Mullen Group Ltd.

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.

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.

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.