Mullen Group Ltd.

Thank you for standing by. This is the conference operator. Welcome to the Mullen Group Limited first quarter earnings conference call and webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Mr. Murray K. Mullen, Chairman, CEO, and President. Please go ahead.

Thank you. Welcome everyone to Mullen Group's quarterly conference call. Once again, we'll provide shareholders and interested investors with an overview of our first quarter financial results. We'll discuss the main drivers impacting operating performance, our expectations for the year, and we will close with a Q&A session. Before I commence today's review, I am always reminded, but I need to remind you that the presentation contains forward-looking statements that are based upon current expectations and are subject to a number of risks and uncertainties, and as such, actual results may differ materially. Further information identifying the risks Uncertainties and assumptions can be found in the disclosure documents, which are filed on CDAR, and at www.mullen-group.com. So with me this morning, I have the majority of our executive team. I have Richard Maloney as the Senior VP, Joanna Scott, Corporate Secretary and VP of Corporate Services, and Carson Erlechter is our Senior Accounting Officer, who's been filling in for Stephane Clark as he recovers from the side effects of multiple surgeries on his ankle. Son of a gun, so. Steph is taking some well-needed time to try and get that looked after. Carson has been filling in for Stephan, as I said, and will until Steph comes back to fulfill his normal duties. So as I turn to the next section, I'm going to talk about the Q1-22 financial and operating performance. I think the way to start this is the numbers really tell the story. We had record revenues. We had higher operating profitability. And if we can base the future On our March results, I would tell you we have a lot of room to improve. And, oh yes, you will notice we have fewer shares outstanding. So to all of our loyal shareholders, we had a very good quarter. And if I'm right, then many more solid quarters are in our future. But more on this in our outlook commentary. If you looked at our MD&A, you'll see it has a new look to it. It's crafted by Carson Erlacher, and he'll provide the additional commentary in just a few moments, explaining in detail the reasons and events influencing our Q1 performance. In my opening comments, I'll summarize the important highlights and themes impacting the economy and our business in the quarter. Let's call this my Twitter version. So what did we see in quarter one? Let me start with the obvious, acquisitions. that we completed in 21 provided the growth. What the numbers do not tell you is the quality of these new acquisitions. They are all first rate companies, and I'm delighted that they are part of our organization. And truthfully, based upon what I see in this market, acquisitions are the clearest path to growth, especially in a market where there is near full employment. New equipment is virtually impossible to obtain. And if you talk with any transportation service provider, they'll most likely tell you the warehouses and docks are running at full capacity. I know ours were. In other words, internal growth is difficult to achieve. Now, this might just explain why inflation is running so hot. We'll talk more about this shortly. So here's what we witnessed in the first quarter from an overall economic and market perspective. You know, when I analyze our results and the data, it's pretty evident the economy continued to show some pretty good resilience. with consumer spending still remaining strong, freight demand elevated, and tight labor markets. But truthfully, we did not see any real growth. There were also a few issues. For example, inflationary pressures started to really alter consumer behavior. High food prices, the rising cost of home ownership, and of course fuel prices that have doubled year over year. So of course consumers must alter their spend. I can also say that some of these inflationary pressures we didn't plan on. like the huge jump in oil prices, which only accelerated when Russia invaded its neighbor. This impacted costs, but more importantly, the rain increases we implemented early in 22 did not take into account the surge that occurred in the quarter. As a result, margins got squeezed by a couple of points. Now let me spend a few minutes on the fuel story. Year over year, fuel prices have doubled. We all know this because as individuals, you go to the gas station every week or so. But to the trucking industry, we go to the fuel pumps every day. Fuel expense is now the number one issue for the trucking industry. Generally, we are indemnified from increases in fuel with fuel surcharges. But this always lags the real-time price that shows up at the pumps. So we're behind in quarter one because fuel prices just kept rising. As they moderate, the surcharges will catch up to the cost. There is another issue related to the rise in fuel price, and that is inefficient trucks. If you operate an older truck, and let me tell you there are lots of older trucks on the highway, your fuel mileage will not be where it needs to be. Even the fuel surcharges won't be enough to cover your increased costs. So I predict there will be a huge shakeout of the inefficient carrier, small and large, especially if freight demand slows and rates fall. So stay tuned to this. This could tighten trucking capacity even more. Now what about the supply chain? Obviously, it starts with the demand, and as I commented, overall freight shipments were generally quite strong in the quarter. But this may or may not be a negative, because consumer demand did not appear to grow. So if spending cools for a period, then the supply chain can regroup. Productivity can improve, and costs can moderate, helping the inflation bite. But in the quarter, there was lots of freight to haul. However, it appears some of this most certainly was tied to backlogs associated with the supply chain bottlenecks that continued deep into quarter one. This kept the trucks moving and warehouses full. It does appear that end demand was virtually pretty stagnant, so I suspect the supply chain will start to improve in quarter two with improved weather, fewer employee absences, and the expected change in consumer spending habits. What about flat deck freight, or more accurately, let's call that the demand for goods related to capital investment? I'll tell you, this part of the economy in our business was quite strong as evidenced by our logistics and warehousing segment. One area still struggling was service activity related to oil and gas investment as the drilling account really never took off in the quarter. And this part of our business changed a little year over year, and most likely because oil and gas companies simply bought back shares or paid higher dividends rather than go through the drill bit. But this, too, may be changing. as the need for additional crude oil and natural gas continues to grow. At least this is what the commodity prices are telling us. Now, if this is to occur, then our specialized industrial service segment will be a big beneficiary. I suspect we will know more in the next few quarters if a new cyclical uptrend emerges. And to our long-term investors, you all know we have had a successful history in the oilfield services business. As for last quarter, however, The industry was basically flat year over year. With all of this as a backdrop, I admit we did not improve our margins as expected, most of which I attribute to increased costs and lower productivity levels that were really tied to unplanned events, issues such as weather, blockades, COVID-related absenteeism, and vaccine mandates. These all cost money and margin. For example, we had 10% fewer trucks operating drivers, sorry, qualified to cross into and out of the U.S. border. All in all, however, I take the view that our business units did a pretty good job of managing the issues. And those that didn't, I will tell you this, they'll get it right this quarter. Our biggest issue today is inflation. As I look back to 2020, we had the COVID surge. In 21, we had a freight surge. And this year, we have a cost surge. So we just adapt. We stick to our long-term strategy, we manage our business, and we capitalize on miscalculations by our competitors. Carson, you were up. Take it away.

All right. Thank you, Murray, and welcome, everyone. I'll provide a bit more of the detail. However, our first quarter interim report will fully explain our financial performance. So as such, I'll provide you with some of the financial highlights. For the quarter, we generated record revenue as compared to any previous quarter, which was largely driven by acquisitions. Year over year, revenue was up $166 million or 57% to roughly $457 million. Our revenue growth can really be broken down into three factors. The first and most significant of which is the $135 million of incremental revenue we generated from acquisitions. Our growth from acquisitions really started to commence in the third quarter of 2021. Secondly, we also experienced modest internal growth of approximately $17 million, or 6.4%, that was mainly attributed to the strong results experienced within our L&W segment, while our internal growth from the LTL and S&I segments remained largely flat when compared to the prior year. And lastly, our revenue from fuel surcharges excluding acquisitions rose by $14 million due to the sharp increase in diesel fuel prices. In terms of total fuel surcharge revenue, which includes the amounts for acquisitions, this was $45 million, an increase of $25 million compared to the $20 million we recorded last year. Most of the increase in fuel surcharge revenue occurred in the LTL segment. So the average wholesale rack price for diesel fuel, this isn't the price that you see at the pump, but the average wholesale rack price in Canada for the first quarter of 2022 was approximately $1.17 per litre and ended the quarter at $1.36 per litre, Needless to say, the wholesale rack price for diesel has continued to climb in April. It's important to note that virtually no margin is made on fuel surcharge revenue, so this is actually detrimental to our overall margin, but more on this in a bit. Now going a bit deeper into our segment revenue, first starting with our largest segment being the LTL segment, it grew by $55 million to $175 million compared to $120 million in 2021. Acquisitions accounted for $44 million or approximately 80% of the rise in revenue. The remaining increase was mainly due to an $8.6 million increase in fuel surcharge revenue and a modest $2 million of internal growth as consumer spending remained strong but did not grow. Revenue growth was challenged by unplanned events including severe weather conditions in northern Ontario and Manitoba and freight bottlenecks in major distribution hubs of Vancouver and Toronto. Revenue in the L&W segment rose by 51 million to 142 million as compared to 91 million in 2021. And this was due to $29 million of incremental revenue from acquisitions, as well as a $4 million increase in fuel surcharge revenue. We also experienced almost an $18 million of internal growth as demand related to capital investment and infrastructure projects was strong. This translated into an overall improvement in freight demand and higher spot market prices at virtually all of our business units within this segment. Moving over to the S&I segment, it increased by $4 million to $83 million as compared to $79 million in 2021, primarily due to $4.5 million of incremental revenue from the acquisition of the bean and a $1.1 million increase in fuel surcharge revenue. Revenue from our established business units declined by $1.6 million, mainly due to a $9.3 million decrease at premade pipeline hauling, which came off a stellar performance in the first quarter of 2021. This decrease was almost entirely offset by greater revenue being generated from our drilling-related services and from those business units involved in the transportation of fluids and servicing of wells, as higher commodity prices led to a slight improvement in activity volume this year compared to 2021. Drilling activity recovered a bit, but not enough to really provide for any meaningful growth. We also experienced greater demand for our dewatering and water management business at Canadian Dewatering, which had an excellent quarter in what is traditionally a slow period for that business unit. Revenue generated by our US 3PL segment were strong, coming in at $57 million for the quarter, as consumer spending remained robust and the supply chain was still recovering from bottlenecks that were noted in 2021. Our team at Holistic continues to grow on the 3PL space by adding new additional station agents to our Silver Express technology platform. Now moving over to profitability, our adjusted OIBDA was $60 million in the current quarter, an increase of $19 million as compared to $41 million in 2021. The $19 million increase was largely due to acquisitions, which generated $13.4 million of this increase. We also generated $5.8 million from internal growth. Now, internal growth was mainly experienced in the L&W segment and to a lesser extent in the S&I segment. So let's take a look at adjusted OIBDA by segment for a minute. In the LTL segment, adjusted OIBDA increased by almost $5 million to $23 million as compared to $18 million in 2021. Now, this increase was due to $6.8 million of incremental adjusted OIBDA from acquisitions which was somewhat offset by higher fuel and purchase transportation costs. The $8.6 million increase in fuel surcharge revenue in this segment had a detrimental impact on our margins. As a percentage of revenue, adjusted operating margin decreased by 2% to 13.2% as compared to 15.2% in 2021. This margin erosion is due to higher operating costs and lower productivity levels that resulted from inclement weather, protests and blockades, freight bottlenecks, that I spoke up to earlier and surging costs, most notably being fuel. Overall, the segment did experience a stronger month of March as the weather improved, volumes recovered and a number of price increases were implemented. Adjusted OIBDA in the L&W segment increased by 10.8 million to 25 million as compared to 11.7 million in 2021. 5.1 million of this increase was due to incremental adjusted OIBDA from acquisitions which the remaining increase was largely attributed to internal growth of 5.7 million and across virtually all of our business units within this segment. Adjusted operating margin increased by 1.8% to 17.9% compared to 16.1% in 2021, as our business units did an excellent job mitigating the cost surge with general rate increases and fuel surcharges. The cross-border freight market between Canada and the US saw the largest freight increase. This coupled with government-mandated vaccine requirements for drivers traveling to and from the US reduced the capacity of qualified drivers, resulting in customers paying higher rates to get their freight moved. Adjusted OIBDA in the S&I segment increased by $2 million to $13 million as compared to $11 million. The $2 million increase is attributable to improved results at Canadian dewatering and from those business units involved in drilling-related services and the transportation of fluids and servicing of wells. These increases were somewhat offset by a $2 million decline in OIBDA at pre-May pipeline. Adjusted operating margin improved by 1.9% to 16% from 14.1% due to the strong performance at Canadian dewatering. Adjusted OIBDA in the U.S. 3PL segment was 1.1 million or 1.9% of gross revenue. During the first quarter, the availability of contractors was extremely tight, which led to higher spot market prices and which negatively impacted our margins. Operating margin as a percentage of net revenue was 23.4%. And from strictly a cash perspective, adjusted OIBDA in this segment is virtually the same as earnings before tax. So as I summarize our margin on a consolidated basis, adjusted OIBDA as a percentage of revenue was down by 0.9% to 13.2% from 14.1%. And this 0.9% reduction is explained by really two factors. First, accounting rules require us to report gross revenues on our U.S. 3PL segment, which in the quarter generated $57 million of revenue and a margin of 1.9%. By excluding the financial results of this asset-light segment, our overall margins would have actually improved by 0.7% to 14.8% compared to the 14.1%. So excluding the US 3PL segment on a consolidated basis, our rate increases and change in business mix enabled us to more than offset the surge in inflationary costs in the quarter by a bit. Secondly, including acquisitions, we generated $45 million of fuel surcharge which was increased by 25 million compared to the 20 million last year. If we were to exclude that 45 million of fuel surcharge in the first quarter of 2022, our adjusted operating margins would have actually increased by almost a point and a half to 14.6%. Similarly, in 2021, if we excluded the 20 million of fuel surcharge revenue, our adjusted operating margins would have improved by just over 1% to 15.2%. Looking at some other notable items, we continue to generate cash in excess of our operating needs as net cash from operating activities for the period was $18 million compared to $39 million in 2021. So this decrease of $21 million is due to our revenue growth and business expansion as we are now a much larger organization and as a result we need to finance our working capital requirements. We have a total of $250 million of bank credit facilities available to us and we had $111 million drawn at the end of the quarter, thus leaving us approximately $140 million worth of room. Our earnings per share was up to $0.17 as compared to $0.13 on a reduced share count as we bought back and cancelled roughly 926,000 common shares in the quarter at an average price of $12.01 per common share. The main reason for the increase in earnings per share was due to the $13.2 million increase in OIBDA and the $1 million increase in earnings from equity investments. And these were somewhat offset by a $3.4 million negative variance on our foreign exchange due to our U.S. debt and swaps, and a $3.3 million increase in income tax expense due to greater earnings. With respect to ESG, I'd like to remind everyone that posted on our website is our 2021 ESG report that outlines our approach for ESG along with some of the measurements that you can use to benchmark our performance. In the first quarter, we continue to make progress on some of our ESG initiatives by committing $9.5 million of CapEx towards our sustainability goals. The majority of these CapEx are expected to be received in 2022 and 2023 and consist of additional CNG-powered trucks along with containers to support our investment in the intermodal space that will assist us in moving customer freight while reducing emissions. So, Murray, with that, I will pass the conference back to you.