Mullen Group Ltd.

Thank you for standing by. This is the conference operator. Welcome to the Mullin 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 and welcome all to Mullen Group's quarterly conference call. We will be providing shareholders and interested investors with an overview of our second quarter financial results. In addition, we will discuss the main drivers of impacting our operating performance, our expectations for the year, and close with a Q&A session. But before I commence today's review, I'll remind everyone that our presentation contains forward-looking statements that are based on 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 this morning, I'm calling in from our brand new state-of-the-art facility in Kamloops, B.C. It's a 36,000-square-foot crosstalk. It's got 40 doors and warehouse capabilities, including we can service our ambient capabilities for our customers. The terminal is now occupied by Apps Cargo. It's a leader in the West Coast logistics space. It provides, and this provides apps with a great facility, ensuring they can service the entire interior BC from a central location. And as our shareholders know, LTL is one of the core investments identified by our organization. And this facility is just another great example of an investment by our company and how we ensure our LTL businesses are positioned for the future. Now back in Okotoks, the corporate office, the other members of the senior executive team are joined on the line. I have Richard Maloney, senior operating officer, Joanna Scott, senior corporate officer, and Carson Erlacher as our senior accounting officer. And he's the primary architect of the interim report. And he'll be reporting on analysis and discussion on our financial performance. So let's start this morning's call with a review over Q2 2003 financial operating performance. And in this section, I really will address two topics. The first is how did we do? And the second is how did we do it? So from my perspective, I have to say Q2 was another very good quarter for our organization. We managed to mitigate most of the collateral damage from the change in the economy. And from that perspective, what I really mean is we saw consumers alter their spending patterns away from buying goods, doing things like travel, personal services, going out to restaurants, concerts, etc. But the consumer, I think, only tells half the story here. Businesses also changed. Retailers, manufacturers, shippers, They finally realized late last year that they miscalculated their supply chain requirements and began to right-size inventory levels after ordering way too much in 21-22. This combination, changing consumers' habits and business right-sizing, led to lower freight volumes and more competitive pricing in 2023, which is the exact opposite of last year. So in other words, we went from a freight boom... in 2022 to a freight recession in 2023, all within a few quarters. Now, the other thing to remember about our results, the last year was punctuated by high fuel prices that were passed on to customers via fuel surcharges. Now, this year, there's been a moderation in fuel prices. And as a result, fuel revenues are down $20.8 million year over year, just in the second quarter. This alone represents the majority of the consolidated revenue decline of 27.2 million. Now, despite all of these changes in the market, we still managed to generate some pretty nice results. Basically, what the numbers tell us is that we had a pretty good quarter, which is, as I mentioned, is even more compelling when comparing to the boom in 2022, a year of supply chain disruption, off-the-chart freight demand, and pricing surcharges implemented due to the surge in demand. So I would say, yes, revenues were down in the quarter. They're down about 5% year over year. But perhaps a better way to look at our performance is to compare not to the boom year of 2022, but compare to our five-year average, or as I like to say, the period before 2022. In fact, excluding last year's results and looking at our five-year historical average, you'll see that we exceeded prior year periods by a mile. So when I say I'm pleased with our performance in Q2, In fact, for the first six months of 2023, you will know what I am referring to, and that's the long term. So most shareholders have come to expect that we will grow this company in a prudent and thoughtful manner. We always think about tomorrow. We never chase deals, particularly at the top of the market like last year. We have a long-term game plan, and we stick to it. Now let me just give the next couple of comments here about how we did it. Firstly, and most importantly, I'd say it has to do with our diversified portfolio of service offerings and our brand-name business units that are involved in multiple different verticals within the North American economy. This diversity is all part of our risk management strategy. It helps in times like last quarter where we saw some pretty stiff revenue and price declines in the big consumer markets like Metropolitan GTA in Ontario or in Vancouver and in the United States where the freight market was hit particularly hard. There was, however, we saw some pockets of strong demand, such as transload services, which is where our Cleason Group shines. And from our vantage point, the Western Canadian market was the best-performing market, with energy and mining industries continuing to provide a solid base for companies that are in our old-field services business or at Canadian D Watering, which everyone will know is a leader in water management and logistical support services, and at the Banster Group. which is, by the way, a key supplier to BC's mining industry. In other words, diversification matters in times like this. Now, we also did a couple nice tuck-in acquisitions where we saw a good fit, the price was right, and where there were lots of synergies to be had. In fact, acquisitions added $22.6 million to our consolidated revenues, and that mitigated the loss of business and most of the loss of business and fuel surcharge revenue. And in terms of operating profitability, often referred to as OIBDA by the accounting profession. We adjusted, and we did a great job of managing operating costs, especially generating a very healthy $83.4 million in the quarter, and that represents a margin of about 16.9%. It's down about 1%, but I think we can make this up once we get these new acquisitions fully integrated into our network, which I expect to occur soon. by year-end 2023, and that'll set us up, I think, pretty good for 2024. So for more on the quarter, I'm going to turn it over to Carson. Carson, it's your turn. You're up, bud.

All right. Well, thank you, Murray, and welcome, everyone. Today I'll provide the highlights from our second quarter, the details of which are fully explained in our second quarter interim report. Consolidated revenues declined by $27.2 million to just shy of $500 million. and was due to the net impact of four factors. First, revenue excluding acquisitions and fuel surcharge declined by approximately $25.5 million due to lower freight volumes, particularly in eastern Canada and from the more normalized pricing environment compared to the elevated levels of last year. Second, fuel surcharge revenue declined by $20.8 million as diesel fuel prices decreased by 35% year over year. Thirdly, we disposed of our HydroVac assets and business in 2022, which contributed to a $3.5 million reduction in revenue. And lastly, somewhat offsetting these revenue declines was $22.6 million of incremental revenue from acquisitions. OIBDA decreased by $10.5 million to $83.4 million, largely due to a decline in the LTL segment. OIBDA in our other three segments remained relatively flat year over year. Operating margin decreased by 1.1% to 16.9%. Now let's take a closer look at how we performed by segment. Starting with our largest segment, revenues in the LTL segment were down $17.3 million to $193.4 million due to lower fuel surcharge revenue, lower freight volumes in eastern Canada, and from a more normalized pricing environment. As a result, OIBDA was down $7.9 million to $34.5 million, Operating margin decreased by 2.3% to 17.8%, primarily due to lower margins experienced by BNR, our most recent acquisition. The financial results of BNR contributed to almost a one full percentage point decline in segment operating margins. Our second largest segment is our L&W segment. Revenues in the L&W segment were down $13.8 million to $142.9 million. due to the continuation of the inventory rebalancing cycle and softer freight demand. Other factors contributing to the decrease in revenue consisted of lower fuel surcharge revenue and a reduction in revenue from the sale of our hydrovac business. OIBDA remained relatively flat year-over-year at $30 million, while operating margins improved by 1.5% to 21%. Operating margins improved due to the strong results at Clayson Group and from the ability of us to use owner-operators and subcontractors more efficiently. Moving to the S&I segment, revenues were up by $6.8 million to $107.3 million on $13.3 million of incremental revenue from acquisitions, which was somewhat offset by lower demand for some of our services due to extreme wildfires curtailing activity levels and from the timing of certain turnaround and maintenance work activity. Lower fuel surcharge revenue and the sale of our hydrovac assets also contributed to a reduction in revenue. OIBDA in absolute dollar terms was relatively flat year-over-year at $20.6 million. Operating margins declined slightly to 19.2% due to higher S&A costs as a percentage of revenue. In our non-asset-based U.S. 3PL segment, revenues declined to $50.8 million due to lower freight demand in the U.S. for full truckload shipments. OIBDA decreased to $0.9 million which was mainly due to higher S&A costs as we added IT staff to continue the development of our proprietary software known as Silver Express. Operating margins declined to 1.8% on higher S&A costs. Operating margin on a net revenue basis was 18.8% compared to 43.1% in 2022. Net income decreased by $6.2 million to $36.5 million or $0.41 per common share. This decrease was mainly attributable to lower OIDA and from a reduction in earnings from equity investments, which was somewhat offset by lower income tax expense and a positive variance in net foreign exchange. The number of common shares outstanding decreased in the quarter as we repurchased and cancelled approximately 2.1 million common shares for $31.5 million, or an average price of $15.11. We continue to generate strong cash flows in excess of our operating needs, as net cash from operating activities in the second quarter was $88 million, an 80% increase compared to $48.8 million in 2022. This increase was mainly due to the changes in non-cash working capital items. Our balance sheet remains very strong. Our debt-to-operating cash flow covenant under our private debt agreement is at 1.95 to 1. We have a total of $250 million of bank credit facilities available to us, of which we had $115.7 million drawn at the end of the second quarter. So with that, Murray, I will pass the conference back to you.