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Mullen Group Ltd
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Thank you for standing by. This is the conference operator. Welcome to the Mullen Group Limited second quarter earnings conference call and webcast. [Operator Instructions] I would now like to turn the conference over to Murray K. Mullen, Chairman, CEO and President. Please go ahead.
Good morning, everyone, and welcome to Mullen Group's quarterly conference call. We'll be discussing our financial and operating performance for the second quarter, and this will be followed by an update on the near-term outlook as we see it. But before I commence the review, I remind you that our presentation contains forward-looking statements that are based upon current expectations and are subject to a number of uncertainties and risks, and actual results may differ materially. Further information identifying these risks, uncertainties and assumptions can be found in the disclosure documents which are filed on SEDAR and at www.mullen-group.com.So with me this morning I have our senior executive team of Stephen Clark, our CFO; Richard Maloney, Senior Vice President; Carson Urlacher, Corporate Controller; and on the line via [ Remarks ] is Joanna Scott, our Corporate Secretary and VP of Corporate Services.So this morning, Stephen will review the quarter financial results and operating performance, after which I'll provide our outlook for the balance of 2019. And of course, that'll be followed up by a Q&A session. But before I turn it over to Stephen, I'd like to open with a few comments.So if there's a headline that I can use to define the recent quarter, it would go something like this: growth is hard to come by, but we keep finding ways. And without trying to repeat what I articulated after Q1 results, which is difficult when nothing really changes quarter over quarter, but by way of example, just look at our consolidated revenue. $319 million in this quarter, $319.6 million in quarter one.So what are those highlights and trends I spoke of on our last quarterly call? Because it would appear that things are just about the same as quarter one. Well, let's start by looking at the macro picture. Is it a surprise to anyone if I said the Canadian economy is not growing and remains stuck-in a narrow range? Now within this scenario, the consumer is doing quite well, actually, given strong employment numbers. And this continues to support the economy. On the other hand, capital investment remains on the sidelines. Now this adds up to a stable but no growth economy.Now how about the Canadian owned natural gas industry? Everyone knows by now that the industry remains under duress as commodity prices fluctuate, market access remains elusive, and new sources of capital is scarce at best. Under this scenario, the entire sector's underperforming relative to history, and actually by any other metric, for that matter. And I would be stretching to say the industry's in a no-growth mode because most of the industry's clearly retrenching, which is not good for the service industry. So within this macro growth -- within this macro context, growth is difficult to say the least. But we find ways to grow, and that is by acquisition, and remains the only game in town.So there you have it. No economic growth, but our Trucking/Logistics segment continues to do well in spite of the challenges. Another quarter of contraction in the oil and natural gas industry, because capital remains very tight, and acquisitions that when done strategically and smartly can actually allow well capitalized companies like Mullen to grow in spite of the headwinds. And as a reminder to all of our investors, we still do business here at Mullen the old-fashioned way. We take the long game approach to managing our business, and we always think about tomorrow.Now for some of the specific highlights in the quarter, I'll start with the positives. Now let's look at financial performance. It was solid, and it was up over Q2 2018. We tended year-over-year top line growth in spite of macro headwinds. We increased OIBDA, my favorite saying, sounds like a cartoon character, both before and after the IFRS accounting changes. Net income was significantly higher due to positive OIBDA growth, the accounting changes I mentioned, the positive impact of the Canadian dollar appreciation vis-a-vis the U.S. dollar and tax changes here in Alberta. And after taking all of the noise out of the quarter, net income adjusted was up slightly.Cash flow was strong at $46 million, which shows the stability of our business model and our strategy. So how did we do it? Acquisitions helped in both segments, but the biggest impact was on our Oilfield Services segment results. The acquisition of the AECOM Canadian Industrial Service Division business in assets last year was positive from a revenue perspective, along with adding approximately $4.5 million in incremental OIBDA during the creative integration strategy, which saw the business layered into 3 of our production services business units.Secondly, being prepared for this period of slow growth certainly helped along with being very thoughtful in regards to our acquisitions strategy. Now we did not chase yesterday's deals, preferring to wait and -- take the wait and see approach to this somewhat, what I call, dazed and confused market. Yes, we gave up some growth yesterday, but clearly this was the right approach because valuations have condensed significantly in today's market, and profitability at most companies is not what was advertised. Thirdly, we had a couple of business units perform exceptionally well. Premay Pipeline Hauling had an active quarter, much as we'd anticipated, with some large diameter pipeline project hauling. For example, the Trans Mountain line in [ Nalvett ], Canada owns the pipeline. I can say thank you, Canadians, for fronting this business. That was a good project, and still ongoing. And lastly, our LTL business continued to improve, especially our Gardewine Group.What I was most pleased with was how our Trucking/Logistics segment business units controlled costs and managed margins given the lack of growth and labor costs pushed, so nice job, team, on this front.Now as for a negative highlight, if a negative is a highlight. It has to do with that dastardly drilling activity in western Canada, or lack thereof. I've said it before and I'll reiterate it. It's a disaster, plain and simple. We can thank technology, and we can thank Canada's democratic system for this one, technology in the form of multistage horizontal drilling, which has unleashed the U.S. shale, oil and natural gas boom. And let's just take the Permian Basin as an example. This basin's added over 4 million barrels of crude oil production in a few short years, which is absolutely unprecedented, displacing much of the U.S. reliance on Canada's oil, and the natural gas story's even more impressive. Consider this: U.S. natural gas production has grown every year since multistage fracturing technology was introduced. Today, U.S. production is an astounding 93 BCF a day. Canada by comparison is 15 BCF a day. This is how the market works.But in Canada, we have been slow to react to the market changes, and its core is the fact that the U.S. doesn't need our crude oil and natural oil like they used to, and we continue to struggle to gain access to new overseas markets due to regulatory process and this, what I call, Canadian born concept of social license. Bottom line is that in Canada, we are trying to please everyone, even if it means hurting those that derive their livelihoods from the oil and natural gas sector, even if it makes no sense at all. So lots of blame for the industry woes, but such is reality. And under this scenario, producer cash flows are constrained, and as they say, the rest is history.But this was the only negative I could think of last quarter. Yes, the economy was slow, but that in itself is not a negative per se. All in all a very good quarter, and with the positive news surrounding LNG, the only option that will provide Canadian producers access to the insatiable Asian demand for natural gas, there might just be some light at the end of this tunnel. So more of this on my outlook overview in a few moments, and right now Stephen Clark has the details as it relates to our financial performance for Q2 2019. Stephen?
Thank you, Murray, and good morning, fellow shareholders. Our second quarter interim report contains the details that fully explain our performance. As such, I will only provide some high-level commentary.First of all, we are again in record territory. The Trucking/Logistics segment experienced the highest level of second quarter revenue and EBITDA on record. But for those that have reviewed the results will know that this, although technically a record, revenue was essentially flat. And on an IFRS 16 adjusted basis, the Trucking/Logistics EBITDA was only marginally better. But a record is a record, and this is a series of 10 consecutive quarters now where we've seen growth in our Trucking/Logistics segment.The Oilfield Services segment revenue was up 30% due to the AECOM acquisition, and overall the second quarter revenue was up in total 7.9% to approximately $320 million. As for EBITDA or OIBDA, we need to address the effect of IFRS 16, the lease accounting standard. The new standard gives the appearance that everyone's EBITDA's has risen with none of the fundamentals of the business or cash flows -- but none of the fundamentals of the business or cash flow have changed. It improved our OIBDA by approximately $3 million in the quarter, but had little impact on net income or cash flows. I'll go over the specific impacts of IFRS 16 on each segment as I review the second quarter results.All things considered, the quarter was reasonably good given the context of the severely challenged Canadian oil patch. Revenue grew by $23.3 million, of which $23.1 million was in the Oilfield Services segment due to acquisitions and the return of some pipeline work being offset by lower drilling-related revenue. The remainder of the increase, or just $0.2 million, was due to the Trucking/Logistics segment, so vastly improved oil services revenue all due to our prudent acquisition strategy and flat Trucking/Logistics results reflective of a slow Canadian economy.As for profitability, operating income before depreciation and amortization was $51.4 million, an increase of about 16% over 2018. This was despite some well-known challenges, such as the 30% decline in drilling activity. As stated previously, approximately $3 million of the rise in OIBDA was due to IFRS 16. So on an apples to apples basis, OIBDA increased by $4 million, or about 9% to $48.3 million as compared to $44.3 million in 2018. Margin was essentially the same as in 2018 once adjusted for IFRS 16.On a segment basis, the Trucking/Logistics segment OIBDA was up by $2.8 million to $36.2 million. However, $2.5 million of this increase was due to IFRS 16. So it was really a minor $0.3 million increase without any accounting changes. On an IFRS 16 adjusted basis, when comparing apples to apples, margin was 15.3% in this segment, versus 15.2% in 2018, or essentially flat. EBITDA in the Oilfield Services segment improved by $5 million, of which only $0.6 million was due to IFRS 16. Margin on an IFRS 16 adjusted basis was up to 16.4% as compared to 15.5% in 2018. Again, that was despite some very well-known challenges during the quarter, with drilling being down 30% and intense competition for work did exist. But we held our own because of our integration of the AECOM assets and some pipeline works. The full details of OIBDA and such can be found starting on Page 16 of our MDNA in the interim report.I also know that many of the analyst community are looking at our results on a sequential basis. On a sequential basis, consolidated revenue was essentially flat due to the seasonal rise in the trucking industry being offset by the traditionally lower Q2 drilling activity. For 2019, our earnings per share improved to $0.30 per share, as compared to $0.13 in 2018. This was in large part due to the effects of foreign exchange on our debt and the Alberta corporate tax rate reduction. Adjusting for this and other nonoperating items, EPS adjusted, as defined in our interim report, was a flat $0.15 per share for both years. Full details of this reconciliation can be found on Page 21 of our MDNA.During the quarter, we generated $45.7 million of net cash from operations. However, the more notable event during the second quarter was the issuance of our convertible debenture. During the quarter, we issued $125 million of convertible debentures that are subordinated to our private placement notes. As such, our debt component leverage level exited the quarter at 2.33x. Including the convertible debentures, in a traditional debt to EBITDA calculation, the ratio was closer to 3x with a total debt of approximately $325 million, but this 3x is reflective of the lower Oilfield segment profits. And this 3x does not take into account our in the money hedges on our U.S. debt or the cash on hand, which is approximately $85 million. But no matter how you slice it, our balance sheet is, with relatively conservative debt levels and approximately $85 million in cash, will allow us to continue to pursue strategic acquisitions to further enhance our cash flows in the future and ensure that our dividends remain rock solid.So with that, Murray, I'll pass the conference back to you.
Hey, thanks, Steph. So before I get to the outlook, I'll just summarize.I'll say, look, I don't think there was much in that second quarter that really was either a highlight or a lowlight for me. It was what I expected and what we had articulated to our shareholders and our investors, so that's where it was. We looked at a number of opportunities, and we chose only to do one here in the second quarter. But it has to be on our terms, and that's just the way it is these days.So as I turn to the outlook, I would say basically not a lot has changed since our last update, and I do not expect any significant variation in the economic forecast, which even recently just came out calls for Canadian economic growth of around 1.5% in 2019, and they're projecting 1.9% in 2020. Under this scenario, we expect marginal growth in the second half in our trucking that will support our LTL and our final mile business, and even in our truck load business. We should also do somewhat better as the inventory overhang normalizes and carriers reduce capacity, either via forced closure or carriers making good, thoughtful decisions.Pricing, I expect, will stabilize over the balance of the year. This means our Trucking/Logistics segment should be up marginally to last year using a same store analysis, and this is the good news.Now in the Oilfield Services segment, we will most likely continue to struggle for all the same reasons we've talked about for several quarters now. And without the benefit of the AECOM acquisition, which we completed late June of 2018, our comparables will now start to show how the lack of investment and drilling activity actually negative impacts segment results. I just do not see the catalyst that will change this situation. In fact, if there's one change to my earlier forecast, it relates to drilling activity. And clearly, I might have been a little too optimistic predicting a meaningful recovery in the second half. It looks like our customers are going to have to live within cash flow like everybody else, and that probably means activity will be a little bit less than what I anticipated, although even today it's up. We're up over what we were in the second quarter.Now I fully expect business activity to be slow and pricing to be competitive under this scenario, so this remains a negative. Offsetting this could be our Premay Pipeline group. There's still several pending projects, including Trans Mountain construction, so all the pipe, we've moved it to the stockpile locations with approvals pending. It'll have to move from stockpile locations up to the sites, and then for into the ground, so we were optimistic that maybe that will go, or our Prime Minister says, anyhow.And coastal gas, the TC Energy natural gas project linked to LNG Canada. That's scheduled to start in the fall as well. So this would obviously be a positive for what we call our Oilfield Services segment, but let's not totally write the obituary off for the oil and gas industry quite yet. I know it's going through a difficult time. In particular, I could make a bullish case for natural gas as Canada moves towards sanctioning of LNG projects. Now these are huge capital projects, will eventually require continuous drilling in western Canada to meet future natural gas demand.In terms of crude oil, the world consumes, get this, 100 million barrels per day. And while the growth rate and demand will most likely moderate over time, there will still be a market for crude oil for many years to follow. Now earlier I spoke about the impact of the Permian basin on world oil production. And it's when, not if, this basin starts to decline, that those incremental barrels must be found somewhere else. And remember, the world still consumes that 100 million per day. Within this context, I don't see any growth in the short term. The capital and service work will still be required to maintain production, either for conventional crude oil or for oil sands work.From a corporate perspective, our balance sheet, as Stephen said, couldn't be better. We have the cash and liquidity to pursue acquisitions, but they must be strategic to our company. Our debt structure gives us tremendous flexibility, and the interest rates on our debt is very favorable, clearly. Our shareholders and investors believed in our company and our senior team and our strategy, which is why we were able to complete that successful capital raise of $125 million via the convertible debenture offering. Now not many offerings have been this well received by investors, and I along with this senior team here appreciate the vote of confidence. I can assure everyone that we will be good stewards of the capital.Now we've already completed the acquisition of 2 companies in British Columbia, which fit quite nicely into our regional network. These 2 companies, Argus Carriers and Inter-Urban Delivery Service, they have a great history. They got a super group of dedicated employees, and they provide outstanding customer service. What's even better is that they fit very nicely into our Tenold group, which is based in Surrey, British Columbia. Now these are not in itself significant acquisition in terms of size, but they are well managed, they're profitable, they have strong brands and they meet our strategic objective. So these type ends, that's really our preferred acquisition candidate in this competitive and changing marketplace.So in summary, I'm still of the view that our business remains on track to meet our outlook and business plan for 2019 that I articulated in February -- in 2019, i.e., consolidated revenues of $1.3 billion and operating earnings of around $200 million. Now well, I'll use exactly the word that I used in February, with volatility based on some drilling activity in the second half. So we still have to be mindful that we need at least some drilling activity to go on so that it's not a negative on our Oilfield Services side and on our drilling related rather than a -- and give us some positive.So we'll be steadfast in our commitment to build a sustainable business and reward our shareholders with a stable dividend. It's on this issue of stable dividend I wanted to make it clear, the difference between today and yesterday. For years, we were aggressive as we saw opportunity in the Oilfield Services sector. Then we moderated our growth and we returned cash to shareholders via an aggressive dividend and distribution policy. Over the years, it's equated to roughly $1.3 billion, in fact. Now along the way, there were times with were forced to reduce or cut the dividend because of the cyclicality of the oil and gas industry. But let's remember, by paying the $1.3 billion in cash to shareholders, we did not chase growth and destroy shareholder capital. We gave it back as we earned it. Now what about today? Well, we're not as aggressive in terms of growth. We prefer to invest in the steady part of the economy, i.e. the consumer. And I believe we have a clear path towards a stable dividend under our steady as she goes mantra, in other words, maintain that dividend.I will now turn the call over to the conference operator for our Q&A session. Thank you very much.
[Operator Instructions] Our first question comes from Walter Spracklin of RBC Capital Markets.
So let's start with your Oilfield Services segment and the margin run rate that you're getting under your increased focus, obviously, on cost control and the success you've had certainly this quarter. When I look at your margin in the back half, it's generally better than the first half, and you're up to 17% EBITDA margin here in the second quarter, suggesting you could do better than that in the back half, which further suggests you're going to do better than 17% for the full year.Your prior indication to us, Murray, was that you could probably run at 15% to 17% longer term. Is this year exceptional because there's something going on, and then if revenue starts to increase, you won't be able to control costs in the same level? Or should we interpret this as maybe that 15% to 17% should be recast? And I don't know if IFRS had an impact or if that's been updated, that range has been updated, since IFRS. But maybe some color there would be great.
Yes. I think on the Oilfield service, it performed well because of the AECOM acquisition. I think it met every -- it exceeded every expectation that we had, so that was a positive. Pipelines, we had a nice quarter in the pipeline. Now when I look to the second half, typically you're right. Our margin goes up because drilling activity gets back in in [your biz], but I don't know if it's going to get enough to get the high margin this year. So I think we're going to just steady as she goes. I think drilling activity will be somewhat muted compared to last year, but I think our pipeline business will be up on a year-over-year basis. So they might offset each other and it'll be somewhat flat is what my expectation is right now, and that's based upon my expectation that coastal gas goes.Now I know the pipe has been ordered. We're waiting to move it off of ships and get it to stockpile locations, and we're going to be busy -- we're going to have a busy run rate here for a couple years with our pipeline division, which is good news as drilling activity takes a bit of a pause and the market figures out what they want customers to do. And that's where I see -- I don't know if we'll have a whole bunch more margin improvement in the third quarter. If we do have it, Walter, I would say I would put that as a positive and go there, but I'm not anticipating it.
But in terms of longer term, if you have some kind of growth in your business, should we see margins -- I mean, you're looking at around 17%, which is kind of at the higher end of your range. Is that margin range moving up a little bit here as you get better clarity going forward?
Not until we get into a capital replacement cycle, if you ask my opinion.
Okay. Okay. Fair enough.
I think we'll find a really good business, be very smart. As Stephen said, we're still in a very competitive market. Our competitors are struggling to survive, and they predatory price, and those kind of things. So but over time, these things will square themselves away. The capital's going to have to be replaced, and when capital's replaced, you probably get -- you get a bump in your EBITDA margin, because we're not putting capital -- or we're not reinvesting capital until we see rates go up. That's just the quid pro quo.
Right. And on your trucking business, you're right in that range that you've indicated, 15% to 16%. So no reason to adjust that unless you suggest otherwise, but it seems pretty steady and coming into where your expectations -- maybe just, then, on CAPEX. You got it to $60 million for the year. Is that still the net number that we should be looking at?
I think we said $50 million for rolling stock, and then we added some for land and building. So we're still going to look at -- particularly in the Trucking/Logistics side, you've got to be positioned with the right facilities to be successful in LTL and final mile.
Right. Then we go…
And you hear that from Blackstone. You hear that from Amazon. You hear that from Spotify. You hear it from everybody. You got to get close to the customer, and so we're being very thoughtful. You got to have the right facility and the right location. That's your enabler.
Right. Going into 2020, I know you haven't given guidance, but is there anything you can kind of suggest based on what your crystal ball tells you right now? And even just directionally, are things just feeling better on a revenue perspective in each division? Just kind of your initial thoughts as opposed to anything in the form of formal guidance.
I haven't given much thought to it, but I just don't see much that can change in the Canadian economy. I mean, I gave you the number, I think it's around 1.9%. That's steady as she goes. And then, but we got to be smart about doing the acquisitions in the -- that's where our goal's going to come from. Honestly, that's also where our margin improvement comes from, because we're able to realize synergies. That's what we really look for, and that's where that tuck-in strategy that I talk about probably has the best impact. It's not aggressive on growth, but boy I'll tell you what, it sure solidifies and helps on the margin.
This is my final question there, is on the acquisition strategy. Where's your attention most focused right now? If it's OFS, what kind of areas, what subsegments? And then in trucking, are you at all active? Would you consider yourself at all active in the trucking sector on the MNA side?
So let's start with the first one on the Oilfield Services side. We're not really active in the Oilfield Services side. Notwithstanding that, If we get something handed to us, a pair of aces like we did with AECOM, and we can layer that into our existing businesses and find synergy, and what it we pay, 2.5x EBITDA, we're going to do that because that makes good sense. But we're not actively going out and looking at Oilfield Services. But on the other side of the coin, boy, do we get a lot of stress calls these days. But it has to be the right one, and it has to -- got to be something like an AECOM. So those only come around once in a while. We'll just be patient on that side.On the TL side, truck load side, the LTL, final mile, that's our preference, tuck-ins as big. There's a few quality companies in this country that we would love to have within our portfolio, that are privately owned, family owned, whatever you want to call it. We'd love to have them on our portfolio, but they only come up when they're ready to come up. The good news is we have the balance sheet to do it. And I think for most of the trucking industry, what we're finding today is we really may be the only game in town from a liquidity perspective. So at the end of the day, we're setting the press.
So is the debt raise there just giving you the flexibility to strike when ready? Is that what that is?
Yes, that's what it is. We set the price, and sometimes you got to let people come to realize. As we said to you, we were not aggressive on pursuing Trucking/Logistics in the last up cycle because I personally didn't think that the earnings and the projections were as advertised. And guess what, they're not. So being patient, I think, is a virtue, but when we see the right one, we are very impatient and we move very quickly.
Our next question comes from Konark Gupta of Scotiabank.
Just wanted to ask you a big picture question first. So the Oilfield segment, I guess obviously the EBITDA has more than halved in the last, call it, 5, 6 years. Right? And then trucking has grown significantly, but not enough to offset those declines. So in terms of very long term looking out 10, 20 years, Murray, do you see an opportunity to further diversify the business by perhaps adding a third segment just to kind of diversify away from both the segments, or maybe focus on sort of more visible secular trends such as e-commerce?
Yes. I think we'll be a little careful of stretching into another segment. Now we've debated inside whether some of our Oilfield Services or segment business units are actually Oilfield Services, i.e. our specialized services. Maybe we would think about carving that out, but you got to be careful stretching outside your core prominency. Capital's tough to come by. I think you have to be very thoughtful on that. We'd have to make sure that we saw an emerging trend that would give us a long run rate. Now I don't see anything right now. e-commerce is there. Clearly, our move into LTL, which is less than truck load, and final mile was a -- we caught that, and we've been very thoughtfully and very strategically adding that into our portfolio. It's now the biggest part of our business. Right, Cars?
That's right.
Yes. So we'll continue to invest in that e-commerce final mile solution, because that's what the consumer's doing now. They are ordering online, and they order packages that need final mile delivery rather than pallets that go to a retail store, then they go shopping. So we've got to make sure that we do that right, and I like our position. There's very few companies in Canada that got the network we do. Right, Richard?
Right.
Our network coverage is 5,500 points of service.
5,500 points of service, right from Toronto all the way to, right now, to Vancouver Island.
So that gives us something. And then we're just going to continue to build on that and find out how we can be smart about it. We'll layer in good tuck-in acquisitions like we just did in BC. We're blessed to have some really smart people running our operating businesses, and they come up with good ideas, and we'll feed them. That's our job.
Okay. So Murray, then, you mentioned e-commerce a few times, obviously, before. And obviously, you have done some acquisitions there. You have some major urban centers in Canada where you may not have the density yet, but you might focus on those things. So can you give us any kind of sense as to where you would like to focus more geographically in Canada on e-commerce?
Well, we've done a pretty good job in a number of centers, and we have, in British Columbia, over the last year we've added 3 companies now to given us a really good footprint along with our PCX, so we've got -- that would be 4. But one that we have to do, we've got plenty of room to aggregate, consolidate, and do whatever, is [ quarterly ] in the GTA. Now we have a footprint, but that's a massive market. It's the biggest consumer market in the country. The fundamentals are exactly the same.Now the one thing that is really impacting all this right now is the rapidly rising cost of commercial real estate and facilities. We've got to be thoughtful on that, because in this very, very low interest rate environment, and negative interest rates in a good chunk of the world today, commercial real estate has just skyrocketed. So clearly, us owning our real estate is a very good strategy, but getting the next one is not easy. So we have to be very, very smart of how we go here. But the industry must aggregate. You've got to get bigger to be able to get the density to be able to handle final mile, because final mile really means quick, boom, boom, boom, boom. And that means you got to have multiple locations, and you got to have a really good, thoughtful network.Hopefully that helps. That's the last big one that we would really look at consolidating. We've got our DWS warehousing up there, we've got our drive line group. We'll be active in that market over the next period of time, for sure.
I got it. That's great color. And then my last question is on the second half outlook. Just wanted to kind of build on Walter's question. I mean, you guided $200 million EBITDA, right, or OIBDA for the full year, which is pre-IFRS 16, I understand. So that's probably $212-ish million for the full year with IFRS. First half, the EBITDA, right, so second half is clearly going up versus the first half. There's some seasonality and there's some other things, including the recent acquisitions you have done on trucking side. If we just add those things up, do you think the Oilfield Services segment and trucking segment can both show organic growth apart from the $3 million, $4 million EBITDA that you can get from those trucking acquisitions? Is that the way to think about second half?
Yes. I think we typically get into -- the third quarter's pretty good for the trucking LTL business as you start positions for the holiday season and those kind of things. So yes, I think it's -- that's my thesis. And once again, I'll qualify that thesis that there's at least going to be a little bit of growth in the Canadian economy. That's the projection, so I'll refer to the projections and say I'm not going to outthink all the experts, but I think there'll be a little bit of growth. And then that softs up some of the excess supply that we've seen on the truck load side. Our LTL side's doing fine. It's the truck load side that's really been hit by an industry of overhang on inventory, too many trucks, and it's the one that got hurt.If we would have had same store sales on them, we would [ up ] very nicely on that. But we kind of anticipate that was going to happen. That might start normalizing in the second half, and that would be positive. So I need a little bit of growth on the Canadian economy side, and clearly we need to have some drilling activity over and above 0. And if we did that, then we'll -- then if there's business, we know how to get margin. But I can't get no margin out of no business. So it really is dependent. Our pipeline side is probably going to do fine. The little caveat I've got is how aggressive are our customers going to be on the drilling side in the last half. And I'm making the assumption that it will improve over the second half, but maybe not be quite as good as the last half of last year. That's what I'm making my assumption now.
So if I read between the lines, you're basically saying LTL, pipeline and the recent acquisitions that you've done on trucking side, those would be the key drivers for the second half.
That's basically the drivers of growth and positive, with the one negative is probably going to be drilling side. And if that picks up a little bit, that sops up capacity again and it takes away a little bit of the pricing stupidity that we're seeing in the market. No, I'm not particularly worried about in the short term in the second half. If it's a tough quarter, I say bye-bye to a number of our competitors. Bye-bye, see you later. There's no way they can survive on no revenue.
[Operator Instructions] Our next question comes from Aaron MacNeil at TD Securities.
Each of you gave a bit more detail on the trucking and logistics margins in your prepared remarks, but gross margins improved a bit faster than what we were expects, and perhaps a bit higher than what was thrown around on the Q1 call. You obviously note in the MDNA that this is due to reduced fuel costs and greater operational efficiencies. So I recognize that the change is relatively minor here. But with a bit more economic growth, do you see margins on the trucking and logistics business improving from here in Q3 given that it's typically one of your stronger quarters of the year?
Yes. I would say my thesis would go, I think, that as we get just a little bit of growth, I would be very surprised and very disappointed and we didn't increase margin as we just covered that increased book of business across our cost structure, particularly on the LTL side, because all that cost structure, most of it's fixed. We already have the trucks going on, it's just the incremental little bit of growth to get that should have a better margin to it. Now it's not going to double it, but I think, yes, that's our thesis. That's what we work towards, margin improvement over time.
Do you have any sense of, or would you give any guidance on what you think a potential high water mark might be just so we don't get ahead of ourselves?
No, because it really is dependent upon entirely on what the economy's going to do. And I just have to say if it goes up -- if you're projecting robust economic growth, our margin will go up robustly. If you're projecting a little bit, it'll go up a little bit. If you're projecting negative, we'll have a tough time maintaining the margin because you got too much fixed cost that has to be amortized over a lower revenue base.
Yep, fair point. And then final one for me…
I'll let you do your job on that, Aaron, and you can -- we'll see who's more accurate, us or you. But I don't expect huge. These are bunts and singles and grind it out. There is not a lot of activity to really change it meaningful, but I could tell you, we're investing in technology. We're investing in facilities to get our cost structure down. These are all the thing that we focus on when there's no growth, just how to be better. So yes, I expect margin to grind a little higher.
Okay. That's helpful. And then last one for me. Obviously, with the conversion feature on the debentures might change how leverage ratios are viewed. But given what I expect would be a strong MNA pipeline, what leverage ratios would you be comfortable with assuming that the debentures are treated as debt?
Well, the one that we always have to be mindful of is our private debt. That's 3.5x debt to EBITDA. But I'd never want to go right out to that, and if we did, we'd have to articulate that very clearly to our shareholders that that would only be temporary. In our business model, because we've distributed to much cash out to shareholders, we're totally transparent with our shareholders. We give you the money. If we see a good deal, we'll come back to you. If you don't like it, we get it. But if we keep doing the right things and we're good custodians of capital, our shareholders will be there to fund good ideas.
Our next question comes from Elias Foscolos of Industrial Alliance Securities.
Questions regarding the acquisition pipeline. You did talk about quality companies that you're interested in. Can you focus a bit more on the motivations? You also said you're the only game in town, potentially. Is it age, lack of capital, that's driving the pipeline, and quality in terms of assets and pricing? And finally, to make this an all-encompassing question, any chance of making another acquisition from an exiting U.S. company?
So as always, those are thoughtful questions. I guess I got to be like Bob Mueller and I got to think about this for a little bit. I won't ask you to repeat the question, though. Elias, I think that from the macro side, what we're seeing is we've got a lot of quality private family-owned businesses in this country. But the last run up, we had a really good run up, and I think everybody got a little bit ahead of the skis, and then everybody started seeing stars, and lights and everything that goes with it. So you have to be careful that you don't try and buy yesterday's earnings knowing that, I think, that those earnings were not as advertised, as I said. But I can tell you with the number of calls we're getting, too many carriers are either getting themselves into a leverage issue, or they're coming to realization that, hey, this could get tougher, and they're going to look for an exit strategy.Now within that context, clearly our stock price reflects that investors also believe that the economy and the opportunities are not that great right now. So we'll take guidance from our shareholders and we'll be very thoughtful as to how we look at opportunities and how we price them. But all along the way, it's got to be strategic, and it will fit our financial model, and we'll take risks, but it'll be measured risk, but multiple circuit drafting. What's troubling for some of the sellers is so are the earnings, because they're not like us that can backfill and grow the business. But if the economy's not growing, you have to figure out another game in town. So we just have to filter through the whole list that we've got and pick the ones that we think will be long term and strategic. Now in terms of the U.S., we'll…
Well, U.S. companies exiting Canada for specific…
Yes, yes. There's not a lot of U.S. companies in Canada today. They were so busy down south, so I don't -- they're not the biggest competitor up here now, Elias, and they typically would not have a good book of business up here, to be honest with you.
Okay. Moving a bit to your biggest asset class, which is real estate. I know you had a budget. I think it was $15 million, but I could be wrong on that. Two questions related to that. With the recent acquisitions, would you, including Argus, would you be looking at acquiring more land and upping that budget? And also with that, and I do believe a few years ago you sold a piece of land in central Edmonton. Do you have other, maybe, redundant pieces of real estate that you might put on the block?
Kind of yes to both of those, Elias. We're definitely looking at real estate. Particularly as we've grown our business in Vancouver, we're looking at some facilities out there. But you got to be really thoughtful of that. We got a bunch of facilities that if we're leasing right now, we're looking at acquiring them and taking them off the lease, long-term leases, because we want to have control over our own destiny, which is why real estate's our single biggest asset class. And do we have a few properties that either are redundant or are just too good to be true? Yes, we're looking at some of those situations right now. And the 2 hottest markets by far are Vancouver, lower mainland, and Toronto. I mean, just, that's probably price prohibitive in most cases right now, but we have us a pretty good footprint, and that, I think, gives us a pretty good long-term advantage.
Okay. And one last question to close it off. Moving to the more asset-light item. And I haven't seen very much on this written lately, so I'm wondering if this is still an area you're pursuing, it's Moveitonline, and any comments or color you can add on that.
Yes, Moveitonline, Richard, we're working very hard. Moveitonline is still active every day. People are still signing up every day. We've chosen thus far not to enter the U.S. market on that because we wanted to get our mobile app 100% right. And some of the things that I see they're working on in this mobile app are absolutely first class, and so we want to get it right. And we'll incubate, but then we would go after the U.S. market and go after -- you would have to go after it big time. So we're still active. We have trucks posted all the time. We actually have more trucks posted now, Rich, than loans.
Yes. Elias, well, one of the things that I think I mentioned earlier, and what we're seeing over the last 3 months is more posting of trucks on our more traditional Moveitonline platform, which is a web-based platform. But what we're seeing, as I said, are more trucks being posted, which telling us and speaks to all the points we talked about, a lot of capacity. And our logistics divisions within each of our business units are really capitalizing on that and identifying that stranded trucker, as Murray calls them, and being able to leverage off of that. So that's where we're seeing some benefit on that. Mobility, our holistic app, is right, as Murray said, in the midst of being developed. We expect something over the next couple weeks to have something. We have Tenold working on it for us as well, so we're looking forward to that.
Yes. So Moveitonline is the desktop, so that's really trucker, to shipper, to trucker there. But the mobile app is really for the driver, and that's, of course, the big ecosystem here. The smart, intelligent technology that's going into this, it will instinctively know where the driver is and post loads that are liked. So it would be no different than you going on your Facebook or whatever. It'll know what you like. But we're not going to go out and go to the U.S. until we know it's bullet proof, but we sure like the way we're moving along with it.
So you like the way it's move ago long, and you do see it as a value add in terms of understanding the marketplace within your business?
It'll be a value add, Elias, just like Moveitonline is a value add to our core business. It gives us great information. It will make our drivers stickier to us, et cetera, et cetera. But the Holy Grail is, if we get it right, that we then take that platform and we go to the U.S., but we've got to get it right up here. There's really no losing situation for us because it makes us a better company, and it makes us a better employer, and it changes the way we do business. But if we really get it, then we can go after the U.S. market. I'm not going to go buy a trucking company in the United States because there's a zillion of them down there. And there's a lot of technology. But that would be our entry point to go to the U.S., is with technology, yes.
Our next question comes from David Ocampo of Cormark Securities.
My first one here is, Murray, you've spoken in the past about ELD and you not being bullish on that, and its impact on contract rates in 2020, whereas your counterparts in Canada have been pretty favorable on that. Can you kind of recap your thesis on that for us?
No, I haven't recalibrated. I'm extremely pleased that it's now getting the appropriate headlines, but I always thought that it was going to be a emerging trend, yes.
And the contract rates for 2020, are they enough to offset any cost inflation?
I think so. There's not many contract rates, is there, in our business?
No, no.
I don't see that. So there's going to be changes in the marketplace, but the marketplace adapts very, very quickly, David. We saw that happen in every market, U.S., everywhere. I don't think it'll be -- it'll be just a short-term disruption if it's anything. You got to be careful with short-term disruptions because the marketplace adapts.
And I would just add further, Stephen here. On ELDs, the U.S. phenomenon was where they were implementing new regulations at a time when they're cutting immigration and the economy is booming. That really caused that triple cascading effect. With Canadian truckers that already truck in the U.S., they have to be ELD compliant already. So there's a vast group of truckers in Canada that are already compliant, so you're not going to have that same withdraw of capacity in Canada that you did in the U.S. It's a different phenomenon in our estimation.
I think one of the issues that has to be sorted out over the next bid is, and I saw a notice on this from the federal minister, is that he's encouraging all the provincial ministers to adopt federal regulation. But sometimes, the provinces don't always adopt federal -- don't follow the big brother. So that will be an interesting thing. So in other words, if you're a local carrier and you're subject to provincial regulation, then you will fall outside the realm of federal regulation. If you cross a boundary, cross a border, if you're a federal carrier, then you must comply with the federal rule.So I hope there's a harmonization of that so there's one standard across the country, but provinces, they are very reluctant to that I've noticed in a number of other movies. So we'll see how that plays itself out. To us, it will not change the way we do business because we do not put people in harm's way and we do things the right way for our safety and everything else that goes with it. What it would do is it would cause some irritant with some of those that are kind of living on the edge up there. But like I said, the marketplace will adapt very, very quickly in my view.
And sort of continuing on the theme of regulations. Is there any update on drug and alcohol testing in Canada, or is that not on the docket at all?
Well, if you go to the U.S., you must still comply with U.S. law, which is drug and alcohol testing. You have to be compliant, of which marijuana is considered a drug. In Canada, that's not considered a drug. So if you want to sit down with a driver and explain that to them, go ahead. It's confusing at best. We tell people, "We don't care what you do with your personal life, but if you're drunk or you're stoned or whatever, you can't go to work for us, and you cannot consume on site, period."
It's fit for duty testing.
Fit for duty is our test. By the way, I'd say to you, the vast majority of people don't have to be told that. We're talking about the minority of the minority. But it becomes very complicated for some people that can't go to the U.S. It's a strict law, and until that changes, that's the way it is. But we're not growing our cross border business because you can't grow the driver pool.
In the U.S., in some instances, some of the states have legalized cannabis. But if those individuals who choose to use that drive a truck within that state, they cannot go to a neighboring state because that is not accepted federally. So they are bound by where the jurisdiction in which they...
Yep, and the company is bound by testing that individual, even though if they're a federal motor carrier company in the United States. So it's a really messy, complicated situation, to be honest with you. Most of our business today is now moving towards local, strong brands where we can see the people and we know whether they're stable, and steady and those kind of -- we're in contact with them. It's the long haul where they're away from a little bit that it gets a little more complicated.
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Mullen for any closing remarks.
Thank you, folks. The meter's up at one hour, so thanks for joining us. We hope you have a great rest of the summer, and that we're hopeful enough to [indiscernible] that the Canadian economy continues to find a little bit of legs. And maybe the governments are going to spend a bunch of money here over the next little bit as they try and woo voters. So thanks so much. Enjoy, take care.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.