Q3 2023 Triumph Financial Inc Earnings Call
Alright studio ready.
Good morning, it's 930, and a beautiful morning in Dallas, we'd like to start the call today by thanking you for the interest in Tiffany.
And your attendance today.
You know, it's a busy day for earnings and we appreciate the time to discuss our third quarter results with you.
With that let's get to the business at hand.
We had a strong third quarter and a lot of things break our way, but the quarter continued to present, a challenging freight environment, one, which we do not yet see improving.
We remain excited about the possibilities and our progress in spite of that.
Last evening, we published our quarterly shareholder letter that letter in our quarterly results will form the basis of our call. Today. However, before we get started I would like to remind you that this call may ensue include forward looking statements. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ the company undertakes no obligation to publicly revise any forward.
Looking statements for details please refer to the Safe Harbor statement in our shareholder letter published last evening. All comments made during today's call are subject to that safe Harbor statement.
With that I'd like to turn the call over to Erin for a welcome and to kick off our Q&A Erin.
Thank you Luke and good morning. Thank you all for joining US we made significant progress in the third quarter on several fronts. Our financial results were also better than in prior period.
In the shareholder letter released last night I outlined four things that I thought were important to communicate to our investors about the quarter. Those included first try at Pes momentum and financial performance has exceeded even our own expectations second we had a unique quarter from an expense perspective that is.
Lee to repeat in the near term.
Third the freight market has not rebounded and it could get worse before it gets better and finally related to that the things that make us uncomfortable in the short term, we believe will create value for us in the long term.
As it relates to those third and fourth point. The last few days have produced some interesting headlines two days ago freight waves broker story detailing the convoy a well known tech enabled freight broker had pulled this loads and that an announcement was forthcoming. We now know that convoy is in the process of shutting down without a sale.
That is something that would have been hard to imagine just a few months ago.
Additional stories have followed speculating that several more freight brokers and carriers could face a similar fate.
I'm friends with many people in this industry and it Saddens me to think about the disruption this will bring to many employees and customers, but however, I feel about it that is the reality of how capitalism works companies that are not profitable will eventually fail.
And one of the reasons I am bearish on freight over the short term is because I believe that private equity and venture capital have artificially propped up some companies that were attempting to bring disruption to the industry without ever achieving profitability.
I believe a significant amount of money will exit the stage and the freight industry and may not return anytime soon.
I also believe that triad financial and specifically, what we're doing at try and pay is bringing innovation to the industry and I know that this change is another healthy force of capitalism.
The difference is that we are able to earn our cost of capital while bringing about this advancement instead of being beholden to additional outside funding my journey into banking started in 2008, and 2009 and going through that process leaves you with a deep appreciation of the need to remain profitable even through the toughest cycles.
And that is what we're built to do.
As it relates to convoy triumph has less than 300000 of counterparty risk outstanding some of which we expect to collect in short order.
And as additional brokers go through difficult times, we will continue to focus our attention on servicing the needs of the industry, while we remain vigilant in protecting our own balance sheet as we always have.
Before turning it over for questions. Let me explain that while my Bearishness about the next 12 months or so is real. It also makes me extremely bullish on the long term future for triad financial we have a business plan and a balance sheet that is prepared for a soft freight market, we will be one of those companies who emerge stronger through this.
And we should have a materially greater market share than we do now we are receiving more inbound inquiries than I can recall it anytime in the past as companies in the industry look to partner with a known industry leader with the financial wherewithal operational experience and technology stack to help them navigate this market.
And if the market ends up performing better than I expected in the short term, we will be more profitable and that would be great, but I am far more interested in creating value for the long term.
In conclusion Tri and financial is not a typical bank nor do we desire to be what we are building our payments network in a market that needs one now more than ever communicating that requires effort. So we put a significant amount of time and energy into our shareholder letters to help investors achieve an informed view.
I hope you find those efforts valuable with that we're ready to take your questions.
We will now go to Q&A, if you have connected via zoom and we'd like to ask a question. Please use the raise hand feature at the bottom of your zoom window or if you have dialed in press star nine once called upon and please feel free to on mute and ask your question.
Our first question comes from.
Michael Perito from Kw, Michael Please go ahead.
Hey, everybody good morning.
Good morning.
I had a few things I wanted to touch on.
Number one just off of your comments Aaron.
The shareholder letter was very helpful. So thanks for all the color and thoughts around the current environment.
On try and stay obviously, a very strong quarter.
I know there were a couple of things it sounds like on the expense side, you guys highlighted but 101 comment in the release I also noticed was around flow.
And I was just curious I mean, I imagine that.
At pretty high margin. So I was wondering if you could may be just dissect what the contribution of float was to try and stay in the quarter and is it fair to think that that you know if rates stay at current levels were higher for longer that that should be kind of a sustainable EBITDA margin contributor or do you expect any volatility around that.
Sure the as we've explained in the past how we calculate flow for purposes of inter segment accounting is as the fed funds rate overnight. So I believe that rate is roughly five 4%.
And so that contribution of that just under $300 million of float at that.
That the fed funds rate would be $16 million in pretax revenue that is very valuable for us that is very high margin for us and of course, it's going to track what fed funds do so as if we stay in a market that's higher for longer than.
And we expect that revenue component to grow because we expect our float will grow as our payment volume grows and we definitely that will happen over the next year that was more. The question is just is that the does the volume. The obviously the rates are the rates, but there's the volume you expect that to continue to grow as your network transaction volume grows.
Especially as we move further up market into the shipper and participants we would expect that to be a half exponential growth.
Okay.
And then secondly, I wanted to ask you Aaron I thought some of your comments around credit stood out.
And I appreciate that for you guys. It's it's.
Less of a percentage of your business and what youre trying to become but still impactful near term and so you know I did see that the nonperforming assets ticked up when it looks like the reserve didn't really change much I was just wondering if you could give us some color about what you saw on the credit side and.
Well, maybe near term expectations around any provisioning of reserve build that we should just factor in us as we model out the early part of 'twenty four.
Yeah, I'll I'll take that one so on the tick up in the nonperforming assets those particular assets happen to be so well cover that there was no reserve required that's the that's the short answer to that question.
As we continue to look forward. If there are additional credits would need to be downgraded will go through the same analysis, but we're already stress testing the portfolio and we feel very good about secondary sources of repayment.
Mike If I can just add if you go back and look at our shareholder letters from a year or two years ago.
That was the time to make sure you were being vigilant on credit when the market was far more competitive than it is now and I would never submit to you that we got it perfectly correct right that that doesn't happen, but what I do know is because we work up.
First with growing our balance sheet and because we know this market operates in cycles. We were very disciplined we are very thoughtful when we take credit on our books and I believe that will serve us well and so we have some things I'm sure. We will work through in the cycle do I expect there to be material losses I do not.
Because I know how our team has approached that and the discipline, we brought to it in a market when a lot fewer people were thinking about that but we're going to have to navigate these waters and something may surprise us along the way, but I feel very good about where we said relative to the collateral position we have.
And our loan book and the underwriting we did when we were.
In the two years ago when a lot of these credits would have showed up.
Alright, and then just last I'm sure others have questions so of Iowa as too much here, but just on the factoring outlook near term as you mentioned Darrin. It sounds like there continues to kind of be incremental events in the industry that that kind of give you guys. The clarity that you think that the recessionary kind of.
Trends to continue for some time.
How do you have any near term outlooks or expectations around kind of invoice volume and average invoice size that that we should be taking over or may even if it's just directionally kind of what you think that the current environment could could could mean for you guys as we think about the model.
Mike I'll take that one.
We still see the freight market very soft and one thing that we look at very closely to monitor that is how the freight market is reacting to fuel in the third quarter U fuel increased significantly where it took a long time for for rates to actually catch up we didn't see improvement in the rate until late.
In the quarter and even still in a vibrant market. Those items are those numbers will move more in lockstep. So we see increase in the average invoice amount not so much as demand driven as more expense driven through the fuel side of the business.
Got it okay by I guess and in a high level. It is good the EBIT margin improvement on TCA Comdata, a nice time for you guys to be able to sustain investment in that business, even if the factory businesses, a little light for the near term.
Okay. Thank you guys I appreciate all the color.
Youre welcome.
Our next question comes from Thomas Wendler from Stephens Thomas Your line is open for Frito in mute.
Hey, good morning, everyone.
Good morning Martin.
I just wanted to go back to Tpa can you give us an idea of what the critical mass for the network volume looks like and then maybe how the conversations are going with moving some of the legacy pricing up closer to that five dollar per transaction target.
I can take that Aaron My you know our projections for critical mass here, we think that with the industry needs is for us to be processing, and hopefully making payments on one attitude brokered freight transactions over the right transaction right. Now we are we are touching about one out of three and so our goal is to continue.
To build out the network and bring on clients to get to that when it when a few position and then and then further beyond and turns of the the five dollar per transaction pricing on all of our pricing models for new business has has been adding updated to include the per transaction pricing and however, there are always going to be some case.
Or we have to be creative in how we price deals to get them onboard them onto the network and the value that they create for all the participants and their creativity that happens there, but there has been substantial progress made in repricing existing clients and as well as holding pricing on the new business that we are chasing today.
Great color. Thank you and then sticking with <unk> can you give us some color around the expansion of network participants into the verification only brokers what does the opportunity look like with your audit only clients.
Yeah. So that that has a beautiful question I'm I'm glad you asked it so as we have expanded our technology and capabilities and the point of conforming transactions or network transactions is to provide the data that factors need in order to do their verification validation and cash application processes and try and paywall where may.
<unk> 21, a little over 21 billion in payments, we are touching over $47 billion in and on carrier spin and so we have data associated with the audit only brokers on our platform that are very valuable to the factoring industry and so over the last couple quarters, we've been working on our technologies.
Be able to include those datasets into the conforming transactions and network transactions. So that they begin to see the value and are able to utilize that data on the front end, even though the payment data doesn't you know it's not attached to it.
Perfect. Thanks for that.
And then just moving over to credit.
You seem to have some increased fears around theory, and I noticed an uptick in the loan modifications for CRE.
Was there any theme behind the loan modifications I mean specific group of loans and then are you expecting to see any more modifications going forward.
We did lose a little bit to that in the shareholder letter. The theme is that those are variable rate credits and so when you have a variable rate credit with prices up 500 basis points in a short period of time, obviously that puts some borrowers and stress and so when we hit we had to make modifications to address that we ended up at <unk>.
That is still okay. Our economics are not as good as we would love, but it allows that loan to continue those loans to continue to perform.
And they're still equity in those properties. So the borrowers are willing to work with us on a long term basis. So we expect more of that to occur over the course of the next few months as more and more of those variable rate borrowers are dealing with the reality of the new environment.
Alright, I appreciate you answering all my questions.
Thank you.
Our next question comes from Julien <unk> from Raymond James.
Good morning.
Good morning, Joe.
So.
Carnival Onyx sponsors.
<unk> you mentioned in the shareholder letter that you expect fiber song.
Noninterest expense growth in 2024 absent any raw.
Wrapping of large clients I was wondering if you could flesh that out but growth by different segments for payment factoring a community bank and corporate.
Bulk of the incremental spending that you'll see next year is likely to be in the payment side.
You'll see a little bit in corporate but I would probably couch, it as 60% corporate or see the 6% payments, 40% corporate roughly.
Okay, perfect and then.
Weatherford deepening.
Customer penetration, but where the onboarding of new brokers how.
How much annualized payment volume is contracted to come on to the network in the next six to 12 months.
That's the way I would describe that for you. Joe is you know we speak only about two <unk>.
About brokers that are in active integrations and so those that are contracted and an active integration represent that's come on onboard and in Q2 Q3, and then what we expect to onboard in Q4 represents approximately $9 billion in annualized carrier payments amongst all of them some of them.
They've they've been on boarded and they're in their ramp up stage of game, which takes six to 12 months for them to typically fully ramp.
So all else equal no other brokers or factor side or on the network you would have 9 billion in incremental volume.
Okay.
And then assuming payroll lousy market conditions remained state the same yet right.
Of course.
So Bertie pay.
You've announced a lot of major wins on the broker side, but we haven't seen the same type of momentum on the factoring side.
No I think at this point the quickest way to increase the network transaction penetration, which looks to be about 6% of all invoices on a quarter would be to add some large software companies can you discuss the progress on that front and you know when we might see some some large wins there.
Let me take that one so the and we allude to it if you read the factory section of this letter.
The gating issue in my opinion towards driving greater factor participation in the network has to date been the fact that we were making one out of every six payments to them.
And then we were making one out of every four or providing network data on one out of every four and now we're at one out of every three.
I believe a day is coming sooner rather than later, where it will be one out of every two and once you get to that level of penetration.
Factoring companies now can start to use your technology to change their processes. I mean that is the brand promise that try and pay makes to the factoring industry. If you look at our own factoring subsidiary it costs us roughly $6 to do the back office processing per invoice.
And that's that's a generalization because it depends whether it's a large fleet of small carrier, but let's just use $6 as a good approximation.
We need to for our own benefit and for every other factor we want to join the network, we need to be able to demonstrate we can get that price down to $3 when that would be a tremendous margin pickups for them well you part going to be able to do that if you don't make a significant amount of their payments or.
<unk> a significant amount of audit data for conforming transactions, we are closing in on that Mark.
Second gating issue is there is required technology improvement in most factoring management systems in April for them to be able to ingest low data before an invoice is created no S. M. S was ever built to do that we are having to.
Our own Fms had to be improved to be able to ingest that data and so one of the things we talk about it in this letter is we are thinking through how we can offer to the factoring industry. The ability the tech some of the technology, we have built and the operational expertise we have so that they can more easily.
Ingest that data so that they can pick up the cost savings that is the brand promise of trying to pay it's the cost savings and the assurance of the validity of the invoice that is our promise to them. We are delivering on that it's a very fair question, Joe I think it comes.
In in a much faster rate after we achieve that 50% penetration that Melissa alluded to and we are working towards that.
Alright, well thank you much for taking my questions.
Sure.
As a reminder, if you have a question feel free to use the raise hand feature which can be found at the bottom of the zoom application and if you've joined us by phone today, you may dial star nine.
Our next question comes from Gary Tenner from D. A Davidson Gary. Please go ahead.
Thanks Morry everybody.
Aaron I wanted to ask.
Your comments in the letter regarding your pessimism or bearish about the freight industry.
It didn't sound like it was universal, but surely your view of the world.
<unk>.
As we looked at it.
The data from J D.
You've seen spot rates for van spot rates move up a little bit from the summer lows.
But over the last couple of weeks after moving a little higher the band load.
Loads of an ratio seems like it's one of the Cliff I mean does that is that more recent.
Data is that kind of really big driver of your of your view going forward and the lack of capacity coming out of the system.
Yeah, I wouldn't tie it to that that's just one data point.
I start with the point, Gary that I think any of us in the industry.
Begin with the hope that we're wrong right, we all want.
The industry to return to 2022 levels, although I think any of US who lived through that would acknowledge I don't know that that was particularly healthy either it was very profitable in the short term in 2021 and in that time period.
What I look at is <unk>.
Normally in this part of the season.
You would see invoice the spot rates, moving and and those moves would certainly pick up a movement in diesel costs. Because if you think about what the spot rate is it's just it's marking to market every night to marking to market capacity its marking to market input costs of which diesel is a very large one.
And at this point in the season, if we believe all of that has been written about retailers are at the end of the Destocking phase that you know we went through this bullwhip effect that some people were very right on that of why the market got so tight for a while if we believed we were coming to the end of that we.
We would see the spot rates more sensitive to the input costs in the system, we are not seeing that.
And that plus just all of the things we see just leaves me to believe we have excess capacity in the system.
We think that many a very significant number of small carriers are unable to earn their cost of capital taking spot rate loads right. Now of course, there are exceptions, if euro and a certain lane, but on the whole I believe that to be true and that is why you're seeing the attrition in our own factor.
<unk> client base, that's why I think youre seeing softness across the market and so my view is it. It is what it is so what is it I think the freight has not rebounded to the point, where most carriers can earn their cost of capital, which means we need capacity to leave the system in order to recreate equilibrium.
And.
Hope wrong I don't think we are.
How long it takes to do that there will be catalysts yard. If you think about what's happened the last few days with the announcements we've referred to it seems like these things always start slow at first and then they accelerate.
And so it may be that the industry recalibrates more quickly than I would expect but right now my own personal view is this takes the next 12 months for for the industry to sort itself out and achieve equilibrium.
I appreciate that and since you're just kind of alluded to recent news in that calm buoy.
Wind down I don't know that drove the company to early well, but.
Was there anything you do it by upstream they were carrier that was kind of tech enabled but.
Was there anything they were doing that you think was equally interesting that kind of plays into your longer term view of those for an industry.
But I think convoy built tremendous technology, they were exceptionally talented and smart people.
The problem that they in some of these other tech enabled brokers have is that in order to bill go from just traditional brokerage like if you think about what what was traditional freight brokerage. It was contracting with shippers to move loads and then using people and using phones to find carriers to haul those loans and makeup.
15% margin beautiful business model highly scalable a lot of freight brokers have done exceptionally well with that.
Take the last 10 years there has been this move to we should create digital freight marketplaces and conceptually I don't disagree with that I think the idea is right. The execution is exceedingly hard exceedingly hard to get the scale and bring in all of the dynamics they get priced into this very.
Three vibrant very hard to predict trucking industry that is attached to the global supply chain. It's just hard so I think convoy did great things I think there are many other tech enabled freight brokers, who have built really cool technology.
At the end of the day.
Cool technology.
And.
And really good marketing will not make up for the inability to earn your cost of capital.
And this market and where the capital markets or has brought that to bear and we've known that none of US are surprised that this day is coming we didn't know exactly when we didn't know exactly what would cause it.
But it's our job at triumph, because we've had freight brokers as our counterparties and our factoring business for over a decade frankly since the inception of our factoring business back in 2000 and for before we even bought it we it's our job to think about not who has the best technology or who's in.
Has the best user interface, it's who can afford to repay us when payment is due that is a banking discipline and that is a discipline, we have never forgotten because.
We know what it's like when it goes the other way so I suspect there will be some more I suspect. This technology will live on and will improve the industry for all of US I hope that these real estate talented people I've gotten to know the land places and continue to make the freight industry better. It's just you have to do this you have to build things for us would try and pay you have.
To build it.
In a way that when the market inevitably turns against you you can afford to keep making investments and that is a discipline, we take very seriously.
I appreciate your thoughts on outage throw in one last really quick question a follow up on the on the expense question.
Really thinking about the fourth quarter and kind of modeling a jumping off point there from a segment perspective, the return or normalization of expenses in the fourth quarter closer to the second quarter I assume that's <unk>.
<unk> really weighted towards the payment segment.
I would expedite Akron for quarter to look pretty similar Iberia to the second quarter across each of our segments.
And Gerry one thing if I may add on that.
Those expenses and I think we're all in a cycle, where talking about expense control is appropriate and that's what we should be talking about.
But understand that.
Those expense spikes that we sometimes have in triad pay that are tied to the onboarding of a large freight broker.
Are the best kind of expense because that is an investment in a long term contractual relationship and so we take a lot of that expense not all of it but we take a significant amount of that expense upfront.
And we have yet to have a large freight broker ever leave our ecosystem. The duration of those relationships is proving to be very long in every quarter. We go forward and do more for these customers. The relationship gets deeper so we want to be thoughtful about expenses, we don't take it lightly but those specific spikes that.
Part of the expense base I will take all day everyday because I know over the long term it creates a lot of value for us.
Fair enough. Thanks, Sir.
Thank you. Our next question comes from <unk> from B Riley Security Hal. Please go ahead.
Hey, guys.
I want to ask about the core banking business into your word and not really grown the assets on balance sheet.
One of the areas, where it does include a girl existing commercial real estate up year over year.
I just wanted to get your feel on <unk>.
Are you just D&C right.
Conditions, right now and make some good loans that very selective.
Opportunities for your team and that banking segments Love your thoughts on that.
Yes, I think you characterized it really well there are a lot of opportunities out there not all of them have adjusted to the new realities of this interest rate environment. This economy, but some have and where we see a really strong tenants really strong borrowers great risk adjusted returns we are still open for <unk>.
And we will continue to be so so yes, that's what drove the growth last quarter.
Okay.
Great. Thank you guys ended up my question for you.
Thank you.
There are no other questions on this line at this time thank you.
Assuming that was my invitation to conclude the call.
We thank you all for joining us today, we appreciate.
Your attentiveness and interest in what we're doing and we look forward to speaking with you soon have a great day.
Goodbye.