Titanium Transportation Group Inc

XTSX:TTR

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen, and welcome to Titanium Transportation Group's Q2 2020 Earnings Conference Call. [Operator Instructions] 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 factor and cautionary provisions outlined in the press release issued by the company yesterday as well as the filings made by Titanium on SEDAR.Please note that this call is being recorded today, August 12, 2020. A replay of this call will be made available until midnight on August 26, 2020. Details of the replay can be found on our website under the Investors section.I will now turn the call over to Titanium's President and CEO, Ted Daniel.

[Theodor Daniel, President, CEO & Director]

Thank you, operator, and good morning, everyone. I am pleased to report that Titanium had solid second quarter results despite facing significant macroeconomic challenges due to the COVID-19 pandemic. We took decisive action early on by implementing cost reduction initiatives and leveraging the significant investments we have made in our in-house purpose-built technology in order to maintain the level of service our customers expect, all while keeping our workforce and customers safe.Additionally, the Canada Emergency Wage Subsidy allowed us to preserve a significant number of jobs and technical capabilities during these challenging times. The culmination of our efforts, coupled with the benefit of government assistance, allowed us to remain profitable in the second quarter of 2020, noting we reported a 9% year-over-year increase in our consolidated EBITDA to $5.3 million for Q2. Furthermore, our operating discipline allowed us to once again generate positive free cash flow and reduce our indebtedness during the quarter, putting Titanium in an even stronger foundation and positioning the company to thrive as the North American economy regrows.To put our Q2 results into context, from a macro standpoint, GDP in Canada contracted a staggering 18.2% from the February peak to April when government-mandated business closures were in full effect. Since those April low, GDP picked up 4.5% in May as the economy began to reopen and preliminary estimates indicated a further 5% improvement in June, which would imply a roughly 12% contraction in GDP for the second quarter. These trends were not dissimilar to what we saw on a monthly basis.On the Truck Transportation side, starting mid-April to the end of May, volume and pricing came under pressure as certain customers were forced to temporarily shut down their operations. Consequently, competition intensified for remaining volumes, which reduced market prices. However, as governments relaxed restrictions and businesses began to resume operations, volumes improved significantly in June and are even stronger in July. In fact, volumes in June and July were higher when compared to last year, which had been quite promising. We continue to leverage our technology, creating operational efficiencies, allowing Titanium to build strong financial fundamentals.Our Logistics segment was significantly impacted by COVID-19, but the asset-light nature of the business, cost controls and government-related assistance allowed us to remain profitable in the second quarter. As we have talked about previously, we believe that the technological investments we have made over the years positions Titanium to be a leader with unwavering customer service in a complex, challenging economic environment. We remain focused on our growth strategy and opened our second U.S. brokerage location in Nashville, Tennessee at the beginning of July, even with the Canada-U.S. border remaining closed.Given the strength of our team and the book of business we already have in the U.S., I'm very proud to report that Nashville is already positively contributing to the bottom line. Overall, we are committed to the logistics component of our growth strategy by expanding into the sizable and fragmented U.S. freight brokerage industry regardless of near-term industry challenges as we strive to build long-term shareholder value.As we look to increase our footprint, we will continue to utilize the investments we have made in our people and technology, which allows for seamless integration and scalability at lower incremental costs. Given its asset-light nature, we believe the brokerage business offers excellent returns on invested capital, and we look forward to growing this part of our business over time.Lastly, true to Titanium's history and our unwavering dedication to managing the business responsibly, we once again reduced our indebtedness and improved our liquidity position over the second quarter. I'm proud to say that we have a very strong balance sheet able to withstand economic shock and allows us to capitalize on organic and inorganic growth opportunities.As it relates to our M&A strategy, we remain very much engaged and continue to assess opportunities. The strength of our balance sheet positions us to go after both tuck-in acquisitions and larger transformational acquisitions, which continues to be our preference. We believe that our disciplined approach to M&A will yield the desired results as we move into the back half of the year. As always, we will only look to pull the trigger on acquisitions that are accretive and will build long-term shareholder value.With that, I will now turn it over to Alex to go over our financial results.

[Kit Fu Chun, Chief Financial Officer]

Thanks, Ted, and good morning. On a consolidated basis, revenue for the second quarter was $38 million, representing a 9.7% decrease in Q2 2019 revenue of $42 million. The year-over-year decrease can be attributed to the impact of government-mandated shutdowns due to COVID-19, which impacted the top line of both operating segments. However, profitability improved year-over-year on an absolute and percentage of revenue basis.For Q2 2020, consolidated EBITDA amounted to $5.3 million, representing a 14.7% EBITDA margin. This compares to $4.9 million, a 12.4% margin in Q2 2019. The increase in EBITDA for Q2 this year can be attributed to the cost reduction measures we undertook as well as utilizing the Canadian Emergency Wage Subsidy program, benefiting EBITDA by $2.2 million. On a segmented basis, Truck Transportation segment revenues were $24.4 million for Q2, a 14.7% decline year-over-year.EBITDA for Q2, however, increased to 13.9% year-over-year to $5.1 million or 22.2% of revenue. This compares to $4.5 million or 16.8% of revenue in Q2 2019. The decline in revenue can be directly attributed to COVID-19 economic contraction, while the improvement in EBITDA can be directly associated with cost reduction measures as well as the assistance received from the CEWS program, which benefited the segment by $1.7 million.Looking at the Logistics segment, revenues amounted to $14.6 million for Q2 2020 compared to revenues of $14.9 million in Q2 2019. EBITDA for the quarter was $0.6 million or 4.4% of revenue compared to $0.7 million or 4.8% of revenue in Q2 2019. While our Canadian operations were adversely impacted by the government shutdowns, the significant growth in our U.S. operations positively contributed $5.0 million to the top line this quarter. Logistics expenses also included a $0.5 million benefit from the CEWS program.Turning to our balance sheet and equity position. Again, we generated positive free cash flow during the second quarter. Our liquidity and working capital improvements moved us into a positive net working capital position, a situation we have not seen since 2015. Overall, free cash flow for Q2 2020 amount to $10.9 million. As indicated on our Q1 call, we deferred all discretionary spending given the uncertain economic environment. As such, CapEx was mitigated during the quarter as we look to improve the utilization of our existing equipment. That said, we intend to deploy $4.3 million towards rolling stock in the second half of the year.With respect to our balance sheet, during the quarter, we deployed our free cash flow towards further reducing our net indebtedness to $53.6 million, down $10.1 million or 15.9% from the end of Q1 2020 while our net debt-to-equity ratio stands at 1.26:1 as at June 30, down from 1.54:1 on March 31, 2020.Given visibility remains limited, our preference is to retain ample amount of liquidity and significant borrowing capacity. As at quarter end, we had $1.7 million of cash as well as $17.8 million under the revolving operating facility, $12.5 million under our acquisition facilities and $5.5 million under an equipment financing facility. Furthermore, we have an additional $15.8 million available in finance facility through other institutions, total availability of more than $51.6 million.With that, I would like to turn it back to Ted for closing remarks.

[Theodor Daniel, President, CEO & Director]

Thank you, Alex. As Alex pointed out, we continue to remain financially flexible as we have significant dry powder to deploy towards organic and inorganic growth opportunities, both in the U.S. and in Canada. We will continue to grow in disciplined manner, prioritizing shareholder value. As always, we are unwavering in delivering sustainable and profitable growth and creating both short-term and long-term value for our shareholders.Before opening up the call to questions, I would like to once again thank our team members everywhere in every position, both in Canada and the U.S. for their hard work during these difficult times. Being recognized as an essential service provider, I would also like to acknowledge our workforce of drivers who were and continue to be exceptional during this pandemic.In closing, as always, thanks to all our customers for trusting us with their freight, especially during these unprecedented and challenging times. I will now turn it over to the operator to open the line for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Benoit Poirier, Desjardins.

[Benoit Poirier]

So Ted, you gave some great color about volume for June and July, mentioning that it's higher than last year. I was curious to know a little bit more about how pricing evolved in June and July. And also how sustainable is this volume growth going forward?

[Theodor Daniel, President, CEO & Director]

Okay. Great. Benoit, nice to hear from you. So yes, interesting, the freight cliff going back a little bit here was definitely April. So a very dramatic pricing crash, essentially, I would say, in the spot market in the April, May environment. But in June, it started to tighten up. July was, in fact, even a little bit better than prior year July. So we're definitely seeing an uptick.The pricing environment hasn't even returned to levels that are comparable to prior -- the last 4, 5 years. If you take a look at the Loadlink spot market index, you'll see that June is definitely an uptick and July feels even better. But it's not even where it should be, although it is definitely heading in the right direction, which gives me a lot of confidence that we believe that the second half is going to be far more robust. And we're hoping that this is indicative of a much better second half economically. Definitely, we're feeling positive indicators in the spot market.

[Benoit Poirier]

Okay. That's great color. And with respect to the Canadian Emergency Wage Subsidy program, you quantify the impact in Q2. How should we be thinking about Q3? Do you expect to receive any benefit?

[Kit Fu Chun, Chief Financial Officer]

So we definitely will receive some benefit for the EWS program. We will -- it will be proportionate to our revenue decrease, and they have -- will actually release some guidance regarding the new...

[Theodor Daniel, President, CEO & Director]

Guidelines.

[Kit Fu Chun, Chief Financial Officer]

Criteria and guidelines yesterday right before we announced our results. So you can see that there is a scale back for that program. And because we are also returning to a higher levels of revenue, we will be taking part in that program. We will get some subsidies, but it will definitely be a lot more scaled back than Q2.

[Benoit Poirier]

Okay. And for the trucking segment, are you seeing any opportunities to increase CapEx these days in light of the strong demand in the market?

[Theodor Daniel, President, CEO & Director]

Sorry, Benoit, just -- sorry, I have one more point to make. We have to be -- also be careful that we are recognizing our subsidies on a received basis and on a receivable basis because of the uncertainties in the program itself. So you have to be careful that part of these subsidies will have some timing differences. Sorry, and we can go back to the CapEx thing. Yes, for the CapEx, the CapEx opportunities per se, I view the need for CapEx spend more in terms of market demand. So right now, our fleet is still fairly young. We're not going to have any truck replacements until 2021. But from an opportunistic perspective, there is definitely softness in the used truck pricing, but lucky for us, we're not having to sell any used trucks at this stage. In terms of CapEx opportunity, it really all depends on growth, right?So I mean our goal and our hopes are that if the second half is robust, and there's definitely more demand for organic growth, then we'll definitely buy more trucks. I think that right now, we're -- yes, I mean, like our CapEx is more of a policy, right? So CapEx for us is a matter of sustainability. Once we are in a cycle where we need to replace trucks, then we're going to have to start to cycle through. It's interesting, we actually just recently analyzed that. We're prepared for that.And from a free cash flow, net free cash flow perspective, net of sustainable CapEx, we're actually going to be in still a very positive net free cash flow position. So barring any acquisition expenditures, we actually would continue to have a debt reduction even with sustainable CapEx requirements.

[Benoit Poirier]

Okay. Okay. And talking about leverage, Ted, you ended up with the net debt-to-EBITDA almost 1x. This is something that I haven't seen since quite a while. So very impressive on the leverage front. Could you talk about the opportunities for capital deployment? What is your favorite avenue? And what about the M&A these days in terms of multiple [indiscernible], see further opportunities? Or what's your level of confidence about the ability to make some M&A in the second half?

[Theodor Daniel, President, CEO & Director]

Yes. I mean -- yes. So definitely, as long as we're not writing a check for an accretive acquisition, we're reducing debt for the time being. There's also the potential for expanding our NCIB. But we're still a little light on that only because our hopes are that we are going to find an opportunity that makes sense. I really would prefer an opportunity that is larger, a little bit more transitional in nature, something that's sort of mutually beneficial to both purchaser here, i.e., Titanium and vendor. So we're definitely hoping that the cash will be deployed for a fairly substantial acquisition. Barring that, of course, it's going to be debt reduction and a certain amount of sort of secondary priority would be the NCIB.

[Operator]

Your next question comes from the line of David Ocampo from Cormark Securities.

[David Ocampo, Analyst of Institutional Equity Research]

Ted, I just want to dig a little bit more into sort of your logistics commentary here. In the U.S., you cited that revenue now -- it reduced $5 million in the quarter. And if I take the annual [indiscernible], it's sort of in line with what you were guiding to in the past. Is there still more room to improve beyond that $20 million run rate, and if so are there low-hanging fruit to be able to accomplish that? Or is it more still market-dependent at this point?

[Theodor Daniel, President, CEO & Director]

I feel that there is definitely room. The one component that, unfortunately, none of us can control is the fact that if there's a second wave or there's, again, certain macro conditions that are uncontrollable, but assuming -- if we assume that we're not going to run into any major macro government roadblocks in the second half of the year, we definitely feel that there's going to be expansion on that. Our goal was to actually open a third office before the end of the year. However, we right now are kind of a little stuck because it's -- we still may, although it's probably unlikely. It's probably going to be more like early next year.And it's really only because of the travel restrictions, which is making the third office a little bit more, excuse the pun, logistically challenging from that perspective. But because we are so well into the process with Nashville, we were able to basically get that going a little bit more efficiently. And again, it's very plug-and-play at this point in time. I'm very excited about the growth opportunity in the U.S.We're so small that we have really nowhere to go but up in the U.S. We've got the technology. We kind of have a bit of a plug-and-play model in the sense that we're now -- think of it as us being able to just start to plug in these small franchises. So that's basically the strategy. We've got really great leadership in the U.S. We have really strong people. And we believe that as we add the right ingredients, which for a brokerage in today's world is technology and great people. Those 2 are major components, and we've got both.So we are hoping that -- we know it will grow. It's just a matter of hoping that there are no macro stumbling blocks that will just get in the way of that.

[David Ocampo, Analyst of Institutional Equity Research]

And on the margin profile, by back half of the Q reflect EBITDA was flat to just slightly up. What's the U.S...

[Kit Fu Chun, Chief Financial Officer]

Sorry, can you repeat that? It was a little fuzzy.

[David Ocampo, Analyst of Institutional Equity Research]

Sorry. So when I look at the Logistics EBITDA, if you back out the Qs, it looks like it was just flat to slightly up. How should I think about the differences between your Canadian Logistics division and the U.S. Logistics division? Were they both more or less having similar margin profiles? Or is there a delta between the 2?

[Theodor Daniel, President, CEO & Director]

There's a bit of an absolute similarity, but they're very different actually right now in terms of the economic factors that are existing. What's interesting is right now what we're experiencing in the U.S. is a much tighter capacity market. So I'm hoping that that's to some degree a bit of a canary in the coalmine maybe telling us that, yes, capacity is finally starting to tighten in the U.S., which eventually will lead to stronger proportionate margins. But what we're getting in the U.S. on the other hand is slightly softer margins, but we're getting higher volumes.So what's being lost in the U.S. in terms of margin is being compensated with volume due to the increase in demand. And frankly, our growth, right? We're hiring salesmen, we're hiring great ops people. We've got great leadership. So they're growing that business. On the other hand, in Canada, what we're seeing is still a lot of overcapacity. So it's kind of an interesting scenario, right? We're waiting to see what happens with capacity in Canada.

[Marilyn Daniel, COO & Secretary]

And I'm going to add that...

[David Ocampo, Analyst of Institutional Equity Research]

And the last one...

[Marilyn Daniel, COO & Secretary]

I'm sorry. Just going to add to that, David, just a second is in Canada, the capacity crunch hasn't really happened yet. But we expect in the second half of the year to show that development. We actually thought that even before COVID, that there'd be some natural tightening into the marketplace for Logistics in the second half of the year. We do have some regulatory changes coming at the beginning of 2021 that we think will have some effect on the marketplace. So I think that we're going to see similar effects in Canada that we are now seeing in the U.S. Typically, the U.S. is always ahead of us in terms of trend.

[Theodor Daniel, President, CEO & Director]

Well, the other thing that hasn't happened yet is -- well, has happened is that Canada is going to get ELDs the middle of 2021. And as we saw in the U.S., it sort of started to -- you felt the effects of the oncoming ELDs about a month or 2 ahead of time. And so I think that's going to be a pretty major factor within the next -- over the next 6 to 12 months.

[David Ocampo, Analyst of Institutional Equity Research]

Yes. And then last one here for me on sort of your driver count, how are you guys managing that in terms of COVID environment? Are you starting to see a bit more turnover? Are you able to get the amount of drivers that you need to move your freight?

[Marilyn Daniel, COO & Secretary]

Actually, our driver turnover has been fantastic. To be honest, it's been extremely low. We've been very fortunate. We have an exceptional driver pool, very little turnover. We were able to keep most of our driver pool working throughout the COVID pandemic, which was great. We are now in growth mode again with acquiring new drivers into our fleet and growing that way. There is not a struggle at the moment in finding drivers. As always, good drivers are far and few, but we screen very diligently to make sure we get them. And so right now, acquisition of drivers is not really a struggle. I feel that there's a lot of trucking companies out there that weren't quite as fortunate as Titanium in having a diverse customer-base, which has allowed us to keep drivers steady throughout COVID, and now into the, I guess, mid-COVID crisis and through the post-COVID crisis one day I hope. So we were actually finding that the talent pool out there for the drivers has actually increased, and our pipeline of drivers is really full.

[Operator]

[Operator Instructions] Your next question comes from the line of [ Mike Hoan ] from [ Palos ].

[Unknown Analyst]

I just want to make sure I heard Alex correctly. I think I heard him say that at present your CapEx plan for the second half of the year is $4.3 million. Is that correct?

[Kit Fu Chun, Chief Financial Officer]

Yes. That's correct. That is correct.

[Unknown Analyst]

Okay, great. So that's pretty large relative to the last several quarters, I guess. And so I guess what I'm trying to understand is, let's assume that the $4.3 million gets spent in the second half. And thinking about a normal year in 2021. So maybe we get a vaccine or whatever normal year looks like right now, normal activity levels, let's say, how would you think about a ballpark range for CapEx in 2021? Or is it too early to kind of even have a range?

[Kit Fu Chun, Chief Financial Officer]

Well, let's assume that we do return to a normal miss with the vaccine and everything.

[Unknown Analyst]

Well, that's my assumption here.

[Kit Fu Chun, Chief Financial Officer]

Yes. So if you look at our last few years, we haven't really needed to replace and renew our fleet because we have a relatively new fleet. Come 2020, in 2020 -- over 2020, we're replacing $4.3 million. 2021, we'll have to replace some of our other rolling stocks as well. So our typical range is lower than our free cash flow, but it is typical anywhere from $7 million to $10 million of replacement, and that's our sustainable CapEx. We haven't needed it in the last few years because our fleet was new, but we are coming up to that cycle again. So that would be the range that you start seeing.

[Unknown Analyst]

Got it. Okay. That's very helpful. So then, I guess, just shifting to M&A. A couple of questions have been asked. I guess my question is really when I look at public market valuations, clearly, they're elevated. I'm wondering if you could just give a sense of the private markets and what valuations look like there? Have they followed public markets? Or are there an increasing number of distress scenarios that you might be looking at? How does that look right now?

[Theodor Daniel, President, CEO & Director]

So the -- right now I'm not really seeing a ton of difference. So whether it's private or public, I guess -- I mean, we're sort more of an industrial environment. So right now what I'm seeing is not a lot of change in multiples. There's definitely a significant increase in -- I'm just going to call it M&A discussion. Definitely, there's been a lot more companies that I'm talking to and people that are inquiring. But what's interesting is because of the government subsidies, the discussions usually end up with a, well, let's wait and see over the next 1 or 2 or 3 months, see how things go.So it's really -- it's great, and it's very encouraging to see that there are a lot of companies that are out there that are interested in possibly making a move because I think it's been very volatile over the last few years, with '16, '17 and '18 going nuts, '19 crashing for a lot of people. It's been, I think, very emotionally difficult for a lot of business owners. And I think that they are very interested in considering their options.So it's definitely a huge increase in discussion. But at this point, what we are seeing is the wait and see to some degree. And of course, from a multiple perspective, they're pretty much in line with what they should be because everybody knows that COVID is hopefully temporary, and we all look forward to a new normal. So that's kind of where we're at. We believe that we're still going to have to -- we're still willing to pay a reasonable amount. We don't expect to underpay. We do expect to pay fair and kind of go from there, so.

[Unknown Analyst]

Great. And just good discussions are escalating. Those discussions could continue to escalate and become due diligence. So I guess my question, and I'm seeing this with other companies, industrial and otherwise, some of them have -- certainly have said explicitly they're not going to pull the trigger on big acquisitions because the way they do their diligence includes a lot of onsite work. And in the COVID era, that becomes very difficult. In fact, one, I think view is that they don't do their diligence through Zoom calls. I know you can do a lot through Zoom calls, but many prefer to look in the lights of the counterparty guys. So I guess my question is from the way you've historically done M&A and the way you kind of would have to approach some of these top candidates of yours, do travel restrictions, et cetera, in the COVID era limit your ability to pull the trigger or kind of delay it a quarter or 2? How do you think about that?

[Theodor Daniel, President, CEO & Director]

Yes. I mean, it doesn't really make it that much more challenging. What we're doing is we're just making sure that we've got all the safety protocols in place. So if I'm going to take a look at an opportunity, we're looking at mostly opportunities in Ontario. So it's travel-wise, in most cases, we're able to take a look by -- it's a meeting. We can drive there.Most trucking companies have the safety protocols in place. So we are having meetings. Obviously, like -- it's actually very similar to even a non-COVID environment. Initially, you typically have conference calls, Zoom calls and so on. And you have the digital connection because it is more efficient initially. But then we're still -- we've -- you've got data rings and so on. But then we definitely are still having the meetings. But again, it's -- you've got all the -- you've got the social distancing the mass and things like that, right?So everyone is kind of participating in that, which is great, and it is sort of moving forward from that perspective. We're not getting actually a lot of physical limitations. It's -- that aspect is not necessarily a hindrance to getting a deal done.

[Kit Fu Chun, Chief Financial Officer]

Thank you.

[Operator]

And I show no further questions at this time.

[Theodor Daniel, President, CEO & Director]

Okay. All right. So -- okay, thank you, operator, for facilitating the call. Regardless of the economic conditions we operate in, undoubtedly with our strong hardworking team, Titanium will continue to grow, succeed and increase shareholder value. We highly appreciate your interest in Titanium. If there are any further questions, please feel free to contact us. Stay healthy and safe. Thank you, everyone, for joining this morning's call.

[Operator]

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation and ask that you please disconnect at this time.