Aaron, you ready to go?
I'm ready.
Okay. All right, I'm showing 2:00 P.M. everyone, so we're going to start with our next fireside chat. Matt Olney, Stephens here, and we're with Triumph Financial. And up here with me is CEO Aaron Graft. So Aaron, thank you for being here. We appreciate your attendance at the Stephens Conference. We want to keep this kind of open here in the room. But Aaron, I'll turn it over to you initially. Any opening remarks you want to make? Just thoughts on the outlook here?
We are in month 34 of a freight recession that was supposed to have ended two years ago, and then last year, and then this year. I am probably less optimistic than most, especially of my friends who were at the transportation dinner last night. I understand why they want to be optimistic on that. I think this is a supply-side problem, not a demand-side problem. We are just not seeing supply exit the system as fast as would be necessary to have a strong rebalance. In the short term, as of right now, things are marginally better. I will grant you that. I just don't know if I see that continuing through in 2025. Hope so.
So it sounds like no predictions this year on the economy.
I never make. I just tell people, you know, we just, we try to be, if you read our shareholder letters or novels, as some people call them, we just try to be like, it is what it is, so what is it? And I'm telling you, the data we see does not suggest that you've had the 15% capacity reduction I think you need.
So let's keep going with that. We're looking for market equilibrium. We're seeing capacity move at a very slow pace. It's not accelerating as of yet. So what do we need to see in terms of to get to the equilibrium? What are some things that you're watching for in the data that suggests that we're getting closer?
One of the places I would have been wrong is I would have thought that we report factoring as a segment. If you go back to two years ago, I think we had 10,000 customers, and you got to understand, not all customers are created equal. In that segment, 80% of those customers have one to four trucks, and 20% of those customers are almost like miniature ABL clients. They have 100 trucks. Today, we have below 8,000 customers in that segment, so I would have told you that 20% attrition by customer would have meant an appreciable number of reduction in capacity, but it's not the truth. We are buying more invoices today from the same amount of customers that we did before, so what that tells me is that these small carriers, some of them are surrendering their authority, their motor carrier license.
So they're ceasing to be an independent owner-operator, but they are going and leasing on to a larger trucking company. And so the truck is just moving from the owner-operator market into the small fleet market. It didn't really leave the system. And what I would need to see is more of that capacity to leave the system. Because our average invoice right now, and ours are a little distorted because we have more contract freight in our invoices than other factoring companies, but average invoice size $1,750. Diesel's down $0.71 a gallon year over year. But we think the break-even rate for any small owner-operator to earn their cost of capital is over $1,800. And we haven't seen $1,800 in three years. And new equipment costs 30% more than it did four years ago, three years ago. So it's just remarkable the ability to hang on.
But the hanging on is what is making it just a slow bleed, right? This is the longest down cycle in trucking. It's not the sharpest down cycle in trucking, but it may be the longest before it's all said and done since deregulation in 1980.
So network density, you've got this goal of getting 50% of brokered freight. You're at 48% last quarter. You've got the C.H. Robinson volume coming on. So it feels like that 50% goal is very achievable. I guess, how do you think about that number throughout 2025?
Yeah.
Why is that a cornerstone of success for TPA? Why do you need that first?
Yeah. And so just, you know, for those in the room who are engaged in transportation. So let's just also acknowledge we're talking about the truckload brokered market. So there's the shipper, the contract market, that's probably $250 billion that's contract. Of course, there's the market that also like people like Walmart who own their own trucks. So I'm not including that. Truckload brokered freight's $110-$120 billion market in the United States. That excludes LTL, excludes parcel, just truckload. We touch, and by the first quarter of next year, over 50% of all transactions. So why is that important? Number one, no one in the history of brokered freight has ever touched anywhere near that density. They have seen loads posted. They may have some insurance data.
But when you actually see the density and what the actual payments were, that is a data set that has historically never existed. And so I've watched with a lot of interest, you know, just academic interest and for my own shareholders' interest, Freight Tech go through all of its machinations since Convoy and Uber Freight came and, you know, all the things in the Freight Tech and the digital freight marketplace concept has been around for 10 years, right? I mean, this theoretical world in which we can digitally match freight without human beings, so we therefore don't need to pay account reps at brokers, carrier salespeople. And it's never worked. And I think a reason is the lack of density. Anything you're ever going to do in a fragmented vendor base, and trucking, mind you, is a very fragmented vendor base.
There's probably 140,000, 150,000 active small trucking companies. Don't believe the FMCSA data. There's a lot more names than that, but they're not all active, and it turns over 20% a year. You need density in order to be valuable, and so our customers are the freight brokers, right? I pay carriers, treat carriers well. We have factor carriers, you know, the customers that we factor. But my allegiance is to the brokerage industry. That's who I serve, so that's who we pay. That's who we do audit for, and, you know, I think getting to 50% allows us to do some things for them. We're not ready to talk about all of them publicly now, but to give them some data to help protect them from fraud, which has gone crazy since COVID, and to help them reduce friction, so that's why 50% is a number we focused on.
Okay, and you disclosed that C.H. was one of your newer clients a few months ago. You're now onboarding C.H., I believe. What else can you tell us about just the early impact of C.H. and the onboarding process versus maybe the initial expectations?
Yeah. So I mean, we chased C.H. Robinson as a client for a lot of years. I can't tell you how many seafood towers and steak dinners have been involved in that chase. They have $8 billion of purchased transportation in North America surface transportation. They're their NAST division. They're the largest by far and well-known. And others are growing. You know, but they are still the largest. So C.H. is interesting, number one, because we are onboarding $8 billion of payments volume, which will push our payment volume as a company to $35-$36 billion that we actually are moving the funds. And it will push us to things touching our network to over that 50% number, right? Not in all, we touch a lot of loads where we don't actually move the funds. But doing that with C.H. is great.
And then we announced two things with C.H. Robinson that I think are really important. Number one, factoring as a service. We are the second largest factoring company. That's how we got into transportation. That's what if you followed us, we've been known for. If you want to know why our net interest margin is on an outlier compared to the rest of Matt's coverage universe, it's because of that. Well, we always thought that we didn't just think, it's been expressed to us, the large freight brokers wanted to enter into the factoring industry. Because if you think about it, it's supply chain finance. And it's frustrating to them to run a 2%-3% margin business and then an invoice they're paying get purchased by a financial intermediary from their truck who's making a 20% margin. Like that's just discouraging.
And what they could never do or never were willing to do was to build the infrastructure it took to actually stand up a factoring company. Because you can't just casually do this, right? It's 1,700 invoices 24 hours a day, seven days a week, 365 days a year. And so our own factoring platform, which we've invested, I don't know, inception to date, probably close to $100 million of just in building, buying, and everything we've done, we've been working on and bearing the expense of creating it in a way that allows us to offer factoring to the brokerage industry, like Amazon Web Services offers infrastructure to anyone who wants to go build a new company.
Because if you are a startup and you want to go build a new company, you don't want to buy your own servers and compliance and, you know, and make sure the servers are up and all the things that go with that, you go to someone who's figured out how to do it all for you. Or maybe even a better analogy would be Costco wants to sell credit cards. They do sell credit cards, but they're not a financial institution. But they're great at acquiring customers, but once they do, they hand them all to Citibank, and Citibank does everything from that point forward. Well, factoring as a service is our take on that. So we do everything following the acquisition of the customer. And so piloting that with the largest freight broker in America, in the world, is really exciting for us.
Yeah, and then the other two initiatives we've talked a lot about recently are going to be Instant Decision and then LoadPay.
Yeah.
So, kind of weave into the conversation kind of why those two initiatives are so important.
Yeah. So when you buy an invoice from a trucker, you have two buckets of risk you're always managing. The least risky part of the proposition is the credit risk. The trucker is not generally a credit risk. We don't generally even think about the trucker's creditworthiness. What we care about is the creditworthiness of whoever hired the trucker. So if they're hauling, because I'm buying their paper, like this is supply chain finance, Article 9, if you buy an invoice, which is what we do in factoring, then I collect directly from whomever they did the work for. So if they're hauling for Anheuser-Busch, Coca-Cola, Niagara, C.H. Robinson, like there's no risk that they can't pay a $1,700 invoice when due.
We've bought probably $80-$90 billion of paper over 13 years, and our credit loss is less than 10 basis points, maybe 20 basis points, like just almost non-existent. So the real risk you're managing in factoring is, did the truck ever move? Was it a real invoice to begin with? So how we describe it is the account debtor, the person who hired the truck is your credit risk. The trucker is a fraud risk. And so after doing this for 13 years and losing money every which way is possible, we call it tuition. We didn't lose money, but it was tuition.
We have built a risk model that's really good at telling us if you start to sell us a bunch of invoices really fast, if you start to sell us invoices where we get paid less than all, if you start to sell us invoices in markets where you haven't historically operated, if you start to sell us invoices with account debtors you haven't historically hauled for, our system flags that. Well, historically, we had people doing that. But we've invested millions of dollars and a bunch of backtesting on years' worth of data to use machine learning. And yes, AI, and this isn't a plug for AI, but like literally the model was built. And when Instant Decision was created, is now our model ingests the invoice. They put it into the application, right? They submit the invoice.
We OCR the invoice or we already have it in structured data if it's inside the network. And then that runs through the model, and the model tells us whether or not to buy that invoice 65% of the time. And it is performing better than humans because it follows our risk parameters unfailingly. The other 35% of the time, humans get involved. We make verification calls, whatever we have to do. So what does that mean? Well, that means that we can buy invoices 24 hours a day now. Because historically, we don't pay for people to staff our factoring business after five or after six. And the reason you didn't ever do that after five and after six is because being able to instantly make a decision is a cool thing, but it didn't do anything for the trucker.
It never did anything for the trucker because if you missed the ACH deadline to get the money out to them, it doesn't matter whether the decision was made yesterday or this morning. It only matters to them when the money showed up. So we developed Instant Decision while we built LoadPay. And LoadPay was, you know, we're hardheaded. It took us a while to figure out we were a bank and that we've been a bank for 14 years. And it's dumb for us to ACH out billions of dollars to other banks where truckers have accounts and these other banks do not care about trucking accounts, right? A trucker is going to have $10,000 in their account. Like we were wiring money to competition we could have disintermediated over a customer base they weren't even going to fight for. So LoadPay is a virtual wallet.
Think Venmo for trucking. It sits inside of our ecosystem. Now we can move, it's just a ledger in our system. Well, if you couple Instant Decision with LoadPay, then you have what I wrote about in our last shareholder letter. We had a trucker drop off a load at 10:00 A.M. or 7:00 A.M. on Saturday of Columbus Day weekend. Now, historically, if you drop off a load on Saturday of Columbus Day weekend, you're going to get paid on Tuesday morning. He submitted the invoice. The system automatically read the invoice. The Instant Decision model made the decision to purchase the invoice, and we auto-funded into his LoadPay account by 7:01 A.M. on a Saturday of a holiday weekend. That has never been done before. I don't think there's anyone in the world besides us who can do that.
Now, someone else could run us down, but you would have to have the infrastructure to make the decision instantly, and you would have to have the rails to move the money instantly. And I just, you know, I'm talking my own book here, and obviously I'm biased because we've spent a lot of money developing this, but that is really powerful technology, and it makes your customer's life better. It's a product because that money got spent by that trucker on Saturday. You know, some truckers, believe it or not, they will sit at a truck stop for a holiday weekend because they cannot afford to fill up. I know that's hard for people in this room to imagine running a business with that thin of margin, but that is the real world.
And truckers can go about 1,700 miles between fill-ups, so that's every two days if they're actively driving because fuel efficiency has improved so much. Getting their money when they need it, where they need it, how they need it is really, really important to these people. And so that's what we built.
Yeah. Those are a lot of good data points, Aaron. I want to pause there, see if the group has any questions on some of those data points. Aaron, you've also mentioned your total addressable market, $500 million. Kind of update us on what that entails. And then more recently, you thought there was an incremental $500 million, so call it a total of a billion.
Yeah.
What does that entail? Kind of walk us through that.
Yeah. And I would encourage anyone who's interested in investing in us, we decked an investor presentation this morning, Luke. We're headed to Europe doing a European roadshow starting in a day. So here's how we look at the world. I don't know if this is the right way to look at the world, but this is how we look at the world. We say that transportation consists for us of factoring, payments, and data. Okay? Factoring is a $2 billion addressable market. We are $150 million of revenue in that market at a net margin of over 40%. That's what we do, right? We're the second largest factor in the U.S. I think you're going to see us grow for all the things we just said. We've also got C.H. Robinson now as a channel marketing partnership. Like we're going to get our growth in that area.
And I know historically that would have been considered a commercial finance business that didn't deserve the same kind of multiple. Catch me offline or talk to Luke, and I'll tell you why I think the way transportation factoring done now is more like embedded finance and looks very different than your traditional ABL commercial finance lending. So that market's $2 billion of addressable market, we're never going to be even half that market. We can't be. Like there's too many other players. The second market is payments, and we report that as a segment. $60 million in revenue, CAGR for the last three years of 30%-ish, right, Luke? Something like that. Touch 60% or touch over 50% of all freight. 21 of the top 25 freight brokers use us.
$250 million of that is our traditional B2B payments product, B2B audit and payments product where shippers and brokers are paying carriers or shippers and brokers are paying factors. We, you know, we pay both. We pay whomever we're supposed to pay. The other $250 million inside our payment segment is LoadPay, which we just brought to market. Third quarter of last, we announced it third quarter. We're in beta. C.H. Robinson, also a referral partnership for that. You should expect, and one of the reasons I think we win on this is we have distribution channels. You can build a great product in technology. A lot of people focus on building products, but you've got to think about distribution. Every freight broker who uses us for payments is a distribution model for us. And that includes 570 freight brokers, including 57 of the top 100.
There is no true incumbent that we're competing against. That's payments, $500 million. Then this has been out there. We have not talked about it at length. We will be talking about it more, and I will not get into specifics today. Data in freight is a huge market. Capacity data, rate data, fraud data, equipment data. Who wants it? Cargo insurers want it. They want to know, like they have questions. Freight brokers want to know if the person hauling my load is double brokering. Like there's so many questions that are not answered well in the gray market of trucking. We think the products we have in view to go bring to market. We think there's a $500 million market there.
So if you look at that deck, it's $1 billion plus, and currently we have $200 million of revenue of that $1 billion plus. And I think we have a really good sightline of how we go get the rest. And data is pretty exciting. We've been bearing the cost of preparing our data products. We've not talked about it. We've not segmented it. It's just been buried. And so as that goes forward, it will bring visibility to that. And we've gotten our payments business to an EBITDA margin positive. That's hard to do. I mean, at $60 million of revenue, it's hard when you think about all we've invested. And then this is all happening inside of a $6 billion bank. So yeah, that's how we think about it.
Just following up on the data monetization, is that something you'll detail more in the next few quarters, or is that more of a longer term, say multi-years, where we'll hear about that?
I think you'll hear about it. You should expect to hear about most of it in 2025.
Okay.
When we hit the market with it, yeah.
Okay. Perfect. And then on TPay, lots of investments in recent years. You've pulled back on some of those investments. You achieved EBITDA positive levels in the third quarter. You've talked about improving that, obviously, but it won't be linear from here. How much confidence do you have at this point that it will remain positive and we're not going to slip back into EBITDA negative territory?
Oh, I mean, I'm sure my Luke, our IR guy and our CFO are back there squirming, right, when you asked me to be positive. Over any reasonable period of time, the trajectory is up and to the right. Volume begets revenue begets margin. Volume is going to grow. We don't even have, we have 5% of Robinson's margin volume already on the network. There's 95% to go. Volume begets revenue. Our revenue growth, you can see it speaks for itself. And margin is what comes from that. So I am confident that a year from now, our EBITDA margin trends will be better than they were now. If some weird thing happens in one quarter, sure. But like the product is built. We're not out there selling vaporware. We move billions of dollars.
And so we want to make sure we continue to improve it and stay in a market lead. So yeah, I'm confident EBITDA margin will improve. And ultimately, we owe it to the street. We owe it to the people who buy our stock. I think that our payment segment should be operating at a 50% EBITDA margin or better. Our factoring segment already operates at a better than 40% net margin, right, because it's a finance company. Like net margin is not a perfect way to look at it. You could look at it ROA. You could look at it efficiency, however you want to look at it. But I think 40% net margin in that business. And then I think our data business should operate at higher than an 85% gross margin because we already have the data. I don't have to go out and buy the data.
I get the data. Factoring taught us how to do payments. Payments taught us how to do data. So we think about each of those has a different margin metric over time that is appropriate for what each of them are because data is more SaaS-based, payments processing. It's a processing base. It's not really a balance sheet business. It has some components of that. And then factoring is more of a traditional finance business in a way, but I think there's other components to it that are not.
Okay. Aaron, I want to pause there again one more time to see if there's any questions from the room. So we've got, I believe, in the third quarter, 63 factors on TPay, but you had one single factor leave TPay last quarter. I think as a result, the overall network transactions contracted last quarter. Can you help us out? What drove that customer to leave? And is it fair to think that there could be other customers who leave the system that could potentially slow the momentum as you go through this big migration?
Yeah. Yes. There's a risk that any of them could leave. The biggest problem is that 95% of the factoring industry operates off a, I don't think I'm allowed to say names here, a Jack Henry product that is terrible. It's called FactorSoft. It hasn't been invested in since like, I think, you know, George W. Bush was president. Like it's so bad. And I don't know if this is being recorded, but whatever. It's the truth. And the truth is an absolute defense. But there's not a big enough market for them to go invest in it. So we are offering them an API that has a tremendous amount of data in it. Like data that they could use to make instant decisions and all the things we do. They can't ingest it because the architecture of their, it'd be like trying to ingest it into a Fiserv-based product.
Like you'd have to build a wrapper on top of their factor management software, which is just cumbersome. And so that is the issue. They love the product. The data we can offer them is tremendous. It's the technology gap between what their system of record and what we are offering them, trying to speak to one another. This is again why I think FAS is going to be successful because you're using our stuff, which is cutting edge, can do make instant decisions, can see things. And there's no incentive to make FactorSoft better because, again, the market's shrinking, right? There's just not that. And then like they do certain things, and I probably shouldn't have said they're terrible. Still, I think it is. It's an antiquated technology. So that's the technology gap.
So we have to think about how do you value what is the value proposition to a factoring company? Because we want, we don't want to be the only factoring company. There should be other factoring companies who serve small truckers. How can we give them the data they need in a way they can ingest it? That is the biggest thing we're trying to solve.
Okay and then another big initiative right now is NextGen. We've talked about a lot of legacy customers are using the legacy audit product as well. You have the opportunity for customers to upgrade to NextGen. Kind of tell us why that initiative is also important for TPay.
Yeah. Well, what you want to do, if you want to give, and there are other really good audit providers in the marketplace, so you have to compete to stay up. Just saying you do OCR technology is like that was effective 10 years ago. Now you have to do managed indexing. You need to show a freight broker wants to see all the docs typed for them. They want you to manage the indexing. If they're really going to reduce headcount, which is what they need to do, you just need some feature sets that in our NextGen product we built. It also has an LTL module because many brokers who are in truckload also do less than truckload. It has some user-facing dashboards that really help executives see and make decisions, maybe we should have gotten that done a year ago.
We've just been busy with all the things and then trying to stay profitable. We don't have the luxury as a publicly traded bank of not heeding profitability, and so that's what it is, and that product, we will charge more for that product because it delivers more value, and we're in the process of rolling that out.
Yep. And then on the capital front, you guys still continue to maintain significant excess capital. I think you've defined internally as around $250 million. Help us think about kind of how that could be deployed and just various manners that could happen and the odds of that happening.
Yeah. So at $250-$260 million of excess capital, that means we hold equivalent to $12 a share in cash, right? We're banks. We kind of have all the cash there is. It's capital, not cash. But I don't believe in efficient capital structure all the time. I don't. I believe you have to be prepared for 34-month freight recessions you never saw coming. And if you have to raise capital on bended knee, then you destroy the value for all my shareholders who've been with us since we went public at $10 a share. And I care very much about that. So we've bought back 18.5% of the company over time at a blended price, Brad, of what?
40.
In the 40s. We traded 100 right now. So I think that's been a good stewardship of our shareholders' money. So we will buy back shares since an opportunistic chance to do so. We will maintain excess capital so that we can allow for the unforeseen. So the use of that capital will be for the investment and potential acquisition of technologies that have been built for the freight industry that never got the density that was required to build a real business model that would save us multiple years of development if you could plug them into our data set. That's very interesting to us.
I'd like to do that on an all-cash basis so I don't dilute my existing shareholders because if you believe, right, and people can follow where they want on this, but if you believe there's $1 billion of revenue we can go get over the next three, five, seven years, then the stock price, we can create additional value from here, even though a lot of people would say we're very, relative to other bank stocks, we're highly valued. But it's not so much the entry multiple as what you can do, what we can do with it. So that would be the primary use: acquisition of technology that fits in our strategic roadmap.
It sounds like the last one we talked about this morning would be buying more factoring companies, I guess, is also possible.
Yeah, we can do that. We can house them on our balance sheet. The beautiful thing about a bank is you already have 10-to-1 leverage. So buying $100 million of factored receivables takes $10 million of capital inside a bank versus if you do it outside a bank in a commercial finance company, it'll take $25 million because you get 4-to-1 leverage there generally. So yeah, I mean, we're not going to buy. There's not enough factoring out there to buy to use all that capital there. It's just available. If somebody comes to us, needs our help, we can certainly do that.
Yeah. And as you said, Aaron, TFIN still has a bank. So I have to ask about credit quality. There are some headwinds you're facing right now in a few portfolios. Just hit on those and help us appreciate how much deterioration is more broader deterioration in the industry versus specific to these borrowers that you have.
Yeah. So in commercial real estate, which we don't attempt to grow that book, so we're very defensive there. If you look at our charge-offs in our commercial real estate business going back years, they've been next to zero. What you have there is interest rate moves. You know, we had variable rate debt that moved up. So it makes it hard for the borrower to service the asset. Our basis is such that we don't perceive there to be any risk of loss. But there is stress in the credit because of the interest rate mismatch. So a falling rate cycle, if that's what we end up with, that certainly would bail some of these borrowers out of their short-term cash flow issues. So I don't foresee, I mean, you can never be sure because lending's a risk business. I don't foresee material downgrades there.
In our equipment finance business, which is $450 million. Look, I frankly am proud of the way that's done 34 months into a recession because there's been a lot of people who've taken really big lumps, and so we've increased our reserves there because we think that's appropriate to do. I can't promise you that we won't have something pop up there, but given that we haven't seen, we have not pursued the growth of our balance sheet in four years. We have excess capital. We feel like we did a pretty good job cherry-picking credits, although we're not perfect. I don't lose a lot of sleep at night over losing control of our destiny based upon credit quality issues. It's just an annoyance right now. Yeah, and you know, there's lessons learned, right?
We all got lulled to sleep a little bit on, you know, we could have fixed some of those commercial real estate loans. We could have fixed the interest rate in a different cycle, made less money and not faced a classification, right? So it's the trade-off. Yeah, and yeah, we're not perfect, so yeah. But I don't think anyone who really knows us looks at what we do. Yes, we don't like the classifieds where they sit now, but there's no systemic thing that was going on, and I think where most people are scared is the factoring business, and that shows your fundamental misunderstanding of factoring because those receivables turn every month, so if there was some issue, you would have seen it within a month. In the factoring business, the pain we experience, and it's a very real pain, is revenue volatility.
We don't take credit risk there per se. I mean, you do, but you really take revenue volatility risk because you're turning it every 30 days. It's the difference in owning an office building with 10-year leases and owning a hotel where it turns every night, right? It just turns so fast in a soft market. We can't outrun the revenue degradation. So we didn't lose money on credit. We lost money because the industry slowed down. And that's just a known risk we live with.
Right. I think you've hit all my questions, Aaron. I'll look to Luke. Any other topics we need to hit on, Luke, that we haven't hit on? Or Aaron, anything else you can think of?
Any cleanup? I don't want to have to do another 8-K tomorrow.
No, I don't think so. I think we've covered just about everything we typically talk about with investors.
Okay.
Okay.
All right.
Thank you all.
Thank you very much, Aaron. Appreciate it.
Appreciate it.
Thanks, Matt.
Thank you, sir. As always. Yeah.