Thank you for standing by. This is the conference operator. Welcome to the Mullen Group Ltd. Second Quarter Earnings Conference Call and Webcast. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there'll 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 and 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 all to Mullen Group's quarterly conference call. We will be providing shareholders and interested investors with an overview of our second quarter financial results. In addition, we will discuss the main drivers impacting our operating performance, our expectations for the year, and close with a Q&A session. Before I commence today's review, I'll remind everyone that our presentation contains forward-looking statements that are based on current expectations and are subject to a number of risks and uncertainties, and as such, actual results may differ materially. Further, information identifying the risks, uncertainties, and assumptions can be found in the disclosure documents, which are filed on SEDAR and at www.mullen-group.com. This morning, I'm calling in from our brand-new state-of-the-art facility in Kamloops, BC. It's a 36,000 sq ft cross-dock.
It's got 40 doors and warehouse capabilities, including, we can service our ambient capabilities for our customers. The terminal is now occupied by APPS Cargo. It's a leader in the West Coast logistics space. It provides APPS with a great facility, ensuring they can service the entire interior of BC from a central location. As our shareholders know, LTL is one of the core investments identified by our organization, and this facility is just another great example of an investment by our company and how we ensure our LTL businesses are positioned for the future. Now, back in Okotoks, the corporate office, the other members of the senior executive team are joined on the line. I have Richard Maloney, Senior Operating Officer, Joanna Scott, Senior Corporate Officer, and Carson Urlacher, as our Senior Accounting Officer.
And he's the primary architect of the interim report, and he'll be reporting on analysis and discussion on our financial performance. Let's start this morning's call with a review of our Q2 2023 financial operating performance. In this section, I really will address two topics. The first is how did we do, and the second is, how did we do it? From my perspective, I have to say Q2 was another very good quarter for our organization. We managed to mitigate most of the collateral damage from the change in the economy. From that perspective, what I really mean is, we saw consumers alter their spending patterns away from buying goods, doing things like travel, personal services, going out to restaurants, concerts, et cetera. The consumer, I think, only tells half the story here.
Businesses also changed. Retailers, manufacturers, shippers, they finally realized late last year that they miscalculated their supply chain requirements and began to right-size inventory levels after ordering way too much in 2021, 2022. This combination, changing consumers' habits and business right-sizing, led to lower freight volumes and more competitive pricing in 2023, which is the exact opposite of last year. In other words, we went from a freight boom in 2022 to a freight recession in 2023, all within a few quarters. The other thing to remember about our results, you got to remember The last year was punctuated by high fuel prices that were passed on to customers via fuel surcharges. This year, there's been a moderation in fuel prices, and as a result, fuel revenues are down CAD 20.8 million year-over-year, just in the second quarter.
This alone represents the majority of the consolidated revenue decline of CAD 27.2 million. Despite all of these changes in the market, we still managed to generate some pretty nice results. Basically, what the numbers tell us is that we had a pretty good quarter, which is, as I mentioned, is even more compelling when comparing to the boom in 2022, a year of supply chain disruption, off-the-chart freight demand, and pricing surcharges implemented due to the surge in demand. I would say, yes, revenues were down on the quarter. They're down about 5% year-over-year, but perhaps a better way to look at our performance is to compare not to the boom year of 2022, but compare to our five-year average, or as I like to say, the period before 2022.
In fact, excluding last year's results and looking at our five-year historical average, you'll see that we exceeded prior year periods by a mile. When I say I'm pleased with our performance in Q2, in fact, for the first six months of 2023, you will know what I am referring to, and that's the long term. Most shareholders have come to expect that we will grow this company in a prudent and thoughtful manner. We always think about tomorrow. We never chase deals, particularly at the top of the market, like last year. We have a long-term game plan, and we stick to it. Let me just give the next couple of comments here about how we did it.
Firstly, and most importantly, I'd say it has to do with our diversified portfolio of service offerings and our brand name business units that are involved in multiple different verticals within the North American economy. This diversity is all part of our risk management strategy. It helps in times like last quarter, where we saw some pretty stiff revenue and price declines in the big consumer markets, like Metropolitan GTA in Ontario or in Vancouver and in the United States, where the freight market was hit particularly hard. There was, however, we saw some pockets of strong demand, such as transload services, which is where our Kleysen Group shines.
From our vantage point, the Western Canadian market was the best performing market, with energy and mining industries continuing to provide a solid base for companies that are in our oilfield services business or at Canadian Dewatering, which everyone will know is a leader in water management and logistical support services, and at the Bandstra Group, which is, by the way, a key supplier to BC's mining industry. In other words, diversification matters in times like this. We also did a couple of nice tuck-in acquisitions where we saw a good fit, the price was right, and where there were lots of synergies to be had. In fact, acquisitions added CAD 22.6 million to our consolidated revenues. That mitigated most of the loss of business in fuel surcharge revenue.
In terms of operating profitability, often referred to as OIBDA by the accounting profession, we adjusted, and we did a great job of managing operating costs, especially, you know, generating a very healthy CAD 83.4 million in the quarter. That represents a margin of about 16.9%. It's down about 1%, but I think we can make this up once we get these new acquisitions fully integrated into our network, which I expect to occur by year-end 2023, and that'll set us up, I think, pretty good for 2024. For more on the quarter, I'm gonna turn it over to Carson. Carson, it's your turn. You're up, buddy.
All right. Well, thank you, Murray, and welcome, everyone. Today, I'll provide the highlights from our second quarter, the details of which are fully explained in our second quarter interim report. Consolidated revenues declined by CAD 27.2 million to just shy of CAD 500 million, and was due to the net impact of four factors. First, revenue, excluding acquisitions and fuel surcharge, declined by approximately CAD 25.5 million due to lower freight volumes, particularly in Eastern Canada, and from the more normalized pricing environment compared to the elevated levels of last year. Second, fuel surcharge revenue declined by CAD 20.8 million, as diesel fuel prices decreased by 35% year-over-year. Thirdly, we disposed of our hydrovac assets and business in 2022, which contributed to a CAD 3.5 million reduction in revenue.
Lastly, somewhat offsetting these revenue declines was CAD 22.6 million of incremental revenue from acquisitions. OIBDA decreased by CAD 10.5 million to CAD 83.4 million, largely due to a decline in the LTL segment. OIBDA in our other three segments remained relatively flat year-over-year. Operating margin decreased by 1.1% to 16.9%. Let's take a closer look at how we performed by segment. Starting with our largest segment, revenues in the LTL segment were down CAD 17.3 million to CAD 193.4 million due to lower fuel surcharge revenue, lower freight volumes in Eastern Canada, and from a more normalized pricing environment. As a result, OIBDA was down CAD 7.9 million to CAD 34.5 million.
Operating margin decreased by 2.3% to 17.8%, primarily due to lower margins experienced by B&R, our most recent acquisition. The financial results of B&R contributed to almost a 1 full percentage point decline in segment operating margins. Our second-largest segment is our L&W segment. Revenues in the L&W segment were down CAD 13.8 million to CAD 142.9 million due to the continuation of the inventory rebalancing cycle and softer freight demand. Other factors contributing to the decrease in revenue consisted of lower fuel surcharge revenue and a reduction in revenue from the sale of our hydrovac business. OIBDA remained relatively flat year-over-year at CAD 30 million, while operating margins improved by 1.5% to 21%.
Operating margins improved due to the strong results at Kleysen Group and from the ability of us to use owner-operators and subcontractors more efficiently. Moving to the S&I segment, revenues were up by CAD 6.8 million to CAD 107.3 million, on CAD 13.3 million of incremental revenue from acquisitions, which was somewhat offset by lower demand for some of our services due to extreme wildfires, curtailing activity levels, and from the timing of certain turnaround and maintenance work activity. Lower fuel surcharge revenue and the sale of our hydrovac assets also contributed to a reduction in revenue. OIBDA, in absolute dollar terms, was relatively flat year-over-year at CAD 20.6 million. Operating margins declined slightly to 19.2% due to higher S&A costs as a percentage of revenue.
In our non-asset-based U.S. 3PL segment, revenues declined to $50.8 million due to lower freight demand in the U.S. for full truckload shipments. OIBDA decreased to $0.9 million, which was mainly due to higher S&A costs, as we added IT staff to continue the development of our proprietary software, known as SilverExpress. Operating margins declined to 1.8% on higher S&A costs. Operating margin on a net revenue basis was 18.8%, compared to 43.1% in 2022. Net income decreased by CAD 6.2 million to CAD 36.5 million, or CAD 0.41 per common share. This decrease was mainly attributable to lower OIBDA and from a reduction in earnings from equity investments, which was somewhat offset by lower income tax expense and a positive variance in net foreign exchange.
The number of common shares outstanding decreased in the quarter as we repurchased and canceled approximately 2.1 million common shares for CAD 31.5 million, or an average price of CAD 15.11. We continue to generate strong cash flows in excess of our operating needs, as net cash from operating activities in the second quarter was CAD 88 million, an 80% increase compared to CAD 48.8 million in 2022. This increase was mainly due to the changes in non-cash working capital items. Our balance sheet remains very strong. Our debt to operating cash flow covenant under our private debt agreement is at 1.95 to 1.
We have a total of $250 million of bank credit facilities available to us, of which we had $115.7 million drawn at the end of the second quarter. With that, Murray, I will pass the conference back to you.
Thanks, Carson. As we get close to wrapping up this morning's official commentary, I'll now provide some thoughts on how we're looking at the market, the economy, and our business. In this quarter, I'm gonna keep it quite simple, because our outlook really hasn't changed from Q1 presentation back on April 27th, 2023. I invite any interested listener to check out the transcript of my comments last quarter, and you'll see that really, the outlook really hasn't changed much. We still view the macro picture as stable, but risks become more elevated each hike in interest rate. We continually ask ourselves, when will the consumer break? I can tell you from what we've seen thus far in 2023, they haven't done so yet.
As such, it's reasonable to assume the economy will continue to grow, perhaps slowly, but it still looks like there's some growth. Under this scenario, freight demand will remain under pressure and probably until manufacturers, shippers, and retailers begin to restock inventories. As I commented earlier about what happened last quarter, it was a lot of the loss of freight demand was not in consumer demand. It was really about businesses adjusting inventories. I can tell you, the warehouses are emptying pretty fast these days. Eventually they're going to have to restock inventories if the consumer's gonna keep spending as they are. This suggests that our LTL and LMW segments will continue to perform, I think, at levels consistent with this past quarter.
Truthfully, I think our number one challenge will be in finding productivity gains to alleviate cost pressures that have built up over the last couple years. We're 100% focused on that, both at the corporate offices and in our business units. The U.S. 3PL segment, and what I'm referring to here is Holistic. They're going to continue to be impacted by the most by the freight recession. I think the good news is that this is a non-asset and non-asset-based business, and the senior team at Holistic, they focus simply on one thing, that's managing the spread, and that's the difference between what the market offers and the price the subcontractors are willing to work for. Thus far, there is more capacity than there is freight, which means the contractors are very price competitive.
However, our margin will suffer a little bit because we are focused on the long run, and we've added new IT talent to the team to help build out SilverExpress 2.0, and that increases your S&A expenses in the short term. This is so unlike our competitors that are downsizing, and that's really for one reason. We believe the future of the 3PL business lies in the technology offering. Turning now to mining and energy. We see these as growth areas, which is why we are optimistic that our S&I segment will continue to exceed last year's performance. At least that's our expectation today. On the corporate front, well, we're going to continue to balance the balance sheet, as Carson says, with a high degree of respect, that the market could be vulnerable to a slowdown.
If this were to occur, having a strong balance sheet would be very, very strategic. We will, however, continue to pursue acquisitions that meet our three criteria. That is, fit, the right price, and we must find synergies. We have a great book of business, an excellent team throughout, and we're well positioned to be very opportunistic, because I can tell you from the calls we're getting, there's some people are getting stretched. Thank you. I'll now turn the call over to the operator, and we'll go straight to the Q&A session.
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. Our first question comes from Konark Gupta of Scotiabank. Please go ahead.
Thanks, operator. Good morning, Murray, and everyone.
Good morning.
Morning. Good quarter for sure. What I wanted to understand was, you know, the L&W segment had a pretty good margin, and as Carson pointed out, it's a Kleysen Group that had a pretty good performance in the quarter. Which is not surprising. The transport business seems to be good. I'm just wondering, how sustainable is this margin performance at Kleysen or at the entire segment? Like, do you see any signs of, you know, I don't know, maybe the cost or pricing, you know, pressure or tailwinds on either side? How should we think about this segment in the next six to 12 months?
Yeah, it looks, you know, it looks like that segment, we've got some competitive advantage in that. Number one is the Kleysen Group, as we talked about, they've got a very strong book of business involved in transload, and those are assets that not subject to the same market pressures that because there's not a lot of competition. Very few strategic transload operations. We've got it. We're not subject to the same pricing pressures that you might have in the, in the general consumer, general business. That's a, you know, that's a good sign for us. The other one is the Bandstra Group is included in that.
Our two biggest businesses there are Bandstra, which is tied to the mining business in British Columbia, which is going through a bit of a growth spur right now, because, you know, if you're going to move towards if you're going to look at energy, you have to think mining and energy are correlated, because if you're going to move towards cleaner forms of energy, well, you'd have to find the minerals and the metals, which is through mining. It's not through just asking for it. You got to go find it. Mining's got a bit of a, has got some good tailwind with it for the next bit, and Bandstra is very well positioned in British Columbia, so that was a very good acquisition. Those two are doing very well. The rest of our businesses, Konark, we kind of manage the spread.
We have a lot of owner-operators in there, use a lot of subcontractors. Our business units just manage that spread. You've heard me talk about that. If you have all company trucks and there's price pressure, well, you're going to take it on the chin. Right now, it's the one that owns the truck that's taking it on the chin because there's too much supply for how much demand there is. We can still maintain margins. Revenues are going to be down a little bit because of fuel. They're not, you know, that's not really load count. That's just a flow through. All in all, not too bad. From that, I think it's going to be pretty stable on there. At least that's my projection for today.
That's good color, Murray. Thank you so much. Just to follow up on the trucking market in general. You know, your segments kind of give us an indication as to, you know, how the Canadian market is a little bit different than the U.S. market, clearly, and it seems like the U.S. market went up a little bit higher last year, and it's coming down from that cliff, perhaps. What I wanted to understand on the U.S. side was, there's a situation right now in that market where there's a very large player, Yellow, is going through a major labor and business uncertainty at this point.
Has there been any change that you have noticed in your U.S. 3PL segment because of the Yellow situation at this point, and what are your thoughts on that whole situation?
You're, you're right. That's a headline news item, and Yellow has... You know, they're a big company, and, but they've always been on the edge of not doing well. There's reasons. I don't know what they are, but they're having some real challenges right now because of the market and because of their labor issue. What we are seeing right now is, customers are shifting, and they're shifting some of that business. That, that is not if I'm Yellow, that's not a very good situation. That's not new demand. That's just a shift in demand. There will be some winners and some losers of that. We don't do any business with Yellow in our network, in our LTL network.
We do business with some of the other LTL carriers, and we provide, like Estes Group, we have a, we deliver their freight in Canada for them. Estes, their load count is going up even though the market's not going up, and that's most likely a shift of freight from Yellow. There's a shift going on, and that's a, that's a specific market issue there. In Canada, you know, our biggest issue that we've got up here is probably got to deal with, you know, with disruptions on the ports and stuff like that. That's backing up, you know, inventories coming in.
There's too many ships waiting to come in. I can tell you that the side effect of that is our warehouses are amping up pretty fast. You know, that could resolve the Canadian freight recession awfully quickly, is from my perspective, because our inventory levels are being drawn down pretty fast. End consumer demand has not changed dramatically, the consumer still seems to be pretty good. That's what we're seeing.
Great. That's very helpful. Thanks for the color. I appreciate it.
You bet.
Our next question comes from Kevin Chiang of CIBC World Markets. Please go ahead.
Thanks for taking my question, and I'll let go of Conor's comments. A good second quarter here. Maybe if I extend out the questions related to your comments around Yellow. You know, obviously, LTL has been a focus area for you here in Canada, and you do a little bit of it through your brokerage arm in the U.S., you know, on the 3PL side.
Yep.
Do you think with the potential bankruptcy of Yellow, that that opens up the door for you potentially taking a step into the U.S. LTL market? Is that a market you'd be interested in? You know, it's much more consolidated, much more rational. You've had great success here in Canada in consolidating the market north of the border. Does this accelerate maybe a timeline to enter into the U.S., or is that something that doesn't interest you?
No. If you're going to get into the LTL business, Kevin, you're going to have to go big. You can't fart around.
That, that would be such a big step out, so We, we won't enter that freight. That, that doesn't make any sense to us. Where we are gonna move freight in LTL is through our Holistic Group. We don't move the freight. We help customers drive the best value. That's what our technology's about, because the little customer is gonna get squeezed here. you know, Holistic is just a, they're a bulk buyer, and they manage the spread on that. Holistic will benefit. They're being awfully careful about using Yellow right now as a contractor. That, Kevin, I'll be honest with you, that business will be gobbled up in a heartbeat.
Right. Right.
yeah. It won't take, it won't be as disruptive as what people think, I don't think. You know.
Right.
That's my, that's my personal opinion. Those other, those facilities, if they do go into it, those facilities will be gobbled up by somebody else, and it'll be disruptive for a few quarters, but, you know, that's. Even as big as they are, it's not huge compared to the total size of the market.
That's great color there. You know, the one thing I did notice, you mentioned this in your opening remarks, how we're in a freight recession. I appreciate Canada might be a little bit different than the U.S., but the one thing that did stand out to me is if I look at your LTL margins in 2019. I appreciate there's M&A in here, and, you know, fuel surcharges will kind of whipsaw your reported margin. If my numbers are correct, it looks like you did something like 15.5%, just a tick over 15.5% in margins in 2019.
If I look at the last three quarters here in LTL, you know, you're kind of in the 16.5% to 17% range, despite the fact that we're in a freight recession. Just how do you think about your margins in LTL here through the cycle? Is, do you think you're kind of at a It seems like you're at a higher high maybe, or a higher high and a higher low here through this cycle. Just wondering if you'd agree with that you've kind of taken a step function, maybe 200 basis point step function increase in your overall margins, you know, through the cycle?
Yeah. We're gonna increase margin in LTL over time. You've got to remember, I think, you know, really our investments in LTL have really only been over maybe the last 10 years or something like that. I think we're in the early stages of building out what you need in LTL, which is you need lane density and critical mass, and you got to have the right business units. I think we've done a really good job of getting some great businesses in our organization, and I think we're in the early stages of finding our stride.
Doing that. For example, I'm out in Kelowna, right, in Kamloops right now, in a brand-new LTL facility.
That's the future, and we are building for the future and, you know, we don't build facilities to make no margin. We're very optimistic that we'll build the lane density and get the critical mass that's required. You know, our business units, they're running a good job.
Margin will improve in LTL over time.
We will continue to do tuck-in acquisitions, which when you do those tuck-in acquisitions, the smaller little one, there's a consolidation trend going on, guaranteed. Is that we'll be able to build the density within our group, but number two is you get rid of an undisciplined competitor.
Right.
When I say undisciplined, I mean, they're very price competitive. In this new day and age, you got to have the technology platform to be able to integrate in with the big shippers. Whether that big shipper is a another carrier in the U.S., like Estes, we're totally synergized between the companies and the data flow, and then to their customers. Little companies just cannot get that, so they're boxed out.
B&R is a perfect example of that. They're in the LTL business. You know, they haul a lot of LTL freight in northern Alberta, and they don't make any money at it.
I guarantee you, within our network, we will make money with that. Yeah, we have a long-term game plan in LTL that's really good strategic facilities and build lane density and critical mass, and I think we're in the early stages. I mean, if you give me 10 years, another 10 years in the LTL business, we're gonna be a lot. It's not gonna be 16%, 17% margins.
I can tell you that.
That's helpful. Maybe just one more for me, just 'cause you're in BC there and with the opening of a new Apps facility, just maybe how you're looking at the BC port strike and maybe how Apps is managing it, given, you know, they have an intermodal agreement with CN, and maybe how quickly you think you can recover from, you know, from this disruption here?
Well, thus far, you know, I think the biggest disruption, Kev, that I've seen is there's not any inbound freight coming into our facilities.
That's why I say to you, most of the freight that we're hauling now is emptying out the warehouses. The problem you have with the port issue, and this is a regional issue. This is not like COVID, which was a worldwide issue. This is a regional spat, it's gonna impact Western Canada the most, including exports. There's bottlenecks. I'm sure that will be resolved, right now, what it is, there's lots of inventory, there was lots of inventory in the system. Guess what? In Western Canada, that's cleaned out now, 'cause there's nothing coming in. It's all sitting on the ships, I think they can only offload maybe one, maybe two, at best, ships a day.
Okay, that's good to know.
It's, you know, you got quite a few ships, backed up there right now, so this could take, from the port, from the flow of traffic, it could take quarters, not weeks.
Once it gets resolved, and the port workers go back and become productive again. The worst-case scenario is they go back to work, they're mad, and they're not productive, and things just get extended out, and that's just gonna increase the cost and hurt a whole bunch of people down the line.
No, that makes sense. That's a great color. Thanks for taking my questions, Murray and team.
You got it. Thanks, Keith. Appreciate it. Bye.
Our next question comes from David Ocampo of Cormark Securities. Please go ahead.
Thanks for taking my questions, Murray and team. I guess the first one I have for you guys, I mean, when we look at the seasonality of your quarters, Q3 is typically stronger than Q2. Just based on the commentary that you guys made about inventory levels normalizing and probably the progress that you've seen in July, should we expect those normal seasonal patterns to persist this year?
You know, it's complicated. You know, my instinct is it's gonna normalize. There's always, you know, things that can happen in the market. Let me tell you, I drove out to Kamloops last night. I don't want anybody telling me there's no freight moving. There's a lot of freight moving on the highways. I still think the consumer is doing well. I think so long as job, you know, that we don't have a deterioration in job losses, I think this market is finding a new equilibrium. I think that we're gonna be back in balance. It's gonna be a more competitive market than 2023, than 2022.
Okay, drive your synergy, be in the right business model, be in the right lanes, and I think you'll do just fine. You know, I think we're in pretty good shape from that perspective, the way that we've built our business and that diversification model. The other is, we're gonna be very, very opportunistic. Some parts of this supply chain are getting whipsawed here, and those people will get into trouble, and we'll take the long-term view and say: Okay, are those good long-term returns on investment? We'll look at putting capital to work on those markets.
No, that's helpful color. Maybe I can ask the question another way. I mean, if I take a look at your H1 performance, you guys did CAD 160 million of EBITDA, kind of reached that CAD 300 million target that you guys have been alluding to. It kind of suggests that H2 would be down 12%. Are you looking at that CAD 300 million number as more low-hanging fruit, then?
Well, as I said in my commentary, I mean, in the press, I go, "Well, you know, if it keeps going the way it's going, I guess my CAD 300 might be a little low." We always said: Look, we don't know if it's gonna be 300. What we're running our business on and our balance sheet is if it's gonna be 300. Thus far, we're ahead of that curve. You know, we feel pretty good and pretty positive. You know, we're running it as if it might happen, but that consumer is, keeps defying the odds, and the economy keeps defying, so I might have been too cautious at the CAD 300. Thus far, I'm wrong. I'm wrong.
You know, if you took Q1 times two, that's CAD 320, not CAD 300. We got a great business. We just were running it as if it was gonna go down to CAD 300, so what we did is we pivoted to focus on cost, and we watched the balance sheet. That clearly was the right move, which is why we maintained the way we did. As we're looking at now, we're saying: Okay, it appears that the market's adjusting to 5% interest rate. I don't know how the consumer's doing it, but they're doing it. 'Cause businesses, you know, you see from our numbers, it's still pretty robust. Take out fuel, you know, our revenues weren't down that much.
No, it's helpful color. I'll hop back into you. Thanks a lot, Murray.
All right. Carson, you got anything to add to that?
No, no. I think that was spot on, Murray. No, nothing to add.
Our next question comes from Cameron Doerksen of National Bank. Please go ahead.
Yeah, thanks. good morning. I guess in the MD&A, you sort of highlighted in the specialized and industrial services segment that there was maybe some impact from the Alberta wildfires. I don't know if there's probably no way to quantify that, but just maybe you could describe what impact that had, and is there any kind of lingering impact from that might affect Q3?
I don't think so, Cameron, to be honest with you. I think there was. You know, there's always some type of an event or something that slows things down for a little bit. You know, those were for what? A few weeks, you know, maybe a month, where it was disrupted in certain pockets. It just slowed things down a little bit, and all you do when you slow things down is it just backs it up and puts it into the future quarters. I think the market's fully recovered from that now. Some of the communities have not. They're still struggling with some of the residual effects of that, but I think business, I didn't see any real damage to infrastructure, and it certainly wasn't none to our infrastructure.
I don't think it was kind of a, you know, a situation that happened just in that quarter. I think it won't impact us this quarter.
Okay. No, that's great.
This quarter, you're gonna be impacted by the strike on the West Coast port, because you can't get exports out either. You know, we're having some of our transload business be impacted by that because you can't ship the product that's going out. You know, we put it onto rail, it goes to rail, onto ship, and out to Asia or other parts of the world, that's being disrupted. There's always something, and I'm just hopeful that some common sense prevails here, and the, you know, the workers there understand is that you're, you know, don't be too greedy here because you're gonna impact a lot of other people and a lot of other businesses, if you get... We need them back to work. That's. Then hopefully they will.
Yeah, certainly it sounds like it's moving in that direction, that's good news. Maybe my second question is just around M&A. I mean, you commented a little bit on it in your prepared remarks, maybe just talk about the outlook. I mean, you've kind of indicated there's quite a few, you know, businesses giving you a call. Just where are the opportunities now? What's most interesting? Are valuations, you know, coming down further, given maybe some of the disruptions for other businesses in the freight space?
Yeah. Let's look at it from each of the different perspective, or each of the segments. In our LTL business, we'll continue to do tuck-in acquisitions like we did with BNR. We've got some other ones that we're looking at that will add density and lane capacity and get rid of an undisciplined competitor in some of our other business units. We've got some of those files, and we're working through those right now. That's my preferred way of doing, just layer them in. I'd only increase cost. I get business, and I get rid of cost, and I drive margin. I get rid of a, you know, I just get rid of the undisciplined competitor. We'll continue to do that in L&W.
Probably no big homeruns in that one, unless, you know, somebody gets a really good opportunity comes up, and then we'll make a big step out in that to expand our coverage across Canada. We got a great footprint from the greater GTA all the way out to the West Coast, so we'll continue to add in there. In L&W, we'll be opportunistic. I really like transload assets. If we find them, I'm on them, because that's your path to the future. Really good business. U.S. 3PL, we're not gonna buy anybody in that. We're gonna focus 100% on building out the technology, because, as I said, that's your competitive advantage of the future, is in the U.S. 3PL, it's all on the technology platform.
That's why I kind of refer to U.S. 3PL, Holistic as our, as our technology group, not our logistics group, because if you don't have the technology, you're not doing the logistics. We're focused 100% on that, not on doing acquisition there. Acquisitions will come after we get SilverExpress 2.0. In S&I, those are your best opportunities right now, because it's still... You know, energy business is still not reflected by investors as being a good business, and those are your best opportunities. You get good cash flow, and you don't have to pay a lot for it. The market is not pricing those assets as if they're generating cash or that they will generate cash, I guess, and which is why we bought B&R.
I mean, that, you know, we're, you know, you're talking at maybe two to three times EBITDA, not six or eight or 10.
Right. Okay.
So-
That's, that's very good.
Yeah. Each one of them has a different, there's a different denominator that works with them. In the freight business, general trucking business, it's difficult to peg that number right now because I can't tell you, when does pricing leverage come back in that? If you don't get pricing leverage, you're just trucking. You're just generating revenue, you're not generating bottom line. That business is ultra-competitive, which is why we're not in that business a whole bunch, Cameron Doerksen. We're in different verticals where it's not quite as competitive. I think that's the power of our business model. We built it up over 30, 40 years, and it's not just, it's not by chance. That's why the diversification is pretty good.
Yeah, absolutely. No, it certainly shows in your results, outperforming pretty much all other trucking companies. Appreciate the color. Thanks very much.
Thanks, Cameron. Bye-bye.
Our next question comes from Walter Spracklin of RBC Capital Markets. Please go ahead.
Yeah, thanks very much. Hi, Murray and team. I want to kind of simplify your outlook that it was provided when you first gave your guidance to what's changed so far. I guess when you're looking at your outlook, you're probably looking at three factors. You know, the inventory destocking trend, the consumer trend toward more services versus goods, and a potential recession as kind of drivers of your lower, you know, kind of CAD 300 million target. Now that we're trending more toward a CAD 320 million, as you mentioned, what would you say would be the biggest change of those three buckets? Is it that you built in a recession that you're not seeing manifest?
Is it consumer pattern shifting back to goods a little quicker or inventory destocking? I know you mentioned that you're seeing the warehouses start to come down. Is that the factor that is the biggest differentiator versus the assumptions you had at the beginning of the year? Just curious as to what's?
I think Walter, if we go back and we look at it, and we said, look, we thought that the biggest factor that was gonna change in 2023 was in pricing. Because if you go back in and we said, "Look, we're still gonna do CAD 2 billion in revenue." Well, guess what? We're on target for CAD 2 billion in revenue, because that's what we did last year. It's not the revenue, it's the competitiveness that we thought, and some of the, you know, some of the surge pricing that was happening when you had, you know, this massive, these big bottlenecks that were happening, and customers would just get it done. Well, that's over.
We're now back to a competitive marketplace, that's where we thought the biggest challenge was, would come from, is from that side. You know, for the most part, we were right on that. It's in the pricing side that you're getting hurt. I didn't know what was gonna happen with fuel, we projected it was gonna be, at best, flat. The biggest surprise is fuel is down. The economy's held in pretty good. The consumers, God, they're resilient. I'll tell you, the biggest thing is business readjusting to the inventory levels. They totally screwed up the last cycle during COVID. I think they're overshooting again, this time to the downside, that might get... You might find that they're gonna have to go back in.
Retailers are gonna have to go in and start restocking their shelves pretty quick. because the consumers, we're still moving freight.
It's not coming in as fast, as fast as it's going out.
just to clarify, you thought pricing would come down, and it just hasn't come down as much, which is why we're-
No, pricing has come down. You can see that on our LTL side. You can see that in general trucking. Where we did fine, as we said, our S&I was gonna do fine, and our L&W did fine with our transload and that. You can see in our LTL side, it came down.
I'm trying to figure out what made your numbers go up? What was the difference between what you were-
S&I.
Okay.
S&I and L&W. Yeah.
Got it.
Our mining and energy business is doing better than what we had originally thought.
Okay.
We're overachieving on that side.
Really, when you look at LTL then, you haven't seen the way it's playing out as you expected, and really the upside here is if that inventory destocking trend, as you flagged in your opening remarks, if that continues, and if even so, as you just mentioned, if they overshot on the, on the other side, then we could see, perhaps in the fourth quarter, early, or early 2024, a nice rebound.
Normalization.
A normalization-
Yeah.
versus what you've been assuming in that CAD 300 million. Okay.
I think that is a reasonable assumption.
Perfect.
So long as the consumer stays healthy, and.
Yeah.
-we know that what keeps the consumer healthy is a job. If they have a job, they're still gonna consume. What are they gonna consume on? I don't know. But, it's all in the job numbers, and thus far, it's pretty healthy. It's in-
Okay
It's in balance right now, Walter. I think that's what you're seeing in our numbers, is pretty healthy balance. As I say, that's why I say, compared to our five-year average, just to the surge of last year, which was a one-time event, take a look at it and you're seeing, man, you're outperforming your historical numbers pretty nicely there, Mullen Group.
Absolutely. No, I appreciate the time, as always, Murray. Thank you.
Thanks, Walter. Good chatting.
Once again, if you have a question, please press star then one. Our next question comes from Tim James of TD Securities. Please go ahead.
Thanks. Good morning, everyone, and congratulations on a good quarter here. Just wondering if I could return to... I guess I'm thinking about M&A when I ask this question, are you seeing, Murray, any signs in Canada, of competitors that are struggling? I mean, you mentioned some opportunities that you've got, one that's being disruptive in the market. Are you seeing any players in the industry that are struggling, and maybe you will get opportunities from that eventually?
Yes. If you overextended yourself in 2021, 2022, and thought that that was the sustainable market, you overextended, you're now in trouble. Those are the ones that will pay a hefty price in this market, because the market has now normalized. If you thought last year was gonna be the new trend, you're probably in a lot of trouble. Yes, and does that mean the whole industry is in trouble? Not a chance. It's a, it's a bifurcated market. If you positioned yourself well, you can ride through it. If you didn't, the banks, you know, cost a lot more money to borrow today, and you're getting squeezed. What we look at is, we don't want business that just generates revenue.
We want business that layers into our network, so we can drive margin. That's our number one target, is companies that will fit into our network with our teams, that will drive our bottom line, not just our revenue. We don't chase revenue, Tim. That's a fool's game. We chase margin.
Okay, that's helpful. My second question, looking to the U.S. 3PL business and the work you're doing there, investing in SilverExpress. Is there kind of a timeframe that you have in mind with those investments when your margin, I don't want to say matures, but kind of normalizes, or maybe those investments start to slow down and you get what, again, would be more of a normalized level of profit margin in that business?
Well, if you're our senior team at Holistic, Pat Malone and his team down there, they hear from me. I want to normalize next quarter. However, they say, "Well, Murray, we're still fighting a few headwinds here." But they're working on the long-term game plan, Tim, not the next quarter. I can't. When you think of technology, you can't think of quarter, you think of the long game. I can just tell you, I am very pleased with the initiatives that they are undertaking. Their business was not down as much as the U.S. freight business, which you look at all of the other providers that are gonna be coming out, I bet you any money, they're down 15% to 20%.
Our Holistic is not down 15% to 20% because they added new station agents. We are gaining market share, but we're building for the future so we can gain more market share and be one of the number 1 players in the U.S. 3PL business. I encourage them to keep driving hard, and as I tell them, "You gotta beat the competition to the puck." We got the team down there that can do it, so I'm pretty pleased there.
Great.
I don't think of it in terms of a quarter. I think of it in terms of them, that's the long term. That's our long-term game plan, down in the U.S. market, is to build out, critical mass down there.
Absolutely. Okay. If I could just sneak in one last one, Murray, I'd be curious to get your thoughts today on sort of the inflation environment. You know, clearly we're seeing headline inflation slowing, and I'm not thinking so much about, you know, trucking rates and that, 'cause we know what's going on there. I'm thinking about other parts, maybe the cost side of your business, whether it's labor, technology, equipment. Are you seeing sort of easing inflation in your cost structure as you sort of sit here today and look forward?
We, Richard, I'll have Richard chime in here. Richard and Lee Hellyer work with the OEMs on the equipment side. The OEMs, Rich, they've come to us and tried to push pricing, and we're pushing back on them because our customers are pushing back on us. I think that we see that stabilizing. Richard, am I right on that?
Yeah, you know what? Absolutely. Tim, you know, with respect to OEMs, trucks, trailers, and things like that, you know, if you come the beginning of last year, they were telling us we're gonna have to wait a long, long, long time, like just about a full year, to get some stuff. Now, they're coming back saying, "Hey, we might have some equipment that's coming available." Some of that is related to other operators throughout Canada that cannot take the order for whatever reason, and whether it's trailers or trucks. Yes, Murray's absolutely correct. Then we're pushing back with some of these OEMs, the trucks guys in particular.
We're seeing some break in the, you know, the commentary you hear from the OEMs talking about, "Oh, it's gonna take 12 months to get a truck," and we're starting to see those orders becoming available. We're getting a little more aggressive with the pricing side of this from our perspective, where we're saying: You know what? We need to, we need better pricing. Murray's right, you know, the customers are coming back at us with, you know, in certain regards as well. I guess it's more telling of the OEMs and that they're calling now, looking, saying, "Hey, I may have another 150 trailers available" that was not even in the works in January and February. Again, we're seeing some of these.
orders not going to the customers that thought they wanted them. Their costs have gone up, their costs of borrowing have gone up, their capacities to borrow have come down. It's, we'll be timely on that, and we're not acting on that at this moment, but we will at the right point in terms of buying this equipment. I think it's important to point out as well, that, you know, some of the costs that have gone up with labor, you know, they're not coming down. These are sticky costs, right, as well.
When Murray talks about, and we talk about margins, I mean, that's our focus, because as we move forward, you know, there's not gonna be any major reduction in the actual how much we have to pay our people, because those are, those are sticky as part of this inflationary environment here as well. I know these are all part of the, you know, the world we live in, and then we just adjust our pricing accordingly in the business model and the size it may be and where we're gonna be doing that work.
There's Tim, there's gonna be pockets in this economy where you're gonna have. Still, labor's got some advantage. They're gonna drive nice increases. I'm thinking in airlines, I'm thinking railways, I'm thinking ports. You know, those are kind of monopolistic kind of markets. They're gonna get higher wage improvements than the general population. Overall, though, we see it moderating. There's a little bit of catch up, and you're hearing that from some of the contracts that are coming out. That's because in the last market, if you had a labor contract, well, they didn't benefit when prices went up because they were locked into a contract that they negotiated the last time. They're playing catch up.
Well, most of ours are non-union. We went to the market. We paid people more money. I don't think we have to pay our people more money now, but I think there's catch up in some of the union agreements that have to play, get caught up there, right? That's gonna catch a lot of the headlines, I think, over the next bit.
Okay. Thank you. Those are helpful insights.
Thank you.
This concludes the question and answer session. I would like to turn the conference back over to Mr. Mullen for any closing remarks.
Thanks, folks. Hope you enjoy the rest of your summer. We look forward to chatting with you in Q3. Hope everybody has a safe and really happy summer. Take care.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.