Mullen Group Ltd.

Thank you for standing by. This is the conference operator. Welcome to the Mullen Group Limited year-end and fourth 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. We'll provide shareholders and interested investors with an overview of the Q4 2024 financial results. In addition, We will discuss the main drivers impacting these results, our expectations for 2025, and we'll close with a Q&A session. Now, before I commence today's review, I'll remind everyone that our presentation does contain 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. For further information identifying the risks, uncertainties, and assumptions, These can be found in the disclosure documents which are filed on CDAR Plus and at www.mullen-group.com. So with me this morning, I'm joined in Okotoks by Carson Erlacher. He's our Senior Financial Officer. He's going to be speaking this morning. And online is Richard Maloney, our Senior Operating Officer, and Joanna Scott, our Senior Corporate Officer. Let's start. I'm going to start with the 2024 financial operating performance. And really, there are three topics that I want to touch on this morning before I turn the call over to you for Q&A. So let me begin by talking about the macro environment that we've had to migrate through this last quarter. In fact, all throughout the whole year, which is along with discussing what has changed year over year. Then I'll turn it over to Carson Urlacher. He'll provide an update on Q4 financial results. And for those of you that are interested in detail, we've posted the 2024 annual financial report online. It's a detailed 125-page report covering all aspects of the results and our balance sheet. And it's both on our website, which is www.mullen-group.com and on CDR+. Then I will close with a discussion on the macro environment as we see it and how the results could be impacted. Now, let me just kind of go off topic for just an off script for like two seconds. And I go, you know, the market's difficult. But let me just summarize what I think. Forget about the last quarter or the last year. Let me give you what we've done the last three years. Do you know that in the last three years we've generated two, two, and two? Two billion, two billion, two billion. That's six billions. And during that time, we've generated OBDAW, operating income for depreciation and amortization, of nearly $1 billion in those three years through every market that you could imagine. So really, we've got a pretty stable business these days that we've changed over the number of years. And that's what we've got. The last three years kind of prove the stability of performance. And what we had to do at corporate offices, we had to backfill because the market isn't giving us a whole bunch in 2024. But that's basically, I'll just go off script on that for a little bit, just to summarize it for you, to say this is who we are today. That's the new Mullen Group. So let me start by reiterating what I think should be obvious to everyone by now. You know, we're mired in a no-growth economy here in Canada. Capital investment is not anywhere near it should be. And in the transportation and warehousing industry, there remain lingering issues associated with the inventory rebalancing by shippers and excess capacity that was built up during the 22-23 freight boom era. So 2024 started this year and it ended that way, which is precisely what we anticipated and what we articulated to investors throughout the year. In other words, really nothing changed in Q4. The markets we serve are challenging. There was no growth. It was certainly competitive. And the costs remain elevated due to inflation and the legacy issues associated with facility lease costs that had to be signed at the peak of the market, et cetera. So quite simply, there were no free rides in 2024. Now within that background, how did Mullen do? You know, how did we fare? So anticipating that the macro environment might be challenging, we've been pretty steady on that for quite some time. Accompanied by the lack of new capital projects to replace the major pipeline construction work in 2023, you know, we planned a corporate office to backfill what the market would not provide to our business units. We simply reverted to what we've always done and what we're good at, and that's acquisitions. And this is the number one reason why we held our financial results flat through 2024, including Q4. So not only did we hold our own, but I think we've also positioned Mullen for a bright future by investing in some really good opportunities. You know, what I'm really proud of is not the five acquisitions we completed last year, but it really was that stellar performance of our 39 legacy business units. They did a great job. They did not have an easy market. They managed through what I can only describe as challenging conditions. So I've got to say thank you, team. Your hard work and discipline cost management issues are a really big reason why Mullen Group performed as well as we did throughout 2024. Now, I also fully expect that we can continue to benefit from all this hard work in 2025. So keep your foot on the pedal, team. So how did our four operating segments do last quarter? Well, investors know that the organization's been built up over 30 years by investing in verticals within the economy that we believed offered the most stability and growth potential. But here's what we really focused on. Can the business we invest in generate free cash? From this perspective alone, it is evident that our performance over many years, you know, and Some years were not good and some were not so good, but this validates that this strategic approach to investing your money is a successful formula. Here's the proof. We've returned over 1.5 billion to shareholders over the years. And I believe with much more to come because of our past decisions and investments. Our business is built around an extensive network of great business units. It's operated by passionate and professional management teams. In corporate office, we maintain a healthy balance sheet that we can add new investments as opportunities arise. Carson will speak about that in his presentation. High on the list of great verticals within the portfolio of really good solid business units is our LTL segment. Earlier, you heard me speak about the challenging market conditions, but LTL, it's a little bit different. It is, generally speaking, very steady, and the fourth quarter was no different. Segment revenues were somewhat flat. And this is with fuel surcharge revenues being down year over year by $5.3 million, and that's only because the price of fuel is down. So, you know, you lose $5.3 million from fuel surcharge revenues in the quarter. Most impressive was a nearly 1% improvement in operating margin. The segment's not only resilient, it still offers what we think is the best opportunity for margin improvement. As we continue to invest in technology, better yield management, improved lane density, And we think that comes from tuck-in acquisitions. Now, what about the L&W segment? Well, we saw revenues improve by 14.3%. And that was mainly due to the acquisition of Container World earlier in the year. And the solid performance by our two largest business units in the segment, Cleason Group and Banster Transportation. Margins held steady, which I think in itself is a major win. And we remain of the view that this segment offers the most growth potential as we build out a national network of warehousing and logistic capabilities. You know, combining first-class warehousing with intermodal capabilities and a final-mile delivery network, that's how we're going to provide customers with a valuable end-to-end solution to meet their logistics needs. S&I segment. That's on the other hand. We had a tough quarter. This was not unexpected, though, primarily due to the completion of the major pipeline projects in Western Canada. projects that were not replaced, and we always have articulated to people, you have to build the pipelines, then you drill to fill. The drill to fill has not happened yet, but the pipeline work is done. The next stage will be you've got to fill the lines, and that's with natural gas and with crude oil. So we also decided to exit on some business lines, such as Drilling Services Group, and that was only due to one thing, the high cost to replace capital equipment And we didn't think it was worth deploying new capital. And so we exited the businesses. Plus we chose not to invest in new acquisitions in this vertical due to the lack of quality opportunities. So as a result, revenues were down year over year in the fourth quarter by 18.7 million or 15.3%. These revenue declines were virtually all due to pre-made pipeline business unit. And as the principal reason segment OBDAW declined by 8.4 million. Now, unfortunately for Mullen Group and perhaps even Canadians, is the fact that capital-intensive projects came to a virtual halt in 2024. However, the reigning business units of segment were essentially flat year over year. U.S. 3PL and international logistics segment, you know, actually we generated the same results in Q4 as the prior year period. And to me, that's the first signal that we've seen to suggest that the U.S. logistics market has stabilized. Margins remained under pressure due to competitive markets, but this too could change as revenues improve, primarily due to the fixed cost nature of the S&A expenses holistic, which, by the way, is currently the only business unit in the segment. So in summary, I've got to say, no real surprises. The markets remain competitive. We streamlined businesses where needed. Our business units did a great job given the market conditions. In the corporate office, you know, we were busy looking at opportunities. We found a couple nice gems that we believe fit nicely in the group. But I'll tell you, we passed on all the big acquisitions because of what we believe are structural changes occurring in the transportation or housing industries. And if we're correct in our analysis, this implies that competitive conditions will remain for an extended period. So we'll be ultra-cautious until we see signs of stabilization. But I want to make it clear that being realistic about the current market conditions does not mean that the markets will not eventually improve. wind remains the only unknown to our senior executives. And when the market starts rewarding the industry for the capital invested, we will be there to invest and to acquire. More on this in the outlook section. Now, one more topic I'll talk about this morning, and that's safety. You know, on Tuesday, we held our annual safety award presentation with all our business units. Our director of HS&E and risk management, Randy Mercy, he hosted the meeting providing everyone with a detailed report on our safety statistics for the entire group. And we benchmark every single business unit. And I'll tell you this, you do not want to be the leader of a BU that comes in with poor safety results. But it is more than just about statistics. It's about culture. Annually, we recognize the best of the best with our grand prize safety award. We affectionately call it the bear. And the winner gets to host the bear at their office for the next year. This year, I'm delighted to report that our Grimshaw Trucking business, a business we've invested in nearly 30 years ago, is this year's recipient of the bear. Well done, Team Grimshaw. Celebrate your accomplishments and keep everybody safe out there. So, Carson, I'm going to now turn it over to you for more on the fourth quarter financial analysis. You're up.

Perfect. Well, thank you, Murray, and welcome, everyone. I'll provide some of the additional highlights from the fourth quarter. the details of which are fully explained in our annual financial review. So as Murray mentioned, we are stuck in a no-growth economy. So one of the main reasons we were able to achieve the results that I'm about to summarize was a result of one factor, and that's due to acquisitions. Overall, our fourth quarter results continue to highlight our ability to consistently generate free cash in yet another competitive operating environment. Revenues in the fourth quarter were approximately $500 million, virtually flat compared to the prior year with respect to oibda we generated 85 million in the quarter and 332.2 million for 2024. in terms of cash which is what we focus on we generated cash flow from operating activities before non-cash working capital items of 92.9 million in the fourth quarter and approximately 340 million for 2024. This cash generation continues to be in excess of our requirements, including our interest payments, our cash taxes, CapEx, and our lease commitments. This really comes as no surprise, though, given our acquisition strategy that Murray articulated earlier, which is to invest in businesses that generate free cash. I'll go through the results by segment shortly, but the overall theme is as follows. Top line revenues were flat compared to the prior year as incremental revenues from acquisitions offset the lack of capital investment in Canada, the continued softness in freight demand, and lower fuel surcharge revenue. Operating margins improved due to a combination of our tuck-in acquisition strategy from the niche markets that we serve and from recognizing a positive variance in foreign exchange on U.S. dollar cash balances held in the corporate office. So despite completing five acquisitions in 2024, we continue to maintain a strong balance sheet, which I will highlight shortly. In the fourth quarter, revenue per working day remained consistent to the prior year period at 8.1 million. We generated OIBDA of 85 million, an increase of 5.8 million compared to the prior year, with acquisitions adding $6 million of incremental OIBDA. Operating margin improved to 17% as compared to 15.9% 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 revenues decreased by 0.7% as our business units did a great job adapting to current market conditions and controlling costs. S&A expenses as a percentage of consolidated revenues decreased by half a point due to the positive variance in foreign exchange being somewhat offset by inflationary pressures and from higher S&A cost experience at Container World. Now let's take a look at how we perform by segment. First, our largest segment revenues in the LTL segment were $189.4 million, a slight decline from last year due to $5.3 million of lower fuel surcharge revenue and from demarketing unprofitable business. Acquisitions virtually offset these two revenue declines. OIBDA was $31.4 million, up $1.5 million from last year, despite lower segment revenue. Operating margins improved by nearly 1% to 16.6%, due to our tuck-in acquisition strategy into our existing network driving greater lane density. Our second largest segment is our L&W segment. Revenues in the L&W segment were $160.9 million, up $20.1 million from last year. Acquisitions added $30.9 million of incremental revenue, which was somewhat offset by lower revenue generated from our existing business units due to a lack of capital investment in Canada and from shippers electing to keep a tight rein on inventory levels. OIBDA was $33.2 million, up $4.1 million from the prior year with Container World adding $5.4 million of incremental OIBDA, while our other business units experienced a slight decline in OIBDA due to more competitive operating conditions. Operating margins remained virtually flat at a respectable 20.6% as compared to the prior year. Moving to the S&I segment, revenues were down $18.7 million. to $103.8 million, driven by a $11.1 million reduction in revenue from pre-May pipeline due to the completion of both TMX and Coastal GasLink pipeline projects. We also experienced lower demand for civil construction services in northern Manitoba for our smooth contractors business unit. OYBDA was down $8.4 million to $16.2 million on lower OYBDA being recognized at pre-May pipeline. Lower OIBDA was also experienced within our drilling-related services business units, including our rig moving divisions and OK drilling experience certain wind-up costs. Operating margins decreased by 4.5% to 15.6% due to the reduction of higher margin business and from slightly higher S&A costs. In our non-asset-based US 3PL segment, revenues were essentially flat at $47.5 million from last year. As the industry continues, to experience lower freight demand for full truckload shipments and lower pricing per shipment. OIBDA improved by $1.1 million and operating margin on a net revenue basis was 28.2% compared to 9.8% in 2023. The increase in operating margin was primarily driven by lower S&A expenses as a percentage of segment revenue. So that's a wrap on our fourth quarter commentary, but let's have a quick look at the balance sheet going into 2025. We closed a $400 million 10-year private placement debt financing in 2024, and we used some of those funds to repay some previous notes that matured in October. We ended 2024 with approximately $126 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 effectively have one main covenant, which is total net debt to operating cash flow. Our total net debt to operating cash flow covenant on our new 2024 notes is 2.24 to 1 and is 2.5 to 1 on our 2014 notes. Now total net debt under this covenant is calculated differently under the 2014 note agreement compared to the 2024 note agreement. 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 calculation purposes. The $125 million of debentures is now included as debt under the new notes given that they mature prior to when the 2024 notes become due in 2034. So in summary, our balance sheet is once again well-structured and positions us to make long-term strategic investment decisions and to be able to look for new acquisition opportunities that inevitably generate free cash. So with that, Marie, I will pass the conference.