5/14/2024
Good morning, and welcome to Titanium Transportation Group's Q1 2024 conference call. On today's call, we have Ted Daniel, President and Chief Executive Officer, Alex Foote, Chief Financial Officer, and Marilyn Daniel, Chief Operating Officer. Before we begin, I would like to remind everyone that certain statements made on this call today may be forward-looking. In that regard, please refer to the risk factors and cautionary provisions outlined in the press release issued by the company yesterday, as well as the filings made by Titanium on Cedar. Please note that this call is being recorded Tuesday, March 19th. Tuesday, May 14, 2024. A replay of this call will be made available until midnight on May 28, 2024. The details of the replay can be found on Titanium's website under the Investors section. I would now like to turn the call over to Titanium's President and CEO, Ted Daniel. Please go ahead, sir.
Good morning. Thank you, Operator, and thank you all for joining us. During the first quarter of 2024, unfavorable market conditions persisted within the transportation logistics industry. Muted economic activity, overcapacity, inflationary input costs, geopolitical and market uncertainties continued to impact freight demand and volume. I'm pleased to share that our team was able to successfully navigate through these disruptive industry conditions and deliver another profitable quarter. In the first quarter of 2024, we generated $115 million in revenue, an 8.3% increase over Q1 of 2023, and $9.5 million in consolidated EBITDA. As outlined on our previous conference call, we had anticipated these market conditions, and our diversified business model positioned us well to steer through them Once again, these results reiterate Titanium's proven ability to deliver consistent results through an unrelenting focus on operational excellence, prudent capital allocation, and a strategic model of almost equal asset and asset light business segments. Turning to our segmented results, our trucking business continued to drive growth. We delivered revenue of $59.6 million in Q1 2024. a 15.5% increase year over year. EBITDA margin came in at 12.6%, a decline from Q1 2023. As I mentioned previously, this 570 basis point decline in EBITDA was mainly due to the segment absorbing the majority of integration costs from the acquisition of Crane, as well as soft economic conditions. we expect to see growth in the second half of the year. The current freight environment continued to exert downward pressures on the logistics segment of our business. Despite these unfavorable conditions, logistics generated revenue of $56.2 million flat compared to Q1 of 2023, with EBITDA coming in at $3.1 million in Q1 2024. EBITDA margins for logistics during the quarter were 5.5% in Q1 of 24, compared to 9.3% in Q1 of 23, a 320 basis point decrease. I would like to highlight that even with continued pricing pressure during the first three months of the year, our team was able to grow volumes organically across both our segments. Truck transportation saw an increase in volume of 23%, mainly attributable to the acquisition, which offset losses in volume due to strategic pricing decisions. On the logistics side, volumes increased approximately 28% year over year. Our growth, notwithstanding economic challenges, is not only a testament to the strength of our technology and people, but it's a reminder that we're uniquely positioned to take advantage of an eventual market improvement with the foundations we have built over the years, regardless of economic conditions. Speaking of foundational platforms, titanium's commitment to scale our business in the U.S. market would be the major driver for our next stage of growth. As of Jan 1, 2024, we started to see the benefits of our acquisition of Crane. As their operations were migrated onto the titanium technology and financial platforms, This directly contributed to significant growth within our truck transportation segment. As discussed, we anticipate a temporary adverse effect on margins during this period of integration, which was experienced during Q1. Looking ahead, we expect crane to be a core asset in our business and enable customers to access a comprehensive freight management offering driving growth in titanium's U.S.-based logistics business. In addition to capitalizing on the benefits of our crane acquisition this quarter, we have directed considerable focus to identifying innovative solutions to achieve profitability within this environment. As we evaluated pricing concessions requests from our customers, we opted to remain committed to responsible rates to operate in this environment, which resulted in a loss of unprofitable volume. Furthermore, through advanced data analytics, we purposefully allocated capacity to sustainable or flexible markets. Overall, Titanium's steadfast commitment to deliver sustainable and profitable growth is the driving force behind every action we took during the quarter and continues to be our top priority as we navigate this market. Despite the current economic challenges, we remain focused on strengthening our foundation of people and technology, all while enhancing our capital position. We're also committed to operating responsibly whether through sustainable contractual pricing or unyielding fleet safety standards. Our capital allocation strategy prioritizes debt reduction while maintaining dividend payments and opportunistic buybacks via our NCIB. Our continued focus remains on scaling for future growth and generating long-term value for our shareholders. With a refreshed fleet and reduced capital expenditures, we expect to generate substantial free cash flow over the next 18 to 24 months. We strongly believe, as we always have, that a prudent capital management strategy coupled with good governance is a backbone to to current and future long-term sustainable growth and profitability. Due to significant pricing pressures from ongoing adverse economic factors, we're revising our 2024 full-year revenue guidance. New range is $470 to $490 million, and our EBITDA margin target percentage has remained the same. Despite market conditions with the acquisition of Crane, as well as our developing freight brokerage offices, we remain resolute in preparing titanium for future growth. We also anticipate the addition of at least one more brokerage office this year. With that, I'll turn it over to Alex for a more detailed discussion of our financial results for Q1. Alex, take it away.
Thanks, Ted. In the first quarter of 2024, on a consolidated basis, titanium generated revenue of $115 million, compared to $106 million in Q1 2023, an 8.3% increase. We delivered EBITDA of $9.5 million, with EBITDA margin of 8.2%. Diving deeper into segment performances, the truck transportation segment saw revenue of $59.6 million, an increase of 15.5 percent over Q1 of 2023, and EBITDA of 7.5 million, with an EBITDA margin of 12.6 percent. As Ted mentioned, it is important to note that these results include the segment having absorbed a significant portion of continued integration costs resulting from the acquisition of Crane. We expect this to last for the next few quarters. The logistics segment generated revenue of $56.2 million compared to the same period last year. EBITDA was $3.1 million compared to the $4.6 million in Q1 2023 with an EBITDA margin of 5.5 percent. During the quarter, we took meaningful steps to identify redundant assets in our portfolio. These measures include the sale of about 21 acres of unused raw land in Cornwall, which closed earlier this month. This aligns with our capital allocation strategy, reinforcing our commitment to strengthen our balance sheet, rapidly paying down debt, and improving our overall capital position. Given the strength of our business and our confidence in the earnings outlook, we maintain our dividends. declaring a dividend of $0.02 per common share. To conclude, I would like to highlight that we have a strong balance sheet, which will continue, as always, to be our focus as we navigate these economic headwinds. I would now like to turn the call back over to Ted.
Thank you, Alex. Despite industry-wide challenges, titanium delivered a profitable first quarter. While we anticipate continued macroeconomic uncertainty for the first half of 2024, our expectation is that the market will improve toward the latter part of the year with reductions in capacity to the freight market, enabling additional organic growth and shareholder value. Navigating this environment has been difficult, but we have demonstrated that we have the right management team in place to execute our growth plan and take advantage of end market weakness. For the remainder of the year, we'll remain focused on continuing to grow and diversify our customer base, leveraging the strength of our U.S.-based footprint, utilizing technology to strategically allocate capacity, and continuing to deliver sustainable and profitable growth. With that, I'll turn it over to the operator to open the line for Q&A.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star, followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the pulling process, please press star, followed by the two. If you are using a speakerphone, please lift the hands up before pressing any keys. One moment, please, for your first question. Your first question comes from Yuri Zoraida with Canaccord Genuity. Your line is now open.
Good morning, and thank you for taking my questions.
Good morning, Yuri.
Good morning. So first, just on logistics, I think you called out some potential margin compression in the last call, but I was a bit surprised by the magnitude compared to past quarters, and given where spot freight rates are. So I was just wondering if you could provide any more color on the drivers and any other specifics behind that margin weakness.
Okay. So I'm glad you asked that. Let's start a couple things, right? We're going to start with the fact that there's a lot of pressure on pricing, right? A lot of competition out there right now. The pricing pressure is significant. And in a way, there's more pricing pressure than there is at this point in time. There's less movement at the carrier level. So there is a little bit of margin compression, number one. Number two, we're also dealing with the fact that there is an element of fixed costs in a brokerage formula. You know, we do a really great job balancing fixed and variable, but there is an element of that. And the other thing is that we're actually still in growth mode. So, albeit we're profitable, it's a little compressed. But what's really, in a way, I'm kind of glad you asked this because I'm actually excited to answer this question because we're in growth mode in logistics. So... We are in the process of adding, actually, not reducing certain headcounts in particular. And those are headcounts that are involved in increasing volume, increasing growth, building out new for additional offices this year. So we're actually a bigger broker today. In fact, we're a bigger company today than we were a year ago. Our brokerage has grown by over 22% in volume year over year. That's incredibly exciting. And as soon as things turn, that's going to explode.
Okay. Yeah, thank you. That's quite helpful, actually. And then I think just shifting gears a little bit, I'd just like to ask about the overall situation dynamics that you're seeing so far in Q2 compared to Q1. Of course, you mentioned pressure, but just want to know how that's playing out and also on the pace of the sequential margin improvement that you expect to see given that you kept the margin guidance unchanged. So how do you see that playing out throughout the rest of the year?
I'm sorry, I'm just trying to... clarify the question here, if you don't mind. You're talking about the economic pressures of the pricing environment that we're currently in?
I'm talking about the dynamics in general in Q2 compared to Q1.
Okay.
Sequentially, volumes, pricing, are you seeing the same types of pressure? And then What does that sort of imply, given the unchanged margin guidance for Q2 and the second half of the year?
So, morning, Yuri. It's Alex. So, obviously, with the EBITDA margin and change, we do expect a EBITDA improvement over time. Q2 remains a little soft. it's a little better than Q1. However, our volumes, like Ted said, continue to be strong. We are expecting that in later half of the year that the margin will climb so that we will be within the 10% to 12% range. That is our expectation going forward. If it's a Q3 or Q4 recovery at this point, it's difficult to tell.
I'll just add a little bit to that. In terms of our second half expectations of the year, we expect to continue to see capacity exiting the marketplace. we know that we'll have an effect on the current pricing market. We are hearing from our customers who have also been down in volumes that they expect to see increased productivity in the second half of the year as well. So we're sort of aligned with that, and we've been very cautiously watching our customer volumes as we go through that. But there is a little bit of a shift already in terms of telltales for the second half of the year in a positive light.
Okay. Thank you. Thank you, everyone. That's helpful. I'll turn it over. Thank you.
Your next question comes from Benoit Poirier with Desjardins. Your line is now open.
Good morning, everyone. Good morning, Benoit. Just on the contract rate front, are you seeing competitors being more aggressive than expected and undercutting the market and when would you expect contractual rates to increase, or maybe it's more a 2025 story?
I mean, nobody has a complete crystal ball, but I think we have seen some of that neutralized a little bit already. I think some of the, we'll call it, hyper-competitive undercutting of rates seems to have softened just a little bit and part of that is, again, because a lot of the carriers have hit bottom and the exits are starting, we'll call it a bit of a purge, is already underway. I don't think it's as far out as 2025. 2025 will be a continuation of the same story in terms of a realignment of shipper and freight markets, etc., with their carriers. But in terms of of pricing in the current RFQ marketplace, it is neutralizing a little bit already.
Okay, okay, that's great. And when we look at the integration crane last quarter, you mentioned that it was to continue until the end of the second quarter 2024. We didn't see any mention at the MD&A. Any update on the integration of cranes?
So the integration of crane is still ongoing. We didn't specifically mention the margin compression or how much of that quantify it because it is now in the second phase of the integration where we are done the physical part. We're into the culture and optimizing the lanes and routes. So that takes time and the cost is a little more harder to separate. But we are seeing that margin compression. And, of course, the market as well doesn't help during this time. But we are expecting it to finish second or third quarter this year. We are expecting that this will be a huge benefit to titanium once it's completed, especially when the market conditions improve. And we are very excited that Crane is now within our portfolio and I'll pass it off to Marilyn.
I'll say that we are on track as expected to our plans Alex mentioned our integration physically was completed at the beginning of this year, 2024, and we're in that optimization phase. We have now had the opportunity to get in front of a lot of new customer base in the United States, adding our names to RFQs and business opportunities that we expect to see a rate of return on, hopefully by the second half of this year and certainly into the future beyond that. Remembering that Crane was a large company, door opener for us into the U.S. marketplace, both on the asset and on the brokerage side for exposure and leverage to some of our current accounts, some of the accounts we acquired through Crane, and now new opportunities that we're getting into that was a barrier for entry for us without having the assets in the U.S. So we're very excited to see where Crane moves along, and it's completely on schedule for what we had set it up for.
Okay. In your... Oops, sorry. All right.
No, it's okay. I was just going to say it's purely a strategic acquisition, right, in terms of the fact that we're going to be cross-selling and that, you know, there's going to be holistic offerings that are going to augment significantly, you know, just, you know, the purchase itself.
Okay, that's great. And last one for me and your MD&A. You mentioned committing to $8 million in capex to work the purchase of 100 trailers. You did about this figure in Q1, so does it mean that you're mostly done for the year and also wondering if you have any other underutilized assets you could monetize?
Well, as we continue forward, we are going to continue to evaluate underutilized or redundant assets in our portfolio. I can't say that we will or will not divest of any of them going forward. One of the things that we are looking at, for example, is our trailer pool. As we refresh them, we're also looking for older excess age redundant assets. On to our CapEx, we are substantially completed in Q2. We have completed our refreshment cycle, so there are some CapEx in Q2, but going forward, that would be it. We're not expecting any additional CapEx. capital expenditure unless the market requires us to.
Perfect. Thank you very much for the time.
Thank you.
Welcome.
Your next question comes from Steve Hansen with Raymond James. Your line is now open.
Good morning, Steve. Good morning, guys. Perhaps a naive question, so I apologize, but I just wanted to ask a bit more about the pace of the grain acquisition and integration, particularly in the context of the software backdrop. I have to imagine that on the one hand, perhaps it highlights some of the cost redundancies a little more easily with the software backdrop, but then at the same time, it might also make it harder to generate the revenue synergies on the other side. So I just wanted to understand that dynamic a little bit and how you're thinking about it from, I think you referenced already, the physical side has already been done. Now you're moving on to... the more intangible stuff, but maybe just a bit more context around how, you know, you see that in the integration in the context of a software market. Thanks.