Titanium Transportation Group Inc
XTSX:TTR
Titanium Transportation Group Inc
XTSX:TTR
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Earnings Call Transcript
Earnings Call Recording
Other Earnings Calls
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Titanium Transportation Group Inc. Q3 2018 Conference Call. [Operator Instructions]Before we begin, I would like to remind you that certain statements made on this call today may be considered forward-looking. In that regard, I refer you to the risk factors and cautionary provisions outlined in the press release issued by the company yesterdayas well as the filings made by Titanium on SEDAR. Please note that this conference call is being recorded today, Wednesday, November 7, 2018.I will now turn the conference over to Titanium's President and CEO, Ted Daniel. Please go ahead.
Thank you, operator. Good morning and thank you all for joining us. With me on the call today is Titanium's COO, Marilyn Daniel; and CFO, Katarzyna Malz. We are extremely pleased to report that with third quarter results, Titanium has delivered another solid quarter of consolidated revenue and EBITDA growth. Both the Logistics and Truck Transportation segments delivered strong year-over-year growth in both revenues and EBITDA. The success of both segments contributed to consolidated year-over-year revenue growth for the company at 42% for the quarter and 51% year-to-date. Likewise, consolidated EBITDA was up 86% for the quarter and 86% year-to-date.Overall, the company reported net income per share of $0.03 this quarter. As expected, after a dynamic start to the year for the industry, conditions have stabilized and what we view as more sustainable levels. Customer demand for logistics and trucking services remains very healthy and volume demand is trending well ahead of year ago levels. Overall, industry conditions remain favorable and are expected to remain so for the foreseeable future. Operationally, we had another strong quarter of progress. In terms of capacity, we remain an industry leader and our ability to recruit and retain the best drivers in trucking and in managing carrier capacity in logistics. This remains a key strategic advantage in a driver constrained marketplace, and we continue to demonstrate our ability to effectively service increased customer demand.Combined with our past and ongoing investments in technology and service excellence, we remain well positioned to continue to support our customers' needs and to capitalize on current favorable market conditions to further drive the organic growth of our business. During the quarter, we announced that we had engaged Left Lane Associates. The addition of Left Lane complements our significant in-house M&A experience with access to a wider set of potential opportunities. The engagement however does not change our disciplined approach to acquisitions. We remain committed to pursuing opportunities that have a clear path to enhancing shareholder value. So in the meantime, we continue to aggressively pay down debt. I'm pleased to note that we reduced net debt by $10.4 million during the quarter and we expect to continue to see strong free cash flow in the coming quarters.Turning now to our performance by segment. Looking first at our Logistics segment, we delivered another strong quarter of year-over-year growth. Revenue of $17.3 million was up 55% over Q3 2017. EBITDA came in at $1.4 million, more than double year ago levels at the segment -- as the segment delivered significant operating leverage. EBITDA margin was up 270 basis points to 8.8% from 6.1% in the same quarter last year. As expected, brokerage demand stabilized relative to the elevated record levels of the first half of the year. However, volume demand remains well ahead of last year's levels. We remain well positioned to meet the needs of our customers, as a result of our investments in technology and strong industry relationships with carriers. Our focus on operational efficiencies within our sales and operations teams has helped to deliver significantly improved margins and bottom line results for the segment. We view current activity levels to be more sustainable relative to the exceptional strength seen in the first half of the year. We expect these favorable conditions to persist through the balance of the year and should support opportunities to deliver continued year-over-year growth for the segment. Turning to Truck Transportation. This segment also delivered another quarter of significant growth. Revenue of $28.7 million was up 39% from Q3 2017, while EBITDA at $4.2 million was up 59%. EBITDA margins improved 230 basis points from 13.8% to 16.1%. The segment was bolstered by the acquisition of Xpress Group on October 1, 2017, which contributed approximately $4 million to revenue and $1 million in EBITDA. Organic growth in the segment, reflects our growth in drivers and our ability to service increased customer demand as well as significantly improved contract rates. Going forward, we expect industry demand to remain strong and contract pricing to further improve into 2019. We continue to aggressively recruit drivers in order to add capacity and support our organic growth objectives through the balance of the year.Looking forward, we remain confident in our ability to continue to deliver strong performance. We have built a great infrastructure and a great team that has allowed us to meet our customers' needs and to deliver strong organic growth. We remain focused on delivering on these organic opportunities and complementing that growth with strategic acquisitions. Market conditions have stabilized, relative to the first half of the year, but remained broadly favorable for well-positioned operators like Titanium. As such, we are reiterating our revenue and EBITDA run rates of $180 million and $20 million respectively.In closing, we are extremely pleased with how the company performed during the quarter and we believe that it is a strong validation of the investments we are making in our business. We are extremely proud to have been ranked by the Growth 500 for a 10th consecutive year. Titanium has been recognized among Canada's fastest growing companies with 5-year revenue growth of 296%. Before opening it up for question. I want to again thank all of our team members for their hard work and focus again this quarter and to thank all of our customers for trusting us with their business.With that, I'll now turn it to the operator to open the line for questions.
[Operator Instructions] Your first question comes from the line of David Tyerman with Cormark.
My first question is on looking into 2019, so you had a very nice rebound this year. I'm wondering, what your feelings are for further margin and return on invested capital improvements going into 2019?
So going into 2019. We believe that industry conditions are going to remain favorable. From Titanium's perspective, we're going to continue to do what we do best, we're very good at what we do. So we're going to continue to focus on organics and continue to look for accretive value-added acquisitions. We're going to keep hiring salesmen, we're going to keep increasing our driver count, we're going to be again looking at economically, we expect to see some rate improvements, further rate increases going into 2019. So again, we're definitely seeing a positive fairway ahead of us.
The other thing I wanted to note is that, with scale and with growth, you'll continue to see margin improvements in the long term.
And then the second question, just drilling down on logistics specifically, obviously settling back to a more sustainable level. Is this the kind of level that we should think of as sustainable or is there some other level that we should be thinking about when we're modeling the company?
No, we believe that this is a very sustainable level at this point in time. So if you look at sort of the history of what went on in '16 and '17, we believe that this is a very sustainable level and the ingredients of what's going on in the industry really haven't changed that much. So we believe that the balance of the asset-based component and the non-asset based component at this point in time is very -- I think it's very balanced at this point in time. And there's a lot to support the 2 businesses in terms of what they both do and what the customer's needs are. So we're able to fulfill on either level depending on the situation.
I just wanted to add to that, David, that we continue to focus on our strength in the logistics department, continuing to grow our programs and make investments in terms of how we're broadening our customer base within the logistics group. So we think that the growth will continue and the stabilization that we're feeling now is sort of a new -- new norm normal.
Your next question comes from the line of Benoit Poirier with Desjardins Capital.
Kasia, my first question, could you maybe provide the -- quantify what was the contribution of Xpress Group? I mean, I think, the last quarter, where it will show some growth through M&A after that will be all organic, but what was the contribution of Xpress Group during the quarter?
Absolutely. Our revenue contribution was about $4 million and EBITDA contribution was about $1 million.
And looking on the logistics side, if we look at the margin contraction quarter-over-quarter, so EBITDA went from 11.2% to 8.8%. Is it kind of more seasonality or is there any other more reason behind the sequential decline in terms of EBITDA margin?
It's really just volumes over fixed costs, so contribution margins remained very similar to Q2. Any changes in spot rates would profess down to carriers. So there's no change there. So it's really just on lower volumes over relatively fixed cost leave out the margin pressure. So it's very much in line if you look at historical [ level ].
Okay. And when you talk about sustainable level, should we be thinking about the kind of the $7.3 million on revenue or kind of the year-over-year growth that will be more moderate, going forward? How -- what's your definition of more sustainable level?
It's a little hard to say from a quarter-by-quarter basis because each year tends to have some unique seasonal personalities, for lack of a better term. But definitely, I think that logistics will have fairly similar capability next year over this year. The question is, where will you see the spikes? So that, that I think is -- tends to change on a year-by-year basis. But beyond that, I think where we're at today is a very supportable environment and we aren't seeing any major ingredients that are going to cause the current transportation market to significantly change.
Your next question comes from the line of Konark Gupta with Macquarie.
So Ted, just wanted to ask you on the guidance here. You maintained your guidance. Obviously, the quarter was pretty good. And if I look back, the last 4 quarters, your EBITDA is already above $20 million, right. And you're still kind of maintaining $20 million growth rate. I'm sorry, sustainable rate here. So my question is, is it all because of logistics normalization or are you expecting any sort of softer patches somewhere?
No, not specifically. I mean, we're not expecting any softening. This is really a run rate, for lack of better term. It doesn't really take into account organics or acquisitions. It really is just a run rate and it really is just taking new account essentially where we're at today. So it's mathematical.
I just wanted to add like nothing's really changed in terms of our perspective, in terms of what we're expecting from last quarter. We knew sort of the levels we're seeing in Q2, especially logistics division, weren't sustainable. We knew those were onetime, right. And so Q3 sort of fell right in line in terms of what we expected and nothing has materially changed in the industry since we first set those targets.
Okay. So just to clarify. So that $20 million EBITDA, as you said, it's before organic upside, right. So is that before you buy any more trucks, basically?
Correct.
Okay. And so -- and you still have plans to buy more trucks, I guess?
Our plans to buy trucks is 100% on our continued -- it's continuing on our organic growth plan. And we are -- we have drivers that are basically applying to work at Titanium and we continue to grow our level in our trucking division. So for sure, we expect to buy more trucks as we keep recruiting.
Okay, that's great. And then second question, Ted or maybe Katarzyna. There is -- like in your contractual obligations table, you mention about the loans and leases that you have to repay over the next several years. So in the next 12 months, I guess, the amount is almost $19 million. Just wanted to understand how do you plan to pay that? I know you said, strong free cash flow. Like is that all in terms of source of cash or something else?
Nothing is really going to dramatically change over the next year. Our commitment in terms of loan repayments has been consistently about $4 million, $4.2 million a quarter, and that won't dramatically change in 2019.
$4 million, $4.2 million? Okay. Perfect. That's all from me. Thank you. I will get back in queue.
Your next question comes from the line of Anthony Prost with GMP.
Just wanted to see if you could provide a little bit more detail as to the actual quantity of new drivers that you hired and what your goals would be for the balance of 2018? And what your -- if you have any specific goals for 2019?
Sure. It's Marilyn. So our growth has been very strong over the year. We have definitely increased our driver count significantly. We expect that to continue. We have a active recruiting program now that we've launched this year, new to Titanium. That's been very, very successful for us. We held the driver fair that is very successful et cetera. And we've always sort of been a top market payer, so we were able to attract good drivers to our company. We're not seeing a significant slowdown in that at all. So our driver count continues to increase in the expected rate of increase to continue into the New Year.
Okay. Reason I asked is, just because in your quarterly statements, it's like the number of drivers seems -- like in your -- seems to be fixed at that 550 level. Do you actually have like a specific number that you can provide?
The reason for that is -- just following an acquisition, there's always some streamlining, right. So after following Xpress that those drivers that didn't fit our culture and so forth, and we were able to regain that now are growing on top of that, right. And just, I also wanted to highlight the 550 includes office staff as well or closer to 575 at this point in time. But I feel, we need to update it. It never has grown a little bit on there as well. So factoring in, one of the big things in the industry that people also -- driver shortage, there is bit of attrition. So we're offsetting our attrition with new hires and we're adding on top of that. So our net growth has been very, very good. The actual numbers -- we haven't actually updated our numbers because they haven't been back to significant, but they have increased.
Okay. And for the drivers that end up choosing not to come to Titanium, would you be able to say, where they're going like? Are they hitting at West or…
I am not saying, drivers go out West. There is movement within the industry, for sure. Sometimes, it's as simple as we just don't have the right work for the right driver or more often than that we are finding that he isn't the right driver for us. So those are -- that would be a factor in drivers not coming to us, partially because they don't fit our criteria or conversely, may not necessarily have the runs or the type of work that they're looking for. But overall, it's an attractive place for a driver to be.
[Operator Instructions] Your next question comes from the line of David Tyerman with Cormark.
Yes, so I just want to follow up on the growth -- organic growth side. What is a reasonable expectation in the current market for organic growth?
I think that from a market perspective, a lot of people are expecting rate increases depending on the lanes, depending on the geography and the type of work. I think a lot of people are expecting rate increases anywhere from 3%, 4% to as high as 10%, again depending on the situation. So that would be on the rating side. But from our point of view because we are a very well-paying company, we have some unique features here such as our stock purchase program, where we match our shares to our drivers and employee. We're really -- I think we're the only trucking company in Canada that actually has a match program with drivers, which is really amazing. So we have some very unique features. So our organics not only include rate increases, but they also include the ability for us to increase our capacity. So from that point of view, we do have some goals next year.
Just to kind of put in perspective for you, our year-to-date to the end of September, net of drivers leading were up about 45 drivers. And we expect that trend to continue into 2019.
Okay. So that suggests 5% to 10% volume growth. Is that correct?
I think that's fair. Yes.
Okay. And so something like that on the volume side, and then rate increases mid-single-digit to as much as 10% kind of thing
That's right.
Seems to be most likely at this point. Okay. That's very helpful. Thank you. And then my other question just -- there does seem to be a bit of concern in the industry, and in some of the US calls, in particular, about what's going on in the industry? There has been a huge number of trucks ordered. And I guess, is the worry that we could be getting into an excess capacity tipping past the best part of the cycle because of this. Just wondering, what your thoughts are, you've kind of answered it a bit, but your thoughts on what we're seeing, and I know you're not a strictly U.S. player but presumably some of this we expect to kind of [indiscernible].
A couple of things are going to I think mitigate that. At the end of 2019, we're expecting to get Canadian ELDs as well, so that's going to correct some of the issues that the Canadian truck transportation industry is still experiencing. So that's going to get rid of obviously, some of the extra time that isn't currently being logged on a domestic level. In addition, if you want to talk about our canary in the mine, I think that -- we're actually really not seeing much of an indicator in our logistics group, which tends to be a bit of a telltale on the industry. We are seeing a very stable market at this point in time. We're not seeing an expectation of decline. We are seeing still very strong fundamentals in the industry, so. And we're not seeing at this point in time, any rate reductions per se in our contract rate, so.
Just to add there that you do -- you have reports are out there for record orders on tractors and trailers, but a lot of that was replacement orders. So a lot of companies over the years in tougher times that we've seen have held off on buying equipment will now -- sort of gone gangbusters in buying equipments this year, especially with the strong first half of the year coming in. So I think a lot of the record orders that are there are -- a lot of it is for replacement in the industry, not necessarily new players in the marketplace.
And just one last question. So you're looking at good rate increases in 2019 based on what you see right now. What about on the cost side? Do you see any cost push I guess, particularly from drivers, but anything else to?
We've always been very cognizant of our driver pay. We've always made sure that was a priority for us in operating our business and being the top end of our marketplace and we are very confident that we are well positioned for that into the next year. Cost increases are certainly there year-over-year in terms of driver compensation and cost of equipment and I think that some of that carries over into the industry that is a driving factor in rate increases.
So when we think of overall cost increases, are you talking 2% or 3% or 5% kind of numbers?
More likely, there is going to be some inflationary pressures, I would think to some degree on just some of your general overheads, right. And in addition, I think what's going to be interesting to watch is that because we actually invested in equipment over the last few years, I don't think we're going -- we aren't quite as exposed to the increase in interest rates that you're going to see over the next few years. And being in a capital-intensive market, I think that people that are now only starting to replace their equipment are going to have further challenges whereas we've actually been somewhat proactive in that environment, so.
Your next question comes from the line of Benoit Poirier with Desjardins Capital.
When we look at free cash flow generation, obviously it was strong in the quarter, you've been able also to pay down some debt. What should we expect going forward in Q4 and 2019? If you could give some color on the free cash flow, kind of CapEx also you intend to deploy and where do you see the debt ratios to go to?
Poirier, this quarter was a little extreme because we're catching up from prior quarters. The growth in the logistics was very dramatic and that sort of negatively impacted us in the first quarter from a debt perspective and we sort of caught up this quarter, right. But if you look at 2018 year-to-date, I don't expect that to materially change into 2019, if you average that out over the quarters.
So you basically, Kasia, intend to be at around 2 in 2019 assuming no M&A, right?
So you're saying $2 million?
Yes, 2x debt-EBITDA.
Debt to EBITDA level, yes, that's right. That should continue to go down barring any acquisition growth.
And could you comment, overall about the bidding pipeline now that you hired Left Lane Associates. Just wondering, if you could provide some color about the M&A pipeline right now?
Yes. So the pipeline for us is always fairly robust. Because we're fairly well-known player in the market, we tend to get a decent amount of leads. What we do is we've got to put it through essentially in evaluation and we look at all sorts of different factors to determine whether or not an acquisition make sense, and we're fairly disciplined in our approach. So all these factors, need to be taken into account. The addition of Left Lane Associates, they are primarily an M&A firm. Their objective is to basically just augment our ability to generate leads and we're really simply just casting a wider net out there from a lead generation perspective.
And in terms of CapEx, it's running at about $2.3 million, $2.5 million a quarter, is it kind of a sustainable level going in 2019 or should we expect a modest growth depending on your truck purchase?
It will likely be a little bit higher next year. But again, it depends on growth in terms -- as the same thing this year in terms of maintenance CapEx, there won't be much required for next year, will be very nominal early maybe starting 2020. So in Q4, it might be a little bit higher, it can be probably more in $4 million range and then into 2019, we have up to 80 trucks that we can purchase. So it depends how many drivers we can recruit. And then we'll probably want to add some trailers on top of that as well. We don't have to purchase any trailers this year other than a handful of flatbeds, because of the efficiencies we gained from the BlackBerry trailer tracking technology, but into 2019, if our growth rate continues, we'll probably have to purchase up to maybe 150 trailers as well next year.
So you could buy between 80 and 150 -- 150 trailers, sorry and about 80 truck. Okay, perfect.
Your next question comes from the line of Konark Gupta with Macquarie.
Just a follow-up guys. On the ELD discussion, perhaps Marilyn, it's more for you. The discussions are obviously picking up here right, as we head into the mandate here potentially in Canada. What do you see from ELD in terms of -- I know there will be some impact on capacity like we saw down -- south of the border. Do you see more organic opportunity or more M&A opportunity coming out of it?
A bit of both. Like we saw with the US, the ELD was challenging for a lot of companies. They weren't prepared, they couldn't afford them and so on, so we expect much the same in Canada, which may give rise to further acquisition opportunities for companies which is not interested, who don't have the wherewithal, who don't have the money to go ahead with that initiative. So we expect something similar out of the U.S. probably somewhat muted, largely because of our size, because we're looking to our cousins across the border and hopefully learning from them. We fully expect the ELD to come in December of 2019. There is support on every front, both politically and through our interest groups as well. So that is very much on the forefront. And there aren't anything else I want to wrinkle down, so I expect that it will actually generate some opportunities for companies like Titanium and again, it might clean up some of the industry as well.
And so would you not expect because, your customers know that ELD is coming, so would they not be willing to kind of source or kind of lock-up capacity before it comes in so that they have capacity right and that will push up pricing in 2019 even further, right?
Yes, we're actually already seeing that. I think a lot of customers have sort of wisened from the early part of this year and capacity definitely on the forefront. All of our talks with customers, their biggest issue is commitment to capacity and that's definitely something that will be stronger in 2019 directly related to ELD capacity-related issues as well.
And then on M&A side, Ted, just wanted to clarify a few things there. So we saw the last acquisition was late last year, right. So obviously, it's almost a year now. What's your focus now, and has it changed in terms of like the size of the company, geography, lanes, drivers, trucks, so what's your focus right now on M&A side with especially with Left Lane coming in?
Right. So the focus -- I would say, the focus hasn't changed per se. We are at this point in time looking at all opportunities. The fact that we have the ability to grow organically is something that we're focusing on, but at the same time our acquisition, interest there hasn't changed. We're very interested in doing acquisitions. We believe that we have a really fantastic company. On every level, we have great people, we have great technology and we have a great driver program. So we feel that we're actually an excellent buyer and we think there will be an excellent opportunity for companies that are looking for the next chapter in their existence. We are able to buy as we continue to pay down debt. Obviously, what's happened is -- is that we are able to buy larger and larger companies at this point in time, we're able to buy a fairly significant company, some fairly large revenue because we do have that ability in our ratios. So our appetite, if anything has not decreased but it's actually broadened in terms of what we're looking for we're just, we simply maintain our level of discipline. We are very excited about the opportunity for other companies to become a part of Titanium and we feel that we're just going to still stay focused on our product lines and our general geographies and look for something that makes sense for our shareholders.
And so in terms of your available resources to deploy for M&A like what's your headroom like on that?
In terms of cash or we talking in terms of --
Yes, cash and lines.
At this time, we could fund an acquisition of up to about $70 million and that continues to grow each quarter.
And then lastly, Ted, I think years ago, I remember you were kind of visioning $500 million kind of business, right over time. So I just wanted to see where your head set on that, I'm like, the industry has changed dramatically since that discussion and I mean like, volumes have gone up -- pricing has gone up right and there is still more upward pressure I would say. So I mean, what do you see because the M&A market is kind of balanced with organic right now, the $500 million revenue goal still kind of remains intact and like do you see that in the next few years, is that something in the middle of the next decade, kind of thing, I mean, what's your thought there?
Our goal hasn't changed, that's very viable and in fact what gives me confidence that we'll have the ability to reach that is that we continue to be profitable, more profitable and we continue to generate free cash flow and pay down debt. So at some point in time as opportunities present themselves in particular, opportunities that make sense for our product lines, our geography, et cetera, et cetera, we believe that that goal becomes even more attainable. When you've got a strong foundations in your organization, it makes it a little easier to be confident in the fact that you have the ability to reach your goals. And so we feel that a company of this caliber has the ability to reach those goals.
There are no further questions at this time. I would now like to turn the call back over to the presenters for closing remarks.
Okay. Thank you, operator, and thank you to everyone for joining our call, and thank you to all of our staff and our drivers for continuing to make this a fantastic organization. We look forward to reporting on the rest of 2018.
This concludes today's conference. You may now disconnect. Have a wonderful day.