Q3 2022 Mullen Group Ltd Earnings Call
Thank you for standing by this is the conference operator, welcome to the Mullen Group Limited third 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 to join the question queue. You May Press Star then one on your telephone keypad.
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I would now like to turn the conference over to Murray K Mullen Chair Senior Executive Officer and President. Please go ahead.
Thank you welcome everyone to Mullen group's quarterly call conference call.
We will provide shareholders interested investors with an overview of the third quarter financial results. In addition, we will discuss the main drivers impacting operating performance.
Our expectations for the balance of the year and close with a Q&A session, but before I convince commence today's review I remind everyone that our presentation contains forward looking statements.
That are based on our 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 and at Www Dot Marlin Hyphen group Dot com. So with me. This morning, I have our senior team.
We have Richard Maloney Senior operating officer, Joanna Scott Senior Corporate Officer, and Carson Urlacher, who is our senior accounting officer.
So as I start looking at Q3 2022 financial operating performance I will start by Uh Huh.
Using my recollection from the July Investor call in.
And that I based are based upon our strong Q2 results that I believe that we were on target to achieve annual revenues.
But around $2 billion and EBITDA of $300 million.
But based upon our Q3 results, it's evident that I was only half right. The revenue number looks to be on target. However, it now appears very likely that EBITDA will be higher than the $300 million that I had talked about in Q2.
Personnel, let herb will dig deeper into our quarter results in a few moments, but what I can say is that Q3 was another great quarter for our organization our focus on yield margin and profitability show. Some results strong revenues, great EBITA, improving margins and our cash flow the positions M T O.
The very sound future. So now for the details on the quarter I'll turn it over to Carson Urlacher person Europe , Alright, well, Thank you Murray and good morning, everyone.
I'll provide a bit more detail however, our third quarter.
Interim report fully explains our financial performance.
I'll just speak to some of the highlights.
This is the second consecutive quarter, where we've generated in excess of $500 million in revenue and now on a trailing four quarters basis, we've generated over $1 9 billion in revenue along with $319 million in OE, BDA and $1 25 in earnings per share in.
In the third quarter, we generated $519 million in revenue a record compared to any previous third quarter revenue increased by approximately $86 million or 20% compared to the prior year and was primarily due to three reasons.
First general rate increases along with steady demand resulted in a $40 million increase in revenue secondly, fuel surcharge revenue increased by 37 million due to the 63% year over year increase in the price of diesel fuel and lastly, we recognized $9 million of incremental revenue from acquisitions and <unk>.
Adjusted Oi BDA, we generated approximately 98 million again, a record compared to any previous third quarter and second to only one previous quarter being the first quarter of 2012, where we generated $99 million of adjusted or IBD eight.
Adjusted EBITDA increased by $33 7 million or <unk> 52 per cent compared to the third quarter of 2021 with all three of our asset based segments contributing to the increase in.
In terms of margin, our adjusted Oi BDA margin improved by 4% to 18, 9% in 2022 compared to 14, 9% in 2021 and was mainly due to rate increases implemented in 2022, which more than offset inflationary costs.
Sequentially operating adjusted operating margin improved by almost a full point from the 18% generated in the second quarter of 2022.
Now, let's take a quick look at how we performed by segment.
Starting with our largest asset base segment, our <unk> segment grew by $32 5 million to $201 million.
$21 million of the increase was due to higher fuel surcharge 9 million was due to acquisitions, while general rate increases and steady consumer demand added $2 $4 million in segment revenue.
Adjusted Oi BDA increased by $14 million to $41 million in the quarter, which was largely due to rate increases implemented in the current year, while acquisitions accounted for $1 7 million of the increase.
The continued strength in consumer spending held freight volume steady while rate increases led to higher revenue and adjusted Oi BDA adjusted.
Operating margin increased by four 5% to 24% as compared to 15, 9% in 2021.
The adjusted operating margin of 25, 24% was relatively flat on a consent on a sequential basis. Our second largest asset based segment is our <unk> segment, which grew revenues by 34 million to $156 million compared to the prior year and was essentially flat on a sequential basis.
Up to $34 million increase in revenue $22 million was due to general rate increases and strong demand for freight services, while fuel surcharge accounted for the remaining $11 9 million dollar increase in revenue.
Adjusted Oi BDA increased by 10 million to $32 7 million in the quarter and was mainly due to rate increases that led to the strong performance at virtually all of our business units.
Adjusted operating margin increased to 29% in 2022 from 18, 6% in 2021 as freight rates remained elevated and more than offset inflationary cost on a sequential basis adjusted operating margin improved by one 4%.
Our third asset based segment as our F&I segment revenues in this segment were up 23 million to $108 8 million in the quarter, which was mainly due to rate increases and strong demand for specialized services, including dewatering water management pipeline hauling oilfield activity in construction projects in northern Manitoba adjusted Oh.
DDA increased by $9 million for 57% in the quarter compared to the prior year, our adjusted operating margin increased by four 4% to 22, 6%.
Compared to the prior year due to price increases the strong performance of Canadian dewatering, and greater oilfield activity levels sequentially adjusted operating margins improved by two 2% compared to our most recent quarter.
Lastly, our non asset based U S. III PL segment revenue in this segment was down slightly to $54 7 million as freight demand in the United States for full truckload shipments softened in the third quarter and negatively impacted revenue in this segment.
Adjusted operating margins were two 7% on a gross basis, while operating margins on a net revenue basis were 28, 8%.
Margins were negatively impacted by higher than normal contractor expense and an increase in M&A costs as we continue to add talented staff to continue to build out our technology platform.
Our net income was $38 million or 41 per common share both up over 100% compared to the prior year.
When we look at net income on an EPS on an adjusted basis, which really excludes the gain and loss generated from how we account for our U S dollar denominated debt and our cross currency swaps, which is which essentially provides appear economic hedge on the principal repayment on such debt, we generated 47 million.
Adjusted net income or <unk> 51.
On an adjusted EPS basis.
Our adjusted EPS on a trailing four quarters basis was $1 41 per common share.
We continue to buy back our stock by repurchasing and cancelling just over 206000 common shares at an average price of $12.11 in the quarter.
As a result of our strong performance our return on equity improved to 16, 6% in the quarter and 14 three.
<unk>, 3% on a year to date basis.
Looking at some other notable items, we continue to generate cash in excess of our operating needs as net cash from operating activities in the period was $95 7 million compared to $37 3 million in 2021. This increase of $58 million was mainly due to two things one being the $33 $6 million increase in <unk>.
And the other was due to a $24 million year over year variance and changes from noncash working capital items. This strong cash flow generation enabled us to reduce the amount being borrowed on our credit facilities by over $40 million in the third quarter alone.
Our balance sheet remained strong our debt to operating cash flow covenant under our private debt agreement is down to $1 98 to one which is the lowest level we've seen since 2014.
We have a total of $250 million of bank credit facilities available to us of which we had $98 7 million drawn at the end of the quarter, leaving us with approximately $150 million of room available.
This trend of paying down debt on our credit facility has continued into the fourth quarter. The repayment amounts on our credit facilities over the last half of 2022. We believe is just one of the highlights.
Our results so far this year and really provides us with increased flexibility to be able to adapt to market conditions as we head into 2023.
So with that Murray I will pass the conference back to you.
Well Don Thank you Carsten.
So as we shift gears now and we'll start looking at the outlook section and I'll give a few comments and then we'll move right to the Q&A session.
But it's pretty obvious that with three quarters that are now completed.
We've generated some excellent results for this organization economic conditions have been favorable.
And we've really grown quite nicely with a couple of them in some very key good acquisitions.
If I'm looking backwards doesn't always foretell the future and one must look at what could change. So investors in fact, all stakeholders are continually asleep focussed on what comes next.
When it comes to predicting the future, but we are.
All of our thoughts or opinions and our views you have yours and I have mine. So I will use the next few minutes to provide my best analysis of what the balance of 'twenty two it looks like for the Mullen group.
Now it should be obvious to everyone on the call today that there is a fair amount of uncertainty these days, which really means that it is difficult to predict with any degree of conviction top of the list is financial stress caused by rising interest rates.
Wars, Uruguay, and damaging to way too many people and a changing geopolitical landscape, which will undoubtedly alter supply chains it needs to be taken into consideration.
Energy and all those important and those all important computer chips are huge issues and won't be front and center as politicians migrate to supply concerns with these topics in mind I have a number of thoughts as to how our business should perform.
And I'll break from the tradition in salt and just use what I call bullet points. So let's call. It my my Twitter account shortened to the point.
So let's start with the economy.
I don't see any growth there is downside risks.
There are no elevated but let's not listened to me, let's hear from the experts.
If we listen to politicians both sides of the border there will only be a slight downturn.
To listen to all of the economists a material downturn is almost certainly.
Financial exports are theyre warning of dire consequences of interest rates continue to be pushed higher so who do you believe that's your choice, but what is pretty clear is that manufacturing.
At least of continued critical components, just coming back to North America.
There is an excellent read on how Fedex views these new conditions and for reference I suggest those interested.
I should read the October 522, economic reports that summarizes and really dovetails quite nicely with what.
A few points are.
Now what about the consumer.
In the absence of significant job losses I suggest the consumer will continue to spend. So this is the number one issue I focus on because of the job market remains strong consumption will remain steady it'll perhaps change, but it'll still be okay.
And we all must remember that we are a consumer driven economy.
Another important element of capital investment I'm still of the view that the key to bringing prices down to controlling inflation is adding supply capital project construction activity oil and gas drilling all of this is required and all by the way speaking of oil and gas drilling did I just hear that our minister of finance.
He is advocating that Canada must do more to help our European friends and allies with energy supplies and that the federal government will fast track projects.
Now I haven't heard.
Anything like this since the days of the Harper government.
So how about a number for all things considered how will we be impacted.
From my perspective, no growth does not mean contraction order book is still sound and based upon everything we currently see I still expect somewhere around $500 million in consolidated revenues in Q4, meaning that our $2 billion target for 2022 was achievable at $500 million in revenue, we have the potential of generating.
In excess of $90 million in EBITDA next quarter.
Which means 22 will be a record year.
What about on the people side.
We're currently fully staffed at this time and people are now available and we are still here at Mullen group Old school when it comes to recruiting new employees. This means we do the interviewing not be employee we ask what you bring to our team.
And we will not lower our standards everyone must contribute.
I must say there is some really good candidates have joined our winning team lately.
In terms of pricing rates.
Rates are stabilizing.
Perhaps they might come down somewhat but costs are remaining sticky I like wages facility costs.
Equipment costs prices will not go back to where they were in 2020. Furthermore, any price declines will be short lived in my view because of low prices combined with high cost will crush those that price discount steeply.
Now, there's one exception that I.
In the marketplace that I think prices may still move higher and that relates to oil and natural gas services activity. We still think prices must rise if drilling activity in western Canada reaches that magical 250 active rigs.
Working.
And if that's the case then prices will rise in this sector of the economy now I don't want to dwell on the oil and natural gas sector, because so many investors shun the space, but it is becoming increasingly evident that the world steel needs carbon even as economies transition to the net zero world.
Canada is blessed with some of the best natural resources in the World. The only question. Therefore years do we share are plentiful bound or not.
Europe and they may have the key to Canada's energy Riddle.
Supply chain issues pockets of disruption remain.
Though most issues are starting to be resolved and saying this there'll always be some disruptions. This is a tight market.
For example, let's look at our warehouse space. It is still very tight due to high inventory levels quite simply we can only handle new volumes when existing inventory is sold or liquidated in other words, one pallet in one pallet out.
How about equipment.
Everything is on allocation today, even if we wanted to purchase more trucks for example, we cannot get them.
And we expect these challenges to persist into 'twenty three 'twenty four secondly, the price of a new heavy duty truck has virtually doubled since a few years ago.
And two Canadian companies. This is partially due to the collapse of the Canadian dollar versus the U S dollar, but its also do with inflation and changing truck design.
So think about what this will mean with the price of the truck doubling for Canadian truckers or independents.
That have old trucks, they have to increase their prices dramatically.
Competition has.
He said the trucking industry is dominated by independent contractors, they work hard, but many do not have the right equipment for.
For today's market in other words, it is old and not very fuel efficient they will struggle, which means supply may shrink and as I just mentioned can they even afford a new drug.
And I can tell you, there's not a big cut rates.
So fuel prices.
This one is tricky because.
I subscribe to the thesis of the crude oil markets are close to being under supplied if you layer on top of tight crude oil markets. You got to think about refining capacity issues. This too is very limited and it's due to years of chronic under investing meaning that a one thing goes wrong and they usually do at some point there will be shorter.
Chip refined products.
Under this scenario I believe fuel prices will stay elevated this is why having the right equipment spect to get good fuel mileage as a competitive advantage fuel prices are one of the largest input cost of the transportation set so if it only makes sense that one should manage these costs very very closely.
And I can tell you at Mullen group, we do one.
What about acquisitions.
Well truthfully, we're being cautious these days, although we have deals thrown at US every week, we will continue to look at tuck ins in smaller deals that strengthen our current market and competitive positions and I can also comment that valuations are coming down.
<unk> mentioned, a little bit about the last topic I'll turn it over to the call to the Q&A and that's the balance sheet.
I really don't see any reason to leverage the balance sheet at this time given the uncertainties of the moment time is on our side. So we have chosen a path of prudence and caution and with our decision to slow acquisition growth that free cash flow, we generate simply is allocated to debt repayment. It's quite conceivable in fact that we have no bank debt by year end given the cash flow.
Project and the potential to monetize some non core assets.
So that will leave us with roughly $250 million to pursue growth when the time is right.
So with that enough of the Twitter talking points, let's move right to the Q&A session I will turn it over to the operator.
Thank you we will.
Now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you'll hear a tone acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any keys to withdraw. Your question. Please press Star then two we will pause for a moment of callers join the queue.
Q.
Our first question comes from Kevin Chiang.
Please go ahead.
Hi, good morning, Thanks for taking my question.
Congrats on a good Q3 there.
Maybe if I could.
So I'll start with.
Your outlook comments.
Well optimistic about 2022, but cognizant of the risks that could be facing the economy in 2023 I'm just wondering.
What does that mean in terms of how you prepare for that because it seems like you're kind of facing.
Two extreme situations here, where you're resourcing for continued strength.
Which means do over Resourcing.
There was a downturn in 2023, just like how much flexibility do you think you can bring into the operating model in the event that we do that turned to a mild recession or deeper recession as you mentioned in your prepared remarks.
And are you are you specifically referencing 23 cap, yes, just given how strong 2020 gigawatt.
We're not going to deploy the resources now yeah.
We still have wound care I think as you know.
The truckload business, which we're really not dominated.
Our business model with truckload business, we do some but not that's just a transaction. That's just what does the market do because you can't find the yield in truckload, where do you find yield is in small package or L. T. L. So.
We will focus on yield and management and process improvement that will help.
I'm still optimistic we can improve and L T O a bit.
We still have a lot of room. There now there's a lot of hard work to get yield management.
But.
I still think theres some operate operating efficiencies.
The efficiencies we get in L. T O.
Some of the trucking the logistics warehousing side now that's going to be a little tricky on yield, but I think that's going to hold in pretty sticky.
Just due to the makeup of our business models that we have in there we got warehousing.
That's not that's not changing can we drive margin yield next year on that one I think that would be a bit of a stretch but.
We still have lots of levers to pull to protect margin.
But may be not improve margin and logistics and warehousing.
In the U S III PL side that one is.
That one.
Don't have enough to know whether that when I can improve margin there or not I don't think we will because what we're going to do is really focus on building up with technology there.
Even in this quarter our margin.
Margin was down a little bit, but that's just because we're investing for the future and we don't capitalize our it spend.
Spend we just expensive.
But it is the Q2 and development is the is the key to that business on a go forward basis, and so we'll probably continue to invest in that one so I don't see margin improvement.
But we're going to build for the future because.
Markets come markets go and then who are specialized and industrial side potential margin improvement.
Primarily.
The reason I talked about if the oil and gas sector.
Is going to increase drilling activity at all then prices will rise as activity increases.
That market is very very tight right at the moment so.
Maybe we can move margin to summarize an L T L a little bit.
But truthfully I think will really be focused on protecting margin next year more than.
Coming out aggressively in C&I can increase margin in a tougher economic environment.
That's what we think is going to happen. So we'll work hard on protecting rather than improving but that means we got to work hard we're going to have to.
We have some productivity gains next year for sure.
That's.
That's great color and a fair comment.
Q3 results were strong, but I'd like to if you could provide like a monthly cadence of how that how that.
Progress just cut some of the.
Some of the U S carriers I don't know the business is it.
Fully overlap with what you do so the Kpis are the same but number of the companies that have reported you know, whether it's Fedex or night sweats seem to suggest that they saw a pretty material deceleration in demand in September maybe more so than they would've anticipated even back in August and so you kind of thing that play through when they report Q3.
What have you seen that continue on a book of business I know, it's primarily Canada, but are you seeing something similar in Canada is that holding up better I don't I don't see material deterioration Kevin.
No there are certain pockets that you might see material deterioration if you were in.
The truckload business.
You know you've seen a material deterioration because of the <unk>.
Inventory buildup scenario that we had from 'twenty to 'twenty. One early 'twenty two is over now it's you know they've got to liquidate those high inventory so I would expect.
That will be soft for most of 'twenty three but.
You know the retailers have worked through their inventory.
Issues, and then they'll have to go back and.
Replenish again sometime in 'twenty, three I'm pretty sure.
Unless you have material job losses, which I'm not predicting that there's enough.
I, just don't see that happening so so long as the consumer's strong I don't see any material downturn in business activity I see no growth.
And the only growth that we may see as maybe in in the energy related business, where you've got to add.
Supply if you want to bring if you want to keep prices from going through the roof.
So.
So I don't see anything I don't see anything material now if you had business in Europe , which we do not.
We might be talking to different stories, so anybody that had business in Europe and Fedex at all much.
No that's not a pretty place to be right now, but in North America.
Where would you rather be I'd, rather be in North America than anywhere.
So I like our position.
No that's great color.
Just last one for me and I think on the Q1 call.
Maybe your Q4 call you talked about.
There's a lot of high cost capacity in the market just people that entered in doing.
During the pandemic and obvious lidl.
Higher opex cost higher driver costs are higher.
Trucking costs.
Capitalized costs.
Are you seeing some of that that capacity exit the market as we've seen a little bit of softness in the freight world or or is that just something you think will eventually happen or are you actually start to see that happen today.
Yes, I think thats.
You know that that's exactly what happened we saw high cost in Q1.
And the marketplace was.
It was kind of in a bit of disarray in Q1.
We were our businesses were probably a little bit slow on the pricing side.
And because we use so many sub contractors and independents.
The independents moved faster than we did and Thats because we have the relationship with the customer and you have to be very careful.
Not to get too far ahead of your customer they have to kind of see that things are changing before you go in and slap them with a big price increase but you saw what happened post Q1.
With all of those price increases in all the productivity losses that have been built into the systems.
Post COVID-19.
Prices went up and then you saw what happened when we raise prices that's why our EBITDA is gone.
Up into the $90 million to $100 million range, just because of pricing increases.
The sub contractors are lowering prices now the market slows down and we took advantage of the last quarter, which is why were up over second quarter a bit.
They are they're very very.
Price sensitive on the day to day, because theyre all spot market, whereas a lot of art.
Business is either through contracts with customers or it's with relationships that you gotta be you.
You got to be pretty careful how you manage that in our view.
Excellent great great color congrats on a good but there is.
Look there.
There has been a lack of productivity in our business in the economy post Covid, there's more vacation days there's more.
Leave days, there's a lots of weighting is still bottlenecks.
The rails the warehouses all of that leads to additional costs and.
That has to be passed on in your price and.
You know that that might normalize here over this next bid is it slows down.
Maybe we can get back to getting productivity gains again.
And growing our business the old fashioned way, which is you earn it rather than just price.
Perfect. That's of luck as you go through the year. Thank you.
Thanks Scott.
Our next question comes from Connor <unk> of Scotiabank. Please go ahead.
Thanks, operator, and good morning, everyone and congrats on a good quarter, great to see the margins expanding in a tough sort of inflationary environment here.
I wanted to kind of dig in on the rate environment to my you kind of mentioned obviously the subcontractors are lowering the rates right now we all know what's happening in the spot markets. These days.
The spot market, though eventually transpire into the contract market.
Any insight you can provide on your <unk> business do you think if inflation kind of slowed down here and demand slows down do you see a risk that the LDL and rate environment becomes negative meaning rates instead of being up high single low double can they be down low single mid single kind of late next year.
Sure.
I don't really see that so long as the consumer stays active now the consumer squeezed.
With consumers squeezed with inflation, we all know that.
And they just adjust their spend but they're still spending and so and thats really what drives LTM business. So we're okay on that side.
And as I said, we still can work on some productivity improvements and drive yield management and we're looking at all creative things.
To make sure that we can do that in all of our businesses.
That are tied to the <unk> side, so LCL looks pretty sticky I don't see a lot of.
Big change there, where we have seen the big changes and that is in that truckload space, where the prices win.
Sky rocket, while Theyre coming back to Earth and Navy below below but in the <unk>. They just went up steady just you can even look at our emerging Europe couple of points, but it's not a 10 point move so.
No.
Gouging of customers or whatever there was a.
Really good solid demand was steady pricing increases and.
I think what we're going to do is just work on the high grading some of our.
Some of our freight that we're hauling to make sure that we get good yield management there. So.
<unk> stayed pretty sticky no growth.
The only growth we'd get us if we do tuck in acquisitions, but.
I think the pricing will stay pretty sticky and we will probably get <unk>.
Pricing increases in 'twenty, three something equal to what.
Labor cost will go up or something like that in those kind of things, which.
Our perspective, the inflation is coming down fast.
We don't have the same pricing leverage in the marketplace that we had before.
Still there is still inflation, but nowhere near at the same elevated level that it has been for the last 12 months or so.
Okay, No that's great color and the last one from me before I turn it over.
We talked about.
And being debt repayment right now so I was just curious with respect to our.
Capital priorities, although that definitely Pam and where do you see those as well.
Especially as the M&A slows down here I'm going to get in touch with you know dividend buybacks or.
Capital envelope, especially in the Alberta market, if you can't go out anyway.
Yeah.
Don't think we will we're just going to stay the course here over the next web question.
Yeah, Yeah I would.
I think what we're doing right now is.
Being prudent with the balance sheet and managing for 2023.
Just being cautious to.
Ensure that.
Either if things go sideways.
Sure.
We're in a debt structure that that would be just fine.
Or if things turn and grow positive will then than.
And then you've got that balance sheet that you can go ahead and do acquisitions in and.
And continue the growth story, so so by prudently paying down.
Our operating line.
We're getting ready for either scenario.
Going into 2023.
Thanks Victor.
In terms of M&A.
Really we take our cue from.
The from our shareholders.
And right now when we speak to shareholders, they're more cautious they are really not going to reward us for growth.
They.
So why why would we pursue M&A unless share unless shareholders will reward us for that for taking that risk. It appears that shareholders are risk averse. So we'll just take our cue from them and then any acquisition that we do we're looking at whether we can see clear and obvious.
Synergies.
So that we can drive margin out of that.
For our existing businesses.
Okay great.
Great. Thanks, so much guys.
Thank you.
Okay.
Our next question comes from David Ocampo of <unk> Securities. Please go ahead.
Okay, Thanks, and good morning, everyone.
I wanted to do.
Brian I wanted to focus a little bit on the F&I segment, you talked a little bit about rig counts moving up.
What's it going to take for you guys to deploy more capital to that division is it.
Significant rate increases or more demand from your customers.
Take from you guys commitment from a capital.
A commitment from the customers.
I've always said.
Our customers look you can't ask for commitment unless you give them a commitment.
So you gave us a commitment well.
No.
We will go make will go make the capital, but on the capital front and even if they gave us a commitment today I can't get the capital anyhow the markets, it's too tight.
So that would tell me in any.
It's just a market the market is tight so if they decide that they're going to spend a little bit more money.
Because they want to add growth or whatever.
The prices are going to go.
I'm going to go up because its just a very very tight market right now.
But we're not going to make big capital investments until we get a commitment from customers.
And does the margin profile needs to be significantly higher just given the volatility in the cyclicality of that division I mean, youre doing 20 point margin Youre doing 20 points.
Trucking assets, which is almost identical with the risk profiles are different.
If you are going to go and they are in the energy space.
Youre going to need.
But if you're going to make the capital commitment youre going to get a heck of a lot more than 20% margin.
But we won't even entertain anything at a 20 point margin now we may make 'twenty margins, David and some of our in some of ours, but that's because we use subcontractors not not because we make that capital we have a big capital commitment.
But you know if we're going to have a big capital commitment youre going to see.
North of 25.
Point margins or else, we're not even going to entertain it.
Got it that makes a lot of sense and then just going back to Kevin's initial question about your 2023.
How much you can flex the capacity there.
And if I go back to kind of the depth of the pandemic.
Revenues are down 20% in Q2, but your margins were relatively flat.
What's it going to take for the margins to depth is it a three point drop in revenues and that's kind of when you know.
You can pull on the levers that you have to keep margins at the same same levels that they are today.
Well.
Honestly I think for us to move that margin dramatically you'd have to have pricing increases again.
And.
That's really a market driven thing like I said to you I don't know if we're going to drive margin.
Improvement in 'twenty three.
Unless there is pricing and pricing improvements I don't think we can make it up on productivity massively what I think we can do is protect margin.
I think thats.
Going to be our number one focus if we can improve it all I'll do.
Handstands and Backflips, but.
I'm not going to predict that.
<unk>.
You know, it's a slowing.
We all know it's got a slow I mean, thats, how youre going to tame inflation either team inflation by slowing demand or increase in supply. He can add supply fast so theyre going to slow it for a little bit.
I get it and so we're just going to stand.
Stan our lane and add to cash we generate a ton of cash.
And that'll position us as to when we want to really accelerate our growth one more time through acquisition and then we'll look for companies that we can find good synergies that can drive margin improvement.
Okay. So maybe let me ask it another way if you see a 10 point drop in your top line, but you can still defend your margins.
We can I think we can and a good chunk of our business with independent contractors. So we just manage the spread right.
So.
If the.
Business comes down well that means on the spot market did the prices come down so that really doesn't change a whole bunch. It didn't change on the way up and it didn't change in the way down.
You you, we could lose a little bit of margin if you lose 10%.
But that would be a huge drop.
Got.
We're not going there but.
I see any scenario, a 10% drop in business, but.
It depends I guess as to how aggressive the fed's going to be if they want to take interest rates up and you have job losses.
Anything's on the table, we've got multiple scenarios, David I'll leave it to you to which scenario. You think is the is going to go and then you can go.
Pick your poison from there, but if we lost 10% of revenue I don't if we could maintain margin I think it's going to be.
You got a pretty tough environment there so.
I'm kind of just don't get it.
I'm not predicting that but you may that's your call.
No that makes a lot of sense. Thanks, a lot guys.
Okay.
Our next question comes from Matthew Weekes of <unk> capital markets. Please go ahead.
Hi, Good morning, Thanks for taking my questions. My first question is just clarifying earlier on that.
Did you say during the opening remarks that.
You have the potential to exceed $90 million in EBITDA next quarter.
Yes, we're doing $500 million I think.
It's conceivable that we could do 90 and Thats, what I said, it's conceivable it.
And I.
I don't see them, a big change in the demand for the fourth quarter. So.
We have the potential to do it.
And I'm not.
And if we did $500 million, we'll probably do nine will do $90 million, if we do $500 million. So.
Sure.
That's where we're at yeah, that's kind of what we think we could do so that will it be that I don't know you know this is a pretty fluid market right now, but based upon what we see right now I think we're still on target for roughly 500 million for the fourth quarter.
Yeah that makes sense and I appreciate the clarification on that and then just one and thinking about demand and maybe different pockets of demand I'm. Just wondering if you can sort of roughly breakdown.
Sort of exposure on the consumer side of the business.
How much of the shipments would generally be discretionary goods say say non discretionary.
Oh, you know what.
I don't have that at my fingertips.
I don't have that.
Yes.
We don't we don't track now we don't track it that way.
But.
I think if you.
If you looked at the overall economy.
You can look at it and look it up as to whats discretionary and non discretionary.
Uh huh.
You could probably accurately predict that we're somewhere around there because.
Because we all we do have service the consumer basically with L. T O.
But I don't have it at my fingertips.
No. That's okay. Thanks, I figured I'd ask in my life.
Question, just on kind of oilfield services.
It seemed like it was kind of a lot of the structural tightness in that market dropping a lot of.
High prices and you want to.
That was likely to kind of SaaS and imagine you've sort of been spending investing less in that in that business over the recent years I was just wondering if you could kind of comment on what the returns on capital it might be like in that area of the business compared to recent years, and maybe even compared to sort of pre 2016 year.
<unk>.
And what sort of returns you might be earning at this point.
Ah well geez I don't have that.
It's an asset based business. So let me just comment on the oilfield service for a second before I try and get into that granular stuff you're asking.
Number one is oilfield services, we think will remain tighter.
Than the overall economy.
For the reasons that we've talked about is that there is a chronic <unk>.
Under shortage under the market's under supplied for energy so that market will stay tighter than the overall economy in our view so that means prices will stay up or may stay elevated or maybe go up.
On our returns on capital employed.
Sure.
We don't have to I think we have to go through that and before I comment on that we'd have to do that offline I think Matthew that's I don't have that right here on each one of our business are different than some of our oil patch we use subcontractors some is.
As you know we got a lot of cap, we got a lot of capital employed.
In the old days, we used to make $25 30 points on capital employed over the last bit that's been.
We weigh down but in the future if we're going to put new capital work, we're going to make 25% to 30 points. So we're not making the capital investment.
It's that simple.
Yeah.
So that makes sense I appreciate the commentary and I apologize if the questions were a little bit granular and I think that's it for me. So I'll turn the call back. Thanks, Yes, Okay very good I think just get parts of the call and maybe we can yes, we can work through that specific one but yes.
We don't have that right in front of us here on that question.
No problem, Yeah, maybe we can touch base after after the call but that yeah. Thanks.
Okay.
Our next question comes from Walter <unk> of RBC capital markets. Please go ahead, yeah, thanks very much overdue.
Morning.
Hello, everyone.
I guess I'm, a little surprised by your comment on the acquisitions because you mentioned it was based on what investors and the market is valuing and I always look at your.
Commentary in the past and your acquisition strategy as being something more long term oriented.
You know that you're focusing less on what your stock is doing day to day in moron.
Getting good businesses that can can reinforce your business model going forward.
You mentioned valuations are coming down and you have a prime balance sheet. So I would've thought that this would be the time you would start looking to ramp up acquisitions opportunistically kind of regardless of what the market is doing day to day, if it can improve your business and I would add.
I would've thought you you'd be dedicating more more capital towards it so just curious to flush out why.
You're indicating you're going to step on the sidelines here on the acquisition side.
Well I think the number one reason is also that I think shareholders and equity markets are going to be have changed we've now got a higher interest rate environment.
And.
Growth at all costs is not a focus anymore of the markets.
Profitability returns running a great business those are all.
Things that are probably more.
More valued and that's what I'm hearing from investors.
When I look at the markets.
Growth is not rewarded today as it once was in a very low interest rate environment. If interest rates are going to be up or stay elevated for a period of time growth is going to be difficult and.
And if you.
I think it's because the market is going to get tough next year why would I buy somebody today.
Valuations are coming down.
But don't make any sense to me.
Okay fair enough.
That actually is a good segue into my next next question for next year.
Or are you still planning on giving guidance in the same framework that you gave you gave in the last in prior.
Prior years and if so how do you approach, giving guidance for next year are you going to.
Assuming the slowdown you know you mentioned it can be anything from modest to really really severe.
What's going to be the approach that you take when you when you sit down and put pen to paper.
And give guidance for next year.
That's an excellent question one that we've debated here.
I.
I think given.
All the cross currents that we see.
It's really difficult to predict what will happen in 'twenty.
23, right now we are winning.
I guess I'm like the fed and the central bankers and everybody else I'm looking for more data points.
We will be in a better position to say whats 23, you're going to look like after we get through Q4, thus far I've said I think we can maintain $500 million and still be very profitable in the fourth quarter.
But I'm not ready to.
What I said is I thought that the slowdown.
To come is it 'twenty three.
What's going to happen in 'twenty three.
No.
Want to see how Q4 really shakes out.
And see how my competitors respond and all those kinds of things before I really start talking about 23.
Walter I don't know what will come out.
In December with a 23, if I if we have comfort that we know what's happening I'll come out and I'll say there is what we're going to do it.
And this is how we think we will shake it out how it will shake out otherwise we might wait till we get Q4 out before.
Before I get to.
Too aggressive on trying to predict what the heck is going to happen next year I'm trying to predict what will happen this quarter.
And I hedged my bets on that so.
Alright.
I'll be getting economic reports.
Listen this central bankers and listen to our customers. That's a big thing we're listening to our customers and we're watching what consumers do those are those are the things we're really watching.
Along with a really paying attention to how our competitors.
Our handling this situation, we're in a way better position than most of our competitors. So.
We might have to.
<unk>.
We're just going to be cautious for the next Bill I think that's the right thing and Thats the message that we're telling to our shareholders, we're going to be prudent we're going to be cautious.
And don't worry this market will go if it slows down it's only going to slow down for a bit.
And then we will pick our spots when we do acquisitions, we are not going to force growth and leverage the balance sheet I'd, rather protect our balance sheet and wait for another day.
That's great and then my last question kind of relates to something you mentioned, there, but listen to your customers, which customers do you think give you the best kind of lead time for where the economy's going where demand is going.
What particular not not the specific customer name, but perhaps what what segment of your customer base do you kind of really pay attention to when you look to gauge the tea leaves for for how demand is developing over the foreseeable future.
As you know, we just don't have one customer base we are in.
Nearly every vertical in terms of logistics, so that the Canadian economy covers so.
We don't have just one we look at all of them, what's happening in the auto sector, what's happening with consumer spend.
What's happening with the on the retail side, what's happening in the.
With our big industrial customers like feeling what are they seeing what are the big oil and gas companies, saying what are they saying.
So we listen to all of them and then we package it all together.
That's that's what we do but I don't have just one we listened to I watch one data point for a lot of Qs.
We got close and that is the employment statistics.
If employment stays strong.
We don't have to worry that much.
If you start having.
Job losses.
We're going to have to have a rethink as to what's going to happen there'll be a lot of people and a lot of trouble.
And I'm not predicting that I'm, just saying that's the one I watch the most as employment data.
Okay that makes sense, thanks, very much for the time as always Mary.
Thanks Pavel.
Our next question comes from Tim James of TD Securities. Please go ahead.
I think so congratulations on a great quarter here.
Thanks, Jim.
I guess my first question I'm going to return once again to this kind of M&A team.
Two parts to this.
One maybe Maria can you reflect back in your experience. If you had to look forward to sort of past.
We're at the right time, when <unk> starts to make sense again can you foresee any particular regions or characteristics of targets that may appear for you.
Segments of your business or maybe it's regionally maybe just talk about what.
What are most likely the kinds of opportunities that you will eventually see and then secondly, as more of a confirmation I mean do you feel that.
If you kind of want to look on the bright side. The tougher next year is.
While it may obviously impacting next year it might actually create even better opportunities from an M&A perspective, which over the long term will actually put you even further ahead.
Ah yes.
So here's here's our strategy on acquisitions number one is.
Every acquisition, we do has to fit our strategy.
We don't do it in growth is not the strategy.
But whether it fits in.
In the markets that we see the future of logistics and transportation.
Going.
So we will always make long term investments.
If the right opportunity comes along.
But number two would you love to do acquisitions.
When you see some change.
And mark in the markets and we hit some really well in 'twenty one when we saw.
The market is tightening in.
And potential for getting pricing increases and therefore you are not.
Not only to grow but you get margin improvement, which means the valuation metrics that you paid on your Youll look really smart with that.
Don't want to be Conversely, buying a.
Doing an acquisition and paying and then you have margin deterioration.
So.
Based upon what Youre, saying and every analyst that I heard this morning, and nobody knows what's going to happen why would we take a guess on what's going to happen when the margins next year when I don't know what.
I know, we're going to have to work hard to protect margin. So you never want to do an acquisition and then margins go down.
And then I think the third one is can we find synergy.
Can I.
Find a way that we get market penetration that we get yield management.
And that.
That we can reduce cost to drive margin.
It's not about growth it's about margin.
And.
And in saying that I should also say of course that it's also a return on capital some of the businesses. We acquire are non asset businesses correct.
So they may have a lower margin, but they've got a great return on capital employed.
Right. Okay. That's helpful. My second question when you talk about.
What you see right now.
Is your visibility now and I'm kind of thinking fairly short term here, obviously, you've got a good sense for what October holds and I suppose less for November and December but do you have good visibility on the pricing side as you look through the rest of the quarter and it's maybe more of a volume question that gives more uncertainty I'm. Just wondering if you could kind of talk through.
What your.
Visibility kind of time frame looks like.
Well I don't have any visibility on.
We bought with you on that.
That's why Werent.
Touch with all of our businesses every week and we.
We get we.
We have regular updates from them, what's happening in the marketplace right now because all the other stuff is just.
The markets move so fast today, and then move on anything so we don't have great visibility. What we have is basic assumptions and we've said I feel better about.
I think volumes will hold in pretty steady because theres backlogs and we still got to move stuff.
I haven't seen there's no real crack.
In pricing.
On the contract side, it's getting tougher, but I don't see the cracks where there is.
There is cracks and pricing is on the spot market.
If you are reliant upon the spot market.
There's a big Delta in that for sure right now, but we haven't seen.
Too much on the on the contract side yet.
We are entering into with some of our major clients and but those are getting to be tougher conversations I'll be blunt on that.
That's why I say, it's absolutely important that.
We work on productivity improvements.
<unk> mitigate.
The challenges that might arise in the market on the pricing getting pricing and thats healthy for the economy long term.
That we start focusing on productivity again, not just getting pricing increases thats good for everyone.
And that really fits in our bailiwick, because thats going to put pressure on our competitors that are.
Don't take that long term view that we do.
Once again, if you have a question. Please press Star then one.
Our next question comes from Michael Robertson of National Bank Financial. Please go ahead.
Hey, good morning al Congrats on another really solid quarter here and thanks for taking my call.
Most of the things I wanted to touch on have been covered already I was just wondering I noted in the MD&A.
You guys highlighted that.
Of the three.
Non core potential noncore asset divestitures, you noted on the Q2 call.
With the LOI is one of them had expired without closing the other two were sort of still ongoing I guess I was just wondering a if you'd expect that to be sort of that a Q4 event how that was progressing.
Also what sort of EBITDA loss, you guys would expect with that debt potential divestment.
Yes, so youre right to one expired.
The other two are still we expect to close but this I think if they don't close.
Thats really a foretelling that the financial markets.
Something has happened in the financial markets, it's not the.
The business side.
And.
That really happened on the first one.
They just couldn't come up with the financing so.
I think a lot of it will do how the financial markets respond over the next bid is the weather.
Those other two close in the fourth quarter, which we expect that that is our expectation right at the moment they will close.
And it will have minimal impact on our EBITDA I think of course in.
So.
So.
Really what the story line on that will be as that.
We just.
Bring in a lot of cash and that's why we say if we.
We could be at net zero in terms of bank debt by the end of the year. If we close these two transactions.
With the cash flow that we're going to generate from operations in Q4 like even right now I mean, our bank Dennis is below where we were at the end of the quarter.
End of Q3, so we keep paying off debt.
Quite nicely would you want to do is interest rates interest rates are going to go up again, so we want to have less debt.
In a high interest rate environment, and we will see where those other two closing.
I'm optimistic I'm hopeful, but I don't.
We got to get through the rest of the due diligence into closing dates.
We've got an understanding of the year.
We all know that in here in Q4.
In December as we come out.
Alright, that's great color I appreciate it I'll turn it back.
Thank you very much.
Yeah.
This concludes the question and answer session I would like to turn the conference back over to Mr. Mullen for any closing remarks.
Thanks for joining us folks I think that covers it all.
Really strong quarter for us again, and we look forward to another strong quarter. This.
This one coming up hopefully we can deliver the same quality results that we've delivered for the last while so until and we're going to.
I'd be very very prudent with our industrial capital. Thank you very much and have a great day.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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