Titanium Transportation Group Inc.

Good morning and welcome to Titanium Transportation Group Q2 2024 conference call. On today's call, we have Ted Daniel, President and Chief Executive Officer, Alex Fu, 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 CDAR. Please note that this call is being recorded today, Tuesday, August 13, 2024. A replay of this call will be made available until midnight on August 27, 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. The second quarter of 2024 saw persistent industry-wide pricing pressures, particularly in the full truckload segment. Muted economic activity overcapacity inflationary input costs, geopolitical and market uncertainties continue to impact freight demand and industry-wide volume. Despite these challenges, we prioritize our strategic plan and are focused on optimizing and working with the constraints of the current marketplace through our technology-driven navigation systems. This approach translated into solid results Titanium generated $115 million in revenue, a 14.7% increase over Q2 of 2023, and a $10.2 million in consolidated EBITDA from continuing operations. It is important to note that titanium's ability to generate consistent results despite challenging market conditions is a testament to our diversified business model and our team's operational strength. Now turning to our segmented results. Our trucking business continued to drive growth. We delivered revenue from continuing operations of 59.5 million in Q2 2024, a 20.7% increase year over year. EBITDA margin came in at 15.5%, a decline from Q2 of 23. This short-term decline in profitability can be attributed to two key factors. First, the segment continued to absorb the majority of integration costs from the acquisition in Okra, Georgia, during an environment of economic headwinds. While we're leveraging advanced in-house analytics to identify and harness synergies in areas such as asset tracking, safety, routing, and asset utilization, some of these solutions have been slow to impact profitability. the truckload freight environment continued to exert downward pricing pressures into the first half of 2024. In particular, the full truckload segment faced significant headwinds due to reduced end market demands, leading to a 6% decrease in pricing year over year in the truck transportation segment, despite our efforts to shift capacity towards sustainable rates. Truck transportation saw an increase in volume of 24%, primarily attributable to our OCA Georgia acquisition. We're encouraged by these developments and are confident that increasing targeted volume will exponentially drive profitability once market conditions improve. Aligned with our previous commentary, titanium's commitment to scale our business in the U.S. market will 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 Transport 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've been experiencing temporary adverse effects on margins during this period of integration. That continued into the second quarter of 2024. Looking ahead, we expect Titanium American Trucking 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 Georgia acquisition, we focused our efforts towards delivering sustainable long-term shareholder growth within this challenging environment. Hence, turning to the logistics segment, we generated revenue of $56.2 million, up 6.6% compared to Q2 of 2023, with EBITDA coming in at $3.1 million in Q2 of 2024. EBITDA margins for logistics during the quarter were 6.2% in Q2 2024, compared to 8.7% in Q2 of 2023, a 250 basis point decrease. I would like to highlight that even with persistent pricing pressures during the first half of this year, continued sales efforts ensured that both our operating segments recorded volume growth year over year. Logistics volumes improved by 22% year over year. However, soft consumer sentiment weighed on transactional pricing, offsetting the revenue growth for the segment to approximately 7%. We're pleased with the strong growth of our logistics segment and we remain committed to grow this asset-light segment regardless of market conditions, particularly in the U.S. freight brokerage market. In alignment with our strategic goals, we divested redundant assets in the first half of the year and continued to evaluate our business units, which resulted in reduced operations for specific geographic areas, reducing our asset offerings in these areas. This decision was driven by a thorough assessment of current profitability and future growth prospects. Through the reduction of underperforming assets, we are better positioned to focus on more promising opportunities and markets. More specifically, we continue to actively explore opportunities to monetize non-core assets, which will contribute to an accelerated reduction in our long-term debt. In terms of cost control initiatives, we were able to find efficiencies by centralizing certain operational functions. Our use of technology allows us to continue to pursue additional opportunities for efficiencies as we deploy technological investments in artificial intelligence in our processes. We believe that AI will have a significant impact on the industry. With a refreshed fleet and reduced need for capital expenditures, we expect to generate substantial free cash flow over the next 18 to 24 months. Additionally, we're focused on monetizing underperforming equipment, which will help us further reduce debt. Our priority remains on meeting the growing needs of our customers, scaling for future growth, and generating long-term value for our shareholders. We're taking this opportunity to revise our 2024 full-year revenue guidance range of $440 to $460 million and EBITDA margins of 8% to 10%. With that, I'll turn it over to Alex for a more detailed discussion of our financial results for Q2 2024. Alex?

Thanks, Ted. In the second quarter of 2024, on a consolidated basis, titanium generated revenue of $115.1 million. compared to $100.4 million in Q2 of 2023, a 14.7% increase. We delivered EBITDA of $10.2 million with EBITDA margin of 10.1%. Diving deeper into segment performances, the truck transportation segment saw revenue of $59.5 million, an increase of 20.7% over Q2 of 2023, and EBITDA of $7.9 million with an EBITDA margin of 15.5%. As Ted mentioned, it's important to note that these results are despite this segment having absorbed a significant portion of continued integration costs resulting from our U.S.-based acquisition. We expect this to last for the next couple of quarters. The logistics segment generated a revenue of $56.2 million, an increase of 6.6 percent compared to $52.7 million in the imperative period. EBITDA was $3.1 million, but a margin of 6.2%. As part of our ongoing capital strategy, we continue to take meaningful steps to identify redundant assets in our portfolio and proceed to divest of these assets. For instance, during Q1, we sold approximately 21 acres of unused land in Cornwall. The proceeds from these asset sales, along with the free cash we generated from our operations, will be directed towards reducing debt. This disciplined approach to capital allocation underscores our commitment to strengthening our balance sheet and enhancing our capital position. By prioritizing debt reduction, we are ensuring that we have the capacity to invest in future inorganic growth opportunities and steer through current economic uncertainties. Given the strength of our business and our confidence in the earnings outlook, we maintain our dividend declaring a dividend of $0.02 per common share. I would now like to turn the call back over to Ted.

Thank you, Alex. With the backdrop of this prolonged freight recession, we are reasonably satisfied with the performance in the first half of 2024. While we are beginning to see signs that market conditions are moderating, it is difficult to predict when end market conditions will improve. Navigating this environment has been challenging, but we are committed towards executing our growth plan and focusing on factors within our control. Our continued investments in people and technology have laid a strong foundation for success. By complementing these investments with strategic asset divestitures and fleet optimizations, we're well positioned to navigate the road ahead with confidence and deliver long-term sustainable growth for our shareholders. With that, I'll turn it over to the operator to open the line for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press the star key, then 1 on your touchstone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press the star key, then 2. One moment, please, for your first question. The first question comes from Yuri Zareda with Canaccord Genuity. Please go ahead.

Good morning, and thank you for taking my questions.

Morning, Yuri. Morning, Yuri.

Good morning. Could you provide additional color on the puts and takes behind the 2024 outlook provision? What is included in the guidance for the second half of the year in terms of capacity leaving the market?

Capacity leaving the market is definitely a factor we'll cover in a second. The earnings outlook that we have basically outlines that we are relatively stable in terms of volume with modest volume growth, but there is still transactional pricing pressure. So that's why there's a slight decrease from the last guidance. Uh, if, uh, profitability does, uh, have a toll because of the market condition and that's what's kind of built into the guidance. And I would let Ted handle the, uh, first part of the question, which is the capacity leaving the market.

Yeah. So again, we, um, So, Yuri, we expected that more capacity would have left the market at this point in time. Looking at the charts, the numbers, the industry, all the different indexes and so on, if you look at that, we're just not seeing capacity leave the industry as quickly as we anticipated. Normal cycles would have had a better Q2. And I think that, you know, if you're looking at Q1, Q2 of 2024, it wasn't the capacity that I think in 20, when we were talking about 24 in 2023, we expected Q2 2024 to be better. And the capacity didn't tighten the way we expected it to. So obviously now that's something that we're taking into account. And we're adjusting for that. So that's why we believe that the second half of the year is going to be necessary for, you know, for that type of an adjustment. You want to?

Okay. Sorry.

No, go ahead.

Yeah, no, thank you. That's helpful. And I wanted to know if any of that was related to what you're seeing for the crane integration. In the MD&A, you mentioned it is progressing at a slower rate than originally expected. I think originally completion was expected in Q2, perhaps Q3. So could you just update us on the status of the integration and timeline?

Sure. So the timeline is as we outlined in the MD&A, a little slower than expected. And that portion of it is because we are working through some of the soft integration that we spoke of in previous quarters where there are synergies that need to be realized in it. And because of the market condition, it's slower to realize. But we're still on track. We're still progressing. And Maryland would have better color on that.

So from a physical integration pace, we have recently just successfully finished all of our integrations, back office, front office, equipment, et cetera. So we are now fully on the systems from that perspective. Now the optimization phase of the work is really starting and getting deeper into some of the customer base and some of the pressures that are in the marketplace in the U.S. market. To Alex's point, it took a little bit slower to find the successes in the integration largely because the market was soft and softening as we were progressing through it. We're fairly confident now that we've got our navigation tools in place and we're working on the culture and performance of the company overall that we're headed in the right direction with certainty?

I think that, you know, what's actually exciting about it is that that's a very strategic purchase. It opens up a huge market for us. And so one of the challenges that we ran into was you're integrating at the same time that literally the last year, we're talking four quarters. I mean, we bought this thing, we closed August 1st. So that was kind of the middle of Q3 of last year, and we just hit that one-year anniversary. So during that time, as we're integrating, the pricing environment in the U.S. is imploding. And so I think that that made it a very interesting, call it project. Having said that, what's really exciting is that we are now done, and this is opening up. a lot of opportunities for expansion, particularly on the holistic freight offering that we have, which will now leverage our logistics division for a broader customer offering.

Okay. Thank you. That was helpful. I'll turn it over.

Thanks, Yuri.

Thank you.

The next question comes from David Ocampo with Coremark Securities. Please go ahead.

Thanks. Good morning, everyone. Morning, David. Morning, David. I wanted to circle back here just on Yuri's questions as it relates to potential failures. I'm curious if you guys are starting to see more of these appear in terms of acquisition opportunities or maybe even when it comes to bidding on volumes.

Yeah, we're definitely seeing shrinkage again. So, David, I do look at the indices. We are seeing every month there is, you know, net negative authorities. So there is shrinkage. In addition, we are seeing some green shoots, which is kind of interesting. Obviously, Q2 wasn't the Q2 that we would have expected traditionally in a normal seasonal cycle. but having said that there's definitely some green shoots in terms of opportunities, we're starting to see some sensitivity in the market, which is kind of interesting as well. So from, from that perspective, green shoots, we're seeing customers actually get a little bit more nervous about, you know, the capacity, which is, which is good. They're, they're realizing that, you know what, this, this abundant capacity that's out there is probably going to balance. And we're hoping that it's going to happen in the near term. I, I, You know, there's an old saying, right? What's the solution to lower prices? So I think that that's going to continue to beat up the profitability of the truckload industry in particular, and that's going to keep causing capacity to shrink. So from that perspective, that is definitely, call it, you know, economics doing what it's supposed to do.

And I guess when it comes to your own rationalization, exiting markets that may not be getting the returns that you guys are looking for, are you guys in the first inning, middle innings, or even in the back half of the game here? In terms of, are we talking divestitures? Yeah, your own personal divestitures or exiting markets that you don't think is attractive anymore.

I definitely, I think we're in the third like an inning 7, 8, 9 here. But having said that, yeah, we're not done. I mean, we're continuing to evaluate where we should be allocating our capital. And we're making those decisions. And we believe that we're going to make the right decisions, both in the short term and for the long term of the industry. The long term of the company relative to the industry and relative to where our strengths line, where we're able to generate the best rate of return for our shareholders. So in terms of making those decisions, yeah, we're definitely looking at our capital allocation strategy at this point in time.

I often say that when we're looking at that exiting marketplaces or product lines that we're into now is a choice in the moment. We do have the ability to pivot very quickly that way. So I don't want to make it sound as though anything is a forever choice in terms of what we're looking at. And in terms of redundancy in the moment, we are able to identify and execute on whatever decisions or adjustments need to be made to address those available redundancies that we come across. It's just a matter of timing.

Okay, that makes sense. And then when I look at your deck, you guys still have 20 to 25 logistics offices in the U.S. as your target. Maybe you could walk us through some updated timelines around that and maybe even the potential revenue and even the contributions, just given what we're seeing in the market today?

Yeah, so actually we are, as you all know, we are 50% of our top line, roughly 50% of the top line is a brokerage. And that is an area that we're very good at. In fact, we have a significant amount of technological strengths as well as a broker. We are continuing to grow that product line. Brokerage grew both quarter over quarter and year over year in terms of volume. Our sales departments are doing a fantastic job. Offense is your best defense in this case. So having said that, we're going to continue to grow. We actually should have at this point in time announced our next office, but we did run into a little bit of a delay with a landlord that we were working with. They ran into some issues, and that sort of caused a little bit of a delay in terms of the process. We've got two management teams, in fact, ready to go for two more offices, so we're already working on that. So the growth will continue, in particular in our brokerage.

Okay, that's all the questions I had. I'll turn the line over. Okay, no problem.

Thanks, David.

Thanks.

The next question comes from Gianluca Tucci with Haywood Securities. Please go ahead.

Hi, good morning, guys. Good morning, Gianluca. If I could just ask firstly on your volumes, nice growth on the volume side of things. I'm just wondering if, Ted, can you unpack that a bit for us? Is that growth mainly... onboarding new customers or expanding existing relationships?

It's primarily new, but it is both. So our existing relationships, which we're mostly a CPG company, we're not really luxury items. So our existing relationships continue. There was some slight growth there, but obviously our existing customers are currently also in the maintenance mode for the most part. But what we are seeing for the most part is a lot of new business as well. So that... Great question, by the way. I really appreciate it because there is a lot of excitement, as you can tell. A lot of our growth is... from new customers, which this is all grassroots. I mean, this is the stuff that's going to give us that next stage of growth. As soon as things even slightly tighten, we're going to see the benefit of our systems kick in and be able to leverage that exponential growth. So that's why we believe that a lot of these new customers that are on board are going to benefit from And it's also indirectly an indicator that they're not happy with their existing supply base. So that's why we are excited about the fact that the majority of that is new. And a little bit as well of opportunities that we leverage from the new crane relationships. So you've got sort of several very positive ingredients that are intrinsic in this equation, and especially the new business. our new relationships through the, uh, Oakwood acquisitions, technology efficiency, um, you know, AI that we're currently looking at and all of that is going to, uh, provide for a very high, uh, ROIC, uh, run rate of returns, uh, as soon as things tighten.

That's great color, Ted. Thanks. And, uh, just on your end markets, um, I mean, like you touched on this, but can you speak to any changes from the demand side of things that you're seeing in your end markets? And if any segments are worth calling out from a better or like worse performance perspective than like you'd anticipate for this type of economy today?

Our end markets are primarily consumables. So a lot of CPG or ingredients or products sub-assembly components that are in the consumable space. I'd say we're fairly steady from that perspective, including the fact that we are still seeing as well steadiness in construction for our flatbed division. So that's kind of a good area or a good indicator as well.

I also think it's important to note, again, sort of the breadth of our business. Our lack of dependency on any particular market has certainly helped us kind of balance through In terms of any sectors that are really booming, I don't think there is one right now, but we kind of spread through anything from consumables, food products, construction materials, and so on. I think it's pretty balanced. And again, our largest customers don't represent more than 6% of our business. I think that's been a stronghold for us in allowing us to build on volumes, as you noted earlier. That's a really important factor in our future success, is our volume growth. And that's the part that, although these results aren't obviously as stellar as we would like, but the volume growth is extremely important as we're building our infrastructure and building our business.

Absolutely. Thanks for that, Marilyn. Just lastly, from my end, looks like the rails may actually be going... on Strike later this month. How are you guys positioning if a strike does happen to monetize on some of that volume?

We have very scalable models. Our technology actually and our brokerage in particular will allow us to leverage that. We have databases that can act very, very quickly on an automated basis and provide provide the automation in order to be able to significantly scale those type of volumes. There's no way that the trucking industry has the capacity to all of a sudden carry the volume of freight that needs to go on rail. It's going to cause a significant disruption if that happens. Obviously, what's going to happen is going to be this huge amount of temporary demand for for probably cross-country, so Canadian domestic space. But the two, I mean, they're not going to add up. It's going to cause a really massive, call it spike, on a very temporary basis. But we can handle that because we've got, again, we've got the technology to be able to navigate through that and figure out exactly how to benefit from that. So from our point of view, I mean, it'll be a big benefit. We'll work through it as well.

That's great color, guys. Thank you. Talk to you soon. Thank you.

Thanks.

Again, if you have a question, please press the star key, then 1. The next question is from Benoit Poirier with Desjardins. Please go ahead.

Good morning, everyone. Good morning, Benoit. Just to come back on the previous question with respect to the potential rail strike, once we combine that with the Canadian competitor Pride that is now officially set to one down, have you seen any type of influx of inbound calls from potential customers wanting to switch or it's still to be seen?

I think it's a little early for us to evaluate the effects of pride and the wind down and whatnot.

I can add to that a little bit. Did pride as an operation have an effect in the marketplace? It certainly did. It was of size and significant and predatory pricing was definitely a piece of it. The fallout remains to be seen, the effects remain to be seen, but I do think there will definitely be an effect that potentially would be beneficial for those remaining in the space.

We don't think there won't be an effect. We believe there will be an impact, but we're just trying to figure out at this point in time exactly what the impact of that will be. There are a lot of discussions that are currently happening as a result of that.

Okay, okay, that's great. And when we look at volumes, trends in Q3, it looks like the load lengths reports for July saw a significant jump in the year-over-year load volumes for the Canadian trucking market. So any thoughts whether you are seeing the same?

Yeah, so what's interesting is that usually July is worse than June. In this case, this year, June and July were more or less the same, which is kind of unusual. Having said that, that's more of a volume thing, but there was so much, and I remember a lot of people using the term slack. There's a lot of slack in the system. So there was unexpectedly slightly better volume in June for June, but there was so much slack in the system that that it had very little impact on pricing. So really until, I mean, again, the solution to low prices is low prices. So we need to see more capacity leave the industry. I mean, if you talk to our dispatchers, they'll tell you there's times when, and we don't have a lot of reliance on load boards, but there is a little bit of filler freight out there, just like any trucking company. And you get on load boards and there's not a lot being posted. And we're still seeing that same behavior. So until we start seeing some of the indicators change, that in and of itself is a matter of supply and demand. Okay, that's great.

And just in terms of leverage, could you maybe provide an update on the debt pay down path towards 1.5 times?

what are kind of the next step and you mentioned caller about the strategic initiative so I'm just curious if you could provide more granularity about the the leveraging that thank you well there's no change in our in our astrology we're still paying about ten to eleven million dollars a quarter and where that's coming from is it's a mixture of our free cash flow from our operations and some of the proceeds from our divestiture, and that's going to continue for the near future. We are very committed to bringing down the leveraging. We always believe that a strong balance sheet is what drives our company, and we continue to believe in that strategy. We'll continue to execute that strategy. So in the short term, we have no change in plans in terms of debt reduction. We're fully committed to doing that.

Okay.

Thank you very much, Farhan.

I just want to say we don't have any CapEx in the works for the next 18 to 24 months. I mentioned that in my script. So it's all going to be free cash flow. Okay.

That's great, caller. Thank you very much.

Thank you.

Thank you.

The next question comes from Steve Hansen with Raymond James. Please go ahead.

Hey, guys. Thanks for the time. This is Robert on here for Steve. I just wanted to circle back quickly on the market conditions. You guys have mentioned some signs of stabilization. I was just wondering maybe if you could go into a bit more color as to the fact that you guys are kind of monitoring there.

Yeah, so if you take a look at the fact that the volumes, all of the indices, things haven't gotten worse. They just haven't gotten better yet. So that's kind of a good thing if you think about it. The volumes are there at this point in time. The spread between contract and spot rates is actually narrowed, which is kind of a good thing because the spot market seems to have stabilized versus the contract rate, I believe, has just come down as a result of the fact that you've got just cheaper RFQs out there at this point in time. If there's some tightening over the next three to six months, then you're going to see a slight increase in contracts. Otherwise, you know, it's still going to be rather competitive. Having said that, though, we are seeing some, you know, again, some interesting sensitivity. So that's why we believe that we're into, albeit a trough, but we are into a stable trough. I guess that's kind of good news in the equation. So that's sort of a good thing. A stable trough is better than a continually eroding trough at this point in time. So That gives me confidence that I don't think that inflection is all that far away. I don't believe it's years. I mean, it could be three months from now. It could be six months. I don't think it's a year. That's kind of what my guess would be given the circumstances.

I'm just going to add just quickly to that. There are some telltale signs on the U.S. brokerage side that we look at that gives us a little bit of positive encouragement as we look forward.

Okay, great. Thanks. That's great, Keller. And just the last one for me is with free cash flow ramping, I know you've talked about debt reduction being a priority. Just wondering how else other things fit into those, such as future M&A buybacks, kind of, et cetera.

I think at this point in time, given the fact that over the next, call it six to 12 months, our goal is to continue to grow the brokerage side of our business and We really don't expect to have a lot of M&A activity. Having said that, I mean, we are looking at unique circumstances that perhaps will really fit in, you know, as I said, under very unique criteria. We're not looking to just acquire for the sake of acquiring at this point in time. We're definitely going to strategically focus on where we have technological advances and where we're going to grow a... kind of a more asset-light model. The majority of that growth is, again, more than likely going to be in the U.S. We're in the process of opening up more offices. We do have the management teams ready to go for that. So I don't really see asset-based M&A, something that is a high probability. We believe it's actually going to be a low probability and then the high probability growth on the asset-light model.

Okay, great. Thank you very much for the time. I'll turn it back over. Yeah, no problem. Thanks, Steve.

Ladies and gentlemen, there are no more questions at this time. I would now like to turn the conference back over to Ted for any closing remarks. Please go ahead.

Okay, great. Thank you, operator, and thank you all for joining us today. We appreciate your interest in our company. I look forward to providing an update on our progress and all of our priorities discussed today when we report our Q3 2024 results in November. If there are any further questions, please feel free to contact us. Thank you again for joining us on the call today.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.