Mullen Group Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2023

There are 10 speakers on the call.

Operator

Welcome to the Mullen Group Limited Second Quarter Earnings Conference Call and Webcast. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. Call. I would now like to turn the conference over to Murray K.

Operator

Mullen, Chair, Senior Executive Officer and President. Please go ahead.

Speaker 1

Thank you, and welcome all to Mullen Group's quarterly conference call. We will be providing shareholders and interested investors with an overview of our 2nd quarter financial results. In addition, we will discuss the main drivers Impacting our operating performance, our expectations for the year and close with a Q and A session. But before I commence today's review, I'll remind everyone that our presentation Further information identifying the risks, uncertainties and assumptions can be found in the disclosure documents, which are filed on SEDAR And at www.mullen group.com. So this morning, I'm calling in from our brand new state of the art facility in Kamloops, BC.

Speaker 1

It's a 36,000 square foot crosstalk. It's got 40 doors and warehouse capabilities, including we can service our ambient capabilities for The terminal is now occupied by Apps Cargo. It's a leader in the West Coast logistics space. It provides And this provides apps with a great facility ensuring they can service the entire interior of BC from a central location. And as our shareholders know, LTL is one of the core investments identified by our organization.

Speaker 1

And this facility is just another great example of an investment by our company and how we ensure our LTL businesses are positioned for the future. Now back in Okatoks, the corporate office, the other members of the senior executive team are Joined on the line, I have Richard Maloney, Senior Operating Officer Joanna Scott, Senior Corporate Officer and Carson Urlacher as our Senior Accounting Officer. And he's So let's start this morning's call with a review of our Q2 20 3 financial operating performance. And in this section, I really will address 2 topics. The first is how we how did we do and the second is how did we do it.

Speaker 1

So from my perspective, I have to say Q2 was another very good quarter for our organization. We managed to mitigate most of the collateral damage from the change in the economy. And from that perspective, what I really mean is we saw consumers alter their spending patterns Away from buying goods, doing things like travel, personal services, going out to restaurants, concerts, etcetera. But the consumer, I think, only tells half the story here. Business has also changed.

Speaker 1

Retailers, manufacturers, shippers, They finally realized late last year that they miscalculated their supply chain requirements and began to right size inventory levels after ordering way too much This combination, changing consumers, habits and business rightsizing led to lower freight volumes and more competitive pricing in 2023, which is the exact opposite of last year. So in other words, we went from a freight boom in 2022 to a freight recession in 2023, all within a few quarters. Now the other thing to remember about our results, you got to The last year was punctuated by high fuel prices that were passed on to customers via fuel surcharges. Now this year, there's been a moderation in fuel prices. And as a result, Fuel revenues are down $20,800,000 year over year just in the second quarter.

Speaker 1

This alone The majority of the consolidated revenue decline of $27,200,000 Now despite all of these changes in the market, we still manage Basically, what the numbers tell us is that we had a pretty good quarter, which is, as I mentioned, is even more compelling when comparing to the boom in 2022, a year of supply chain disruption, off the chart freight demand and pricing surcharges implemented due to the surge in demand. So I would say, yes, revenues were down in the quarter. They're down about 5% year over year. But perhaps a better way to look at our performance is to compare not to the boom year of 2022, but compared to our 5 year average or as I'd like to say the period before 2022. In fact, Excluding last year's results and looking at our 5 year historical average, you'll see that we exceeded prior year periods by a mile.

Speaker 1

So when I say I'm pleased with our performance in Q2, in fact for the 1st 6 months of 2023, you will know what I'm referring to and that's the long term. So most shareholders have come to expect that we will grow this company in a prudent and thoughtful manner. We always think about tomorrow. We never chase deals, particularly at the top of the market like last year. We have a long term game plan and we stick to it.

Speaker 1

Now let me just give the next couple of comments here about how we did it. Firstly, and most importantly, I'd say It has to do with our diversified portfolio service offerings and our brand name business units that are involved in multiple different verticals within the North American economy. This diversity is all part of our risk management strategy. It helps in times like last quarter where we saw some pretty stiff revenue and price declines in the big consumer markets Like Metropolitan GTA in Ontario or in Vancouver and in the United States where the freight market was hit particularly hard. There was, however, we saw some pockets of strong demand such as transload services, which is where our Cleason Group shines.

Speaker 1

And from our vantage point, Western the Western Canadian market was the best performing market with energy and mining industries continuing to provide a solid base and at the Banster Group, which is by the way a key supplier to BC's mining industry. In other words, diversification matters in times like this. Now we also did a couple of nice tuck in acquisitions where we saw a good fit, the Price was right and where there were lots of synergies to be had. In fact, acquisitions added $22,600,000 to our consolidated revenues And that mitigated the loss of business and most of the loss of business in fuel surcharge revenue. And in terms of operating profitability, Often referred to as OIBDA by the accounting profession.

Speaker 1

We adjusted and we did a great job of managing operating costs, especially Generating a very healthy $83,400,000 in the quarter and that represents a margin about 16.9%. It's down about 1%, but I think we can make this up once we get these new acquisitions fully integrated to our network, which I expect to occur by year end 2023, and that will set us up, I think, pretty good for 2024. So for more on the quarter, I'm now going to turn it over to Carson. Carson, it's your turn. You're up, bud.

Speaker 2

All right. Well, thank you, Murray, and welcome, everyone. Today, I'll provide the highlights from our Q2, the details of which are fully explained in our Q2 interim report. Consolidated revenues declined by 27,200,000 to just shy of $500,000,000 and was due to the net impact of 4 factors. First, revenue excluding acquisitions and fuel surcharge declined by approximately $25,500,000 due to lower freight volumes, particularly in Eastern Canada and from the more normalized pricing environment compared to the elevated levels of last year.

Speaker 2

2nd, fuel surcharge revenue declined by $20,800,000 as diesel fuel prices decreased by 35% year over year. Thirdly, we disposed of our hydrovac assets and business in 2022, which contributed to a 3.5 $1,000,000 reduction in revenue. And lastly, somewhat offsetting these revenue declines was $22,600,000 of incremental revenue from acquisitions. OIBDA decreased by $10,500,000 to $83,400,000 largely due to a decline in the LTL segment. OIBDA in our other three segments remained relatively flat year over year.

Speaker 2

Operating margin decreased by 1.1% to 16.9%. Now let's take a closer look at how we performed by segment. Starting with our largest segment, revenues in the LTL segment were down $17,300,000 to 190 $400,000 due to lower fuel surcharge revenue, lower freight volumes in Eastern Canada, and from a more normalized pricing environment. As a result, OIBDA was down $7,900,000 to $34,500,000 Operating margin decreased by 2.3% 17.8%, primarily due to lower margins experienced by B and R, our most recent acquisition. The financial results of B and R contributed to almost a 1 full percentage point decline in segment operating margins.

Speaker 2

Our 2nd largest segment is our L and W segment. Revenues in the L and W segment were down $13,800,000 to 142,900,000 due to the continuation of the inventory rebalancing cycle and softer freight demand. Other factors contributing to the decrease in revenue consisted of lower fuel surcharge and a reduction in revenue from the sale of our hydrovac business. OIBDA remained relatively flat year over due to the strong results at Clayson Group and from the ability of us to use owner operators and subcontractors more efficiently. Moving to the S and I segment, revenues were up by $6,800,000 to $107,300,000 on $13,300,000 of incremental revenue from acquisitions, which was somewhat offset by lower demand for some of our services due to extreme wildfires, curtailing activity levels and from the timing of certain turnaround Lower fuel surcharge revenue and the sale of our hydrovac assets also contributed to a reduction in revenue.

Speaker 2

OIBDA in absolute dollar terms was relatively flat year over year at 20,600,000 Operating margins declined slightly to 19.2% due to higher S and A costs as a percentage of revenue. In our non asset based U. S. 3PL segment, revenues declined to $50,800,000 due to lower freight demand in the U. S.

Speaker 2

For Full truckload shipments. OIBDA decreased to $900,000 which was mainly due to higher S and A costs as we added IT to continue the development of our proprietary software known as Silver Express. Operating margins declined to 1.8% on higher S and A costs. Operating margin on a net revenue basis was 18.8% compared to 43.1% in 2022. Net income decreased by $6,200,000 to $36,500,000 or $0.41 per common share.

Speaker 2

This decrease was mainly attributable to lower OIDEA and from a reduction in earnings from equity investments, which was somewhat offset by lower income tax expense and a positive variance in net foreign exchange. The number of common shares outstanding decreased in the quarter as we repurchased and canceled approximately 2,100,000 common shares for $31,500,000 or an average price of $15.11 We continue to generate strong cash flows in excess of our operating needs as net cash from operating activities in the Q2 was $88,000,000 An 80% increase compared to $48,800,000 in 2022. This increase was mainly due to the changes in non cash working capital items. Our balance sheet remains very strong. Our debt to operating cash flow covenant under our private debt agreement is at 1.95:one.

Speaker 2

We have a total of $250,000,000 of bank credit facilities available to us, of which we had $115,700,000 drawn at the end of the second quarter. So with that Murray, I will pass the conference back to you.

Speaker 1

Thanks, Carson. And as we get close to wrapping up this morning's I'll now provide some thoughts on how we're looking at the market, the economy and our business. And in this quarter, I'm going to keep it quite simple because our outlook really hasn't changed from Q1 presentation back on April So I invite any interest to listeners to check out the transcript of my comments last quarter and you'll see that Really, the outlook really hasn't changed much. We still view the macro picture as stable, but risks become more elevated each hike in interest rate. We continually ask ourselves when will the consumer break, but I can tell you from what we've seen thus In 2023, they haven't done so yet.

Speaker 1

As such, it's reasonable to assume the economy will continue to grow, perhaps slowly, but it Under this scenario, freight demand will remain under pressure, and probably until manufacturers, shippers and retailers Begin to restock inventories. And as I commented earlier about what happened last quarter, it was A lot of the freight loss of freight demand was not end consumer demand. It was really about businesses adjusting inventories. Well, I can tell you the warehouses are emptying pretty fast these days. So eventually they're going to have to restock inventories if the consumer is going to keep spending as they are.

Speaker 1

So this suggests that our LTL and L and W segments will continue to perform, I think, at levels consistent With this past quarter and truthfully, I think our number one challenge will be in finding productivity gains to alleviate cost pressures that have built up over So we're 100% focused on that both at the corporate offices and in our business units. The U. S. 3PL segment and what I'm referring to here is holistic. They're going to continue to be impacted by the most by the freight recession.

Speaker 1

I think the good news is that this non asset based business and the senior team at Illystic, they focus simply on one thing that's managing the spread That's the difference between what the market offers and the price the subcontractors are willing to work for. And thus far, There is more capacity than there is freight, which means the contractors are very price competitive. However, our margin will Suffer a little bit because we are focused on the long run and we've added new IT talent to the team to help build out Silver Express 2.0 And that increases your S and A expenses in the short term. This is so unlike our competitors that are downsizing And that's really for one reason, we believe the future of the 3PL business lies in the technology offering. Turning now to Mining and Energy.

Speaker 1

We see these as growth areas, which is why we are optimistic that our S and I segment will continue to exceed last year's performance. At least that's our expectation today. And on the corporate front, while we're going to continue to balance the balance sheet as Carson says with a high degree of respect that the market could be vulnerable to a slowdown. If this were to occur, having a strong balance sheet would be very, very strategic. We will, however, continue to pursue acquisitions that meet our 3 criteria.

Speaker 1

That is fit, the right price, and we must find synergies. We have a great book of business, an excellent team throughout, and we're well positioned to be very opportunistic, because I can tell you So thank you. I'll now turn the call over to the operator, and we'll go straight to the Q and A session.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Konark Gupta of Scotiabank. Please go ahead.

Speaker 3

Thanks, operator. Good morning, Marie and everyone.

Speaker 1

Good morning. Good morning.

Speaker 3

Good quarter for sure. What I wanted to understand was The L and W segment had a pretty good margin. And as Carson pointed out, it's a Gleeson Group That had a pretty good performance in the quarter, but just not surprising the transport business seems to be good. I'm just wondering how sustainable is this Margin performance at Cleason or out at the entire segment. Do you see any signs of, I don't know, maybe the cost or pricing pressure or tailwinds on either side.

Speaker 3

And How should we think about this segment in the next 6 to 12 months?

Speaker 1

Yes. It looks like that segment, we've got some competitive Advantage in that, number 1 is the Cleason Group, as we talked about, they've got a very strong book of business Involved in Transload. And those are assets that just not subject to the same market pressures that because there's not a lot of competition. Very, very few strategic Transload operations. So we've got it.

Speaker 1

So we're not subject to the same pricing pressures that you might have the general consumer and general business. So that's a good sign for us. The other one is The Banstra Group was included in that. So our 2 biggest businesses there are Banstra, which is tied to the mining business in British Columbia, which is going through a bit of a growth spur right now because if you're going to move towards if you're going to look at energy, You have to think mining and energy are correlated because if you're going to move towards cleaner forms of energy, well, you'd have to Find the minerals and the metals, which is through mining. It's not through just asking for it.

Speaker 1

You got to go find it. So mining's got a bit of has Got some good tailwind with it for the next bit. And Vanser is very well positioned in British Columbia. So that was a very good acquisition. Those 2 are doing very well.

Speaker 1

The rest of our businesses, Konark, we kind of manage the spread. We have a lot of owner operators in there, a lot of use, a lot of subcontractors. So Our business units just manage that spread. You've heard me talk about that. If you have all company trucks and there's price pressure, Well, you're going to take it on the chin.

Speaker 1

But right now, it's the one that owns the truck That's taking it on the chin because there's too much supply for how much demand there is. So but we can still maintain margin. So revenues are going to be down a little bit because of fuel. That's not really load count. That's just a that's a flow through.

Speaker 1

So all in all, not too bad From that, I think it's going to be pretty stable on there. At least that's my projection for today. That's good color, Maury.

Speaker 3

Thank you so much. And then just follow-up on the trucking market in general, Hap. So your segments Kind of give us an indication as to how the Canadian market is a little bit different than the U. S. Market Clearly, and it seems like the U.

Speaker 3

S. Market went up a little bit higher last year and is coming down from that cliff perhaps. What I wanted to understand on the U. S. There's a situation right now in that market where there's a very large player, Yellow is going through a major labor and business uncertainty at this point.

Speaker 3

So has there been any change That you have noticed in your U. S. 3PL segment because of the yellow situation at this point and what are your thoughts on that Hold situation.

Speaker 1

Yes. So you're right. That's a headline news item. And Yellow has They're a big company and but they've always been on the edge of not doing well. And so there's reasons I don't know what they are, but they're having some real challenges right now Because of the market and because of their labor issue.

Speaker 1

What we are seeing right now is They're having some customers are shifting, and they're shifting some of that business. Now that is not if I'm yellow, that's not a very good situation. That's not new demand. That's just a shift in demand. So there will be some winners and some losers of that.

Speaker 1

Now we don't do any business with yellow in our network, in our LTL network. We do business with some of the other LTL carriers And we provide we like Estes Group, we deliver their freight in Canada for them. And Estes, their load count is going up even though the market's not going up and that's Most likely a shift of freight from yellow. So there's a shift going on, and That's a specific market issue there. In Canada, our biggest issue that we've got up here is probably got to deal With the disruptions on the ports and stuff like that, that's backing up inventories coming in.

Speaker 1

There's too many ships Waiting to come in. And I can tell you that the side effect of that is our warehouses are amping up pretty fast. That could resolve the Canadian freight recession awfully quickly It's from my perspective because our inventory levels are being drawn down pretty fast. But end consumer demand has not Changed dramatically and the consumer still is to be pretty good. That's what we're seeing.

Operator

Our next question comes from Kevin Chiang of CIBC. Please go ahead.

Speaker 4

And I'll let go of Konark's comments, a good second quarter here. Maybe if I And out the questions related to your comments around yellow. Obviously, LTL has been a focus area for you here in Canada and you do a little bit of The German, the U. S. On the 3PL side.

Speaker 5

Yes.

Speaker 4

Do you think with the potential bankruptcy of Sea of yellow that opens up the door for you potentially taking a step into the U. S. LTL market. Is that a market you'd be interested in? It's much more consolidated, much more rational.

Speaker 4

You've had great success here in Canada in consolidating the market north of the border. Does this accelerate maybe a timeline to enter into the U. S? Or is that something that doesn't interest you?

Speaker 1

No. If you're going to get into the LTL business, Kevin, you're going To go big, you can't fart around.

Speaker 5

And

Speaker 1

I don't that would be Such a big step out. So I don't we won't enter that freight. That doesn't make any sense to us. Where we are going to move Freight in LTL is through our Listic Group. We don't move the freight.

Speaker 1

We help customers drive the best value. That's what our technology is about Because the little customer is going to get squeezed here. And Holistic is just a they're a bulk buyer And they manage the spread on that. So a holistic benefit. They're being awfully careful about using Yellow right now as a contractor and but that Kim, I'll be honest with you, that business will be gobbled up in a heartbeat.

Speaker 1

Right. Yes, it won't take it won't be as disruptive That's what people think, I don't think. That's my personal opinion. If they do go into it, those facilities will be gobbled up by somebody else and It will be disruptive for a few quarters, but that's even as big as they are, It's not huge compared to the total size of the market.

Speaker 4

No, that's great color there. The one thing I did notice and you mentioned this in your opening remarks how we're in a freight recession And I appreciate Canada might be a little bit different than the U. S. But one thing that did stand out to me is, if I look at your LTL Margins in 2019, I appreciate there's M and A in here and fuel surcharges will kind of whipsaw your reported margin. But If my numbers are correct, it looks like you did something like 15.5%, just a tick over 15.5% in margins in 2019.

Speaker 4

If I look at the last three quarters here in LTL, you're kind of in the 16.5% to 17% range despite the fact that we're in a freight recession. Just How do you think about your margins in LTL here through the cycle? Do you think you're kind of at Maybe 200 basis points step function increase in your overall margins through the cycle?

Speaker 1

Yes. We're going to increase margin in LTL over time. You've got to remember, I think, Really our investments in LTL have really only been over maybe the last 10 years or something So I think we're in the early, early stages of building out what you need in LTL, which is you need lane density and critical mass, And you got to have the right business units. I think we've done a really good job of getting some great businesses in our organization and we're just I think we're in the early So, just finding our stride and doing that. For example, I'm out in Kona right in Kamloops right now and in a brand new LTL facility.

Speaker 1

That's the future. And we are building for the future. And we don't build facilities to make no margin. We're very optimistic that we'll build the lane density and get the critical mass that's required. And our business units, They're running a good job.

Speaker 1

And so, our margin will improve in LTL over time. We will continue to do tuck in acquisitions, which When you do those tuck in acquisitions, the smaller little one, there's a consolidation trend going on, guaranteed, is that we'll be able to build the density within our group, but number 2 is you get rid of an undisciplined competitor. And when I say undisciplined, I mean they're very, very price competitive. But in this new day and age, You got to have the technology platform to be able to integrate in with the big shippers. And whether that big shipper Is it another carrier in the U.

Speaker 1

S. Like Estevez? We're totally synergized between the companies and the data flow And then to their customers. So little companies just cannot get that. So they're boxed out.

Speaker 1

B and R is a perfect example of that. They're in the LTL business. They've been they haul a lot of LTL freight in Northern Alberta. They don't make any money at it. I guarantee you within our network, we will make money with that.

Speaker 1

So yes, we have a long term game plan in LTL that's Really good strategic facilities and build lane density and critical mass and I think we're in the early stages. I mean, if you go if you give me 10 years another 10 years in the LTL business, we're going to be a lot it's not going to be 16%, 17% margins. I can tell you

Speaker 4

that. That's helpful. Maybe just one more for me just because you're You're in D. C. There and with the opening of a new APPS facility, just maybe how you're looking at the BC port strike and maybe how APPS is Managing it given they have an intermodal agreement with CN and maybe how quickly you think you can recover From this disruption here?

Speaker 1

Well, thus far, I think the biggest disruption, Kev, that I've seen is there's not any inbound freight coming into our facilities. Most that's why I say to you, most of the freight that we're hauling now is emptying out the warehouses. So nothing the problem that you have with the port issue and this is a regional issue. This is not like COVID, which was A worldwide issue. This is a regional spat, and it's going to impact Western Canada the most and that, Including exports.

Speaker 1

So it's there's bottlenecks. I'm sure that will be resolved. But right now, what it is, there's lots of inventory and there was lots of inventory in the system. Guess what? In Western Canada, that's cleaned out now Because there's nothing coming in.

Speaker 1

It's all sitting on the ships. And I think they can only offload maybe 1, Maybe 2 at best ships a day.

Speaker 4

Okay. That's good to hear.

Speaker 1

And so it's you've got quite a few ships backed up there right now. So This could take from the flow of traffic, it could take quarters, not Weeks. Once it gets resolved and the pork workers go back and become productive again. The worst case scenario is, They go back to work, they are mad and they are not productive and things just get extended out and that's just going to increase the cost And hurt a whole bunch of people down the line.

Speaker 4

No, that makes sense. That's great color. Thanks for taking my questions, Murray and team.

Speaker 1

You got it. Thanks, Kieth. Appreciate it. Bye.

Operator

Our next question comes from David Ocampo of Cormark Securities. Please go ahead.

Speaker 6

Thanks for taking my questions, Mary and team. I guess the first one I have for you guys, I mean, when we look at the seasonality of your quarters, Q3 is typically stronger than Q2. And just based on the commentary that you guys made about inventory levels normalizing and probably the progress You've seen in July. Should we expect those normal seasonal patterns to persist this year?

Speaker 1

It's complicated to my instincts is going to normalize, That there's always things that can happen in the market. But let me tell you, I drove out to Kamloops last night. I don't want anybody telling me there's no freight moving. There's a lot of freight moving on the highways. So I still think the consumer is doing well.

Speaker 1

I think so long as job that we don't have a deterioration in job losses, I think this market is finding a new equilibrium. I think that we're going to be back in balance. It's going to be a more competitive market than 'twenty three, than 'twenty two. Drive your synergy, be in the right business model, be in the right lanes, and I think you'll do just fine. And I think we're in pretty good shape from that perspective, the way that we've built our business and Diversification model.

Speaker 1

The other is we're going to be very, very opportunistic. Some parts of this supply chain Are getting whipsawed here and those people will get into trouble and we will take the long term view and say, okay, are those good long term returns on investment and we look at putting capital to work on those markets.

Speaker 6

That's helpful color. And maybe I could ask the question another way. I mean, if I take a look at your H1 performance, you guys did $160,000,000 of EBITDA, kind of reached that $300,000,000 target that you I've been alluding to, it kind of suggests that H2 would be down 12%. So are you looking at that $300,000,000 number as more low hanging fruit then?

Speaker 1

Well, as I said in my commentary, I mean, and the press has got, well, if it keeps going the way it's going, I guess my $300,000,000 might be a little low. So we always said, look, we don't know if it's going to be $300,000,000 What we're running our business on and our balance sheet Is if it's going to be $300,000,000 Thus far, we're ahead of that curve. And so we feel pretty good and pretty positive. We're running it as if it might happen, but that consumer keeps defying the odds and the economy keeps defying. So I might have been too cautious at the $300,000,000 Thus far I'm wrong.

Speaker 1

I'm wrong. If We got a great business. We just were running it as if it was going to go down to $300,000,000 So what we did is we pivoted to focus on cost and we didn't And we watched the balance sheet. That clearly was the right move, which is why we maintained the way we did. As we're looking at now, now we're saying, okay, it appears that the market's adjusting to 5% interest rate.

Speaker 1

I don't know how the consumer is doing it, But they're doing it and because businesses, you see from our numbers, it's still pretty robust. Take out fuel, Our revenues weren't down that much.

Speaker 6

That's helpful color. I'll hop back in the queue. Thanks a lot, Greg.

Speaker 1

All right. Carson, you got anything to add to that?

Speaker 2

No, no, I think that was spot on, Murray. Nothing to add.

Operator

Our next question comes from Cameron Doerksen of National Bank. Please go ahead.

Speaker 5

Yes. Thanks. Good morning. I guess in the MD and A, you Sort of highlighted in the Specialized and Industrial Services segment that there was maybe some impact from the Alberta wildfires. I don't know if there's probably no way to quantify that, but just maybe you could describe what impact that had?

Speaker 5

And is there any kind of lingering impact from that that might affect Q3?

Speaker 1

I don't think so, Cameron, to be honest with you. I think there was There's always some type of an event or something that slows things down for a little bit. But Those were for what, a few weeks, maybe a month where it was disrupted in certain pockets. But it wasn't it just slowed things down a little bit. And all you do when you slow things down is it just backs it up and puts it into the Future quarters.

Speaker 1

So, I think the market's fully recovered from that now. Some of the communities have not. They're still struggling with some of the Residual effects of that, but I think business I didn't see any real damage to infrastructure and it certainly wasn't on to our infrastructure. So I don't I think it was kind of a situation that happened just last quarter. I think It won't impact us this quarter.

Speaker 5

Okay. No, that doesn't Now

Speaker 1

this quarter you're going to be impacted by the strike On the West Coast port, because you can't get exports out either. So we're having some of our Transflo business be impacted by that because you can't ship the product That's going out. We put it on to rail, it goes to rail on to ship and out to Asia or other parts of the world. And so that's being disrupted. So there's always something.

Speaker 1

And I'm just hopeful that some common sense prevails here and the workers there understand is that you're Don't be too greedy here because you're going to impact a lot of other people and a lot of other businesses if you get we need them back to work. That's Hopefully, they will.

Speaker 5

Yes, certainly, it sounds like it's moving in that direction. So that's good news. And maybe my second question is just around M and A. I mean, you commented a little bit in your prepared remarks, but if you could just talk about the outlook. I mean, you've kind of indicated there's quite a few businesses giving you a call.

Speaker 5

Just Where are the opportunities now? What's most interesting, your valuations coming down further given maybe some of the disruptions for other businesses in the freight space?

Speaker 1

Yes. So let's look at it from each of the different perspective each of the segments. Ellen, in our LTL business, we'll continue to do tuck in acquisitions like we did with B and R. We've got some other ones that we're looking at that will add density and lane capacity and get rid of an undisciplined competitor In some of our other business units. So we've got some of those files and we're working through those right now.

Speaker 1

That's my preferred way of doing, just layer them in. I don't increase cost. I get business and I get rid of cost and I drive margin. I get rid of a I just get rid of the undisciplined competitor. So we will continue that in L&W.

Speaker 1

Probably no big home runners in that one unless somebody gets A really good opportunity comes up and then we'll make a big step out in that to expand our coverage across Canada. But we got a great footprint from the Greater GTA all the way out to the West Coast. So We'll continue to add in there. In L and W, we'll be opportunistic. I really like Transload assets, if we find them, I'll buy them because that's your path to the future, really good business.

Speaker 1

U. S. Repeal, we are not going to buy anybody in that. We are going to focus 100% on building up the technology because as I said, That's your competitive advantage of the future is in the US3PL, it's all in the technology platform. That's why I kind of refer to US3PL, Holistic That's our technology group, not our logistics group.

Speaker 1

Because if you don't have the technology, yes, not doing the Logistics. So we're focused 100% on that, not on doing acquisition there. Acquisitions will come after we get Silver Express 2.0. And then in S and I, those are your best opportunities right now because it's still Energy business is still not reflected by investors as being a good business and there's Those are your best opportunities. You get good cash flow and you don't have to pay a lot for it.

Speaker 1

The market is not pricing those assets As if they're generating cash or that they will generate cash, I guess, and which is why we bought B and R. I mean that you're talking at Maybe 2 to 3 times EBITDA, not 6 or 8 or 10.

Speaker 5

Right. Okay. Well, that's very good.

Speaker 1

Yes. Each one of them has a different there's a different denominator that works with them. In the freight General Trucking Business, it's difficult to peg that number right now because I can't tell you when Does that market when does pricing leverage come back in that? If you don't get pricing leverage, you're just trucking, you're just generating revenue, you're not generating bottom line. And that business is ultra competitive, which is why we're not in that business a whole bunch, Cameron.

Speaker 1

We're in different verticals where it's not quite as competitive. I think that's the power of our business model. We've built it up over 30, 40 years and it's not just it's not by chance. That's why the diversification is pretty good.

Speaker 5

Yes, absolutely. No, it certainly shows new results outperforming pretty much all other trucking companies. So appreciate the color. Thanks very much.

Speaker 1

Thanks, Cameron. Bye bye.

Operator

Our next question comes from Walter Spracklin of RBC Capital Markets. Please go ahead.

Speaker 7

Thanks very much. Hi, Marie and team. So I want to kind of simplify your outlook, that it was provided as it was provided When you first gave your guidance to what's changed so far. And I guess when you're looking at your outlook, you're probably looking at 3 factors, The inventory destocking trend, the consumer trend toward More services versus goods and a potential recession is kind of drivers of your lower kind of $300,000,000 Target, now that we're trending more toward a 320 as you mentioned, what would you say would be the biggest Change of those three buckets, is it that you built in a recession that you're seeing you're not seeing Manifest, is it consumer pattern shifting back to goods a little quicker or inventory destocking? I know you mentioned That you're seeing the warehouses start to come down.

Speaker 7

Is that the factor that is the biggest differentiator Versus the assumptions you had at the beginning of the year? Just curious

Speaker 5

if the

Speaker 1

question is Yes. I think, Walter, if we go back and we look at it And we said, look, we thought that the biggest factor that was going to change in 2023 was in pricing. Because if you go back in and we said, look, we're still going to do $2,000,000,000 in revenue. Well, guess what? We're on target for $2,000,000,000 in revenue because that's what we did last year.

Speaker 1

So it's not the revenue, it's the competitiveness that we thought And some of the surge pricing that was happening when you had This massive these big bottlenecks that were happening, customers should just get it done. Well, that's over. We're now back to A competitive marketplace and that's where we thought the biggest challenge Would come from is from that side. And for the most part, we were right on, on that. And it's in the pricing side that you're getting hurt.

Speaker 1

I didn't know What was going to happen with fuel, but we projected it was going to be at best flat. But the biggest that's the biggest surprise is fuel is down. The economy has held in pretty good. The consumers, God, they're resilient. I'll tell you the biggest thing is business readjusting to the inventory levels.

Speaker 1

Totally screwed up the last cycle during COVID. I think they're overshooting again, but this time to the downside. And that might get you might find that they're going to have to go back in. Retailers are going to have to go in and start restocking the shelves pretty quick. Because the consumers we're still moving freight.

Speaker 1

And it's not coming in as fast as fast as it's going out.

Speaker 7

So just to clarify, you thought pricing would come down and it just hasn't come down as much, which is why we're

Speaker 1

No, pricing has come down. You can see that on our LTL side. You can see that in general trucking. Where we did fine, as we said, our S and I was going to do fine And our L and W did fine with our transload in that. So but you can see in our LTL side, it came down.

Speaker 7

So I'm trying to figure what made your numbers go up? What was the difference between what you were assuming at the Okay. Okay.

Speaker 1

S and I and L and W. Yes. Got it. Our Mining and Energy business is doing better Than what we had originally thought. Okay.

Speaker 1

We're overachieving on that side.

Speaker 7

So really when you look at LTL then, You haven't seen the way it's playing out is as you expected. And really the upside here is if that inventory destocking Trend as you flagged in your opening remarks, if that continues and if even so, as you just mentioned, If they overshot on the other side, then we could see perhaps in the Q4 or early 2024 A normalization. A normalization versus what you've been assuming in that $300,000,000 Okay.

Speaker 1

I think that is a reasonable assumption. So long as the consumer stays healthy and we know that what keeps the consumer healthy is a job. If they have a job, they're still going to consume. What are they going to consume on? I don't know.

Speaker 1

But it's all in the job numbers and thus far, it's pretty healthy. It's in balance right now, Walter. I think that's what you're seeing in our numbers is pretty healthy Balance, and as I say, that's why I say, compared to our 5 year average, not just to the surge of last year, Which was a one time event. Take a look at it and you're seeing, man, you're outperforming your historical numbers pretty nicely there, Mullen Group. So

Speaker 7

Absolutely. No, I appreciate the time as always, Murray. Thank you.

Speaker 1

Thanks, Walt. Take a good shot.

Operator

Our next question comes from Tim James of TD Securities. Please go ahead.

Speaker 8

Thanks. Good morning, everyone, and congratulations on a good quarter here. Just wondering if I could return to I guess I'm thinking about M and A when I ask this question, but are you seeing, Marie, any signs in Canada of Competitors that are struggling. I mean, you mentioned some opportunities that you've got, one that's being disruptive in the market. But Are you seeing any players in the industry that are struggling and maybe you will get opportunities From that eventually?

Speaker 8

Yes.

Speaker 1

If you overextended yourself in 'twenty one, 'twenty two and thought that that was the sustainable market, You overextended. You're now in trouble. And those are the ones that We'll pay a hefty price in this market because the market has now normalized. And if you thought last year Was it going to be the new trend? You're probably in a lot of trouble.

Speaker 1

And so, yes, and Does that mean the whole industry is in trouble? Not a chance. But it's a bifurcated market. If you positioned yourself well, you can ride through it. If you didn't, The banks cost a lot more money to borrow today and you're getting squeezed.

Speaker 1

And our What we look at is we don't want business that Genesis just generates revenue. We want business that layers into our network So we can drive margin. That's our number one target Is companies that will fit into our network with our teams that will drive our bottom line, Not just our revenue. We don't chase revenue, Tim. That's a fool's game.

Speaker 1

We chase margin.

Speaker 8

Okay. That's helpful. My second question, looking to the U. S. 3PL business And the work you're doing there investing in Silver Express.

Speaker 8

Is there kind of a timeframe that you Have in mind with those investments when your margin, I don't want to say matures, but kind of normalizes or maybe those investments start to slow down and you get What again would be more of a normalized level of profit margin in that business?

Speaker 1

Well, if you're our senior team at Alistair, Pat Malone and his team down there, They hear from me, I want to normalize next quarter. However, they say, well, Murray, we're still fighting a few headwinds here. So But they're working on the long term game plan, Tim, not the next quarter. And I can't when you think of technology, you can't think a quarter. You think of the long game?

Speaker 1

And I can just tell you, I am very pleased with the initiatives that they Our undertaking, their business was not down as much as the U. S. Freight business, which you look at all of the All the providers that are going to be coming out, I bet you any money, they're down 15% to 20%. Our holistic group is not down 15% to 20% because they added new station agents. So we are gaining market share, But we're building for the future so we can gain more market share and be one of the number one players in the U.

Speaker 1

S. 3PL business. And so I encourage them to keep driving hard. And as I tell them, you got got to beat the competition to the puck. And we got the team down there that can do it.

Speaker 1

So I'm pretty pleased there.

Speaker 7

Great.

Speaker 1

But I don't think of it in terms of a quarter. I think of it in terms of them, that's the long term. That's our long term game plan Down in the U. S. Market is the build out critical mass down there.

Speaker 8

Absolutely. Okay. If I could sneak in one last one, Maria, I'd be curious to get your thoughts Today on sort of the inflation environment. And clearly, we're seeing headline inflation slowing. And I'm not thinking so much about trucking rates in that, because We know what's going on there.

Speaker 8

I'm thinking about other parts, maybe the cost side of your business, whether it's labor, technology, equipment. Are you seeing Sort of easing inflation in your cost structure as you sort of sit here today and look forward?

Speaker 1

Richard, I'll have Richard chime in here. Richard and Lee Hellyer work with the OEMs on the equipment The OEMs, Rich, they've come to us and tried to push pricing and we're pushing back on them because our customers are pushing back on us. So I think that we see that stabilizing, Richard. Am I right on that?

Speaker 9

Yes. You know what? Absolutely, Tim, with respect to OEMs, trucks, trailers and things like that, if you come the beginning of last year, they were telling us we're going to have to wait a long, long, long time, Like just about a full year to get some stuff. Now we're actually they're coming back saying, hey, we might have some equipment that's coming available and some of that is related to other operators throughout Canada that cannot take the order for whatever reason whether it's trailers or trucks. And yes, Murray is absolutely correct.

Speaker 9

And then we're pushing back with some of these OEMs, the trucks guys in particular, and we're seeing Some break in the commentary you hear from the OEMs talking about, oh, it's going to take 12 months to get a truck and we're starting to see Those orders becoming available and we're getting a little more aggressive with the pricing side of this from our perspective where we're saying, You know what, we need to we need better pricing because Murray is right. Customers are coming back

Speaker 3

at us

Speaker 9

with in certain regards as well. So I guess it's more telling of the OEMs and that they're calling now looking, say, I may have another 150 trailers available That was not even in the works in January February because again we're seeing some of these orders not going to the customers that thought they wanted them. Their costs have gone up. Their costs of borrowing have gone up. Their capacities to borrow have come down.

Speaker 9

So it's we'll be timely on that. And we're not acting on that at this But we will at the right point in terms of buying this equipment. I think it's important to point out as well that Some of the costs have gone up with labor. They're not coming down. These are sticky costs, right, as well.

Speaker 9

So when Murray talks about and we talk about margins, mean, that's our focus because as we move forward, there's not going to be any major reduction in the actual how much we have to pay our people Because those are sticking as part of this inflationary environment here as well. So and these are all part of the world we live in and then we just adjust our pricing accordingly in The business model and the size it may be and where we're going to be doing that work.

Speaker 1

Tim, there's going to be pockets in this economy where you're going to have still labor's Got some advantage. They're going to drive nice increases. I'm thinking in Airlines, I'm thinking railways, I'm thinking, they've got those are kind of monolithic kind of markets. So They can they're going to get higher wage improvements than the general population. Overall though, we see it moderating.

Speaker 1

There's a little bit of catch up and you're hearing that from of the contracts that are coming out? Well, that's because in the last market, if you had a labor contract, they didn't benefit When prices went up because they were locked into a contract that they negotiated the last time. Well, they're playing catch up. Well, most of ours are nonunion. Well, We went to the market.

Speaker 1

We paid people more money. I don't think we have to pay our people more money now, but I think there's catch up in some of the union agreements that have to Get caught up there, right? And that's going to catch a lot of the headlines, I think, over the next bit.

Speaker 8

Okay. Thank you. Those are helpful insights.

Speaker 1

Thank you.

Operator

This concludes the question and answer session. I would like to turn the conference back over to Mr. Mullen for any closing remarks.

Speaker 1

Thanks folks. Hope you enjoy the rest of your summer and we look forward to chatting with you in Q3. And I hope everybody has a safe and really happy summer. Take care.

Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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Key Takeaways

  • Second quarter revenues fell by 5% year-over-year to just under $500 million, largely due to a $20.8 million drop in fuel surcharges and softer freight volumes, but acquisitions added $22.6 million to offset declines.
  • Adjusted EBITDA was $83.4 million (16.9% margin), down $10.5 million YoY, as tight cost control and tuck-in acquisitions mitigated weaker pricing.
  • Operating cash flow surged to $88 million (up 80%), debt/EBITDA remained low at 1.95x, and $250 million in credit facilities (with $115.7 million drawn) underpin a strong balance sheet.
  • A diversified portfolio across LTL, logistics & warehousing, Specialized & Industrial, and U.S. 3PL helped cushion the freight downturn, with Clayson’s transload services and Banstra’s mining/energy work outperforming markets.
  • Management remains cautious about the ongoing freight recession until inventories are rebuilt, but is confident H2 EBITDA will exceed pre-2022 averages and is investing in Silver Express 2.0 technology and targeted acquisitions in S&I and LTL tuck-ins.
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Earnings Conference Call
Mullen Group Q2 2023
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