Mullen Group Ltd.

Thank you for standing by. This is the conference operator. Welcome to the Mullen Group Limited Third Quarter 2024 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 1 on your telephone keypad. Should you need assistance, During the conference call, you may signal an operator by pressing star then 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 to Mullen Group's quarterly conference call. So once again, we'll provide shareholders and interested investors with an overview of the third quarter financial results. And in addition, we will discuss the main drivers impacting these results, our expectations for the year, and we'll close with the Q&A session. But before I commence today's review, I'll remind everyone that our presentation contains forward-looking statements. And these are based upon current expectations and are subject to a number of risks and uncertainties. And as such, actual results may differ materially. And further information identifying these risks, uncertainties, and assumptions can be found in the disclosure document, which are filed on CDAR Plus and at www.mullen-group.com. So with me this morning, once again, I have the full senior executive team. I have Richard Maloney, senior operating officer, Joanna Scott, senior corporate officer, and Carson Urlacher, who's the senior financial officer. So this morning, what happened in Q3-24 in terms of our financial operating performance? Well, the three main topics that... we'll be discussing this morning, and then we'll turn the call over to the operator, and we'll go straight to the Q&A session. I'll begin with the call with talking about the macro environment that we had to migrate through last quarter, along with discussing what has changed year over year. Then I'll turn the call over to Carson Urlacher, who will provide an overview of the third quarter financial results. And I will remind you, for those interested in details, We've posted the MD&A, a detailed 60-page report covering all aspects of the results in balance sheet, both on our website, which is www.mullen-group.com and on CDAR+. So then after that, we'll close with a discussion on the macro environment as I see it and how our results might be infected for the rest of the year. Then we'll go to the Q&A session. Let's talk about the macro environment. So last quarter, you'll recall that I stated that really in our markets that kind of everything had changed, acknowledging the fact that the market is different than last year, in fact, the last two years. So under this scenario, it would be reasonable to expect that results would be different than in prior years. And this is precisely the case with the results that you're seeing from most carriers and from ourselves. Except for one reason, and that's acquisitions. I've commented that I think acquisitions were the only way you could grow in a no growth economy. So we were right on the first, and perhaps we were one of the very few public companies to acknowledge that acquisitions would be the only way to grow given the market fundamentals. And we didn't see a whole bunch of reason to change that from the internal market dynamics that were going on. Early 24, you know, after we were comfortable with the prospects of strengthening the balance sheet with a new and expanded bond issuance, and we expected a meaningful acquisition, we executed a meaningful acquisition, finding what we believe is a real market leader in Container World. And on that, Container World has a significant preference in the beverage and alcoholic vertical and province of British Columbia. They generate around 120 million of annual revenues. They operate as a freight forwarder. They operate a customs bonded warehouse and they are a delivery company. So these are three attributes that we consider crucial to being successful in this market. Now we also know we've got lots to do with this business to make it a profitable venture for our shareholders and we'll turn our focus and attention to that in 2025 and beyond. It'll take a while to change the culture to one of cost driven and be very focused on those kind of things. But for right now, thus far, we've been focused on making sure that there was a smooth transition from a customer perspective. And next year, we're going to focus on the cost side, as I talked about. And that's really kind of come from a combination of investing in new operating assets, technology, and some business process improvements. But I've got to tell you, I think there's more to our results in Q3 than acquisitions. We could not have achieved record revenues, and near record profitability if our existing 39 business units did not manage the challenging market conditions as well as they did. So a big shout out here to all of our business units. Your hard work and disciplined cost management initiatives are a big reason MTL had a very good quarter. Now we also know that solid senior leadership must also be accompanied by investments in the right verticals in order to achieve solid results today. I've commented many times, there's lots of really good operators in our business, but if you're in the wrong vertical, you're trapped right today. So I continue to state the case of this strategy because not all verticals are created equally. Now, you may recall that over the years, we built a large diversified organization by focusing on acquiring quality companies that operate in verticals of the economy that we believe are sustainable and where we can achieve acceptable rates of return. This means we must be disciplined and not chase incremental revenue streams simply for top line growth. Our strategy to invest where we generate acceptable returns on capital for our shareholders. For example, let's consider the LTL segment. Not only is this business in one of the most stable parts of the supply chain, but it also offers, in our opinion, the opportunity to expand margins through a combination of tuck-in acquisitions that help us drive scale through the introduction of new technologies that reduce cost, and something that really the smaller competitors just simply cannot implement. And we focus on yield management. And I think there's some evidence that this strategy is working. And I refer you to our Q3 operating segment results, where operating margins in our LTL segment actually increased year over year by a healthy 1.1%. So pretty impressive given that the economy is stuck in neutral. So a discussion on the market trends last quarter is also relevant to our performance last quarter, so I'll highlight a few of the challenges our business units had to deal with. Let's start by looking at the overall economy. Central banks have successfully brought inflation to the 2% range, but this has only been achieved by slowing the economy through a more restrictive monetary policy and higher interest rates. These initiatives have resulted in virtually no growth in the economy. But it has not collapsed the economy either. We also know that the consumer's pocketbook has negatively been impacted by yesterday's inflation, which I call the worst tax of all on the vast majority of society and high interest rates. So in other words, consumer spending has moderated as compared with prior years. And what this means for the freight and logistics business is that overall demand has softened from heightened levels of 22, 23. But I always say this, demand only tells one half the story, supply is the other. And in this case, it's pretty evident there's more supply today than there was two years ago. And this means there's only one outcome. Pricing comes under pressure. And I would argue that this is now the Achilles heel of the freight and logistics business. There's freight to haul, but the rates are too low for the cost structure the industry is burdened with today. And customers have been quick to bite on the low rates, giving precious little credence to long-term relationships or quality. So this explains why it's difficult to maintain margins today in most verticals. And this in turn exposes the business models that are too dependent on the full truckload market as an example. But, and perhaps this is the good news, nothing lasts forever, and I'll have more to talk about this topic in the outlook section. So in summary, Nothing really surprises this quarter, not the market fundamentals, not the economy, and not the performance of our business units, which are professionally managed and focused on generating the very best results they can. So I'm now going to turn the call over to Carson for more on the Q3 financial analysis. So, Carson, you are up. All right.

Well, thank you, Murray, and welcome, everyone. As Murray mentioned, I will focus on the highlights from the third quarter, the details of which are fully explained in our third quarter interim report. I thought this quarter it would only be fitting for me to first talk about the balance sheet, since we closed a $400 million 10-year private placement debt financing in the quarter. This new financing enabled us to end the quarter with $344.4 million of cash on hand. Earlier this week, we used $217.2 million of this cash to repay some previous notes that came to maturity. After this week's repayment, we now have approximately $130 million of cash on hand. We also have access to $525 million of undrawn bank credit facilities, providing us with ample liquidity. In terms of our debt covenants, we have lots of room available. We effectively have one main debt covenant, which is total net debt to operating cash flow. Once adjusted for this week's debt repayment, our total net debt to operating cash flow covenant is 2.26 to 1 and 2.54 to 1 under our new 2024 note agreement and on our previous private placement note agreement respectively. The total net debt to operating cash flow covenant is calculated differently under the new 2024 note agreement compared to the previous private placement debt agreement. The main difference being what is considered debt for covenant purposes. Under the new 2024 note agreement, lease liabilities with respect to real property is excluded from debt, while our $125 million of convertible debentures is now included as debt for covenant purposes. These two items differ from the previous private placement debt agreement. Our $130 million of cash is not reflected in this covenant, so our covenants would actually be lowered even further once our cash is deployed to generate new operating cash flows. Excluding lease liabilities with respect to real property under the new 2024 note agreement provides us with greater flexibility in positioning our existing business units into strategic facilities. and provides greater optionality when it comes to making long-term investment decisions with respect to acquisitions. Our new blended interest rate, excluding the notes that were repaid this week, is approximately 5.3% per annum. So in summary, our balance sheet is once again well-structured and positions us to make long-term strategic investment decisions, with over a full turn of room available on our debt covenants and cash available on the balance sheet to grow. Now to our operating results. The third quarter highlights that really stick out are that we generated $532 million of consolidated revenue, a record compared to any previous quarter. We generated a very respectable $95.3 million of OIBDA, which is the third highest OIBDA compared to any previous quarter. We generated net cash from operating activities of $66.2 million and our return on equity was 15.3% in the quarter. Earnings per share also remained consistent year over year at 44 cents per common share, so a very solid quarter from a financial perspective considering current market conditions. I'll go through the results by segment shortly, but the overall theme is as follows. Top line revenues grew due to the acquisition of Container World. We entered a new vertical of the economy at a reasonable valuation, giving our organization a new platform and opportunity for future growth. We also improved operating margins. that resulted from the combination of our tuck-in acquisition strategy, from the niche markets we serve, and from the diversity of our 40 business units. In the third quarter, revenue for working day improved by approximately $500,000 per working day to $8.6 million, with revenue peaking at $8.9 million per working day in the month of September. From a seasonality perspective, the revenue trend continues. with Q3 typically being the strongest quarter of the year. We generated OIBDA of 95.3 million, an increase of 6.7 million compared to the prior year, and this is the second highest Q3 ever recorded, second only to Q3 of 2022. Acquisitions added 6.4 million of OIBDA. We also experienced improved results in the LTL segment and in the L&W segment, excluding acquisitions. These increases were somewhat offset by lower OIBDA in the S&I and U.S. 3PL segments and from higher corporate costs. Operating margin improved to 17.9% as compared to 17.6% last year, despite more competitive pricing conditions in certain markets and a reduction in higher margin specialized business. Direct operating expenses as a percentage of consolidated revenue decreased by 1.3%, as our business units did a great job adapting to current market conditions and controlling costs. S&A expenses as a percentage of consolidated revenue increased, resulting from higher cost experienced at Container World and from a negative variance in foreign exchange. Now let's take a look at how we did by segment. First, our largest segment. Revenues in the LTL segment were $188.7 million, down $5.5 million from last year due to a softening in the overall freight demand. from demarketing underperforming business and from a $1.6 million decrease in fuel surcharge. OIBDA was $35.7 million, up $1.2 million from last year despite lower segment revenue. Operating margin improved by 1.1% to 18.9% due to the tuck-in of B&R's LTL operations into our existing network, driving greater lane density as well as using our existing technology platform. Our second largest segment is our L&W segment. Revenues in the L&W segment were $168.9 million, so up $31.8 million. Acquisitions added $33.6 million of incremental revenue, which was somewhat offset by lower revenue generated from our existing business units due to the lack of capital investment in the private sector from competitive pricing in certain markets and from shippers electing to keep a tight rein on inventory levels. OIBDA was $35.2 million, up 8.4 million from the prior year, with Container World adding 6.4 million of incremental OIBDA, while our other business units added 2 million of OIBDA due to more efficient operations. Operating margins improved by 1.3% to 20.8%, primarily due to lower direct operating expenses. Moving to our S&I segment, revenues were up 6.4 million to 131.8 million, due to increased activity levels in the Western Canadian sedimentary basin. The diversity of our 17 business units within this segment led to higher revenues. Our production service business units benefited from certain projects related to facility maintenance and plant turnaround work. Our drilling-related services business units also saw an increase in demand for their services. Somewhat offsetting these increases was a reduction in revenue of pre-May pipeline due to the completion of the Trans Mountain and Coastal Gas projects. Canadian Dewatering experienced lower demand for dewatering services, and Smoot Contractors also experienced lower demand for civil construction services in northern Manitoba. OIBDA was $28.5 million, down $1.2 million from last year, due to lower OIBDA being recognized at Pre-May Pipeline and Canadian Dewatering. Lower OIBDA was also experienced at our drilling-related service business units, as OK Drilling experienced certain one-time wind-up costs. Operating margins decreased by 2.1% to a respectable 21.6% due to the reduction of higher margin business and from higher S&A costs. In our non-asset-based US 3PL segment, revenues were $45.7 million, a decrease of $3.1 million from last year due to the ongoing issue of operating in a highly competitive market. OIBDA declined to $0.3 million and operating margin on a net revenue basis was 7.5% compared to 25% in 2023. The decline in operating margin was primarily due to higher S&A expenses as a percentage of segment revenue. So in summary, a very solid quarter from both an operating and financial perspective, as well as exiting the quarter with a balance sheet that puts us in a very enviable position going forward with cash on hand, lots of room available on our debt covenants, undrawn bank credit facilities, and long-term notes in place at decent rates that mature in 10 years. So with that, Murray, I will pass the conference back to you.