Thank you for standing by. This is the conference operator. Welcome to the Mullen Group Limited Third 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. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then zero. I would now like to turn the conference over to Murray K. Mullen, Chair, Senior Executive Officer, and President. Please go ahead.
Thank you, and welcome to Mullen Group's quarterly conference call. So once again, we'll provide shareholders and interested investors with an overview of the third quarter financial results. And in addition, we will discuss the main drivers impacting these results, our expectations for the year, and we'll close with the Q&A session. But before I commence today's review, I'll remind everyone that our presentation contains forward-looking statements, and these are based upon current expectations and are subject to a number of risks and uncertainties, and as such, actual results may differ materially. And further information identifying these risks, uncertainties, and assumptions can be found in the disclosure document, which are filed on SEDAR+ and at www.mullen-group.com. So with me this morning, once again, I have this full senior executive team.
I have Richard Maloney, Senior Operating Officer, Joanna Scott, Senior Corporate Officer, and Carson Urlacher, who's the Senior Financial Officer. So this morning, what happened in Q3 2024 in terms of our financial operating performance? Well, the three main topics that we'll be discussing this morning, and then we'll turn the call over to the operator, and we'll go straight to the Q&A session. I'll begin with the call with talking about the macro environment that we had to migrate through last quarter, along with discussing what has changed year-over-year. Then I'll turn the call over to Carson Urlacher, who will provide an overview of the third quarter financial results.
I will remind you for those interested in detail. We've posted the MD&A, a detailed 60-page report covering all aspects of the results and balance sheet, both on our website, which is www.mullen-group.com and on SEDAR+. Then after that, we'll close with a discussion on the macro environment as I see it and how our results might be impacted for the rest of the year. We'll go to the Q&A session. Let's talk about the macro environment. Last quarter, you'll recall that I stated that really, in our markets, that kind of everything had changed, acknowledging the fact that the market is different than last year, and in fact, the last two years. Under this scenario, it would be reasonable to expect that results would be different than in prior years.
And, this is precisely the case with the results that you're seeing from most carriers and from ourselves, except for one reason, and that's acquisitions. I've commented that I think acquisitions were the only way you could grow in a no-growth economy. So we were right on the first, and perhaps we were one of the very few public companies to acknowledge that acquisitions would be the only way to grow, given the market fundamentals. And we didn't see a whole bunch of reason to change that, from the internal market dynamics that were going on.
In early 2024, you know, after we were comfortable with the prospects of strengthening the balance sheet with a new and expanded bond issuance, and we expected a meaningful acquisition, we executed a meaningful acquisition, finding what we believe is a real market leader in ContainerWorld. ContainerWorld has a significant presence in the beverage and alcohol vertical and province of British Columbia. They generate around CAD 120 million of annual revenues. They operate as a freight forwarder. They operate a customs bonded warehouse, and they are a delivery company. These are three attributes that we consider crucial to being successful in this market.
Now, we also know we've got lots to do with this business to make it a profitable venture for our shareholders, and we'll turn our focus and attention to that in 2025 and beyond. It'll take a while to change the culture to one of cost-driven and be very focused on those kind of things. But for right now, thus far, we've been focused on making sure that there was a smooth transition from a customer perspective. And next year, we're gonna focus on the cost side, as I talked about, and that's really kind of come from a combination of investing in new operating assets, technology, and some business process improvements. But I got to tell you, I think there's more to our results in Q3 than acquisitions.
We could not have achieved record revenues and near record profitability if our existing 39 business units did not manage the challenging market conditions as well as they did, so a big shout-out here to all of our business units. Your hard work and disciplined cost management initiatives are a big reason MTL had a very good quarter. Now, we also know that solid senior leadership must also be accompanied by investments in the right verticals in order to achieve solid results today. I've commented many times. There's lots of really good operators in our business, but if you're in the wrong vertical, you're trapped right today, so I continue to state the case of this strategy because not all verticals are created equally.
Now, you may recall that over the years, we've built a large, diversified organization by focusing on acquiring quality companies and that operate in verticals of the economy that we believe are sustainable and where we can achieve acceptable rates of return. This means we must be disciplined and not chase incremental revenue streams simply for top line growth. Our strategy to invest, where we generate acceptable returns on capital for our shareholders. Now, for example, let's consider the LTL segment. Not only is this business in one of the most stable parts of the supply chain, but it also offers, in our opinion, the opportunity to expand margins through a combination of tuck-in acquisitions that help us drive scale through the introduction of new technologies that reduce cost, and some something that really the smaller competitors just simply cannot implement.
We focus on yield management. I think there's some evidence that this strategy is working, and you know, I refer you to our Q3 operating segment results, where operating margins in our LTL segment actually increased quarter-over-year by a healthy 1.1%. Pretty impressive, given that the economy is stuck in neutral. The discussion on the market trends last quarter is also relevant to our performance last quarter, so I'll highlight a few of the challenges our business units had to deal with. Let's start by looking at the overall economy. Central banks have successfully brought inflation to the 2% range, but this has only been achieved by slowing the economy through a more restrictive monetary policy and higher interest rates.
These initiatives have resulted in virtually no growth in the economy, but it has not collapsed the economy either. We also know that the consumer's pocketbook has negatively been impacted by yesterday's inflation, which I call the worst tax of all on the vast majority of society, and high interest rates. So in other words, consumer spending has moderated as compared with prior years. And what this means for the freight and logistics business, is that overall demand has softened from heightened levels of 2022- 2023. But I always say this, demand only tells one half the story, supply is the other. And in this case, it's pretty evident there's more supply today than there was two years ago. And this means there's only one outcome, pricing comes under pressure. And I would argue that this is now the Achilles heel of the freight and logistics business.
There's freight to haul, but the rates are too low for the cost structure the industry is burdened with today, and customers have been quick to bite on the low rates, giving precious little credence to long-term relationships or quality. So this explains why it's difficult to maintain margins today in most verticals, and this, in turn, exposes the business models that are too dependent on the full truckload market, as an example. But, and perhaps this is the good news, nothing lasts forever, and, I'll have more to talk about this topic in the outlook section. So in summary, nothing really surprises this quarter, not the market fundamentals, not the economy, and not the performance of our business units, which are professionally managed and focused on generating the very best results they can.
So I'm now going to turn the call over to Carson for more on the Q3 financial analysis. So Carson, you are up.
All right. Thank you, Murray, and welcome everyone. As Murray mentioned, I will focus on the highlights from the third quarter, the details of which are fully explained in our third quarter interim report. I thought this quarter it would only be fitting for me to first talk about the balance sheet, since we closed a CAD 400 million, ten-year private placement debt financing in the quarter. This new financing enabled us to end the quarter with CAD 344.4 million of cash on hand. Earlier this week, we used CAD 217.2 million of this cash to repay some previous notes that came to maturity. After this week's repayment, we now have approximately CAD 130 million of cash on hand. We also have access to CAD 525 million of undrawn bank credit facilities, providing us with ample liquidity.
In terms of our debt covenants, we have lots of room available. We effectively have one main debt covenant, which is total net debt to operating cash flow. Once adjusted for this week's debt repayment, our total net debt to operating cash flow covenant is 2.26 to 1, and 2.54 to 1 under our new 2024 note agreement and on our previous private placement note agreement, respectively. The total net debt to operating cash flow covenant is calculated differently under the new 2024 note agreement compared to the previous private placement debt agreement. The main difference being what is considered debt for covenant purposes. Under the new 2024 note agreement, lease liabilities with respect to real property is excluded from debt, while our CAD 125 million of convertible debentures is now included as debt for covenant purposes.
These two items differ from the previous private placement debt agreement. Our CAD 130 million of cash is not reflected in this covenant, so our covenants would actually be lowered even further once our cash is deployed to generate new operating cash flows. Excluding lease liabilities with respect to real property under the new 2024 note agreement provides us with greater flexibility in positioning our existing business units into strategic facilities, and provides greater optionality when it comes to making long-term investment decisions with respect to acquisitions. Our new blended interest rate, excluding the notes that were repaid this week, is approximately 5.3% per annum.
In summary, our balance sheet is once again well structured and positions us to make long-term strategic investment decisions with over a full turn of room available on our debt covenants and cash available on the balance sheet to grow. Now to our operating results. The third quarter highlights that really stick out are that we generated CAD 532 million of consolidated revenue, a record compared to any previous quarter. We generated a very respectable CAD 95.3 million of OIBDA, which is the third highest OIBDA compared to any previous quarter. We generated net cash from operating activities of CAD 66.2 million, and our return on equity was 15.3% in the quarter. Earnings per share also remained consistent year-over-year at CAD 0.44 per common share. A very solid quarter from a financial perspective, considering current market conditions.
I'll go through the results by segment shortly, but the overall theme is as follows: Top line revenues grew due to the acquisition of Container World. We entered a new vertical of the economy at a reasonable valuation, giving our organization a new platform and opportunity for future growth. We also improved operating margins that resulted from the combination of our tuck-in acquisition strategy, from the niche markets we serve, and from the diversity of our 40 business units. In the third quarter, revenue per working day improved by approximately CAD 500,000 per working day to CAD 8.6 million, with revenue peaking at CAD 8.9 million per working day in the month of September. From a seasonality perspective, the revenue trend continues, with Q3 typically being the strongest quarter of the year.
We generated OIBDA of CAD 95.3 million, an increase of CAD 6.7 million compared to the prior year, and this is the second highest Q3 ever recorded, second only to Q3 of 2022. Acquisitions added CAD 6.4 million of OIBDA. We also experienced improved results in the LTL segment and in the L&W segment, excluding acquisitions. These increases were somewhat offset by lower OIBDA in the S&I and U.S. 3PL segments, and from higher corporate costs. Operating margin improved to 17.9%, as compared to 17.6% last year, despite more competitive pricing conditions in certain markets and a reduction in higher-margin specialized business. Direct operating expenses as a percentage of consolidated revenue decreased by 1.3%, as our business units did a great job adapting to current market conditions and controlling costs.
S&A expenses as a percentage of consolidated revenue increased, resulting from higher costs experienced at ContainerWorld and from a negative variance in foreign exchange. Now, let's take a look at how we did by segment. First, our largest segment. Revenues in the LTL segment were CAD 188.7 million, down CAD 5.5 million from last year due to a softening in the overall freight demand from demarketing, underperforming business, and from a CAD 1.6 million decrease in fuel surcharge. OIBDA was CAD 35.7 million, up CAD 1.2 million from last year, despite lower segment revenue. Operating margin improved by 1.1% to 18.9% due to the tuck-in of B&R's LTL operations into our existing network, driving greater lane density, as well as using our existing technology platform.
Our second-largest segment is our L&W segment. Revenues in the L&W segment were CAD 168.9 million, so up CAD 31.8 million. Acquisitions added CAD 33.6 million of incremental revenue, which was somewhat offset by lower revenue generated from our existing business units due to the lack of capital investment in the private sector, from competitive pricing in certain markets, and from shippers electing to keep a tight rein on inventory levels. OIBDA was CAD 35.2 million, up CAD 8.4 million from the prior year, with ContainerWorld adding CAD 6.4 million of incremental OIBDA, while our other business units added CAD 2 million of OIBDA due to more efficient operations. Operating margins improved by 1.3% to 20.8%, primarily due to lower direct operating expenses.
Moving to our S&I segment, revenues were up CAD 6.4 million to CAD 131.8 million due to increased activity levels in the Western Canadian Sedimentary Basin. The diversity of our 17 business units within this segment led to higher revenues. Our production service business units benefited from certain projects related to facility maintenance and plant turnaround work. Our drilling-related services business units also saw an increase in demand for their services. Somewhat offsetting these increases was a reduction in revenue at Premay Pipeline due to the completion of the Trans Mountain and Coastal Gas projects. Canadian Dewatering experienced lower demand for dewatering services, and Smook Contractors also experienced lower demand for civil construction services in northern Manitoba. OIBDA was CAD 28.5 million, down CAD 1.2 million from last year due to lower OIBDA being recognized at Premay Pipeline and Canadian Dewatering.
Lower OIBDA was also experienced at our drilling-related service business units, as OK Drilling experienced certain one-time wind-up costs. Operating margins decreased by 2.1% to a respectable 21.6% due to the reduction of higher-margin business and from higher S&A costs. In our non-asset-based U.S. 3PL segment, revenues were CAD 45.7 million, a decrease of CAD 3.1 million from last year due to the ongoing issue of operating in a highly competitive market. OIBDA declined to CAD 0.3 million, and operating margin on a net revenue basis was 7.5%, compared to 25% in 2023. The decline in operating margin was primarily due to higher S&A expenses as a percentage of segment revenue.
So in summary, a very solid quarter from both an operating and financial perspective, as well as exiting the quarter with a balance sheet that puts us in a very enviable position going forward with cash on hand, lots of room available on our debt covenants, undrawn bank credit facilities, and long-term notes in place at decent rates that mature in ten years. So with that, Murray, I will pass the conference back to you.
Thanks, Carson. Now, as I look to what's gonna happen in the outlook over the next bit, let's think about the near term.
Personally, I don't see much that's gonna change in the near term. Demand has definitely stabilized over the last quarter or so in most verticals, but as I noted in my earlier commentary, the pricing is currently kind of the Achilles heel of the majority of the industry right now. It's very price competitive in a lot of verticals. So this is, you know, what I now describe as maybe a structural issue for the industry. If my analysis is correct, then it's gonna take some time for the industry to come to its senses and price to generate a return rather than price to gain market share. This is a strategy that simply is not sustainable.
So eventually, we know that it will revert to the mean, but we've got to get some common sense that returns to the market by many of the industry players. With this as the backdrop, let me just reiterate that our strategy, our focus has not changed. We continue to keep a tight rein on costs. We'll work with our customers to help streamline their supply chain needs, but we need to be profitable. And of course, we will pursue acquisitions that meet our base criteria. And we also know that the independent business model works for us. And to this end, I will tell you, we just completed our biannual insight conference.
We brought together 160 of our business leaders to collaborate, to learn, and about what's going on with the latest trends like AI, and to hear from industry leaders like John Hinckley from FedEx. Now, his presentation about how one of the biggest and best logistics companies in the world is navigating these choppy waters was fantastic. We all learned from one of the best. So in terms of the four segments, let me share a few of the expectations. The less than truckload segments. It's where we still see the most stability. And because the smaller carriers in our network are struggling in this market, we think we can still continue to advance our tuck-in acquisition model, which can help drive future margin improvement, and that's through route, terminal, and equipment rationalization.
And to that end, we've already completed, or are in the process of completing, three smaller tuck-in acquisitions, number one. Those will help our existing business units that we roll them into, to help them. So, that'll be continued to be a strategy for us going forward. In the logistics and warehousing segment, we still believe that our core business units will perform well, and, that's backstopped by the likes of Bandstra Group and Kleysen Group. Companies that have unique and sustainable business models. So we do not, however, believe that there are any real internal growth opportunities for the foreseeable future. Growth in the segment is gonna come from our acquisition of ContainerWorld, and that'll be for at least another few quarters.
We are, of course, on the lookout for other quality companies that will fit in our organization. Logistics and warehousing probably gonna be up because of the acquisition of ContainerWorld. 3PL, HAUListic is currently our only business unit in the U.S. and 3PL international logistics segment. It's gonna continue. They're gonna continue to struggle until we can get some scale and size. Most likely, we'll have to come to a acquisition of a complementary or a competitor business. Now, we have a solid senior team there. We've got a fantastic technology platform. We just need more revenue stream, and they'll do just well.
But our focus right now has been, folks, stay in your lane and keep working on that technology platform, because that is gonna be the future of HAUListic. In the specialized industrial service segment, there's gonna be some changes. Some of it is market driven, might be a little bit softer now that commodity prices have softened a little bit. But we're also doing some realigning within some of our business units, particularly those business units that are very, very capital intensive, where we don't think that the returns on future are gonna be good enough to justify future CapEx. So we're gonna realign and shutter a couple of those business units, like the OK Drilling Group.
They're so capital intensive, and I just don't think the returns are there to justify new capital, and we've got to give them new capital to be best in class, so we've kind of decided. They're small business units, we're just not gonna put more capital into those businesses. As I say, in our world, if we're not prepared to invest, then we'll divest, so the core of the segment, though, we still expect to meet our investment thresholds, and we think that'll be okay. In summary, just before we go to Q&A, I'm gonna say a little bit like what Carson said, we think we're in an enviable position here, especially within the context of the majority of our competitors and our peers.
You know, first, we have a very large and diversified portfolio of well-managed business units. They've been acquired over thirty some years, and many are operating in verticals where the fundamentals remain pretty solid. Secondly, and this is where we have a tremendous advantage, we have a well-structured balance sheet. We have no bank debt. All the long-term debt is interest-only, at what I believe is pretty attractive rates. And Carson, we're still sitting on some cash to be able, we can go deploy on some new opportunities. So, with that, I know there's a number of you wanting to ask some questions, so let's move right into the Q&A session. Operator, I'll turn it over to you, and let's go to Q&A. 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 will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. The first question comes from David Ocampo with Cormark Securities. Please go ahead.
Thanks. Good morning, Murray and Carson.
Morning, David.
I just wanted to first kick off with the question on the S&I segment. You just touched on it briefly there about the wind down of TREO and OK Drilling. I was just wondering what the impact is going to be on revenue and EBITDA, and then perhaps even the cost to wind down these businesses, as it looks like you guys did incur some costs this quarter related to that.
Not much on the revenue side. These are really small businesses today. I mean, there was a time TREO Drilling was just one of the real stars of our organization, when there was a lot of delineation of oil sands work, and that they just did a fantastic job for us. But, you know, that's changed. There's no growth, and there's no real drilling for significant delineation on that. So we're not going to put more capital into it. We really haven't had much revenue from TREO for three years, four years now.
At least three years, yeah.
Yeah. So that's not going to impact us. OK is very small. What are they? About CAD 4 million or CAD 5 million a year, maybe, of revenue. And the impact on EBITDA will be virtually nil, because they really weren't that profitable. And that's why we're saying, okay, we kept them around when we had really good people and those kind of things. But once you need new capital, I'm saying: Well, if you don't make money with what the capital we got you now, I don't know how you're going to make money with more expensive capital. So we just, once our leader there decided he wanted to retire, we also retired along with him in that business. But it won't impact significantly the either top line or bottom line, David.
We have some restructuring costs that came in in the quarter, Carson, of about CAD 500,000 or something like that, that you know you've got to settle up and those kind of things. But once we sell the assets, we'll recover that.
Okay, that's helpful. Then, Carson, just quickly on the CapEx, it was a little bit light this quarter, and it does seem like you're running behind the CAD 80 million budget. Just curious if there's going to be a pretty big catch-up here in Q4, or do you have a new number of where you guys expect to land for the year?
Yeah, you know, at the start of the year, I think our objective was CAD 80 million.
It was, yeah.
CAD 70 million was going to be for, you know, replacement, and then CAD 10 million was going to be for our sustainability.
Yeah.
You know, early on, we put everybody on a diet because we said: Look, you know, it's. There are two fundamental reasons. One is, you're not going to need new capital to grow. I can tell you that, because there's no growth. Number two is just be patient because the equipment valuations are coming down for new equipment. Yes, we just waited for prices to come down a little bit, and we were correct. Over the next bit, we'll start back into the replacement cycle, primarily because equipment values are coming down, so we can get more bang for the buck. There was no sense buying in the first half of the year because we thought that prices were coming down, and sure enough, prices are coming down.
Yeah.
That makes a lot of sense.
I wouldn't expect us to hit that target, David, by the end of the year.
Okay, sounds good. And then just last one here, just on the growth outlook, it does seem like it's mostly going to come from M&A, and you guys have typically have always maintained discipline there and keep your multiples quite consistent. Just curious what seller expectations are now. Have they come back down to earth, and are you starting to see more files cross your desks, just given all the pressure that we're seeing with some of the smaller trucking operators out there in the marketplace?
You know, first of all, David, you're right. We've been disciplined, and you can probably, all l of our shareholders and potential investors can probably assume that we will continue to be disciplined. I don't think we're going to lose that. In terms of sellers' expectations, I think, you know, it depends on what denominator you're using. You got to remember, most of the industry was really profitable in 2022, 2023, and, you know, and we didn't bite. I said. And the reason was, I said: You know, this doesn't make sense. It's too good. I've been in the business too long to know that good times don't last for too long. So we didn't bite. Now, you've got the, you know, the rebound of those really good times, which is really difficult times.
So, you know, the sellers' expectations have come down from the highs, obviously, but they're not making any damn money. So, you know, I say to my shareholders: "Well, do you want us to go buy companies that don't make any money?" Well, that doesn't seem to make much sense. So we got to find ones that are top-ends, where we can get rid of costs. I think that makes imminent sense, David. And then secondly, we'll take a look at opportunities where we think the future is long and bright, and then we can work through and help streamline those businesses and get their cost structures in line, i.e., ContainerWorld. We know that the beverage and the alcohol vertical is going to be around for a long time.
So all we have to do is work with that company to implement technology, streamline business processes, and become more profitable. And so we'll look at those opportunities for sure.
Murray, the phone and the other final point was, are there lots of opportunities? Oh, yeah. I mean- David, it's daily. The opportunities coming from all angles and sizes and shapes. But at the end of the day, as Murray said, we will pick the ones that work for us.
I can tell you, David. I'd rather be sitting in our chair with cash and the opportunity to do deals than having to sell my business right now.
That's all the questions I had. Yeah. Thanks a lot, guys, for the commentary. I always appreciate it. Thanks.
The next question comes from Walter Spracklin with RBC Capital Markets. Please go ahead.
Yeah, thanks very much. Hi, everyone. Maybe a few rapid fire questions here. I don't know how deep you want to dive, but really interested to see if, Murray, you're seeing any signs of life here in the overall macro. I know you said it was a fairly neutral environment in your statement. You know, could you touch on what you're seeing in any inflection in trucking rates, any conversations with customers that might signal changes, either direction in demand? Any of those factors getting you more or less optimistic with regards to the kind of the outlook for the next three to six months?
Yeah. Boy, that's one, Walter, that all of us struggle with. We think there's some structural things that have happened in the market, so you got to be careful in most verticals. Demand is, you know, Walter, I think demand is okay. Like, it's not. You can see from our revenue now, like, it's not a disaster, and most of the rails and everybody else. And there's the demand is okay to flat. It's solid, I think, is the word that we use and many, many other people use. It's okay, it's solid. I'd call it okay. There's no growth. We don't see that. You know, will low interest rates and other factors lead to more growth? Well, you've got a whole group of economists that will pick that. You don't need to hear from me on that.
But in terms of pricing, I got to be honest with you, I kind of think we're in a really complicated market in terms of pricing. And my primary thesis behind that is, I just don't think the average consumer can tolerate high prices today. They're strapped. And so I think there's been a compression of that, and I think that could stick around for a while, Walter. And so we're being very, very cautious on that side. I don't see a big rebound in the rate side. Now, if you said to me, we're going to have a big reduction in supply, that the competition folds, there's huge consolidation, blah, blah, blah, then I can say, yeah, you know, that's where it is.
Otherwise, you got to rely on the thesis that they come to their senses, that you got to price to make a profit, not to gain market share. So-
But I think, Murray, that's my-
I wouldn't count on that for in the short term.
Yeah, and that's my second question, actually. It doesn't really seem that that's happening, right? You look at Pride, they go bankrupt, but they're still business as usual, you know, operating under restructuring. And it just seems that there's more leniency or opportunity for those, you know, kind of those type of situations to prevail and remain and continue to kind of keep this excess trucking supply issue out there for longer. And does that then, i f you know, you said in your prepared remarks as well, you're going to kind of be patient and wait for those to happen. You just mentioned maybe there's going to be failures and consolidation, but it doesn't seem like that's happening. And if that's not happening, does that adjust your strategy of waiting?
Do you start to get a little bit more aggressive in terms of what you do if failures just aren't happening?
We will only invest in verticals where we don't compete with the likes of Pride. I will not compete. We, there's no sense, and you just explained why. There's no common sense, and you know, I don't see them going away anytime soon. So we try and stay away from that type of market, Walter. We try and stay away from that type of market. We try and stay away from having to compete or do business with Amazon, for example. So that's when you hear me talk about verticals that have some competitive edge, that's what we search for here as this senior team. We're out there, we know which ones we want to go after and which ones we think have, you know, don't have to butt up against that competition every day.
So LTL is our primary one, and then we look at verticals like we did with Container where we go, "You know what? We've got a really strong position. We just got to improve their margins." And, that's what this team is. We know what we're doing. We know what to look for, we know what to measure, and then we'll improve the performance.
But.
We're going to be, y ou know, Walter, I'm going to continue to be picky because you know why? It's served us well for thirty years as a public company.
Yeah, that actually dovetails exactly into my next question, is the type of acquisition. Are larger deals in the space you're going after, do they exist, or is it just r eally just tuck in?
Of course, they do. Yeah, there's larger deals that exist, Walter. Absolutely.
In Canada, I mean.
Yes. Yeah, in Canada.
Okay.
And you know, of course, there's larger deals that would be strategic, you know, and then, but and remember what I said, no market's gonna stay down forever. No market stays up forever, no market stays down forever. Eventually, you're gonna have a rationalization that happens in the industry. The one thing. I'm not looking for common sense from our industry, but I am saying to you, one of these days, they may not be able to get insurance. Because if you don't have a balance sheet, the insurance companies aren't gonna take that risk. And if you can't get insurance, you're not in the business. That may be the rationalizer of this business.
And, you know, if that happens, we, we'll have a very quick recovery in terms of rates, because then all of a sudden, customers are saying, "Well, I need you to haul." Because there's demand. It's just that currently, there's just a little bit too much undisciplined pricing.
Yeah. Yeah. Last question, now, as we go into 2025, can you give us some indication, either, you know, preliminary or indication as to whether if you're gonna be coming out with your business plan as you have in the past? You know, when you look out to 2025, even just broad revenue and EBITDA metrics, you know, consensus, are you comfortable with it? And anything, I think consensus is around the CAD 350 million level for EBITDA for next year.
Yeah. Yeah, I hear what you're saying, well, I think we've got early December set as our, you know, the time that we'll. We're in budget season right now with our business units. Our process here is, we give guidelines to the budget to our business units, but we tell them: It's your budget, but you better. So go through it, and then you've got to present it to us. So, us being the senior team.
We then go through each budget and question their rationale and all those kind of things, but it's their budgets. Then we'll aggregate them together early December, and then we'll come out with what we think will happen next year. From a macro side, let's start with that. Is there gonna be a lot of growth in the Canadian economy next year? Let's be honest. I mean, we're running a CAD 50 billion deficit in Canada right now to get no growth. If we weren't running a CAD 50 billion deficit, we might have negative growth. Can we go to a CAD 100 billion deficit next year? I doubt it, to get.
I think it's gonna be okay, but I don't see a huge rebound in the economy unless you said, you know, there's a lot of capital coming into Canada, and we've got a grand new scheme that says, "You know what? Invest in Canada." I'm not feeling that right now. I think we've scared away capital out of Canada, and we're really just a consumption economy right now. And I think that consumption economy will remain about where it is right now, maybe up a little bit, maybe down a little bit. But my early indications suggest is more of the same next year. That's why we've got to stay focused on cost, process improvement, remain our and maintain our discipline. But we'll be able to still outperform the overall market because of acquisitions. Why?
Because we got the damn balance sheet, and we're one of the elite few that have got that balance sheet to execute, and it's just up to the senior team here to pick the ones that are gonna add value to shareholders.
Okay. And just as a, I don't know, Carson. I think the last official guide for this year was CAD 325 million for 2024. It looks like you're gonna come in nicely ahead of that if we take the, t hen you're running at about, you know, CAD 7 million above Q3 this year versus last year. And if we assume kind of the same run rate of seasonal, you know, outperformance there, then you're kind of coming into the, you know, the CAD 330 million-CAD 335 million mark. Is that, is that a.
You know, Walter, that's. You know, we came out with CAD 325 million in 2024, and we're not gonna be far off that. We might be a little bit above it. We think that if you look at Q4 of last year, I think we're CAD 80 million.
CAD 80 million, yep.
Yeah. Right, Carson? What, CAD 80 million.
Yeah, we did about CAD 500 million in revenue in Q4 of last year and call it CAD 80 million of EBITDA. And if you kind of look at the trend line right now, we've got ContainerWorld that we've got now that we didn't have last year. So, you know-
But let's just call it a little bit better than last year, Walter.
Okay.
Yeah.
Okay. That's great.
Just like we were in the third quarter, we were a little bit better than last year. That, that's what, that's what we think right now, is we'll be a little bit better than last year. And then, of course, the, you know, we're feeling much more comfortable that, we'll have some be able to take advantage of some acquisition opportunities next year, and that'll add us another growth curve in 2025.
Okay. Appreciate the time. Thanks, guys.
Thanks, Walter.
Thanks, Walter.
The next question comes from Cameron Doerksen with National Bank Financial. Please go ahead.
Yeah, thanks. Good morning. Just a question on the L&W segment. You know, just looking at the margins, like a pretty solid number in the quarter. And, you know, my original thought was that, you know, maybe you've done some good work at the ContainerWorld business to cut some costs there, but just based on your comments, it doesn't sound like that was necessarily a contributor to the margin in this quarter. So I'm just wondering, you know, what did drive that nice, you know, kind of margin improvement in L&W year-over-year and sequentially?
Well, I'd say it's probably a combination, Cameron. ContainerWorld does generate good EBITDA. However, the majority of their costs fall below that EBITDA line with respect to leases, so you know-
That's an IFRS number.
An IFRS kind of a play on it.
The good news about ContainerWorld is that number that you see that they're generating, that pays all their bills. Okay?
Yeah.
Under IFRS rules.
Correct.
Our job is to improve that above there so that we make money on our investment, and I can guarantee you, we're gonna improve that. But that didn't hurt. They, you know, ContainerWorld didn't hurt our numbers.
No.
And our, you know, we've got some really good, solid business units in there, like Kleysen and Bandstra. We highlight them. They continue to do that. They're in good market segments. They're in good verticals. Some of our business units didn't perform very well. You know, if you're involved in competing in the full truckload side, like some of them, like-
Yeah.
Tenold and Payne, and oh, my goodness, and even Caneda.
Yeah.
You know, they're in a tough market for a little bit, and it won't stay that way forever, but it's that way for right now. But I'd say it's really ContainerWorld, and then you know, our two real good ones in.
Bandstra.
Bandstra and Kleysen, that had continued to perform at the highest level of any business units we got.
Okay. No, that that's helpful. And then just the second question for me around, you know, capital allocation. Obviously, you know, M&A is a priority, but it sounds like it's probably more focused on tuck-in acquisitions. And, you know, you've got very significant cash on the balance sheet now and lots of available credit, and free cash flow generation is still really positive. So just wondering how you're thinking about, I guess, the other aspects of capital allocation, specifically on NCIB. I mean, there's been some activity, but just wondering if that's something that, you know, you expect to do more of in the absence of a bigger ticket M&A, or is that something you're just comfortable kind of at the same pace that we've seen for this year?
Yeah, you know, so we talk about that at the Board level, which is really, you know, that's a Board discussion. But our thoughts on that are this, is that, given the opportunities that we see on the acquisition front, Cameron, we think that if we buy back, if we do share buyback, we're allocating capital to that, that's not helping our business grow for the next 10 years. But if we do a good acquisition and use those funds that we got, that sets us up for the next 10 years or plus. So I think our priority is go out and get some really good acquisitions and grow, rather than share buyback. We'll still probably do some, but it won't be the highest priority. I think our highest priority is gonna be growth.
Okay. No, that, that's very clear. That was all for me. Thank you very much.
The tuck-in acquisitions will help you drive margin in the short term. If you do a bigger acquisition, you've got to be a little patient, just like ContainerWorld, because it takes a while for the market to come back and for you to get, you know, the disciplines in place that we think you have to have to, you know, be a free cash generator.
Right. No, absolutely makes sense. Thank you very much.
Thanks, Cameron.
The next question comes from Konark Gupta with Scotiabank. Please go ahead.
Thanks, Operator. Morning, Murray and team. Just one question to begin with. You talked about Q4 to Walter's question. I understand you're running a little bit ahead of your, you know, initial expectation for full year EBITDA. And, you know, ContainerWorld certainly is a big contributor there. But how should we think about, you know, the other segments like LTL and S&I in Q4? Do we see any signs of, you know, growth versus last year in Q4?
I don't. I think if I look at the LTL segment, there really was no growth. What there was, was some. We met our objective, of course, which we said, "Let's go out and improve the margin this year, even though there's no growth.
Correct.
We said we could get 1%. That was our target, and we've met that. So, you know, once you, you know, that's tough work, right? You know, you don't get margin improvement, you know, without doing some pulling some pretty good strings there, particularly when there's no growth in the market, and you really can't get pricing leverage from customers today. So, we did some good rationalization, and I think Carson highlighted that. It was, we took an underperformer in B&R Eckel's, and we put it in with top performers, which is Grimshaw and Hi-Way 9. So we flipped that from a negative to a positive, and that's where we saw the 1% growth. But no, really not a lot of growth in that segment. Specialized industrial, not a lot of growth right now.
You know, we had a couple of good wins, a couple losses. We lost the pipeline business. That project's over. Okay, but the rest, you know, we're diversified, and we had other business units pick it up and those kind of things. So I don't see a lot of growth, Konark, unless we do acquisition. And, you know, we could go give you growth tomorrow, but as I said to you, what the hell good is growth if you don't bring margin with it? What, what's that doing? So that, to us, that's a fool's game, so we don't play that game. It's never been our DNA. And we're not changing. We're gonna. We like what we're doing on that. I love having, as I said to you, just fun. We'll do acquisition.
We always have done acquisition since 1993. How many have we done?
80+ .
80+ .
80+ . I think we'll probably do some more, particularly with we got that nice balance sheet. So let us choose where we think we can drive margin. I'd love to be able to hit you a home run and say, "Hey, you got high margin, high revenue, everything." Yeah? There's only a few of them out there.
Right. That makes sense. No, thanks for that colour Murray. But just following up, maybe on M&A then. You know, like, I think you guys are obviously a little bit more, you know, careful and disciplined, I would say, in terms of, you know, choosing acquisitions and pursuing the right fit and all that, which is great. But obviously, you know, you can see clearly the market like loves to pay for a lot of growth right here. So, you know, like there could be opportunities which could be small, medium, or big for you guys, right? In terms of your appetite, I wanted to ask you, you know, like, you have good cash, you have good lines and all that. Your stock's actually not doing bad, like, considering obviously the last many years.
It's sitting at, you know, a decent level here. What's your strongest currency right now? Is it your debt? Is it your equity? If it's something big, like, you know, CAD 500+ million of deal comes through.
I would say obviously right now, Konark, you know, the debt markets have been pretty favorable for us. That's just a function of, you know, the Board deciding that it was prudent to own our own real estate. There's value in that that debt holders see, but doesn't show up in earnings per share because you don't fair market it every quarter. The other thing that sets us apart is we generate free cash every year and have done so for the last 30 years. That consistency just leads you to that debt market where they love that consistency, they love that balance sheet.
You know, there's a hidden gem there that doesn't show up in the stock price or in your earnings. So I would say if we had a really good idea that came up that you know, I think we've shown the histories that the debt markets would support it. We would also go to our equity holders and say, "Hey, you know, do you support us in this great idea?" So.
Good ideas will be supported by the market, whatever that market is, the debt markets or the capital markets, in general, Konark, you know that. Those would be transformational acquisitions, what you're talking about. If you're talking about just growing at our standard since 1993, I'm gonna go with-
11.7%.
11.7%. You know, well, we can do that without any more debt and without any more. We generate enough free cash than what we got now-
Yep.
To continue to grow at 11% for quite some time. We don't need to go to the markets.
We don't.
But if we saw a transformational acquisition, okay, well, that's a different discussion.
Yeah.
Yeah, no, makes sense. Okay, perfect. Thank you. Thanks for the time.
Thanks, Konark.
The next question comes from Tim James with TD Cowen. Please go ahead.
Thanks very much. Thanks for the time. I just want to drill down a little further into two previous questions, actually. One, just the margin performance, the really good margins in the logistics business. You called out Bandstra and Kleysen. What, like, is there anything specific there that accounts for why, you know, they're performing so well? Is this a pricing dynamic? Is it cost initiatives that have been undertaken? You know, I'm just trying to understand better why it's, you know, performing so admirably.
It's the business models they have. Both of them are in verticals or in markets, or have assets that are really, really difficult to replicate. That's number one. You know, I guess the other is that they were quite simply, they don't have the same competitive pressures. They're, they're kind of, you know, they're, they're unicorns, they're so good. I'd love to have-
Few more of them.
A whole bunch more of them, to be honest with you. And we look for them, and we wait for them, and when we see them, we buy them, and we invest in them. So they're two really solid business units. And we got you know, we don't have better management teams at Kleysen and Bandstra than we do in any of our other business units. But they are in really solid verticals at the moment, for sure.
Okay.
And, we think that their verticals they're in are pretty sustainable, so, that's probably the number one reason, yeah.
Okay.
Yeah.
The U.S. International Logistics Business, Murray, in some of your earlier comments. You're talking about that you need to grow the scale, there to really take advantage of HAUListic.
Yeah.
Like, is this environment, a nd I want to specifically think about the U.S. I'm assuming you kind of have your eyes on the landscape there for opportunities. Is this environment that we're talking about with this kind of, you know, supply or capacity imbalance, this excess. Is this not a good, you know, market relative to a year ago or a couple of years ago for finding a transaction to build scale in the U.S.?
Of course it is.
Do you feel sort of incrementally positive on the opportunity set that you're seeing down there?
Yeah, we've spoken with the senior team there, and that we all have our eyes and ears out, and we're listening, and we're watching to, you know, see if something fits quite nicely with them. Until we find that, you know, I've told the senior team there, I said: "Look, just keep working on your game plan. Make sure the customers are looked after, and make sure you keep advancing that SilverExpress platform that we've got, that's really difficult to replicate." So when we find the right one, we're just gonna be able to plop in the revenue sources, and that's when we'll get the margin improvement. So either that or maybe the economy improves down there. I don't, you know what?
But for the moment right now, what you're seeing across most transportation companies, both sides of the border, very competitive markets. Even though demand is reasonably. It's not bad, but if you have a small reduction in demand, but no corresponding reduction in supply, what happens to price, Tim? I don't care what market you're in. Until they find a new equilibrium, price will be low. Not everybody's gonna survive this low-price environment. You can take that to the TD Bank or any bank.
If I may add as well, within that business model here, we know it's more of a little bit of a volume issue right now because as Carson has articulated, we have kind of a fixed nature of our SG&A. We do know, though, right now that a lot of the big 3PLs down in the States have been kind of laying people off, and they did that at the last part of last year. So our focus, in addition to SilverExpress, building that out, is to, w e enhanced our recruiting efforts on independent station agents, so they're independent, they're not employees. That's not gonna double the size, but that will certainly help us backfill and get a little bit more volume until that moment in time when there is that acquisition.
So that is a major focus of our team down there, and I know they're listening in right now as well, and will continue to be. So we'll, you know, kind of add things along as we go. People like the platform. We know because people are coming on. We've added four or five additional station agents or agent models, and we'll continue to do that.
Yeah, I think, Tim, on that side, by having HAUListic and that team as part of our big, big diversified network, we give them the time and the space to kind of work through these very difficult markets, and we don't have to put too much pressure on them. I said, "Just work on the long-term fundamentals, and everything will take care of itself longer term. But work on the fundamentals. Make sure that we're the best, you know, we're the best employers in that business, best places for people to want to apply their skills," because it's a people business. It's, it's not a freight business, it's a people business. "And work on that damn technology, because that's, that's gonna be your secret sauce of the future." So we've said to stay in your game.
Eventually, if we do the fundamentals right, we think it'll all take care of itself because we got the patience when many others are single source. The pressure's too hot on them. So, we're in a good space. We're just waiting for the right opportunity that fits in with them, because I tell you, we got the team. They got more horsepower down there than I, y ou know. So we can grow.
I'm impatient.
We just need the right opportunity to fit with that, with those horses down there. They know what they're doing.
If I could just squeeze one more in quickly. We talked about on a number of occasions the fact that, you know, supply has not yet responded or capacity has not yet responded accordingly to sort of the demand, the pricing environment. And you mentioned sort of there's a bit of a structural issue here. Can you? I'm curious, Murray, to your thoughts on why it hasn't responded, like, specifically. Is it changes in the CCAA process? Is it something to do with creditors in Canada, or, you know, holders of capital are prepared to accept lower returns? Or what is there anything you can point to as to why there hasn't been a supply-side response yet?
Yeah, they're damn tough. What are they gonna do? You know, they fold their tent or they just work harder. My history tells me when times got tough, and I saw this even with, in our business, when we were a small company, when times got tough, we worked harder, and we worked leaner, and we were tough damn competitors to big companies. And there's just a lot of them out there, and they're just damn tough right now. But if eventually, y ou can only be tough for so long. Eventually, you have to be profitable, and I explained what I think the major issue will be. You're gonna have to show a profit one day, or the insurance companies are not gonna insure you, take the risk on your--. And then if you can't get insurance, you can't haul the freight.
So I think it resolves itself, but not quickly. It could take a little bit of time, but I think the insurance companies may be the ones that bring discipline to the market. Customers are not gonna do it. Customers are gonna take advantage of low rate whenever they can. That's just the way the game is played. And right now, they're doing a hell of a good job of it, but the tide will turn and come back in, and we will be positioned to take advantage of that. Others may not last through it. That's the, y ou gotta stand tough times, to be successful over the long time. How long we've been in business, Rich?
75 years
75 years .
Every economic cycle, everyone through. So Tim, I think in addition to that, Murray talked about the insurance part of this, but those whomever, and you talked, you said CC AA, whomever would have lent credit to groups that have kind of bucked that system, if you will, you want to call it that? It'll be interesting going forward, if they'll be able to get fuel. You got to pay that bill every seven days. Anybody who sent them, sold them equipment on credit, it'll be interesting to be able to do that. So, you know what? It could take time, but maybe they got salvaged, but can they afford to operate going forward? Will they be able to get fuel, tires?
It's just, it's just gonna take time, Tim, but it will work itself out.
So just when-
I can't tell you which quarter will be the inflection point. I can't tell you that yet. I haven't seen it yet, but I know we're one or two quarters closer to when it's gonna happen. I don't know. I can't tell you.
So, I know you guys can't reflect on 75 years of history, but in your experience, is this supply response taking longer than what you've witnessed in other comparable times in the cycle, or is this just normal, do you think?
Well, the cycle hasn't played out yet, so give it time.
Well, I mean, the upturn, t he timing of how long it takes for capacity to respond.
I got one more question we're going to move on to, but I don't think we're in the ninth inning, Tim. I'll leave it at that.
Okay, super. Thanks for the time.
Thank you very much.
Again, once again, if you have a question, please press star then one. The next question comes from Kevin Chiang with CIBC. Please go ahead.
Good morning, Kevin.
Good morning, everyone. Hey, good morning, Murray and team. Thanks for squeezing me in here. Maybe just two quick ones. One, you talked about demand. You know, demand's okay, obviously, excess supply. A lot of comments on this call about that. Just wondering, when you look at your LTL volumes, do you have a sense of maybe what percentage or what amount of revenue might have temporarily shifted to the full truckload market just because rates there are unsustainably low, and maybe those are volumes that come back as the freight cycle starts to, you know, hopefully inflect at some point in 2025?
I've seen some of that commentary, Kev, and I haven't been able to reconcile that with our network. We-
Okay.
Most of our LTL network is in the smaller communities and whatever, so I don't. We're not gonna lose it to the full truckload in our LTL space. So I-
Okay.
I don't think there's been a lot of that. Yeah, you know what? Has there been, have we lost some out of California and some long haul? Yeah, we've lost a little bit, but honestly, I don't think that's the issue from our perspective. We just think that, you know, you've got to be really, really careful of the impact that Amazon has on LTL. They, they're the biggest, they're one of the biggest LTL guys now. Right?
That makes sense.
Because of e-commerce.
Yep. Yep.
Right.
That makes 100%.
Yeah. So if you know, I think there's, you know, I guarantee you, I am way more worried about Amazon than I am about the full truckload guy getting a little bit of our freight. I guarantee it.
That's a fair comment. Yep.
Okay, if I could add.
Yep.
I think if you think about the interlining component of LTL, where the trailer's already full and you've got to move it from here to the other place, we're hearing that happening maybe more in some of the U.S. locations, where you can get almost a tractor service.
Okay.
But getting to the final mile, how we, what our core focus is on LTL, that's to Murray's point, we don't see that. But you can maybe see some of that breaching in, in what we're hearing down in the States, not so much here, but once the trailer is full, it's just got to go from Toronto to Edmonton. Anybody can haul that across the country. You know, there's , w e don't see that as evident right now.
Right. Right. That makes sense.
I'll tell you what I see in the U.S., and on the LTL side, because I know you follow them as well. There's a lot of tough competitors down there, and every one of them I see adding capacity, but I don't see the economy growing. So, we're in Canada, there's really only a few of us. You know, the market's really spread out vis-a-vis the U.S. market, right? So, it's a little different space. And, I mean, we - you see what TransForce does. Their Canadian LTL is best- in- class. They're fantastic.
Yeah.
Yeah.
That's a good point. That's a good point.
You know what? TFI is a disciplined pricer. I mean, they don't, you know, they're - we, we don't mind competing with TFI or Manitoulin. These are business people. They like to make money - because they have to invest it.
Yeah.
And so we can continue to provide the service to the customers. Yeah, so.
Alain would agree with you. He likes to make money.
I think he would, yes.
Maybe just sticking with LTL, last question here. You know, when you buy these tuck-ins, I'm assuming you're buying a company where maybe they've been less rational on pricing. Correct me if I'm wrong. Just wondering, as you look to reprice their book, as you integrate those assets into your own organization, like, has the success rate been pretty good, or have you had to kind of hold the price at a lower level than you would have otherwise liked to, just because of the freight economy and maybe you'll look to, you know, reprice when things are better? Just wondering how that repricing cycle works when you acquire some of these companies.
I guess, Kevin, I would say the, you know, the first thing that we look at when we look at layering in LTL is lane density. That's first and foremost. That's where that's what really drives your margin. Also on facilities. Facility costs are, as you know, quite high. And when you can consolidate facilities, that's that's another win. So those are really kind of the two overarching aspects when we look at layering in LTL acquisitions. Pricing does come into effect, that's for sure. As you saw in our MD&A, we demarketed some business in that segment. It just, it didn't make sense for us to continue servicing those customers at those rates. So I'd say that that's where some pricing discipline comes in as well, too.
Yeah, I think when you do an acquisition of these smaller companies and these tuck-ins, you know, clearly, you have synergy on cost because you're adding yield and network and utilizing the assets. So we don't need every truck following each truck. That's how we drive margin. But I think the other thing that comes into it is more pricing discipline. Smaller carriers, sometimes, you know, they're very tough. So once, you know, once you take that undisciplined pricer out of the market, it's. We don't raise prices. We have more discipline on pricing.
Yeah.
You know, we don't-
That makes sense.
That, that's what really happens. It's just more discipline, yeah. No, nobody, you know. You know, I don't want anybody to think you go and you do an acquisition, and then you can control pricing, whatever. No, the market controls pricing, not us. But sometimes, you know, you have done disciplined pricing. Like, for example, our B&R Group, you know, they were just undisciplined pricers, and, and as I said to you, a customer will always fight on low price, Kev, always. That's never changed in my career.
That's a fair point. Hey, look, it's, you're definitely executing well in a tough market here, so congratulations on that. That's it for me. Thank you very much.
We appreciate it.
Thanks, Kev.
This concludes the question and answer session. I would like to turn the conference back over to Mr. Mullen for any closing remarks.
Not many more folks. Thanks for joining us. We've been a whole lot longer than our one-hour allotment, so we got a lot of horsepower online. I'm going to let you go. Thank you very much. Next communication will be after we do our Q4, which will be in early February. Until then, we got a lot of hard work to do. Thank you very much.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.