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spk00: Thank you for standing by. This is the conference operator. Welcome to the Mullen Group Limited second 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'll be an opportunity to ask questions. To join the question queue, you may press star then 1 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 Murray K. Mullen, Chair, Senior Executive Officer and President. Please go ahead.
spk04: Thank you. Welcome to our quarterly conference call. We'll provide shareholders and interested investors with an overview of the second quarter financial results. And in addition, we will discuss the main drivers impacting our operating performance, our expectations for the year, and we'll close with a Q&A session. Before I commence today's review, I remind everyone that our 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, the uncertainties, and assumptions can be found in the disclosure documents which are filed on CDAR and at www.mullen-group.com. With me this morning, I have our executive team. I have Joanna Scott, senior corporate officer, and Carson Erlacher, senior accounting officer, and Richard Maloney is our senior operating officer. He is on the line. I like to refer to Carson as our senior accounting officer, and some like to say the CFO or chief financial officer, but at the Mullen Group, we do not have chiefs. We have senior executives. So let me pivot towards the next topic this morning, and that is discussing our Q2 2022 financial and operating performance. And as I was preparing my comments, I came across an old saying that I believe pretty much sums up how the market has viewed our performance, really for quite some time. It goes like this. If a tree falls in the forest and there's nowhere there to hear it, does it make a sound? Or in our case, if we have a great quarter and there's no one there to acknowledge it, does it matter? At the end of the day, people justify whatever they want. Philosophy is philosophy. But what I do know is this, and what I can say is we nailed it. So in this morning's call, I'll walk the listeners through the quarter. Carson Erlacher will provide additional commentary and analysis, and then we'll close with the outlook, followed by a Q&A session. So let's start with the obvious. The capital markets are in a tad of disarray, and there appears to be some major stress points associated within the financial system after many years of cheap, easy money, or as I like to refer to as money for all. Now, there's no argument that stimulus was required in the early days of COVID, but all that cheap money didn't go into building infrastructure or adding to supply. All it did was fuel demand, and then because the powers to be didn't turn off the taps quick enough, a new generation of gambling mentality emerged. Markets went crazy. Everything goes up, up, away, until the central bank was finally said, enough is enough. But that was only after they realized that inflation was not transitory. The result of the new central bank moves is troubling. A recent report by James Hodgkin of Stifled GMP highlights that world capital markets, equities, bonds, real estate, cryptos, et cetera, have seen over $50 trillion in perceived wealth evaporate since the start of 2020 and that's on a global perspective. Now you know pretty soon this could get serious. It might even impact overall demand. Unfortunately for those of us that live in the real economy there could be ramifications. So we watch this very carefully because one really never knows. So what about the real economy? And by this I mean the consumers, industry, business. Here's what we saw last quarter and what we know today. As for tomorrow, next year and beyond, I'll let those much smarter than me come to their own conclusions. So actually, last quarter, the economy was pretty good. We didn't see a lot of growth. In fact, it's nearly impossible, I believe, given the inability to add capacity due to bottlenecks everywhere in historically tight labor markets. But there certainly were some pockets of strength. For example, the consumer spend held in fairly well despite inflation. Capital spending by business was quite strong and would have been a lot stronger if it was not for those darn supply chain issues. This suggests to us that the capital spend cycle would be extended out for longer than previous cycles. You know, furthermore, we have so much catching up to do in terms of capital replacement. It is difficult to see any meaningful drop in capital spending for quite some time. By way of example, We are on capital allocation for nearly every piece of new equipment way out into 2023. And we all know you must invest to improve productivity or to get a handle on costs. Now, one area of the economy that finally, after years of underinvestment, entered a recovery phase was in the oil and natural gas sector. It should be obvious to everyone by now that producers must add productive capacity. They must invest if we have any chance of bringing fuel costs down. Longer term, of course, maybe new sources of energy of the energy complex will replace and displace crude oil and natural gas, but there's no way in the short term. This implies old-fashioned drilling, I believe. And if I could be so bold as to suggest that Canadians really want to help our European allies get off of Russian dependence of crude oil and natural gas, then Canada needs additional infrastructure, new LNG facilities, and pipelines to Canada's east coast. Now, let me digress for a moment to speak about the war, because this will impact all of us at some point. The Ukrainian people are paying dearly for the invasion by the aggressor Putin. The rest of Europe, including Germany, the home of a manufacturing juggernaut, is suffering collateral damage because it needs energy to operate their economy, to keep the factories open. And Russia is limiting deliveries. It's fooling with deliveries. This is beyond serious, and it is most certainly going to require real leadership and new thinking. Difficult decisions must be made, and I'll just leave it at that. So okay enough with my digression. Let's get back on truck. You know, when you add up everything I discussed in terms of the economy, I can tell you that from our perspective, the economy did just fine, keeping the demand for all kinds of freight shipments, LTL, truckload specialized bulk, and e-commerce at very healthy levels. This was the backdrop. that I'll speak to now and highlight as it relates to the quarter results, or should I say record quarterly results. How did we do it? Well, let's start with six quality acquisitions in 21 and a couple of tuck-ins so far this year that form the basis of the growth. Secondly, price increases. In response to inflationary pressures, we raised prices quite significantly in many cases. But, and I will reiterate this very important point, we did not nor will we gouge our customers. With inflation running at a hot 8% to 9%, we had no choice but to raise prices. And I am not sure we are done. Every lane, every customer is being critically analyzed to ensure we generate the appropriate returns. Third, fuel surcharges. Now, this is associated with the doubling of diesel costs year over year. This flow through expense to customers is an absolute necessity. but it generally does not contribute to margin because it is designed as a flow-through. In saying this, there can be an arbitrage on fuel surcharge if your company-owned fleet achieves a very good fuel mileage because fuel surcharge is based upon a mean average of fuel consumption. In other words, if your fleet or truck is above the mean, in most cases this is set around 5.5 mpg, which many of our company trucks are, then you can make margin on fuel surcharges. Conversely, if your fuel mileage is below the mean, like many independent contractors, you will most likely go broke very quickly. This is a bifurcated situation where only those with good fuel mileage win, and the last contributing factor to our outstanding results this quarter was the excellent efforts of each one of our business units. They managed costs where they could. They grew market share rapidly. in certain circumstances, and they handled very difficult situations. They negotiated hard to protect our margins, ensuring they did their part to keep the economy moving. In other words, they all did a fantastic job, all 38 of them. Now, for some more details, I'll turn the call over to Carson Erlacher. So, Carson, you're up.
spk05: All right. Well, thank you, Murray, and welcome, everyone. I'll provide a bit more detail. However, our second quarter interim report fully explains our financial performance. As such, I will provide you with some of the financial highlights. For the quarter, we generated $521 million in revenue, a record compared to any previous quarterly period. Compared to the prior year, revenue increased by $209 million or 67%, with all four of our segments contributing to this increase. In terms of adjusted OIBDA, we generated approximately $94 million, a record compared to any previous second quarter. In fact, this $94 million represents the second highest amount of adjusted OIBDA for any quarter in our history. There was only one quarter where we generated more, and for that you need to go back 10 years to the first quarter of 2012, where we generated $99 million of adjusted OIBDA. Only difference being in 2012, we were a much more capital-intensive company as compared to our business model today. Now getting back to our second quarter results. Adjusted OIBDA, which excludes the impact of $6 million of queues in 2021, increased by $41 million or almost 80% compared to the second quarter of 2021, with all four segments again contributing to this increase. In terms of margin, our adjusted operating margin improved by 1.2% to 18% in 2022, compared to 16.8% in 2021. Now, if you exclude the impact of the financial results of our non-asset-based US 3PL segment, our adjusted operating margins improved to just shy of 20%. So, to put it into perspective, adjusted operating margins improved by 3% from our traditional asset-based business units, from 16.8% in 2021 to 19.8% in 2022. Now, let's take a look at our results by segment. Starting with our non-asset-based US 3PL segment, this segment added $57 million of incremental acquisition revenue in the quarter, along with $2.2 million of adjusted OIBDA, representing a margin of 3.8%. As you can see, this non-asset-based segment has a detrimental impact to our consolidated operating margin. Operating margin on a net revenue basis was 43%. Since being acquired one year ago, this segment has added $8.2 million of adjusted OIBDA to our organization with virtually no CapEx requirements. Now let's take a look at how our traditional asset-based operating segments were able to improve margins by 3% to 19.8%. Starting with our largest asset-based segment, the LTL segment grew revenues by $84 million, of which $59 million was due to acquisitions, $18 million was due to higher fuel surcharge, and internal growth added $7 million of revenue. Adjusted OIBDA increased by $19.4 million to $42 million in the quarter. Acquisitions accounted for $10 million of this increase, while internal growth added the remaining $9.4 million. The continued strength in consumer spending held freight volume steady, while rate increases implemented in March led to internal growth in both revenue and adjusted OIBDA. Adjusted operating margin increased by almost a full two points, to 20.1% as compared to 18.2% in 2021. This trend of higher margins started in March, which was the strongest month in the first quarter. Margins in April then exceeded the margin generated in March. Margins in May then exceeded the margin generated in April. And the month of June continued the trend by exceeding the margin generated in the month of May. Our second largest ASTAT base segment is our L&W segment. which grew revenues by $36 million to $156 million. Internal growth represented the largest component of this increase at $16.7 million and was mainly due to price increases implemented earlier in the year, coupled with greater freight demand as more infrastructure spending and capital projects commenced. Fuel surcharge increased by $12.6 million and incremental acquisition revenue of $6.8 million was also recognized. Adjusted OIBDA increased by $7.8 million to $30 million in the quarter and was mainly due to internal growth being highlighted by the strong performance at virtually all of our business units. Adjusted operating margin increased to 19.5% in 2022 from 18.8% in 2021 as freight rates remained elevated and more than offset inflationary costs. Last but not least, our third asset-based segment is our S&I segment. Revenues in this segment were up $34 million to $100 million in the quarter, which was mainly due to internal growth as higher commodity prices led to a recovery in the oil and natural gas service sector, resulting in greater demand and price increases within the majority of our business units. Demand continued to strengthen in all service offerings and was highlighted by the strong performance of Canadian dewatering. Adjusted OIBDA increased by just under 100%. or 10.2 million to 20.5 million in the quarter. Our adjusted operating margin increased by almost a full five points to 20.4% in 2022 from 15.5% in 2021. As greater demand, price increases and the strong performance at Canadian Dewatering led to improved results in this segment. Our net income was $42.7 million or 46 cents per common share. both up roughly 100% compared to the prior year. We continued to buy back our own stock by repurchasing and cancelling approximately 580,000 common shares at an average price of $12.47 in the quarter. As a result of our strong performance, our return on equity improved to 19.1% in the quarter and 13.2% on a year-to-date basis, despite the fact that real estate is our largest asset class on our balance sheet. 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 $48.8 million compared to $55.9 million in 2021. This decrease of $7.1 million was due to our revenue growth, resulting in us financing our working capital requirements. Our balance sheet remains strong. Our debt to operating cash full covenant under our private debt agreement is down to 2.37 to 1, providing us with over one full turn of room available under this covenant. We have a total of $250 million of bank credit facilities available to us, of which we had $142 million drawn at the end of the quarter, leaving us with over $100 million of room available. Lastly, I would just like to point out our highlights within our Q2 interim financial report to take a look at the chart under the summary of quarterly results. The chart on that page highlights our results over the trailing 12 months, whereby revenue is just shy of $1.9 billion, while our OIBDA is roughly $285 million. Our net income over the trailing 12 months is approximately $97 million, while basic earnings per share is $1.02 per common share over the last 12 months. So with that, Murray, I will pass the conference back to you.
spk04: Thanks, Carson. And as we talked about, it's always nice when you give good numbers like that. It always feels good. So thanks for that very good report. So as I move to the next section and talk about the outlook, what do I see? How will the economy perform for the balance of the year? How will our business units perform? But let's be clear, my crystal ball is no better than anyone else. As such, I'll take a very pragmatic and practical approach when it comes to predicting future outcomes. Now, I'll start with the obvious. We all know that risks are elevated as central bankers adjust monetary policy due to inflation, caused, by the way, by central bankers flooding this monetary system with too much liquidity. So now they start correcting their last mistakes. Hopefully, they will get it right this time. When you layer on some very disruptive war, a very disruptive war, tight labor markets, stretched supply chains, system-wide bottlenecks, high commodity prices, you have a pretty good recipe for inflationary pressures to remain uncomfortably high. So slowing for sure, but it's difficult to see inflation returning to the old norm of 2%. I don't see that, but we do think that inflation starts to slow as the year progresses and into 23. Now of course central bankers may play tough and take the job of taming inflation seriously, but this will require a stiff resolve and governments to temper their spending habits. So what does this mean? I'll focus on acute fee metrics in determining the directional move we see for the economy and our business. I'll start with jobs number one. As long as the job market remains on solid ground, and I believe it will, then consumers have money. Government fiscal policy is also right there. I have not heard one policymaker, politician, talk austerity. As such, I conclude that governments will continue issuing checks for everything. Capital flow is obviously crucial to the financial system, but this one I am struggling with, to be honest, because it's capital that is what is required to help us get out of the inflationary spiral we're experiencing. Quite simply, I believe we need more supply. And supply is the fuel needed, and capital is the fuel needed for investment activity. So yes, we need the capital markets to stabilize in order for the economy to move forward in any meaningful way. With all of this as a backdrop, here's how I see the balance of the year unfolding. I'll start with the so-called freight recession investors have been spooked about. I don't see it. Consumer demand is not collapsing, although spending habits are changing. Slowing, yes, but at the same time, there's less capacity to move available freight. So from my perspective, our business will do just fine. I expect the LTL logistics and warehousing and US 3PL segments all to have a good second half, perhaps not growing, but results should be just fine, especially with sticky freight rates. In the specialized industrial service segment, However, I expect a very good second half in 2022 driven by increased investment activity by oil and natural gas producers. In particular, I anticipate drilling activity in Western Canada will hit reach capacity of 250 to 300 active drilling rigs by year end. But this is only if the supply chain cooperates. This means higher revenues and improved margins for our business units leveraged to the oil and natural gas industry. Also, many in our logistics and warehousing segment, because, by the way, all of those consumables must be moved by truck, and we have one of Western Canada's best networks. As for the housing market, higher interest rates are not good. New buyers will be boxed out of the market because of higher mortgage rates. Builders will slow home construction, which will only set up tomorrow's problems, because if immigration remains a priority for the Canadian government, These people all need accommodations and a lot of other goods and services. My hope, my expectation is that infrastructure spending and construction activity accelerates because, as I indicated earlier, this is the key to adding capacity. Whether it's new roads, hospitals, airports expansions, freight terminals, warehouses, you name it, the economy needs it. Now, of course, this implies we need a robust labor force, and this may be the single biggest impediment to future growth and productivity improvement. Without people, without a good work ethic, continuing inflation could be problematic. So in summary, I fully expect 2022 to be an excellent year for our organization, just as I suggested on April 22 call when I said, and if I'm right, then many more solid quarters in our future, and I am sticking with my April outlook. We will generate record results. We will work on margins. We will continue to invest capital in new equipment when we can get it, new facilities when we can get approvals, but we slow acquisitions. And the main reason is because the capital markets are in a state of flux, which implies that our growth rate slows. We are monetizing some non-core assets and have already signed three letters of intent. Now the due diligence period for these LOIs expires this quarter. And if all close as we expect by year end, we free up around $60 million of cash, proceeds we'll use to grow in areas of our strategic focus, or we'll strengthen the balance sheet. So in closing, I know inflation bites. It bites hardest on the working class. But job loss is hurt. So I suspect policymakers will only push so hard. Under this scenario, we do very well. And with that closing comment, let's open the lines to the Q&A session. Thank you.
spk00: Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2. Our first question comes from Conor Gupta of Scotia Capital. Please go ahead.
spk07: Good morning. Thanks, operator. Morning, Murray. Good morning, Conor.
spk02: How are you?
spk07: Morning, Murray. How are you? Good, thanks. I wanted to first, you know, appreciate, you know, three months ago you mentioned, you know, we will probably see good deals, you know, at, you know, a lot of salons and, you know, stores, and that's happening right now. So you kind of nailed the outlook there. In the short term, for sure. So I want to kind of pick your brain on, you know, how you see things evolving now as you go ahead. And as you pointed out, the pre-recession, everyone's kind of talking about, like with respect to your businesses in Canada, especially, have you noticed any significant changes in demand or pricing as, you know, in the recent weeks as inflation and rate increases have started to, you know, slip through or, you know, impact consumer sentiment at least, right? And maybe the spending habits are shifting. So what are you observing? Because it doesn't feel like, you know, we don't have a clear direction from a lot of data points. We are getting a lot of mixed messages at this point. So, yeah, curious as to what you think about where the economy is heading from your perspective.
spk04: You know, Conor, we, all of the From all of the discussions we have with our peers, what we see with all of our business, and this is both sides of the border, everything, we have not seen any meaningful decline in demand yet. Right, Kars? Agreed. I know that the markets are anticipating the freight recessions. And once social media gets a hold of it, then everybody thinks it will happen until new data comes out that challenges the new thesis. What we see as of today is we have seen no meaningful decline in demand across any of our business platforms. And when I speak to my peers, it's the same thing. Now, we don't see any growth. Let's be blunt. And we can't add growth because you can't get equipment and you can't get people and we've lost productivity. What we have seen, Connor, is it's remained tight and we've raised prices. And raising prices to protect our margin from rising inflationary costs and along the way we improved our margins. Last quarter, we improved it by, depending on what number you want to look at, but just over 1% just on stated and up results. But if you back out our US 3PL, if you back out Q's from last year, which is a funny number, it's up by 3% quarter over quarter on a year-over-year basis. So that's what we see today. Tomorrow, maybe the market's right. Maybe... Consumers are in trouble and maybe job losses will hit hard. If job losses hit hard, give me a call back and let's have a future. I'm not predicting it, but it's a prediction. I don't know, but I don't see it as of right now. And we're not anticipating it. And I can tell you, we're not. We have no job losses here. We're still actively trying to recruit so that we can be as productive as we can. And that's what we see right now.
spk07: That's great, Kalamari. Thanks. And as a follow-up, if I can ask you, what are sort of the obvious differences in your mind between the Canadian and the U.S. freight markets, if you have noticed anything in the recent times?
spk04: LTLs remain quite strong, which is really tied to the consumer. And and that's getting right through and to the end part of the consumer. Where it has slowed down, particularly in the U.S., has been in the truckload side, but that's just because I think it was super juiced up last year because of the inventory rebuild by retailers and by manufacturers. So they're slowing the inventory, but it's not stopped. It's still a mess. The ports are plugged. The rails can't get product moved, so the supply chain remains inefficient. It's still moving, but it remains inefficient. I don't know. I feel for the retailers, particularly the small ones, because their costs are up and the consumers are not happy with prices, so they're pushing for price declines. I feel for those retailers, particularly the small ones right now, that there's nothing we can do about the cost side. Our warehouses are plugged. I can't get rail service. We're losing trucking capacity because of high fuel prices. Good quality companies like ourselves are in good shape.
spk07: That's great, Barry. Thanks. And last thing for me on the M&A front, I think you mentioned, you know, obviously the rising interest rates. and your prudence about balance sheet and the volatility in the capital markets, everything is kind of making you cautious perhaps in the short term on M&A side of things. Now, my question on M&A is, maybe given the environment we are in and the rates and inflation, et cetera, it might push a few players over the edge in terms of opportunities. So how do you look at your balance sheet, where it stands today versus the incremental opportunities that may come out because of the downturn?
spk04: Well, let me start with the M&A market. The M&A market, I must get – my in-basket is plugged. I've got to get to a day of opportunity, which is not normal. That tells you there's stress in the market. That tells you that maybe some of the sellers think they can catch the buyer asleep at the wheel. Let me just tell our investors, you don't catch us asleep at the wheel. We were aggressive on acquisitions in 2021 when we felt if we got these acquisitions and then we saw pricing coming up, that our shareholders and our investors would do exceptionally well when we got that book of business and then we raised prices. Our results reflect those decisions. Today, I'm cautious. People show good numbers, just like us. But we're not biting. I'll just wait it out. I think there'll be a better day. Because I think some people have got them stretched. They've overspent. So we'll just wait. And the second thing is, Connor, you know, I read the tea leaves. If investors are not excited about the future, I'll take a cue card from that. And I'm not going to stretch the balance sheet. Just to add some more growth, because I'll be blunt with you, it doesn't appear our shareholders and our investors give us any credit for it, so why would I risk the balance sheet? Man, we've got a big company right now, and we're just acing it. So, yeah, we'll either strengthen the balance sheet or we'll give some more back to our current investors. But I'm not going fishing right now. I don't like it. That makes sense.
spk07: Perfect.
spk10: Thanks so much, Murray, and all the best. Thank you.
spk00: Our next question comes from David Ocampo of Cormark Securities. Please go ahead.
spk08: Thanks. Good morning, Mark.
spk04: Good morning, David.
spk08: I just wanted to touch on the S&I division. You talked about continued strength, at least for the balance of the year, just given the strength in the commodity prices. But does that change your mid- or longer-term outlook on how much CapEx you spend on that division? Because it's been relatively muted in recent years. And then two, what's Do you guys still have a lot of unused capacity where you can really grow off the current base on the top line there?
spk04: You know, David, we're going to have to have a – even internally, that will be a major point of discussion with the senior execs and then finally with the board. But let's just say we wanted to increase capex in the oilfield side because, man, we see things really taking off. David, we can't get it. The supply chain. We're out. You can't get a new truck till 2023. And we're on allocation in 23. So will new capital be required in that sector? Absolutely. Nobody's invested for years. just like we didn't drill so now they got to go back drilling but we need to see first and foremost the recovery and we need secondly to see the commitment that the producers are going to make that they say I need you and then we'll go out and we'll consider I said we'll consider adding capital into that sector but in the meantime I'm raising prices because the capital we got is coveted. And the people we have are outstanding. We stuck with them during the toughest times when everybody said, get rid of that stuff. Now it's our time to make a good profit and a return on those investments.
spk08: That makes a lot of sense. And then on your trucking side, on the asset base there, you guys were guiding the $60 million of CapEx. Any risk that you guys don't hit that number, just given all the supply chain issues that we're seeing today.
spk05: Well, Kars, what do you think? I would say that's going to be difficult to hit. You know, you take a look at our results in six months, year-to-date, we're net capex at $24 million. So you look at the next six months out for 2022, hitting 60 is going to be tough, especially with the delay in getting our orders in. The product's ordered. It's just a matter of timing as to when we can get this stuff. I'm going to say we don't hit the $60 million mark by the end of the year. Is it off by... 10% maybe. I could see a $50 million mark for net capex by end of the year. And again, this is contingent upon us not closing any of those non-core asset sales that we're looking at.
spk04: David, what we do know is this, is that the requests from our business units are significantly higher than our ability to get capital delivered. So what you see is what we spent. That wasn't what was requested by our business units. And in fact, what we articulated earlier was we were going to have a higher CapEx spend this year than what we're on target for. So that tells you the supply chain is tight. It remains, I don't see that loosening up. We're already on allocation, David, for 23.
spk08: And do you guys have a sense on how much that is weighing on margins if you guys are running older equipment? Is it you know, 100 basis points, 50 basis points?
spk05: That would be very difficult for us to calculate, David.
spk08: Yeah, no, completely understand.
spk04: Yeah, I think what it is, we've always maintained a steady CapEx program throughout time. That's why we kept investing in that. What we have is... David, I think that we'll continue to do that, replace capital. So we always got the most efficient equipment. But you can't add to what you've got. You cannot grow our fleet right now because we cannot get it. At best, we're able to replace what we're trying to always improve, always have a better fuel mileage, always do our part for the environment, always lower our repairs and maintenance costs. And we continue to do that, but we can't add incremental to it. There's not enough capacity in the system for us to add more company trucks. And by the way, there's no drivers anyhow, so it doesn't matter.
spk08: Those are my questions. I'll hop back in, Keith. Thanks a lot, guys.
spk04: Thanks.
spk00: Our next question comes from Tim James of TD Securities. Please go ahead.
spk09: Thank you. Good morning. Congratulations. Good morning. That's a great result. Great results. My first question, I'm sorry if you could kind of update us on Mullen's exposure to the spot market pricing in LTL and logistics more specifically. And if you're seeing customers, I mean, you mentioned you've been able to raise prices and there may be more of that to come. Are you seeing customers move towards wanting or locking into sort of contractual pricing, maybe some longer-term pricing? Or what trend are you seeing in that side of the business?
spk04: Yeah, that's a really good observation, Tim. So spot market pricing has definitely softened. And that tells me that... The customer is starting to push back. There was a time when they'd just get it. I just want it because they were caught short. But today people are pushing back saying, no, no, I'm not going to pay a stupid number. So we've seen that. Now, a lot of our pricing in the spot market, we would have also had spot market pricing from our contractors. So we just managed to spread on that between how that worked out. but the spot market's definitely softened. Now you'd say, okay, are customers wanting to go more to the contract market? No, I don't see it. You know, and I've got to be blunt on a, you know, everybody talks about contract pricings. You know, Tim, they all got a 30-day cancellation clause both sides, so let's not pretend that you're locking into a three-year fixed price, no adjustment clause contract. I don't. We don't have any of those. Maybe somebody else has, but we don't do that. So, you know, customers definitely, when they've made commitments to their carriers, they're going into the contract pricing rather than the spot market. So, you know, demand has softened a bit. That's softened the spot market pricing. Contract pricing, we haven't seen any significant pushback. Although I would tell you it feels like customers, everybody – Everybody wants – we all want to get inflation under control. All of us do. The problem that you've got, if customers overcook and they want to really reduce pricing, unless fuel prices really come down significantly, that you're going to – all you're going to do is push more of the independent contracts into bankruptcy. We're already seeing too many contractors fold the tent, not be around, and that's where I talked about the supply side issues. is really at risk in my view and uh because the contractors don't get great fuel mileage and that's your single biggest cost by by two right now the other thing about uh the independent contractors are at real risk is availability of parts that is not that easy to get right now so if you're an independent contractor and your truck goes down because your clutch went out or you had to get new brakes or whatever, you could be down for quite a while. Okay, that's 100% of your fleet. If 20% of our fleet is down at any given time because we can't get parts, that's 20%. But if they go down, it's 100%. That is not sustainable. And you can't just go in and get service quickly today. So I suspect the supply side is going to keep the market and pricing up pretty firm. with all of the major carriers. I don't see us really dropping contract rates too much, to be honest with you. I don't see it.
spk09: Okay, that's helpful. Just to elaborate on that a bit. So your contractors that you use, you're maybe benefiting a little bit from the softness in the spot market, I assume there. But from your transportation equipment that's generating revenue, you've talked about being able to raise prices and maybe some more upside there. could you just kind of talk about your ability to do that in the face of this softening spot market? Is that just because of sort of the regions you're in the, like, like how, what gives you the ability to do that despite a softening spot market, I guess is my question.
spk04: Yeah, no, it's, uh, if we operate in every region in the United States, right across Canada, nearly every sector of the economy. So, uh, you know, there's no doubt there's been a cooling off of the freight surge that happened in 21, as I talked about. But not on the contract side. Those are staying firm. I don't hear anybody really capitulating and saying, because you can't get any drivers. They can't get anybody to go to work.
spk10: They either got the sniffles or they don't want to go to work or whatever.
spk04: And, golly, we've got a lot of people retiring in the transportation sector. So the demographics is not working in our favor at the moment. So we're not dropping prices. It's that simple. I don't know if we're going to increase prices. And we certainly won't be at the same rate as we have. But inflation is up 8% to 9%. Clearly, we had to get that. What's inflation tomorrow? It's not going to be 8% and 9%. I don't believe that. It's going to fall back into line. Is it going to be 2%? As I talked about, I doubt it very much. But I don't think it's going to be 8% or 9% either, so it'll start trending downward. So that means we'll get pricing increases in the future in contract rates to cover inflation. But I don't think much more than that. All of the margin improvement that we will get in the future is because of productivity improvements, that we have better equipment than somebody else, and that we've made better decisions. And we'll continue to work. We always work on that, Tim, and we'll continue to work on it.
spk09: My second question, just looking at EBITDA margins, is it possible just to discuss a little bit the trajectory of margins kind of through the balance of the year that gets you to your EBITDA target for the year? I think, you know, historically and granted with the new presentation, we don't have a lot of history, but, you know, Q4, there's typically a bit of a step down in the margin percentage in LTL and logistics markets. or sorry, LTL and maybe specialized. But could you just give us, again, obviously I'm sure you don't want to get into real specifics, but what we should expect in terms of the trajectory of margins for the segments for the balance of the year?
spk04: Well, let's start with how we did this year vis-a-vis last year. And you should expect that we should have the same the same increases year over year for the balance of the year.
spk09: Okay, so the year over year changes that we've seen kind of through the first part of the year should be sustainable through the second half. Am I interpreting that correctly?
spk04: That's what we think, which is why I said I think we're on target for 300 of EBITDA this year.
spk09: Okay, great. And then my final question, you'd mentioned just more of a confirmation here. You'd mentioned about some non-core asset sales. I may have missed the number, but did I hear $60 million potentially in terms of the three LOIs that you've got? Would the completion of those sales in 2020 to change that kind of you know, let's call it $50 million sort of gross capex number that Carson mentioned earlier, or should we just think about that if that comes through that simply, you know, extra cash that sits on the balance sheet, it wouldn't be redeployed this year?
spk04: Yeah, we can't redeploy it in new capital, forget it. Now, I could, you know, we might redeploy it in acquisitions, perhaps, but not in new capital because we can't get new capital. So we're already behind the curve on our 2022 CapEx. But, you know, we might be able to, we might deploy it into growth CapEx, just repositioning that capital. Or we might just strengthen the balance sheet and just pay down debt. And, you know, we will just play it by ear over the balance of the year as to whether the capital markets are in a total flux, as I call them, and they're going to have a hissy fit for how long. I have no idea. All I know is this. The capital markets didn't have a hissy fit at the start of the year, but now they do. So I don't know what the markets are going to be like at the end of the year, but at least we have options. If I think that the markets are in a bit of disarray, well, we'll strengthen the balance sheet. If things normalize and whatever and we've freed up 60 million, well, we'll go do acquisitions and grow. So that's a great thing about our business model. We've got flexibility galore.
spk09: And are those non-core assets, are they in a particular segment or are they spread across the business?
spk04: Yeah. You know what? We're in a quiet period on our LOI. So I think I'm just highlighting to everybody that, you know what, we're looking at monetizing non-core assets that really aren't adding us a lot of EBITDA. So we'll just frame it up. Okay?
spk09: Great. Thank you very much.
spk04: You betcha. Thanks.
spk00: Our next question comes from Walter Spracklin of RBC Capital Markets. Please go ahead.
spk11: Thanks very much. Hi, everyone. How are things? Good?
spk04: Today they are, Walter, yeah.
spk11: It's a very good day. No, these are great results.
spk04: Congratulations.
spk11: I want to touch on that. I mean, one of the things that when I look at your guidance – And I compare it to what you've commented on a business segment perspective. I came into this call wondering if I could engage by the press release that there was anything one time in the second quarter that was not a trend. So when I look at the segmented, I see you say that less in truckloads, second half will be equal to or better than the first half. when you say logistics and warehousing will continue to produce strong results and specialized industrials should be better than in the first half, when I reflect all that in on a segmented basis, I'm coming up with north of $315 million. And that's assuming, you know, you might have a little bit of conservatism in those segmented commentary, which would mean it might be above $315. So am I... Am I reading something wrong into it? Is there some corporate elimination or something like that that is going to offset the segmented commentary that you provided? Or is the guidance that you provided just have a nice dose of conservatism, even if you add up the commentary on the segmented basis as you provided it?
spk04: Well, you know, you... How do I say this? We said we can – I probably wouldn't say we could do 300 if I thought we weren't going to do 300. So we always undercommit and try and overperform. So I think you have a pretty good analysis, a pretty good take on it, what you said. And if it plays out as we think it might, you know, you could be spot on in your analysis. I'll leave that to you to kind of, you know, make your best guess. But I've given you our best take on what we see and how we see it. And clearly we're on target for a good end of the year so long as there's no job losses, unless there's no major capitulation in the real economy, which I'm not predicting. But I think, Carson, we've talked about it. Last year, our Q3 was our best quarter.
spk05: Yeah, typically, traditionally, our third quarter is now our strongest quarter. And then Q4 obviously falls off because you lose half of the month of December with holidays and that sort of thing.
spk11: Okay, that's a great color.
spk04: So, you know, it's plausible, Walter, although I'm not – I'm reluctant. It's a very fluid market, but it's plausible the third quarter could be our best quarter. Then the fourth quarter falls off typically, but if I'm right that the drilling rig count is going to hit that cyclical high of 250 to 300, then our S&I segment is going to have a good fourth quarter. The stars are lining up pretty good for this business model right here. We feel pretty good about it.
spk11: All right, and then on the non-core assets, you're in a quiet period, but I want to ask whether that sale is an indication of what you might do. It's not that sale.
spk04: Oh, sorry, that... Sales.
spk11: Yeah. Sorry, say again?
spk04: Sales, more than one. It's not just one.
spk11: Is this an indication of a broader strategy... Because you own a lot of your land. Are you looking to monetize more of your balance sheet and your holdings? Is this an indication of further of a strategic shift in that regard?
spk04: No, I don't think it's strategic from that. It's just the opportunity came up. and uh the opportunities that came up were just too compelling for us not to consider on behalf of our shareholders so and then it's just as i said uh if they come to fruition uh you know everybody everybody you know we we were always in lois on acquisitions in this case we're on lois of uh of divestitures you never know how they'll play out you got to go through dealer diligence and you got to come up with funding and all these kind of things so I'm just highlighting is that if it comes to fruition, that's a game changer for our balance sheet. And then we'll figure out whether we just reduce that by 60 or whether we use it to grow in 2023, which is further acquisitions. I can tell you we've got good options on both sides.
spk11: Yeah, and that was the next part of my question is that let's just say it comes to fruition. You're generating a lot of good free cash. You're holding back on acquisitions right now. I mean, you've got the option of shareholder return, but I didn't hear you say much about that in the form of dividend or even buyback. So it sounds like you want to maybe reduce debt, knowing you can always scale it back up, reduce leverage, effectively park that dry powder there. and keep it on hand for either a bigger capex spend next year if the opportunities present themselves, or acquisitions. Am I reading that the right way?
spk04: We got really good, four good uses of cash, but we are just totally steadfast that I'm not going to go try and grow this company and leverage the balance sheet given the uneasiness in the capital markets. That is gambling, and we do not gamble with our shareholders' money. It's too risky. So we'll just take a prudent look at it. You know, clearly we're not going to issue out stock. I mean, you know, investors don't believe that, you know, in our business model, I guess, that's why our stock price is where it's at. But so we have to be, and I'm not going to leverage the balance sheet, so we'll just do it one step at a time. There's not many other ways to do it, Walter. Acquisitions are damn expensive, and they don't pay themselves off in one year. It's a long-term investment, and I don't see where the investors or the debt markets want to make long-term commitment today. So why in the hell would we? We'll just manage our business. We've got a great business. It's twice what we were when we entered COVID, twice.
spk10: And our stock price is not up.
spk04: I rest my case.
spk10: There you go.
spk04: Okay. That's all my questions. Thanks very much, Murray. There was nobody in the forest to hear the trees fall.
spk11: I hear you. Thanks again. Appreciate the time. Thank you.
spk00: Our next question comes from Kevin Chang of CIBC. Please go ahead.
spk06: Thanks for taking my question. Congrats on a very strong set of results there, Murray and team.
spk04: Yeah, we had a pretty good one. Yeah, we hit it out of the park. And so, you know, every analyst missed it. What was the average? Like 66? I think the one thing that most, nearly everybody missed, everybody got kind of the top line, right, except for one thing. Nobody believed that we were going to get the pricing increases. And pricing increases have increased by 10% on $450 million. There's $45 million of incremental revenue. And we maintained margin. Actually, we grew it. I think that's where most everybody missed. They thought we were going to do the same as last year, which is where the 66 came in. Maybe beat it by a little bit. So, yeah, I felt pretty good about our quarter, for sure.
spk06: No, you definitely hit it out of the park there. Maybe if I could ask Walter's question differently, because it does feel like you saw accelerated pricing growth in Q2 and maybe less so in in Q1, which was also impacted by Omicron to start the year. If I just look at the 94 million of EBIT done, it sounds like, again, this is outside of some sort of economic slowdown. So maintain the status quo, which looks pretty good for you. It's hard to see how your normalized earnings on an annualized basis isn't something like $350 million or something north of that. And I know you'll give us a business update know sometime in december this year but is there anything off about just taking what you did in q q2 you know applying what could be normal seasonality for your business um and assuming again kind of the economy status quo that you're not like a mid 300 epa duck company or or should or am i often by very simplistic math yeah it sure feels like it um if prices remain sticky
spk04: which I'm predicting they will, then we made a major step change in the revenue side with the acquisitions, and then in the pricing side, we've done that. Our business units, it was really difficult for all of your businesses that have lived in a non-inflationary environment for 20 years to adjust on a dime to the rising inflation. We talked to them about it, but it was really difficult for them to have those discussions with customers until it became so painfully obvious that inflation was running rampant, that we had to raise the prices. And those were tough discussions we had with our business units. In March, they finally had the wherewithal to go and implement them, and you can see the end result of that. Not only did we cover up the inflationary pressures, but we actually added the margin. And I suspect that I don't want to go back. I don't think they want to go back. And unless the market forces us to go back, and I don't think it will, then we're not going back.
spk06: And then just on the pricing, if I kind of look at it from a yield perspective, perspective. So you mentioned pricing of 10% was any tailwinds related to to mix because I have to think that and tell me if I'm wrong, I have to think that q2, you know, you probably saw a bigger, better recovery and b2b volumes. Just as things reopen, I kind of think of that as being heavier. And that's generally, you know, a positive mix shift when it when I think of yields, is that was that something that also helped in terms of the broader unit revenue trends or is that something that wasn't material in the quarter?
spk10: I don't think so, Kevin.
spk05: Carson? I didn't see any one-off type changes that really impacted the quarter there, Kevin.
spk04: The one-off change, Kevin, the one-off change was pricing increases. Yeah. That is not something we've seen. Now, we used to see that when the oil and gas sector was booming. So that means we haven't seen it in over a decade in our company. But in the general economy, haven't seen it in two decades. So yeah, I would say the one-off change was pricing increases. But no, we're not going to have another 10% rate increase
spk06: in q3 over q2 but you have uh you know q3 uh pricing increases will be 10 percent above q3 of 2021 right well that's uh that makes a ton of sense uh this last one for me you know i've noticed um you know port congestion or the west coast ports here in canada you know the rail dwell times have been have been kind of picking up here just just wondering what you're seeing know within your intermodal franchise and just anything concerning or anything that you're worried about as you kind of think about fluidity in the back half of the year and as you kind of progress to you know 300 plus million of you but uh like how much of a risk is this is it something that seems manageable or is it something that's uh that's concerning in your eyes you know that's a a really good observation kevin i you know we monitor this daily uh let me
spk04: I think the supply chain is still subject to some real bottlenecks. And I think now the bottleneck is now starting at our warehouses. So our warehouses, Kevin, I can tell you, I talked to her, but they're jam-packed. So that means we can't get any more inventory in. But there's inventory in the water. There's inventory on the trains. So you can't bring the container to us because they can't handle it. So then if you can't bring it to us, it can't get out of the railway station. If it can't get out of the railway station, they can't. So there's always a bottleneck. And it appears that the freight is not moving out of the warehouses at a fast enough clip to let new freight in. So that's why I say to you, I really feel for the retailer right now because they're in a bit of disarray. The railways... They're good friends of ours. We use them a lot, but, man, it's a mess. And now you've got particularly issues down in California. That could morph into other parts, which is labor disruption. And you've heard about AB5. And, you know, the independent contractors are striking in California. Because the state of California has ruled that independent contractors can't be independent contractors. And they're fighting mad. And the port union workers in Oakland will not cross the picket lines. Freight is not moving until this gets resolved. So it's a Mexican standoff. It's a shootout of the OK Corral. I don't care what the hell you want to call it. It is going to bottleneck the supply chain. That means you can't offload the ships.
spk06: Right. No, that makes sense. That makes sense. I'll leave it there, Murray. Congrats again on the good Q2. I'll say we all heard the tree fall on this quarter.
spk04: Thank you. Thanks, Kip. Look forward to chatting again. Take care now.
spk00: Our next question comes from Matthew Weeks of IA Capital Markets. Please go ahead.
spk02: Good morning. Thanks for taking my question. Congrats on the good quarter. I think most might have been answered at this point, but I just want to ask, and you talked about sort of the different dynamics you're seeing between spot and contracts rate a little bit recently here. I'm just wondering if you could provide any kind of commentary or color on, you know, how much your business would you say roughly is exposed to spot market versus how much is typically contract?
spk04: Geez, like I would say nearly all LTL businesses is contract rate. It's either book rate, contract rate, whatever. So LTL is very sticky in terms of whatever the rate is, what the rate is. In the logistics and warehousing business, so the long haul business, business, the spot market, a lot goes on load boards and it's posted. The trucks post the trucks and the freight brokers would post what their freight is and that kind of sets what the market is for the spot market. That's soft, but still it's the independent contractors that are taking it on the chin in the spot market, not bigger companies, because we typically don't play in the spot market. Our logistics business plays the spot market, but as I said to you, we just manage the spread between what the market pays and what we can buy a contractor on the market for, so we still manage the spread. Our spread hasn't changed, I don't think, has it, Carson? No, it hasn't. The prices, you know, the price of the contractors went up, we raised the cost of the customers. The spot market changes. we don't get as much from the customer, the trucker doesn't get as much. It's the independent contractor that's at risk here as the spot market, you know, adjusts to whatever the economy is at that day. Whereas the larger carriers, we typically don't play the spot market that much, you know, with our company equipment.
spk05: Yeah, our margins on our, in the LTL, or sorry, the L&W segment actually improved here recently. in the last quarter, year over year.
spk02: Okay, thanks. I appreciate the commentary on that. I'll turn the call back. Thanks. Thank you.
spk00: Once again, if you have a question, please press star, then 1. Our next question comes from Michael Robertson of National Bank Financial. Please go ahead.
spk01: Hey, good morning all great quarter cognizant of the time here, so I'll just have a quick follow up. I guess just wanted to touch on your updated guidance for the year. If I look at those numbers and back out, you know what you've done in the first half of the year, it looks like you know you're pointing to margins. going down from what we saw in Q2 and I guess in H1 as a whole. I was just wondering if you're seeing some specific drivers behind that that you could speak to, or if maybe that's just, as you noted earlier, you know, erring a bit on the conservative side.
spk04: Well, I think we were conservative. I'm always conservative, Michael. I'm not a promoter. We tell people this is our best analysis. I can tell you that, uh, uh, you know, I don't, I don't ever want to perform under perform what we tell the market. Uh, so I would say to you, I would think that I would not say 300 if I didn't think it was baked in the cake.
spk01: Got it. Got it. So you don't see, I was just wondering if maybe there was like a cost creep or something that you saw catching up in the back half of the year that might, uh, put pressure on those margins relative to what you've seen.
spk04: I don't see that because I think that the prices are sticky for the reasons I've explained. I don't think that freight volumes are increasing. Yes, freight volumes are increasing and demand is increasing in the specialized industrial side. There's no doubt about that. And that's because the drilling rate count is going up. In fact, we're seeing the recount is going up like 10 a week right now. So we'll hit that 250 to 300, and that's kind of the peak where I think that industry settles out of it. We've raised the prices. We'll have good margins and a good second half for our S&I side. In the rest of our business, we're going to bust our butts here to make sure that the margins that we had in the second quarter are maintained throughout the, you know, the balance of the year. But, you know, the whole market softens a little bit as we go into the fourth quarter with the consumer spend. So take what we do in the fourth quarter of last year and our logistics and warehousing and our LTL side and say, well, we still should improve it by, one percent cars i mean you know we improved one percent in this last quarter and that's with our 3pl in there but if you take the 3pl out and you take you you know we'll we'll have a nice increase that's our expectation it'll be up by at least one or two percent the margin over last year not over not over the second quarter over last year we're talking about the rate of change year over year got it got it uh appreciate the uh the color as always great quarter i'll uh back to take chances Thanks, Mike. Appreciate that. Thanks, Gary.
spk00: This concludes the question and answer session. I would like to turn the conference back over to Mr. Mullen for any closing remarks.
spk04: I just want to wrap up and say thanks, folks. Early start to the day, we got the numbers out. We're already focused on Q3. The other stuff we've got working on, we've got a lot of work ahead of us, but we feel pretty good about the last half of the year. But we watch carefully. We've got a keen eye on the capital markets just in case the capital markets are right and the world is coming to an end. So we watch it carefully, but we don't predict it. Take care, have a great summer, and stay safe.
spk00: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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