Mullen Group Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2024

There are 11 speakers on the call.

Operator

Thank you for standing by. This is the conference operator. Welcome to the Mullen Group Limited First Quarter 2024 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.

Operator

I would now like to turn the conference over to Mr. Murray K. Mullen, Chair, Senior Executive Officer and President. Please go ahead.

Speaker 1

Thank you. Good morning, everyone. Welcome to Mullen Group's quarterly conference call. So this morning, we'll provide shareholders and interest investors with an overview of the Q1 financial results. In addition, we'll discuss the main drivers impacting these results, our expectations for the balance of the year and we'll close with Q and A session.

Speaker 1

Before I commence today's review, I'll remind everyone that our presentation contains forward looking statements that are based upon current expectations and are subject to a number of risks and uncertainties, and as such, actual results may differ materially. Further information identifying the risks, uncertainties and assumptions can be found in the disclosure documents, which are filed on SEDAR Plus and at www.mullen group.com. So this morning, here in Okotoks, the entire senior team, I have Richard Maloney, who is our Senior Operating Officer Joanna Scott, who is our Senior Corporate Officer and Senior Financial Officer is Carson Urlacher. And once again, Carson is the primary architect and author of the very informative and detailed Q1 interim report. So today, Carson will be providing analysis and discussion on the Q1 performance.

Speaker 1

But before I turn the call over to Carson, let me start with some opening comments. If you look at the Q1 results, perhaps what I'll do as an opening comment is remind everyone and we expected some challenges in the freight market, in the economy and more importantly, in the demand for freight to start the year. In fact, in the 2023 annual financial review, which we released in February of this year, we highlighted that the first half of 'twenty four would be soft. And with economic activity gaining momentum providing central banks started lowering interest rates. So let's talk more about that in the outlook section.

Speaker 1

But we did what happened in this quarter is not really a surprise to us. And I think based upon our quarter results, it's pretty evident that we got the outlook, at least the first part of the outlook correct. Economic activity was muted, but more importantly to the logistics and warehousing industry, freight demand, it was pretty soft. And this was the case in most verticals. You have less freight to handle, accompanied by the increase in capacity in virtually all parts of the business that were added during the '22, 'twenty three cycle.

Speaker 1

And this all led to competitive and what I would now say sometimes predatory pricing. This basically explains what happened in the Q1 and not just at MTL, but across the transportation and logistics industry. Quite simply, there just wasn't a lot of demand and our results, however, on a comparative basis held up reasonably well because truthfully, we were prepared for this market softness and we have a diversified business model. So for example, our emphasis on investing in the LTL segment provides a solid base of revenue, and it's not as competitive as the long haul full truckload business. This is and will continue to be a significant competitive advantage in my view.

Speaker 1

And as our competitors struggle with the reality of the current soft demand and overcapacity, we think it creates opportunity. So the strong, the nimble, they'll not just survive, they'll capitalize on opportunity. And the most effective way to capitalize in this market is via acquisitions. It's the only bright spot for our organization really in the Q1. So for example, we added $20,500,000 of incremental revenues from acquisitions that we completed in 2020 3.

Speaker 1

And primarily that was the B and R Group, which was a very synergistic and strategic acquisition. Not a lot of money, but it did add $20,500,000 of revenue in the Q1, dollars 20,500,000 So And the other thing we had, and this didn't show up in our Q1 results, we announced the acquisition of Container World, freight forwarding. Now that gets us into a new vertical on the West Coast primarily, but they're in the distribution, the handling and the logistics warehousing of the liquor business. So I'm pleased to report that we have now received all regulatory approvals to proceed with that acquisition, meaning that we will close on May 1. And then we will include those results starting in May with the May results.

Speaker 1

So this transactional loan will get us back onto a growth path, which is, I think, a real positive in otherwise kind of difficult quarter. So I'll turn it over to Carson and he'll provide you a more detailed analysis of the quarter. Carson, you're up. Okay.

Speaker 2

Well, thank you, Murray, and welcome, everyone. Today, I'll focus on the highlights from the Q1, the details of which are fully explained in our Q1 interim report, which is available on SEDAR Plus and on our website. So in the Q1 interim report, given the relative consistency and predictability of our business model, we highlight revenue per working day as a way to identify and explain year over year financial results and to identify variances in customer demand levels for our services. Consolidated revenue, OIBDA and operating margin in the Q1 of 2024 all declined compared to the same period in 2023. However, all of these financial metrics exceeded the results recorded in the Q1 of 2022.

Speaker 2

Consolidated revenues in the Q1 was $462,600,000 a decrease of $35,200,000 as compared to the prior year and was due to of a decline in revenue per workday and from one less working day in the quarter. What compounded this effect was the impact of losing 3 working days in the month of March, which is our most productive month in the quarter. Revenue per working day was $7,500,000 in the Q1 of 2024, a decrease of approximately $400,000 per working day as compared to $7,900,000 in the Q1 of 2023. The $400,000 decline of revenue per working day was due to the following factors. Overall freight demand was negatively impacted as suppliers and manufacturers were reluctant to increase inventory levels.

Speaker 2

Economic activity levels slowed in Canada due to a lack of capital investment in the private sector. There was low demand for major capital construction projects, including pipelines as both the Trans Mountain Expansion Project and the Coastal GasLink pipeline project have essentially been completed. The activity that was generated by these large projects in the prior year have not been replaced. Fuel surcharge revenue also declined by $12,000,000 as diesel fuel prices declined on a year over year basis. Somewhat offsetting these declines was $20,500,000 of incremental revenue from acquisitions.

Speaker 2

We generated OIBDA of $66,200,000 a decrease of $10,800,000 compared to the prior year due to the decline in consolidated revenues being somewhat offset by $3,000,000 of incremental OIBDA from acquisitions. Operating margin declined to 14.3 percent as compared to 15.5% last year due to higher percentage of consolidated revenues remain consistent year over year, despite more competitive pricing conditions in certain markets and a reduction in higher margin specialized business. Now let's take a look at how we performed by segment. Starting with our largest segment, revenues in the LTL segment were $182,500,000 down $10,300,000 from last year due to a change in working days compared to last year. A slight decline in revenue per working day on lower freight demand and a $6,400,000 decrease in fuel surcharge revenue.

Speaker 2

These declines were somewhat offset by $5,500,000 of incremental revenue from acquisitions. OIBDA was down $1,000,000 to $30,800,000 on lower segment revenue, while operating margin actually improved slightly by 0.4% to 16.9 percent due to lower DOE resulting from more efficient operations. Our 2nd largest segment is our L and W segment. Revenues in the L and W segment were $126,300,000 down $17,800,000 due to lower freight volumes and logistics demand, a lack of capital investment and competitive pricing in certain markets, while fuel surcharge decreased by $4,000,000 OIBDA was $22,500,000 down $3,600,000 from the prior year period on lower segment revenues. Operating margins declined slightly by 0.3 percent to 17.8%, primarily due to higher S and A expenses as a percentage of segment revenue.

Speaker 2

DOE improved due to our variable cost structure and our business unit's ability to adapt to current percentage of revenue. Moving to our S and I segment, revenues were down slightly by $900,000 to $111,900,000 dollars Lower demand for pipeline hauling and stringing services accounted for an $8,100,000 reduction in revenue. Smoke Contractors experienced a $4,600,000 decline in revenue on lower demand for civil construction projects in Northern Manitoba. The Production Services business units experienced a decline in revenue due to inclement weather, delaying the commencement of certain projects and fuel surcharge revenue declined by $1,600,000 These declines were somewhat offset by $15,000,000 of incremental revenue from acquisitions and greater activity levels in the Western Canadian Sedimentary Basin, which resulted in higher revenue being generated by our drilling related services business units. Canadian dewatering also experienced greater demand for the sale of some water management equipment.

Speaker 2

OIBDA decreased by $3,700,000 to $16,700,000 due to lower OIBDA at premade pipeline and smooth contractors on reduced activity levels. Canadian dewatering generated lower OIBDA due to a change in sales mix and from preparing equipment for upcoming projects to commence later this year. Somewhat offsetting these declines was $1,900,000 of incremental OIBDA from acquisitions. Operating margins decreased to 14.9% from 18.1% on higher DOE and S and A expenses as a greater proportion due to a greater proportion of lower margin business and from preparing equipment for project work to commence later in the year. In our non asset base U.

Speaker 2

S. 3PL segment, revenues declined by $6,600,000 to $44,400,000 due to a slowing freight volumes and excess trucking capacity in the U. S. Market, particularly for full truckload shipments, resulting in lower pricing per shipment. OIBDA declined to $500,000 and margins came in at just over 1% due to higher DOE and S and A expenses as a percentage of segment revenue.

Speaker 2

Operating margin on a net revenue basis was 12.8% compared to 25% in 2023. From a balance sheet perspective, we continue to maintain a well structured balance sheet with a book value of over $2,000,000,000 in total assets with our largest asset class being real estate. In January, we entered into a new $125,000,000 credit agreement with P&C Bank Canada Branch, increasing the amount available on our bank credit facilities to $375,000,000 We had $90,800,000 drawn on these bank credit facilities at March 31, providing us with over $280,000,000 of borrowing availability. In October 2024, we have $217,000,000 of private debt notes coming due that we expect to be able to replace with new long term debt this year. Our debt to operating cash flow covenant under our private debt agreement was 1.941, meaning we could theoretically add $180,000,000 of debt to our balance sheet and still be a full turn away from our covenant threshold.

Speaker 2

We consistently generate free cash, as you know. So adding new debt to our balance sheet would be to grow the business through our

Speaker 1

Thanks, Cars. Perhaps I'll just comment a little bit about the real estate since Carson highlighted that near the end. Real estate, it's our single largest asset, as Carson suggested. There's a funny thing about real estate. Real estate seems to be like that elusive sports star.

Speaker 1

There's inflation for great players. Well, real estate is very, very similar. Real estate is really not going down in value. In fact, what we're noticing is it staying sticky high and even in some markets, if you can believe it, it's still going up and that's because of limited supply and that's what fundamentals of supply and demand always drive price. We all know that.

Speaker 1

So we are delighted to say that real estate is our single biggest asset holding. So in terms of the outlook, which is what I think everybody's interested in, well, what's next? You've heard, Lard. This morning, so far, we've discussed, we've analyzed, we provided our insight into why the Q1 results were soft. Okay.

Speaker 1

Yes. Okay. But what's next? That's what we got to talk about. So first of all, let's just reiterate.

Speaker 1

It's this the softness was not unexpected from our perspective. Nonetheless, it's quite sobering when it happens to you. You don't like it, but it happens, but at least we were prepared and we were, it didn't surprise us. The softness that you're seeing, I think you have to be awfully careful because you're comparing to 'twenty two and 'twenty three, which was a period of robust freight demand, tight supply and favorable pricing. 'twenty two, 'twenty three was a market that was born out of COVID, but that market's over.

Speaker 1

Now we have a new market and it's different. And I think the most instructive thing that we can say, okay, how are we going to handle this market? And we know it's different because all you have to do is look at, say, for example, the general trucking industry, the general logistics industry, all the results coming out, as an example. The long haul full truck lifeboats business specifically, the conditions are awful, the demand is softened, there's too much capacity. And we all know what happens when supply exceeds demand, prices fall.

Speaker 1

This is precisely what has happened. And while I'm not exactly sure how long the current challenging conditions will last, I can tell you that the only solution to the market challenges is higher prices, not more freight at lower prices. And this is because the cost of doing business today, of even living, is so high compared to yesteryear. Let's consider the number one expense for nearly all businesses, wages and benefits. These costs are up nearly 30% since pre COVID.

Speaker 1

Equipment costs have virtually doubled, and this doesn't include new mandated emission free vehicles. And how about those carbon taxes? Does anyone really think that taxes don't increase costs? This is why I suggest that only higher rates will cure the profit squeeze that is devastating many in the trucking industry. And this is what happens when supply and demand fundamentals will adjust.

Speaker 1

It will eventually adjust. So stay tuned on this because the current situation, in my opinion, cannot last much longer. So how does this impact our business? Now even though we have a large we don't not have a large full truckload presence, and by design, by the way, we're too being affected by the slowdown of freight demand. We're starting to see it creep into the LTL segment, for example.

Speaker 1

We're feeling a little bit of a pinch there. This means we have to watch costs very carefully. Our business units must work together more closely than they have in the past, finding those elusive synergies that everyone talks about. And at the corporate level, we need to find those tuck in acquisitions, and our team is laser focused on that. Acquisitions that will backfill any loss in overall end demand, which by the way will come once the consumer has more disposable income.

Speaker 1

So in other words, I think overall demand will improve once the consumer has more disposable income. And this is why I've been so adamant that interest rates need to come down. Until this day, however, I do not expect any significant economic growth or significant improvement. In our other segments, I simply ask where is the growth? Thus far, we just don't see it.

Speaker 1

No economy will achieve, overachieve, sorry, when governments, the public sector becomes the primary fuel for the economy. So until the private sector starts to believe the rewards associated with taking risk and investing improve, I question if the economy can actually grow. There will be business for sure, but I just do not see growth. Once again, this means we must be razor focused on costs. As I wrap up this morning's call, it would be easy to be quite cynical, but at the Mullen Group, I'll be honest with you, we're built for these types of markets.

Speaker 1

Why do I say it? We've been through it before. And today, just like yesterday, we are well positioned to plan, to prepare and to grow for tomorrow's market, which will come just like it always has. And the only way to realistically grow today is via acquisitions, just like container world. And now that we're out of the quiet period, due to the review of the Competition Bureau, we'll be looking to add additional synergistic opportunities as the year unfolds.

Speaker 1

And trust me, this market is providing plenty of opportunity on this front. We will focus on those that just don't provide growth, but also will provide our group to achieve margin improvement. We have the balance sheet and we have the balance sheet because, Carson, we didn't do any acquisitions in 2022, 2023 when the mark was at its peak. So that discipline is going to prove is going to give us that opportunity today. So lastly, in terms of the dividend, we'll leave it at the current rate at $0.72 And to all of our shareholders, I say this, your dividend is sacred and you can count on your monthly dividend even as the market conditions are challenging.

Speaker 1

So thanks for joining us and let's go straight to the Q and A session.

Operator

We will now begin the question and answer session. The first question comes from Kevin Chang of CIBC. Please go ahead.

Speaker 3

Thanks. Good morning, first of all, and thanks for taking my question. Quite a sobering outlook you provided there, Murray, on the broader Canadian economy. I guess when I think of the way Q1 played out, it sounds like broadly speaking, it kind of played out the way you expected. I guess the one segment I wanted to focus in on was S and I, about $17,000,000 of EBITDA in the quarter.

Speaker 3

You have a full year target of roughly 100,000,000 dollars Maybe just walk me through kind of how you, I guess, build momentum or what you see in the pipeline that allows you to kind of build momentum as we work through the year to kind of hit that target?

Speaker 1

Yes, S and I segment, which is it's a pretty large segment in our group. We knew that the pipeline business was the pipelines were being completed. So that we factored in. And when you're building pipelines, our pipeline group did very well and there was a lot of economic spin off when you've got all that happening. Well, we knew that was winding down.

Speaker 1

So we saw that. What we didn't see coming, Kevin, was that we thought that that business would be replaced with more drilling activity because once the pipe is built, you got to fill it with natural gas and with crude oil, for example. But we didn't see drilling activity really improve because truthfully, natural gas prices have totally collapsed. So temporarily, the natural gas producers have really cut back on their CapEx programs and their drilling programs for a little bit. And so that's just what happens.

Speaker 1

So that just delays when our S and I will improve, but it definitely did end the quarter, just not as much cap drilling activity. And damn, that cold weather virtually shut down our oilfield and specialized business in the 1st part of January. So, yes, I mean, you can't go to work when it's 40 below. It just doesn't work. And so that kind of set us back.

Speaker 1

And January is usually a good month for our oil and gas business and our specialized side. So that we didn't kind of count on that. That's really the in the S and I side, that's the only thing that kind of caught us off guard a bit was I think really just that cold weather and natural gas prices collapsed, so they didn't quite drill as much. But I think what that does, it just backs up when it goes. Eventually, they're going to drill.

Speaker 1

I'm just saying they didn't drill in the Q1 because natural gas prices were quite soft. So yes, so that part is down. We'll still do okay in that sector because we did the B and R acquisition last year, it'll be about flat. But I don't see any growth there. And the only part will probably be really be down on us because we're just not going to replace that pipeline business until and unless Canadians support more pipelines.

Speaker 1

That's just a fact. So we'll be very cautious on that side. And we've just leaned up our premade pipeline side and those kind of things. But that was a good driver for us for a bit. But our Canadian watering side, it's going to be fine.

Speaker 1

There's stuff they've gone back to work on. I mean, they were busy in the Q1 selling pumps, but their project work was delayed because of weather. So we didn't have the high margin business, but they still had business, but not the high margin business, right, Cars? That's correct. Yes.

Speaker 2

There was a shift in their revenue mix really going from selling water management equipment versus their day to day water management services, which is higher margin?

Speaker 1

So S and I will be fine, except for the pipeline side of the business.

Speaker 3

Okay. So that makes a ton of sense to me. Let me just ask what you're seeing in the LTL side of things. So if I look at what just as more publicly traded LTL players in the United States, if I kind of sum up, I think what they're saying is, as we've looked through Q1 and into early Q2 here, revenue trends have been improving on a year over year basis, but maybe below normal seasonal trends. They're still seeing there's pressure on LTL volumes that's leaking into the weaker truckload market as rates are soft.

Speaker 3

Is that effectively what you're seeing in Canada as well too? Is there anything different in the Canadian LTL market versus maybe what you're seeing or hearing from the U. S. Players?

Speaker 1

That's a really good question. It's one we think about a lot, Kipp. So I'll give you my view. First of all, the LTL market in the U. S.

Speaker 1

Is different than the LTL market in Canada. We have to it's LTL, but it's not the same DUC. And in the U. S, last year, they lost a really, really big competitor in that market called Yellow. They just shut down.

Speaker 1

Now that supported the market and all the LTL carriers in the short term when the overall market and the overall demand was softening. So even the best of the best down in the U. S. Are seeing no growth in LTL, and that's with one of the major competitors going down. That tells you overall freight demand is not growing, my view.

Speaker 1

Now in Canada, yes, Yellow shut down in Canada, but really they weren't a big player in the Canadian market. We haven't had any major failure in the LTL side. So there's no growth in demand. It's not collapsing in LTL by any stretch. As you can see by our numbers, it's still held in pretty good, but there's no growth.

Speaker 1

So the way you're going to be able to do that is with tuck in acquisitions in my view, and which we're well prepared to do and we will continue to do that. But that market's not growing at the moment, and it's going to be a challenge. And so consolidation will happen in our industry. It's got to happen.

Speaker 3

For sure. I mean

Speaker 1

We're in pretty good shape when it comes to the consolidation game.

Speaker 3

Yes, yes. For sure, your balance sheet is in a great spot there. Maybe just last one for me, and I know you unless I've totally missed it somewhere, I don't think you provide like a mark to market on your real estate, but if you did make a comment in your prepared remarks. If I look at it simplistically, like your cost base, let's say your undepreciated value is probably about $8 a share. It sounds like the value that's probably higher than what you have on your balance sheet on a gross basis.

Speaker 3

I know you get this question speakingly enough, but anything you think you can do to surface that value or even highlight it to investors, just your soft set there to the gross book value is at, a, it sounds like you think the market value is probably higher than that. Obviously, the market is not giving you much benefit for this physical asset here.

Speaker 1

I mean, you always have options, right, to do things of which we got options. And our preferred path is to use that really, really strong asset base to secure long term funding at the very best rates that we can. So because once you secure long term funding, then you can play the long game in terms of acquisition, whatever you do with the rest of your business. So I think that's our primary objective, and we're well down that path, Kevin, of securing long term funding that will replace our long term bonds that come due in October. And it's either that or you monetize them and then you pay off.

Speaker 1

But that's our primary thing. And the other thing I'd say to shareholders is, it's an irreplaceable asset. Like you just can't go get that stuff in the open market. Take a look at Yellow. Yellow, the business made no sense.

Speaker 1

They couldn't make any money, but their real estate was worth a ton.

Speaker 3

Yes, that's a good point. So

Speaker 1

maybe some investors don't see the value of that, but I can tell you as a large investor and as the senior executive of this company, I go, I love owning real estate.

Speaker 3

And also to protect this

Speaker 1

No, I also love owning the business that's occupying the real estate, because I like to own I like to know the tenant. And so we like to own both of them. Carson, you were going to say?

Speaker 2

I was just going to say, it also protects us quite nicely from inflationary pressures when you go to renew lease agreements with landlords and such. So as those rates come up for the property, those got to get passed on through higher trucking rates. So owning your own real estate in that network provides a benefit to our organization.

Speaker 1

Yes, the last point I'll make on that, Kev, is that when you own your own real estate, you can probably pay your shareholders a dividend because they're really the landowners.

Operator

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

Speaker 1

Good morning, David.

Speaker 4

Good morning. Thanks for taking my questions, Maury and Carson. Maury, I really appreciate all the commentary that you provided on the outlook, both in the MD and A in your prepared remarks. But you guys are calling for kind of more of the same in the short run as it could take some time for capacity to exit the market here. When we kind of look back at your plan for 2024, you're originally calling for $325,000,000 of EBITDA and that was before acquisitions.

Speaker 4

So just curious with your current view of the market and with Container World closing, how should we be thinking about that number for 2024 now?

Speaker 1

Well, the market, honestly, I think maybe the one thing that I had anticipated, David, was that I personally didn't see, from what we were looking at, is that how interest rates could stay high and that they had to come down and then that would spur demand and then we would be everything would be good. I have to question whether that thesis that I had is correct now. It doesn't appear that scam interest rates are coming down. And if interest rates don't come down, I don't know how we spur demand. It's going to be complicated.

Speaker 1

So it might be pushed out. I think my analysis might be pushed out until interest rates start coming down. Then I can see demand, that will be the, I think, the catalyst for growth, both for the consumer, because lower interest rates put actual disposable income into consumers' hands, and it makes it easier to invest for capital. So honestly, I thought interest rates I thought they had to come down. From our perspective, they need to come down, but they aren't coming down.

Speaker 1

So I have to be realistic on that. So that we'll probably right now, I think we're still okay for the year end revenue and EBITDA, but we're not going to be above it now. We will need acquisitions to backfill to get to that number.

Speaker 4

Yes. That makes sense.

Speaker 1

I think that's a fair just given that interest rates are not coming down as I had originally anticipated. And so it's going to push off as to when that demand increase comes. Now once that demand increase comes, then everything changes again because then you've got the economics change on supply and demand and then rate per shipment will go up. That's the fundamental problem we got in the business right now is that there's business, but the rates for that business are ultra competitive. So something has to change.

Speaker 1

And if you get a demand push or you get companies going bankrupt, then rates will adjust to where they need to so you can not just cover costs, you can have an appropriate return on your capital investment.

Speaker 4

That makes sense, Murray. And when I look at your LTL division, I mean, even against that backdrop, you guys are able to improve your margin profile. And I even in the outlook section, you guys are calling for another 100 basis points increase for the full year. So I'm just curious where you guys are finding those efficiencies to drive up your margin profile especially against a tougher pricing environment?

Speaker 2

I would say one of the items there David that is obviously the acquisition of B and R Echols last year. Last year, we got revenue from the B and R acquisition in LTL, but we did not get EBITDA. So I think the margin improvement of us calling for 1%, In large part, we've restructured that business now. Now it's into a network where there is technology. There's a greater load factor, because we're not running 2 trucks to the same town.

Speaker 2

So those sorts of things. So we see margin improvement on that side going forward for the remainder of this year as a comparative to what we did in 2023.

Speaker 1

So David, we'll continue to, as Carson says, the B and R thing was we knew what we were getting into, was factored into our price when we paid for it. We didn't pay much. We just got it for asset value. But we knew what the challenges were, but we did the restructuring last year. You can't do it on day 1, but we did get it done relatively quickly in 9 months, Rich.

Speaker 1

Joanna, we got that done. And restructuring usually means job losses. And I think we had, I think, 50 thereabouts, Joanna, roughly 50. And in that business, David, the average employee cost is about $100 per employee, so that's $5,000,000 right there.

Speaker 4

All right. That makes a lot

Operator

of sense. Again, that's all the questions I have

Speaker 3

for you guys.

Speaker 5

You're going to

Speaker 3

have to

Speaker 1

be smart. You're going to have to consolidate. If growth isn't happening, we'll continue. We did a couple consolidation opportunities. B and R was 1, and we did one with a couple other business units.

Speaker 1

And we'll look at a couple more this year. If business stays slow for a bit, we'll have to combine the best with the best and give it to our very best teams. That's what we'll do.

Speaker 6

David, it's Richard. The other thing and you know LTL is a core strategic focus for us. And anything when we talk about LTL, we are consistently and constantly looking at how to get better load factors and get better process improvements. So not only with the B and R tuck ins, but every other of our business units in LTL, That's the perpetual focus. How do we get more stuff in the back of the trailer, that 53 foot trailer going to where it needs to go?

Speaker 6

And that is a focus we're looking at technology process improvement and everything. And Carson highlighted, when we're able to go to one spot in wherever Alberta with 1 truck full rather than 2 trucks with a third or a half full, that's an immediate gain. That's how we continue to and will continue to look at LTL.

Speaker 1

The other thing that I would comment on, David, I think that is happening in this market, I think every company, ours included, we're focusing on where we have competitive advantage and we're exiting business where we were just doing it to do it that didn't really have margin. So we're being laser focused in the business right now, not just on cost, but on where we can be profitable and win the game. If we're just playing the game, we may exit it. We will be laser focused on where we can win the game. That's where you get margin improvement.

Operator

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

Speaker 7

Yes, thanks very much. Good morning, everyone. Question on the container world, good to see that you got all the regulatory approvals and it's going to close soon. Can you just maybe talk about, I guess, the margin impact that business will have on the Logistics and Warehousing segment? If I understand correctly, I guess, maybe as it's currently constituted, the business is maybe a little lower than the average margin.

Speaker 7

So just wondering if you can talk about the margin impact and how you see your ownership of that business improving margins over the next couple of years?

Speaker 1

It's going to be container oil is going to be a little bit like B and R. We know what we're getting into. We didn't the company ran into a little bit of problems as a result of the freight surge that happened. They got trapped with that, some additional costs that we weren't able to really manage through that. So but those things are behind them now.

Speaker 1

So we stepped in and we got that business. I wouldn't it wasn't highly profitable, but I can tell you our expectation is, right out of the chute, we'll probably have low teen margins. That's not to our standard, Cameron, but I would say to you over time, you improve margin with technology, with automation, with robotics and with using our critical mass buying power as an example on equipment and then sharing within our network. So we're pretty confident that we saw synergy there and it will take us a little bit of time to achieve it, don't get me wrong. You buy a company, you go in and it takes a little bit of time to earn the trust and the respect of the people and the customers and those kind of things.

Speaker 1

But like every one of our other business units, like GuardWine, like J's, like nearly all of our LTL businesses and logistics, I mean, we all improve the margins. That's what we do here. We acquire companies and we strive to improve their performance. That's what we do. And we will do it here too.

Speaker 1

I'm absolutely convinced of it. If I wasn't convinced, I wouldn't have sponsored and said let's do it. So but give us a little bit of time, we'll get it done. The great news is the previous owner, Dennis Christmas, did a fantastic job of growing the business. As I said to that team, the heavy lifting has been done.

Speaker 1

You've got significant market presence. That is not easy to get in any vertical, and they've done it. And now with us going in, we will measure, we will focus, and we will improve margins, period. Just give us a little bit of time and we'll get it done. And put that in your calendar that said Murray said on this day.

Speaker 7

Okay. Well, I'll do that. Just second quick question. I mean, sort of thinking about competitive capacity, I mean, it's clear there's an unbalanced market here between supply and demand. And your comment, I guess, was that the current market conditions really can't be sustained for much longer.

Speaker 7

I'm just wondering if you are seeing at all some of this competitive capacity disappear bankruptcy?

Speaker 1

No, no, no. We're not seeing it disappear. It's the first phase that you got to go through is denial. And everybody thinks, oh, no, it's all going to get better in the market. And I can just everybody stays in business.

Speaker 1

The next phase is animal instincts kick in, which is survival, and that's where we're at right now. So it's going to take us a quarter or 2, I think. But eventually, it's going to happen, Cameron, and I'll tell you why. Capital is going to dry up. And Richard knows this, we all know it here, is if you don't have the balance sheet, you can't get the insurance.

Speaker 1

If you can't get the insurance, you can't get your license. And I think that it will eventually happen, Cameron, but it doesn't happen in the first phase of the what happens. And since I don't think the demand is going to come roaring back, I suspect it's going to take a little longer for the banks to kind of not just book their bad debt, but to try and realize on that bad debt. And it will take a little bit of time, but it's going to happen. And I suspect that we've already seen a major bankruptcy happen in the industry, Receivership, not a bankruptcy, that's the wrong one.

Speaker 1

It's a receivership. But that's just the canary in the coal mine.

Speaker 6

Cameron, it's Richard again. Toobin, this is kind of a double edged story here. We're not seeing the capitulation, but what we are seeing is significant things being thrown at us through our acquisition opportunities, right? People are desperate to get rid of their businesses. I don't know if it's a function of even before the full capital gains thing, I won't get into that.

Speaker 6

But people are looking to sell their trucking businesses and we're getting I got 2 pitched to me and within 2 hours yesterday. And we're just coming just

Speaker 1

on that. I just got one come across my While we're sitting here doing that. While we're sitting here giving this presentation.

Speaker 6

So that speaks to the point Murray makes and Carson make that we will be focused on acquisitions. We're not going to do them all. We're not on some sort of super growth platform, but we will do the ones that make sense, precision based acquisitions. So just some color and commentary that ties our acquisition thesis on that.

Speaker 1

Yes. Just to put the to button that up for you, the current market conditions are brutal for carriers, but they're great for acquisitions. And guess what we're good at?

Speaker 7

Yes, absolutely. No, I look forward to seeing more activity there. So appreciate it. I'll pass the line. Thanks very much.

Speaker 1

Thank you.

Operator

The next question comes from Konark Gupta of Scotiabank. Please go ahead.

Speaker 8

Thanks, operator, and good morning, everyone. I know you love your stock, which is why you keep buying that in the market. And just kind of following up on your last comment on M and A. You've been getting a lot of these inbounds from sellers. I get it.

Speaker 8

But what's really your kind of strategy here with respect to M and A? I mean, you talked about like now the container world is done, you have more sort of bandwidth to do more tuck ins. What's really your focus in terms of M and A type, size or quality or region, like where are you focusing on right now? And what's keeping you from doing something more imminently as opposed to in the next 2 quarters?

Speaker 1

Well, the Q1 was clearly the Competition Bureau. We were in a quiet period with them, Conard. So we kind of had to put everything on the back burner because once you're in with the Competition Bureau, if we did anything else, we'd have to refile the company. We would have never got Container World done if we kept doing. So We're in a bit of a quiet period.

Speaker 1

But now we've got lots of our desks are all full with the files of ones that intrigue us. But each one that we look at must make us better. And some are smaller, but really will drive margin in certain of our business units. Those are the, what, tuck in acquisitions. And others like Container World get us into new verticals that we really, really like that we see a long term future in.

Speaker 1

So can I tell you exactly which ones? Well, no, I can't tell you that because it's competitive. But I can tell you we look at them. That's the 2 things we look at.

Speaker 8

Okay. That's helpful. Thank you. And then if I can dig into perhaps on the performance in the quarter, it's great to see the revenue per day metric that kind of gives us more sort of visibility as to what's happening on a daily basis as compared to just on the quarter. But from trends perspective, January sounded like the weakest month.

Speaker 8

Any thoughts on how revenue or EBITDA per day trended throughout the quarter into April so far? So what I'm trying to get at is like how is your quarterly EBITDA progression planned to get to the full year of 325?

Speaker 1

Well, that's a good question. That's one we look at all the time too, Konark. But before I turn it over to Carson, I'll just say, look, Clark, I don't see the second quarter I don't see any economic growth coming in the Q2 in the Q1. We might not have the weather issues. And I think it's same days, same number of working days cars.

Speaker 1

So one less this year than last year, last year's quarter?

Speaker 2

Yes. So this in Q1 of this year, we had 62 working days versus 63 last year. Going into Q2, we're going to have 64 working days this year versus 60 so 63 last year. So we're going to gain that day back and it's really due to when the Easter holiday fell.

Speaker 1

So you'll gain one day in terms of revenue and at $7,500,000 or $8,000,000 once we get Container World starting in May, we'll be back up to $8,000,000 a day of gross revenue. That's you can see how that changes with just one working day, right? And but the overall economy, I don't see I don't in the absence of doing acquisitions, Connor, there's no way that we're going to be at the same revenue per day as last year because the economy is not as strong. It's adjusting to a little bit lower demand and much, much more competitive than it was a year ago. And that's just the reality of the situation.

Speaker 1

That's why we're saying to you, you've got to be really, really focused on cost today. You can't be loose right now. And you can't have too much debt. And you can't be owing the bank too much money or else you're going to be we don't get a call from the owner, we get a call from the bank. We get lots of restructuring calls, trust me.

Speaker 8

Okay, that's great. That's great.

Speaker 1

On the actual number, I just the only thing we're probably not going to have this quarter is maybe just that ugly weather. But I don't it's not going to be as strong as last year. I don't see it because the revenue is not as strong as last year On the same store sales, but then you add acquisitions coming in that will add a little bit to it. And that's going to be our game over the next bit. It's going to be tough on the existing business and we'll backfill it with acquisitions.

Speaker 1

So and then we wait for the next market, and then next time the market turns, we'll be bigger and we'll be better and we'll leaner and the profit margin will go straight to shareholders.

Speaker 8

That's great color. Thanks so much guys. And just maybe one quick follow-up on L&W. You talked about the full truckload market being really kind of under pressure because of overcapacity in pricing, which I think you're seeing on across the industry right now. But how much is this full truckload being the driver on the Allen Derby segment?

Speaker 8

Like what's your exposure there directly or indirectly?

Speaker 2

We really only have essentially 2 to 3 business units that dabble in that space. It's not a significant component of us by design. And when we do dabble in that space, we do it with owner operators, just so that it's a variable cost structure for us. We don't have a fleet of company truck in the full long haul truckload business. That's where you get into trouble.

Speaker 2

So we look at it differently and we've positioned our organization so that's more of a variable cost structure for us there, Konark.

Speaker 1

Very, very by design, as I said in my comments earlier today, Conor, the full truckload business is not a business that attracts my attention or my capital. I've been in this business too long. It's just a tough, tough business. So that's not one that we'd like to put capital to work in. So the trucking business, I bet the trucking business is substantially different than, for example, the rail business.

Speaker 1

Both sectors move a lot of freight, But in rails, they don't they're not price competitive. Truckers can be predatory prices for a short period of time, and we're going through a market segment like that right now. So the truckload business, which is a huge part of the Canadian landscape, that's not one that we'll probably put a lot of capital into, to be blunt.

Operator

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

Speaker 9

Thanks very much, operator. Good, everyone. Hi, everyone. Just to recalibrate here, I know you give a business plan and a lot has happened since, Maria, you called out interest rates that you thought would come down and spur growth, but have not yet. You've seen some mix changes in your business that has resulted in some lower margin business taking more of your or representing a larger share of your total EBITDA.

Speaker 9

There has been M and imminently closing. My question, I guess, is when you put all that together, how do you how does that change the outlook you have out there officially on revenue and EBITDA, if at all?

Speaker 1

I don't think the with the acquisition that we've announced thus far, I think we meet our revenue targets quite easily, Carson. Yes. EBITDA may be close, but maybe not quite as strong. And the reason is, Walter, is that in the specialized industrial side, they just aren't they're just not drilling at the moment because natural gas prices are so low. So the whole thesis was, you build the pipelines, then you got to drill to fill the pipelines and they're just not drilling to fill the pipelines right at the moment.

Speaker 1

So they've just delayed some of those projects. They're just working off their current inventory levels. And they probably won't drill until the prices of natural gas goes up, but eventually it will. And then that helps our specialized industrial side and gets us back to where we had been and that will replace what we lost on the high margin pipeline business. So the drilling side when it's going is high margin business.

Speaker 1

The pipeline side when it's going is high margin business. The pipeline side is not there and the drilling side needs to get going and but that's been now pushed out because natural gas prices are too low. That caught a lot of people by surprise. And so it's pushed it out. But eventually, our S and I side will be just fine.

Speaker 1

Now I think the more instructive thing, are we going to put more capital to work in there? It's kind of like long haul trucking. We'll be really, really careful on that. Only one would get something at a such a favorable multiple that allows us to get like a quick 2 to 3 year payback, would we even consider something like that, Walter. And so really, that's not our preferred use of capital.

Speaker 1

And if we did go into that market, you knew that we got a pure synergy, no growth. We don't really care about growth. We just want to maintain margin and grow margin in that segment.

Speaker 9

On your margin within that segment, given the fluctuation with commodity prices and so on, you had trended up to just over 20% EBITDA margin in your I and S segment. And I'm just curious, I think there was probably some expectations for that to continue to go higher. What I'm hearing from you is that probably not this year. But on a longer term basis, fundamentally, do

Speaker 8

you see

Speaker 9

this as a 20% margin business, something higher or even something lower based on where you look at it today?

Speaker 1

Walter, that's a good a really good point to consider. 20% is kind of the minimum we expect in that business because it's a very capital intensive business. So that business, if you're going to put more capital work in there, 20% is not high enough. Right now, we're still we don't put a lot of capital work in S and I. We're still working off of yesteryear's capital.

Speaker 1

But eventually, just like it costs a lot more to build a pipeline, I can tell you it costs a lot more to get some of that equipment. So your prices have to go up before we will deploy capital. So if the capital goes if I see margins and if I see prices going up, then we'll pull capital work and then that will be the cue card that margin goes up. But margin won't go up until capital gets more capital deployed, but we're not putting more capital deployed till rates go up. So it's a kind of a and I'm not presuming that they'll go up.

Speaker 1

I'm waiting for them to go up before our capital work. I'm from Missouri, you got to show me.

Speaker 2

Yes, in that segment, 20%, you need that because you need 10% for depreciation.

Speaker 1

Yes, yes. Very capital intensive, Walter. So we'll be careful. Right now, it generates a ton of it's a segment that generates a lot of free cash for our business because we're not putting a lot of capital work in there. But when you have to put capital work, I can tell you the margins will be going up.

Operator

The next question comes from Tim James of TD

Speaker 2

Good morning, Justin.

Speaker 4

Just kind

Speaker 5

of a big picture question, I guess, Murray. So I think I'm hearing you correctly that conditions can response by rationalization as I guess current conditions eliminate some competition. From your perspective, which path to stronger conditions is better? Is it a demand response or is there a supply response? I'm just wondering if there's a bit of a silver lining to conditions remaining tough for a little bit longer because of what it will do to the longer term competitive environment.

Speaker 5

Just curious for your thoughts on

Speaker 1

that. Yes. So once again, that's a good observation. As a look to everyone, I say this. Look, we've been in business since 1949.

Speaker 1

We've seen every damn market you could imagine. We've seen brutal. We've seen the best of the best. This is pretty tough right now. What I've learned from my experience is, the longer it stays tougher, those that are better prepared will do much, much better.

Speaker 1

So because we're able to play the long game, we're just fine. But for a lot of new entrants, for a lot of people that just got in, that thought this is an easy business to get into, they're the ones that flooded the system with market. By the way, who funded them was the big banks. The banks are going to eat this because they funded them. They didn't pay cash, they borrowed.

Speaker 1

And I suspect when you go talk to the banks that they're tightening the lending standards today. That creates less capacity tomorrow. And then eventually, interest rates will find a new path. And either interest rates come down or you're going to continue to have inflation for a long period of time because you can't put canoe capital work, Tim, unless we get higher prices. Nobody's going to do that, which tells me interest rates might stay a lot higher for longer because the only cure to many of the problems is higher rates.

Speaker 1

And I don't know if higher rates really help inflation pressures, to be honest. So we really kicked the can down the road on lower interest rates. We've kind of come to grips with it here that says, man, they're staying stickier than what I want them to do. But what I want to happen and what really happens is 2 different things. I don't see them coming down.

Speaker 1

So that means it's going to be slower growth for a while, but eventually higher rates are coming, Tim. I'm telling you, it's coming. We just got to bide our time, and we'll focus on one of those things that we can control, Rich, you talked about it. We'll be laser focused on costs. We'll do restructuring.

Speaker 1

And of course, we'll backfill with acquisitions because we got the balance sheet and we got lots of capacity to backfill and position for tomorrow's market. And that's everything we're focused on right now. The short term is we've got all our business units focused on cost. But at corporate, we're focused on how we position for the future.

Speaker 5

Okay. That's helpful. And then just my second question, Murray, you mentioned earlier on that or I can't remember it was yourself or Carson mentioned that some of the TL weakness that's been prevalent for a while now, you're seeing it creep into the LTL market. Just wondering if you could kind of expand on that comment and what the kind of tie is there between the 2 or how that's happening?

Speaker 1

Yes. It's just the LTL is much, much more disciplined market than the truckload market, which is why we've invested in the LTL market. It's much more disciplined, but that doesn't mean that it can't be more competitive. And then the second thing is, in the LTL market, as Richard opined about, is look, we're always looking at efficiencies. How do we how can we combine?

Speaker 1

How can we share freight? How can we make sure every truck is loaded to its max? Part of that is sharing, but part of that is technology. And so you always can work on productivity improvements in the LTL sector. In the truckload side, a truckload is a truckload is a truckload.

Speaker 1

You can't hold more weight than you already are. You can't go more miles than you're already going. So really, the only thing that cures that market is rate. LTL, you can always be more efficient. You can swap better paying freight for lower quality freight, etcetera.

Speaker 1

So we're always working on margin there.

Operator

The next question comes from Michael Barth of Raymond James. Please go ahead.

Speaker 10

Hi, good morning. Most of my questions have been answered, but just two quick ones. First, I'm just curious given the broader industry weakness, our seller valuation expectations declining significantly or is there some stubbornness there? And I ask because you indicated the denial phase is behind us. And then a follow-up to that.

Speaker 10

In the past, when your stock offered good value, you've shown a willingness to really ramp up buybacks. And so just given where the stock is this morning, I'm curious how you view the relative attractiveness of M and A versus buying back more of your own shares?

Speaker 1

You'd think you're sitting in our boardroom talking with our board. So I'll leave you with this, Michael, is that M and A is the way we grow the business. So I would tell you that is our preferred use of free cash and the preferred use of our balance sheet. And that's what we articulate to our Board. In saying that, sometimes it's compelling to buy back your own stock when others don't believe in you and don't believe in the long term.

Speaker 1

So we have a share buyback and we'll most likely be active buying we'll balance it. But our preferred way is to grow the business and plan for tomorrow. If we buy back stock, that's really just kind of short term thinking and maybe supporting a stock price, but that's kind of short term. Longer term, I'm a big investor, and we'll balance it. So I don't mind increasing my position in Mullen Group.

Speaker 1

I bought some stock last quarter and might buy some more, but I don't mind if others don't like it, we'll buy it back. But I also like building I'm a builder. We've always done acquisitions. We've always grown. So that's my preferred way to do it.

Speaker 1

But we're not naive, and we'll be we'll look at all of them, all opportunities. We will not increase the dividend right now. We'll keep the dividend as is and we'll either grow through M and A or we'll buy back stock. If we don't like the M and A opportunities that come across our desk, well, then we'll be aggressive on buying back stock. But my God, the sellers, they're in virtual panic mode.

Speaker 1

Where I have not seen panic yet is on the real estate front, Tim Michael. So real estate is still stubbornly high If you want that prime piece of property, that hasn't there's no capitulation there, I can tell you. I don't see it. Richard?

Speaker 6

Not at all.

Speaker 1

Not at all. So look, we just to summarize, when the market was at its peak in 'twenty two, 'twenty three, we didn't bite on acquisition. Now many of our peers did on acquisition. They thought, I guess, that the market would stay strong forever. I never did buy that thesis.

Speaker 1

But I'll tell you what, we did a hell of a good job of capitalizing on the market and letting our business units, they did a great job. We capitalized on it. But we were quiet on the M and A front. I don't think we'll be quiet in at the bottom of the market because all your risk is gone. There's no risk now.

Speaker 1

Everybody knows what the bottom is. So it's just a matter of when it returns, and it will turn just like every market always does. So yes, we think we're going to be able to really be in a great position to grow the business in this cycle because M and A, it's very attractive right now. We just have to pick the right ones that fit on our group.

Operator

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

Speaker 1

Yes. Thank you, folks. We'll let you get going. It's the end of the quarter and I know everybody has got a lot of the quarter results to look at and we got a business to run. So thank you very much for joining us.

Speaker 1

Take care.

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Earnings Conference Call
Mullen Group Q1 2024
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