built in a way -- like our customers have very high expectations of us, and we are not going to roll out a product that's half-built because we don't think that's the right thing to do. And even if it makes me get on earnings calls and explain why is this growth slow, why is this growth not here today, you already have the customers, the answer is because we're not going to do it until we can do it. We're not going to do it at scale until we can do it with excellence.

Our next question will come from Joe Yanchunis with Raymond James.

So in your shareholder letter, you touched on how noninterest expenses are expected to increase. Now how should we think about the pace of increase in 2025? And can you provide additional color on some of the internal investments you're going to be making?

So Joe, the -- and as you know, we evolved too fast to really provide explicit guidance beyond the next quarter. But my current expectation is that there will be very modest growth from that $99 million level that we called out for Q1, call it, low to mid-single digits over the course of the year, barring investments and things that we're not looking at just yet. As far as what brings -- what comprises those investments, some of it is just natural resets. We've got compensation resets that happen every first quarter. For the first -- for the last 2 quarters of 2024, we've been accruing bonuses at less than our full target because we didn't hit all of our financial metrics that we wanted to hit in 2024, and our bonus pool reflects that. We'll reset that to 100% because we do intend to hit those numbers this year. We've also got just general inflation in our health care costs and things like that. So as far as the -- what's driving the increase, bulk of it is compensation. It does include layering in ISO for a full quarter. We closed on that deal in December. And we do have some investments that we've made in both our Intelligence segment, we will continue to make investments there, as well as just the operational resources that will be required to ramp up what we're doing in Factoring-as-a-Service and in LoadPay. To the extent that, that volume comes on faster or slower, we'll adjust accordingly, but that's where those dollars are going.

It's -- I mean 100% agree with Brad on that. One thing that Joe just -- that you can watch for is with the instant decision model and the things like -- just for factoring, for example, you should see -- assuming the market does not go down again, you should see and we should be held accountable for growing factoring market share. No questions. No excuses. We will do that organically through FaaS. And what you really need to see and what I'm watching for and what I firmly believe will happen is the gearing ratio as we do that is going to be better because we can use all this technology we built to grow volumes without adding people expenses. Now there will always be some, but our margins should expand. That's why our operating margin should expand. Of course, it will expand if we get a tailwind in the market, but those dollars were spent to build technology to allow us to grow volume without having to add people every time we grow. That's something I would watch for. That's something I'm watching for and something I'll be reporting back to you on is we need to be -- demonstrate efficiency as we grow.

I appreciate that. And then one more for me here. How should we think about increasing adoption of your Factoring-as-a-Service product? And how will that adoption translate to revenue? Just any sort of type of unit economics you can provide would be helpful.

Yes. So Factoring-as-a-Service, it's starting with large brokers in the market with C.H. Robinson. I don't think you'll see another announcement for a few months. But after that, I think you will see other large brokers follow in this space because they have the best marketing funnel, no question. And they care about the carrier relationship, and payments touches the carrier relationship. I think you may see other people who are not in the brokerage industry want to use our platform. That will be later in the year. In each of those scenarios, there's a negotiation about what the unit economics net to Triumph look like, right? It just depends on a variety of factors. You can look at it a lot of different ways, but the average factoring invoice today, on an average, let's just say, for a small carrier, $1,600 invoice is going to be roughly $35 of revenue. And then from that, you got to figure out how to pay your salespeople, you got to fund it, you got to -- all the things you have to do, that's what you're dividing up. Now you're doing that, hopefully, thousands and then tens of thousands and then hundreds of thousands and then millions of times. But the thing about FaaS for us is that -- and I wrote about this in the letter, like we have built the factory, and it has been built at no small cost, right? A tremendous amount of investment, and we have a tremendous amount of talented people. And I think about like Melissa [ Freed ], who even runs that specific business for her. Like I known her in this business for 14 years and watching her career progression and all the people she leads, like those investments are made. And the reason you build a factory and you build it big and you invest in all the ways that things should move is because you expect that the opportunity is going to get -- to come to push a lot of volume through it. And as volume increases, if we hold head count steady, which personnel expense is the largest expense in a factoring business at roughly 60% of it, you're going to see operating margin improve and you're going to see revenue grow and you're going to see volume grow. And if the market gets back to normal, whatever we want to define that to be, but it needs to still move in favor of the carriers, no question, then that's exciting for us. It may not show up until the back half of this year. We may suck wind in the first 2 quarters, I don't know. But that's what we're doing. C.H. Robinson will not be the only FaaS customer. They'll be the only one through the first half of the year, and we're going to make sure we do it amazingly well. And we're going to learn from what we did. And then when we do it again, we're just going to make sure we serve our customers' needs in that regard, and our customer is whoever the FaaS provider is. That's their product. They're taking on the market. We are invisible and behind the scenes and entirely content to be so. So that's -- I don't know if that gives you exactly what you're looking for, but that's directionally how we're thinking.

I would add one thing to that, Aaron, and that's when we have control of the factory, right, the technology, and we talk about the pipe we build and the pipe that can receive the data, with FaaS, we are in control of that. So we were able to take network transactions and push them out to the FaaS clients so that it can be useful in their models as well. So it is serving multiple participants, but it's also serving the network to allow us to continue to grow density in those transactions so they can be leveraged across the Triumph enterprise.

Our next question will come from Gary Tenner with D.A. Davidson.

First, I had a follow-up on your comments, Aaron, on the Intelligence segment from the prior question. In the past, you've talked about finding ways to monetize data. It sounds like, though, from what you were saying, this is more of a pull from clients and maybe a departure from what you had thought about in the past. Is that accurate so kind of the first step in monetization of the data?

Yes. I think we had ideas. And if I go back to the acquisition of HubTran in 2021 and when we stepped into this space, we also had ideas, and we had the ideas about the network. One of the learnings from that, and I think the network and open-loop and all of that is true and right and good. One of the things we learned is figure out exactly what your customers' pain points are, not what you think sitting afar. I mean, hopefully, we don't sit in an ivory tower. That's not our goal, but we don't move freight. We have ideas on how to create efficiencies, but the way to do this is tell us what you need, what would be valuable to you because our job is to provide your service. And so we started with ideas, but that was very wet cement. And then our customers shape that for us and said, "No, this is what we care about. This is what I would like to know. This is a problem for me that I'm struggling to figure out how to solve." And so, "Great. Then let us see what we can do to be specifically responsive to what it is that you would like -- what it is you would want from us."

And then a follow-up, just in terms of LoadPay, you talked about Factoring-as-a-Service, no announcements near term, obviously, CHRW, the big focus there right now. Will LoadPay -- will that broader rollout follow a similar pace as what you're doing with Factoring-as-a-Service?

Todd, do you want to take that first?