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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. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]
I would now like to turn the conference over to Murray K. Mullen, Chair, Senior Executive Officer and President. Please go ahead.
Thank you. Welcome to our quarterly conference call. We will provide shareholders and interested investors with an overview of the second quarter financial results, and in addition, we will discuss the main drivers impacting on our operating performance or expectations for the year, and we’ll close with the Q&A session.
Before I commence today’s review, I’ll remind everyone that our presentation contains forward-looking statements that are based upon 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.
With me this morning, I have our executive team. I have Joanna Scott, Senior Corporate Officer; and Carson Urlacher, Senior Accounting Officer; and Richard Maloney is our Senior Operating Officer, he is on the line. I’d like to refer to Carson is our Senior Accounting Officer and some like to say the CFO or Chief Financial Officer, but at the Mullen group, we do not have Chiefs, we have Senior Executives.
So let me pivot towards the next topic this morning. And that is the discussing our Q2 2022 financial and operating performance. And as I was preparing my comments, I came across an old saying, that I believe pretty much sums up how the market has viewed our performance really for quite some time. It goes like this. If a tree falls in the forest, and there’s no one there to hear it, does it make a sound or in our case, we have a great quarter and there’s no one there to acknowledge it doesn’t matter. At the end of the day people justify whatever they want philosophies’ philosophy. But what I do know is this and what I can say is we nailed it. So in this morning’s call, I’ll walk the listeners through the quarter. Carson Urlacher will provide additional commentary and analysis. And then we’ll close with the outlook followed by a Q&A session.
So let’s start with the obvious. The capital markets enter tatted disarray and there appears to be some major stress points within the financial system after many years of cheap easy money. Or as I like to refer to as money for all, there’s no argument that stimulus was required in the early days of COVID. But all that cheap money didn’t go into building infrastructure adding to supply all it did was fuel demand. And then because the powers to be didn’t turn off the taps quicken up, a new generation of gambling mentality emerged, markets went crazy, everything goes up, but wait until the central bankers finally said, enough is enough. But that was only after they realized that inflation was not transitory.
The result of the new central bank moves is struggling. A recent report by [James Hodgkin of Cycle GMP] [ph] highlights that world capital markets, equities, bonds, real estate, cryptos, et cetera. While we have seen over $50 trillion in perceived wealth evaporate since the start of 2020, and that’s on a global perspective.
Now, pretty soon this could get serious, it might even may impact overall demand. Unfortunately, for those of us that live in the real economy, there could be ramifications. So we watch this very carefully, because one really never knows. So what about the real economy? And by this, I mean the consumers industry business. Here’s what we saw last quarter and what we know today, as for tomorrow, next year and beyond, all that those much smarter than me come to their own conclusions.
So actually, last quarter, the economy was pretty good. We didn’t see a lot of growth. In fact, it’s nearly impossible. I believe, given the inability to add capacity due to bottlenecks everywhere, in historically tight labor markets, but there certainly were some pockets of strength. For example, the consumer spend held in fairly well despite inflation, capital spending by businesses quite strong and would have been a lot stronger if it was not for those darn supply chain issues. This suggests to us that the capital spend cycle would be extended out for longer than previous cycles.
Furthermore, we have so much catching up to do in terms of capital replacement. It is difficult to see any meaningful drop in capital spending for quite some time. By way of example, we are on capital allocation for nearly every piece of new equipment we own into 2023. And we all know you must invest to improve productivity or to get a handle on costs. Now one area of the economy that finally after years of underinvestment entered a recovery phase was in the oil and natural gas sector, it should be obvious to everyone by now that producers must add productive capacity. They must invest if we have any chance of bringing fuel costs down.
Longer term, of course, maybe new sources of energy of the energy complex will replace and displace crude oil and natural gas. But there’s no way in the short-term. This implies old fashioned drilling, I believe. And if I could be so bold as to suggest that Canadians really want to help our European allies get off of Russian dependence of crude oil and natural gas. Then Canada needs additional infrastructure, new LNG facilities and pipelines to Canada’s East Coast.
Now, let me digress for a moment to speak about the war, because this will impact all of us at some point. The Ukrainian people are paying dearly for the invasion by the aggressor, Putin. The rest of Europe including Germany, the home of a manufacturing juggernaut is suffering collateral damage, because it needs energy to operate their economy to keep the factories open. And Russia is limiting deliveries, it’s fooling with deliveries. This is beyond serious and it is most certainly going to require real leadership and new thinking, difficult decisions must be made. And I’ll just leave it at that. So okay enough with my digression, let’s get back on track.
When you add up everything I discussed in terms of the economy, I can tell you that from our perspective, the economy did just fine, keeping the demand for all kinds of freight shipments, LTL truckload, specialized bulk and e-commerce at very healthy levels. This was the backdrop that I’ll speak to now and highlight as it relates to the quarter results or should I say record quarterly results. How did we do it? Well, let’s start with 6 quality acquisitions in 2021. And a couple of tuck-ins so far this year, that formed the basis of the growth.
Secondly, price increases. In response to inflationary pressures we raise prices, quite significantly in many cases. But and I will reiterate this very important point we did not nor will we gouge our customers with inflation running at a hot 8% to 9%, we had no choice but to raise prices. And I am not sure we are done. Every lane, every customer has been critically analyzed to ensure we generate the appropriate returns.
Third, fuel surcharges. Now this is associated with the doubling of diesel costs year-over-year. This flow through expense to customers is an absolute necessity, but it generally does not contribute to margin, because it is designed as a blow through. In saying this, there can be an arbitrage and fuel surcharge if your company on fleet achieves a very good fuel mileage, because fuel surcharge is based upon a mean average of fuel consumption.
In other words, if your fleet or truck is above the mean, in most cases, this is set around 5.5 mile per gallon, which many of our company trucks are. Then you can make margin on fuel surcharges conversely, if your fuel mileage is below the mean like many independent contractors, you will most likely go broke very quickly. This is a bifurcated situation.
We’re only those with good fuel mileage win, and the last contributing factor to our outstanding results this quarter was the excellent efforts of each one of our business units. They manage costs where they could, they grew market share in certain circumstances, and they handled very difficult situations. They negotiated hard to protect our margins, ensuring they did their part to keep the economy moving. In other words, they all did a fantastic job all 38 of them.
Now for some more details, I’ll turn the call over to Carson Urlacher. So Carson, you’re up.
All right. well, thank you, Murray, and welcome, everyone. I’ll provide a bit more detail. However, our second quarter interim report fully explains our financial performance. As such, I will provide you with some of the financial highlights. For the quarter, we generated $521 million in revenue, a record compared to any previous quarterly period, compared to the prior year, revenue increased by $209 million or 67% with all 4 of our segments contributing to this increase.
In terms of adjusted OIBDA, we generated approximately $94 million, a record compared to any previous second quarter. In fact, this $94 million represents the second highest amount of adjusted OIBDA for any quarter in our history. If there was only one quarter where we generated more, and for that you need to go back 10 years to the first quarter of 2012, where we generated $99 million of adjusted OIBDA. Only difference being in 2012, we were a much more capital intensive company as compared to our business model today.
Now getting back to our second quarter results, adjusted OIBDA, which excludes the impact of $6 million of Qs in 2021, increased by $41 million, or almost 80% compared to the second quarter of 2021, with all 4 segments, again contributing to this increase.
In terms of margin, our adjusted operating margin improved by 1.2% to 18% in 2022, compared to 16.8% in 2021. Now, if you exclude the impact of the financial results of our non-asset based US 3PL segment, our adjusted operating margins improved to just shy of 20%. So to put it into perspective, adjusted operating margins improved by 3% from our traditional asset base business units, from 16.8% in 2021 to 19.8% in 2022.
Now, let’s take a look at our results by segments. Starting with our non-asset based US 3PL segment, this segment added $57 million of incremental acquisition revenue in the quarter, along with $2.2 million of adjusted OIBDA, representing a margin of 3.8%. As you can see, this non-asset based segment has a detrimental impact to our consolidated operating margin. Operating margin on a net revenue basis was 43%. Since being acquired 1 year ago, the segment has added $8.2 million of adjusted OIBDA to our organization with virtually no CapEx requirements.
Now, let’s take a look at how our traditional asset-based operating segments were able to improve margins by 3% to 19.8%. Starting with our largest asset-based segment, the LTL segment grew revenues by $84 million, of which $59 million was due to acquisitions, $18 million was due to higher fuel surcharge, and internal growth added $7 million of revenue. Adjusted OIBDA increased by $19.4 million to $42 million in the quarter.
Acquisitions accounted for $10 million of this increase, while internal growth added the remaining $9.4 million. The continued strength in consumer spending held freight volume steady, while rate increases implemented in March led to internal growth in both revenue and adjusted OIBDA.
Adjusted operating margin increased by almost a full 2 points to 20.1% as compared to 18.2% in 2021. This trend of higher margin started in March, which was the strongest month in the first quarter. Margins in April than exceeded the margin generated in March, margins in May than exceeded the margin generated in April, and the month of June continued the trend by exceeding the margin generated in the month of May.
Our second largest asset-based segment is our L&W segment, which grew revenues by $36 million to $156 million. Internal growth represented the largest component of this increase at $16.7 million, and it was mainly due to price increases implemented earlier in the year, coupled with greater freight demand as more infrastructure spending and capital projects commenced. Fuel surcharge increased by $12.6 million and incremental acquisition revenue of $6.8 million was also recognized.
Adjusted OIBDA increased by $7.8 million to $30 million in the quarter and was mainly due to internal growth being highlighted by the strong performance at virtually all of our business units. Adjusted operating margin increased to 19.5% in 2022, from 18.8% in 2021, as freight rates remain elevated, and more than offset inflationary costs.
Last but not least, our third asset-based segment is our S&I segment. Revenues in this segment were up $34 million to $100 million in the quarter, which was mainly due to internal growth as higher commodity prices lead to a recovery in the oil and natural gas service sector, resulting in greater demand and price increases within the majority of our business units. Demand continued to strengthen in all service offerings and was highlighted by the strong performance of Canadian Dewatering.
Adjusted OIBDA increased by just under 100% or $10.2 million to $20.5 million in the quarter. Our adjusted operating margin increased by almost a full 5 points to 20.4% in 2022, from 15.5% in 2021, as greater demand, price increases and the strong performance at Canadian Dewatering lead to improve results in the segment.
Our net income was $42.7 million or $0.46 per common share both up roughly 100% compared to the prior year. We continue to buyback our own stock by repurchasing and canceling approximately 580,000 common shares at an average price of $12.47 in the quarter. As a result of our strong performance, our return on equity improved to 19.1% in the quarter, and 13.2% on a year-to-date basis, despite the fact that real estate is our largest asset class on our balance sheet.
Looking at some other notable items, we continue to generate cash in excess of our operating needs, as net cash from operating activities for the period is $48.8 million, compared to $55.9 million in 2021. This decrease of $7.1 million was due to our revenue growth, resulting and as financing our working capital requirements.
Our balance sheet remains strong. Our debt to operating cash flow covenant under our private debt agreement is down to 2.37 to 1, providing us with over one full turnover of room available under this covenant. We have a total of $250 million of bank credit facilities available to us, of which we had $142 million drawn at the end of the quarter, leaving us with over $100 million of room available.
Lastly, I would just like to point out our highlights within our Q2 interim financial report, to take a look at the chart under the summary of quarterly results. The chart on that page highlights our results over the trailing 12 months, whereby revenue is just shy of $1.9 billion, while our OIBDA is roughly $285 million. Our net income over the trailing 12 months is approximately $97 million, while basic earnings per share is $1.02 per common share over the last 12 months.
So with that, Murray, I will pass the conference back to you.
Thanks, Carson. As we talked about, it’s always nice when you give good numbers like that, always feels good. So thanks for that very good report. So as I move to the next section, I’ll talk about the outlook. What do I see? How will the economy perform for the balance of the year? How will our business units perform? Let’s be clear, my crystal ball is no better than anyone else. As such, I’ll take a very pragmatic and practical approach when it comes to predicting future outcomes.
Now, I’ll start with the obvious, we all know that risks are elevated as central bankers adjust monetary policy due to inflation, caused by the way by central bankers flooding this monetary system with too much liquidity. So now they start correcting their last mistakes. Hopefully, they will get it right this time. When you layer on some very disruptive war, a very disruptive war, tight labor markets, stretch supply chains, system-wide bottlenecks, high commodity prices, you have a pretty good recipe for inflationary pressures to remain uncomfortably high. So slowing for sure, but it’s difficult to see inflation returning to the old norm of 2%, I don’t see that. But we do think that inflation starts to slow as the year progresses and into 2023.
Now, of course, central bankers may play tough and take the job of taming inflation seriously. But this will require a stiff resolve and governments to temper their spending habits, positions in 2021. So what does this mean? I’ll focus on a Q3 metrics and determining the directional move we see for the economy in our business. I’ll start with jobs, number one. As long as the job market remains on solid ground, and I believe it will. Then consumers have money, government fiscal policy is also right there. I have not heard one policymaker politician talk austerity. As such, I conclude that governments will continue issuing checks for everything.
Capital flow is obviously crucial to the financial system. But this one I am struggling with to be honest, because it’s capital. That is what is required to help us get out of the inflationary spiral we were experiencing. Quite simply, I believe we need more supply, and supply as the fuel needed and capital is the fuel needed for investment activity. So, yes, we need the capital markets to stabilize in order for the economy to move forward in any meaningful way. With all of this is a backdrop. Here’s how I see the balance of the year unfolding.
I’ll start with the so called freight recession investors have been spooked about. I don’t see it consumer demand is not collapsing, although spending habits are changing, slowing us. But at the same time, there’s less capacity to move available freight. So from my perspective, our business will do just fine. I expect the LTL, Logistics & Warehousing and US 3PL segments, all to have a good second half, perhaps not growing, but results should be just fine, especially with sticky freight rates.
In the Specialized & Industrial Services segment, however, I expect a very good second half in 2022, driven by increased investment activity by oil and natural gas producers. In particular, I anticipate drilling activity in Western Canada will hit reach capacity of 250 to 300 active drilling rigs by year end. And if – but this is only at the supply chain cooperates. This means higher revenues and improved margins for our business units’ leverage to the oil and natural gas industry.
Also, many in our Logistics & Warehousing segment, because by the way, all of those consumables must be moved by truck and we have one of Western Canada’s best networks. As for the housing market, higher interest rates are not good. New buyers will be boxed out of the market, because of higher mortgage rates. Builders will slow home construction, which will only set up tomorrow’s problems, because immigration remains a priority for the Canadian government. These people all need accommodations, and a lot of other goods and services.
My hope, my expectation is that infrastructure spending and construction activity accelerates. Because as I indicated earlier, this is the key to adding capacity, whether it’s new roads, hospitals, airport expansions, freight terminals, warehouses, you name it, the economy needs it. Now, of course, this implies we need a robust labor force. And this may be the single biggest impediment to future growth and productivity improvement. Without people, without a good work ethic, continuing inflation could be problematic.
So in summary, I fully expect 2022 to be an excellent year for our organization, just as I suggested on April 22 call when I said and if I’m right, then many more solid quarters in our future, and I am sticking with my April outlook. We will generate record results. We will work on margins. We will continue to invest capital in new equipment, when we can get it. New facilities, when we can get approvals. But we slow acquisitions. And the main reason is, because the capital markets are in a state of flux, which implies that our growth rate slows.
We are monetizing some non-core assets and have already signed 3 letters of intent. Now the due diligence period for these LOIs expires this quarter, and if all close as we expect by year end, we free up around $60 million of cash proceeds will use to grow in areas of our strategic focus, or will strengthen the balance sheet. So in closing, I know inflation bites, it bites hardest on the working class. But job losses hurt. So I suspect policymakers will only push so hard. Under this scenario, we do very well.
And with that closing comment, let’s open the lines for the Q&A session. Thank you.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Konark Gupta of Scotia Capital. Please go ahead.
Good morning. Thanks, operator. Good morning, Murray.
Good morning, Konark, how are you?
Good morning, Murray. How are you? Good. Thanks. I wanted to first appreciate, 3 months ago, you mentioned, we will probably see good deals at a lot of sellers and stores, and that’s happening right now. So you kind of nailed the outlook in the short-term for sure. So I want to kind of pick your brain on, how you see things evolving now as you go ahead. And as you pointed out the pre-recession, everyone’s kind of talking about like with respect to your businesses, in Canada, especially. Have you noticed any significant changes in demand or pricing? As you know, the recent weeks as inflation and wage increases have started to flip through our impact consumer sentiment, at least right, and maybe the spending habits are shifting.
So what are you observing? Because it doesn’t feel like we don’t have a clear direction from a lot of data points. We are getting a lot of mixed messages at this point. So, yeah, curious as to what you think about the economy is heading from your perspective?
Konark, we – from all of the discussions we have been with our peers, but what we see with all of our business and this is both sides of the border everything. We have not seen any meaningful decline in demand, yet, right? So I know that the markets are anticipating the freight recession. And, once social media gets a hold of it then everybody thinks it will happen. Until new data comes out that the challenge is that the new thesis. What we see as of today is we have seen no meaningful decline in demand across any of our business platforms. And when I speak to my peers, it’s the same thing.
Now, we don’t see any growth. Let’s be blunt, and then we can add growth, because you can’t get equipment and you can’t get people and we’ve lost productivity. What we have seen corner is, it’s remained tight, and we’ve raised prices, and raising prices to protect our margin from rising inflationary costs. And along the way, we improved our margin. Last quarter, we improved it by depending on what number you want to look at, but just over 1% just on stated results. But if you back out our US 3PL, if you back out Qs from last year, which is a funny number. It’s up by 3% quarter-over-quarter on a year-over-year basis.
So that’s what we’ve seen today, tomorrow maybe the markets, right? Maybe consumers are in trouble and maybe job losses will hit hard. If job losses hit hard, give me a call back and let’s have a future, too. I’m not predicting it. But it’s a prediction. I don’t know. But I don’t see it as of right now. And we’re not anticipating it. And I can tell you we’re not, we’re not, we have no job losses here. We’re still actively trying to recruit so that we can be as productive as we can. And that’s what we see right now.
That’s great, Murray. Thanks. And as a follow-up, can I ask you – have you – what are sort of the obvious differences in your mind between the Canadian and the U.S. freight markets, if you haven’t noticed anything in the recent times?
LTL has remained quite strong, which is really tied to the consumer. And that’s getting right through into the end part of the consumer, where it has slowed down particularly in the U.S. has been in the truckload side. But that’s just because, I think, it was super juiced up last year, because of the inventory rebuilt by retailers and by manufacturers. So they’re slow the inventory, but it’s not stopped, it’s still a mess. The ports are plugged, the rails can’t get product moved.
So the supply chain remains inefficient. It’s still moving, but it remains inefficient. I don’t know. I feel for the retailers, particularly the small ones, because their costs are up. And the consumers are not happy with prices, so they’re pushing for price declines. I feel for those retailers, particularly the small ones right now that there’s nothing we could do about the cost side. Our warehouses are plugged, I can’t get real service. We’re losing trucking capacity, because of high fuel prices. Good quality companies like ourselves are in good shape.
That’s great, Murray. Thanks. Then last thing for me on the M&A front, I think, you mentioned obviously the rising interest rates and your prudence about balance sheet, and then volatility in the capital markets, everything is kind of making you cautious perhaps in the short-term on M&A side of things. Now, my question on M&A is, like, maybe given the environment we are in and the rates and inflation et cetera like it might push a few players over the edge in terms of opportunities. So like how do you look at your balance sheet with stands today versus the incremental opportunities that may come out because of the downturn?
Well, let me start with the M&A market. The M&A market I must get my inbox [ph] is plugged. I got it to get two day of opportunity, which is not normal. That tells you the stress in the market. That tells you that maybe some of the sellers think they can catch the buyer asleep at the wheel. Let me just tell our investors, you don’t catch us asleep at the wheel. We were aggressive on acquisitions in 2021, when we felt if we got these acquisitions, and then we saw pricing coming up that our shareholders and our investors would do exceptionally well, when we got that book of business, and then we raise prices, our results reflect those decisions.
Today, I’m cautious, people show good numbers just like us, and but we’re not biting. I’ll just wait it out. I think there’ll be a better day, because I think some people have got them stretched. They’ve overspent. So we’ll just wait.
And the second thing is, I read the tea leaves. If investors are not excited about the future, I’ll take a cue card from them. And I’m not going to stretch the balance sheet. Just to add some more growth, because it’ll be blank with you. It doesn’t appear our shareholders and our investors give us any credit. So why whatever is the balance sheet? We got a big company right now. And we’re just acing it. So, yeah, we’ll either strengthen the balance sheet or we’ll give some more back to our current investors. But I’m not going fishing right now, I don’t like it.
It makes sense. Perfect. Thanks so much, Murray, and all the best.
Thank you.
Our next question comes from David Ocampo of Cormark Securities. Please go ahead.
Thanks. Good morning, Murray.
Good morning, David.
I just wanted to touch on the S&I division, you talked about continued strength at least for the balance of the year, just given the strength in the commodity prices. But does that change your mid- or longer-term outlook on how much CapEx you spend on that division, because it’s been relatively muted in recent years? And then, two, do you guys still have a lot of unused capacity, where you can really go off the current base on the top-line guide?
David, that’s we’re going to have even internally that will be a major point of discussion with the senior execs, and then finally, with the board. But, let’s just say, we wanted to increase CapEx in the oilfield side, because Mullen, we see things really taking off. David, we can’t get it, the supply chain, we’re out, you can’t get a new truck till 2023, and we’re on allocation in 2023. So will new capital be required in that sector? Absolutely, nobody’s invested for years. Just like we didn’t drill, so now they got to go back drilling. But we need to see, first and foremost, the recovery.
And we need secondly to see the commitment that the producers are going to make that they say I need you. And then we’ll go out and we’ll consider. I said, we’ll consider adding capital into that sector. But in the meantime, I’m raising prices, because the capital we got is competent. And the people we have are outstanding, we stuck with them. During the toughest times when everybody said get rid of that stuff. Now, it’s our time to make a good profit and a return on those investments.
That makes a lot of sense. And then on your trucking side, on the asset base there, you guys regarding this $60 million of CapEx any risks of that, you guys don’t hit that number, just given all the supply chain issues that we’re seeing today?
Well, Carson, what do you…
I would say that’s going to be difficult to hit. You take a look at our results in 6 months, year-to-date were net CapEx of $24 million. So you look at the next 6 months out for 2022 hitting $60 million is going to be tough, especially with the delay in getting our orders in – the products ordered. It’s just a matter of timing. As to when we can get this stuff, but I’m going to say we don’t hit the $60 million dollar mark by the end of the year. Is it off by 10% maybe. I can see a $50 million mark for net CapEx by the end of the year. And again, this is contingent upon us not closing any of those non-core asset sales that that we’re looking at.
David, what we do know is this the requests from our business units are significantly higher than our ability to get capital delivered. So what you see is what we spent that wasn’t what was requested by our business units, right? So, in fact, what we articulated earlier was we’re going to have a higher CapEx spend this year than what we’re on target for. So that tells you the supply chain is tight. It remains. I don’t see that loosening up. We’re already on allocation, David, for 2023?
And do you guys have a sense on how much that is weighing on margins, if you guys are running older equipment, 100 basis points, 50 basis points?
That would be very difficult for us to calculate, David.
No, I clearly understand.
Yeah, I think what it is, we’ve always maintained a steady CapEx program above throw time we’ve – that’s why we kept investing. And that’s what we have is, David, I think that will continue to do that replace capital. So we always got the most efficient equipment. But you can’t add to what you’ve got. You cannot grow our fleet right now, because we cannot get it. At best, we’re able to replace what we’re trying to always improve, always have a better fuel mileage; always do our part for the environment; always do our repairs or maintenance costs, and we continue to do that. But we can’t add incremental to it. There’s not enough capacity in the system for us to add more company trucks. And by the way, there’s no drivers anyhow, so it doesn’t matter.
Those are my questions. I’ll hop back in the queue. Thanks a lot, guys.
Thanks.
Our next question comes from Tim James of TD securities. Please go ahead.
Thank you. Good morning. Congratulations on the great results.
Good morning.
Yeah. My first question, I’m sure, if you can kind of update us on Mullen’s exposure to the spot market pricing in LTL and logistics, more specifically. And if you’re seeing customers, I mean, you mentioned you’ve been able to raise prices, and there may be more of that to come. Are you seeing customers move towards wanting or locking into sort of contractual pricing? Maybe some longer term pricing or what trends are you seeing in that side of the business?
Yeah, that’s a really good observation, Tim. So spot market pricing has definitely softened. So what we and that tells me that the customer is starting to push back. There was a time when they just get it. I just want it, because they were caught short. But today people are pushing back saying no, no, I’m not going to pay a stupid number. So we’ve seen that now a lot of our pricing in the spot market, we would have also had spot market pricing from our contractors. So we just managed to spread on that between how that worked out. But that the spot markets definitely soften.
Now you’d say, okay, our customers wanting to go more to the contract market? No, I don’t see it. And I got to be blunt on, everybody talks about contract pricings. Tim, they all got a 30-day cancellation clause, both sides. So let’s not pretend that you’re locking into a 3-year fixed price, no adjustment clause contract. We don’t have any of those, maybe somebody else’s, but we don’t do that. So customers definitely when they’ve made commitments on to their carriers, they’re going into the contract pricing rather than the spot market. So demand has softened a bit that softened the spot market pricing. Contract pricing, we haven’t seen any significant pushback. Although I would tell you, it feels like customers, everybody wants; we all want to get inflation under control, all of us do.
The problem that you got if customers overtook and they want to really reduce pricing, unless fuel prices really come down significantly. That all you’re going to do is push more of independent contractors into bankruptcy. We’re already seeing too many contractors, fold the tent not be around. And that’s where I talked about the supply side is really at risk, in my view. And because the contractors don’t get great fuel mileage, and that’s your single biggest cost by two, right now.
The other thing about independent contractors are, it real risk is availability of parts. That is not that easy to get right now. So if you’re an independent contractor, and your truck goes down, because your clutch went out, or you had to get new brakes, or whatever, you could be down for quite a while. Okay, that’s 100% of your fleet. If 20% of our fleet is down at any given time, because we can’t get parts that’s 20%; but then, if they go down its 100%. That is not sustainable. And you can’t just go in and get service too quickly today. So I suspect the supply side is going to keep the market and pricing up pretty firm with all the major carriers. I don’t see us really dropping contract rates too much to be honest within. I don’t want to see you.
Okay, that’s helpful. It’s me to elaborate on that a bit. So your contractors that you use, you’re maybe benefiting a little bit from the softness in the spot market, I assume there, but from your transportation equipment that’s generating revenue, you’ve talked about being able to raise prices, and maybe some more upside there. Could you just kind of talk about your ability to do that in the face of this softening spot market? Is that just because of sort of the regions you’re rating like what gives you the ability to do that, despite a softening spot market, I guess, this is my question?
If we operate in every region, the United States, right across Canada, nearly every sector of the economy. So there’s no doubt, there’s been a cooling off of the freight surge that happened in 2021, as I talked about. But not on the contract side that was just stated from nobodies, I don’t hear anybody really capitulating insane, because you can’t get any drivers, I can’t get anybody to go to work. They either got the sniffles, or they don’t want to go to work and colleague, we got a lot of people retiring in the transportation sector. So the demographic is not working in our favor, at the moment. So we’re not dropping prices, it’s that simple. I don’t know how we’re going to increase prices.
And we certainly won’t be at the same rate as we have. But inflation is up 8% to 9%. Clearly, we had to get that which inflation tomorrow, it’s not going to be 8% to 9%, I don’t believe that it’s going to fall back into line is it going to be 2%, as I talked about, I doubt it very much. But I don’t think it’s going to be 8% or 9% either. So it’ll start trending downward. But so that means we will get pricing increases in the future and contract rates to cover inflation. But I don’t think much more than that. All of the margin improvement that we will get in the future is because of productivity improvements. That we have better equipment than somebody else and that we’ve made better decisions. And we’ll continue to work, we always work on that, Tim, and will continue to work on that.
My second question, just looking at EBITDA margins, is it possible just to discuss a little bit the trajectory of margins kind of through the balance of the year that that gets you to your EBITDA target for the year, I think, historically and granted with the new presentation, we don’t have a lot of history. But, Q4, there’s typically a bit of a step down in the margin percentage in LTL and maybe specialized. But could you just give us, again, obviously, I’m sure you don’t want to get into real specifics, but what we should expect in terms of the trajectory of margins for the segments for the balance of the year?
Well, let’s start with how we did this year. These will be last year, and you should expect that we should have the same increases year-over-year for the balance of the year.
Okay. So the year-over-year changes that we’ve seen kind of through the first part of the year should be sustainable through the second half. Am I interpreting that correctly?
That’s what we think and which is why I said, I think, we’re on target for $300 million of EBITDA this year.
Okay, great. And then my final question, just you mentioned just more of a confirmation here. You mentioned about some non-core asset sales. I may have missed the number. But, I think, $60 million, potentially in terms of the 3 LOIs that you’ve got. Would the completion of those sales in 2022 change that kind of, call it, $50 million, sort of gross CapEx number that Carson mentioned earlier? Or should we just think about that, if that comes through that simply extra cash that sits on the balance sheet, it wouldn’t be redeployed this year?
Yeah, we can’t redeploy it in new capital. Forget it. No, I could – we might redeploy it in acquisitions, perhaps, but not a new capital because we can’t get new capital. So we’re already behind the curve until our 2022 CapEx. But, we might be able to, we might deploy it into growth CapEx just repositioning that capital, or we might just strengthen the balance sheet and just pay down debt. And, we will just play it by year over the balance of the years to weather capital markets are in a total flux, as I call them, and they’re going to have a hissy fit for all along. I have no idea. All I know is this.
The capital markets didn’t have a hissy fit at the start of the year. But now they do. So I don’t know what the markets are going to be like at the end of the year. But at least we have options. If I think that the markets are in a bit of disarray, what will strengthen the balance sheet, if things normalized and whatever, and we freed up $60 million, what we’ll do acquisitions and grow. So that’s a great thing about our business model. We got flexibility galore.
I know those non-core assets, are they in a particular segment? Or are they spread across the businesses?
Yeah, we’re in a quiet period on our LOI. So I think I’m just highlighting everybody that what we’re looking at monetizing non-core assets that really aren’t adding us a lot of EBITDA. So, we’re just granted it. Okay.
Great. Thank you very much.
You bet, Tim.
Our next question comes from Walter Spracklin of RBC Capital Markets. Please go ahead.
Thanks very much. Hi, everyone. Very good day. These were great results. Congratulations. Yeah. I want to touch on that, I mean, one of the things that when I look at your guidance, and I compare it to what you’ve commented on a business segment perspective. I came into this call wondering if I couldn’t gauge by the press release that there was anything onetime in the second quarter that was not a trend. So when I look at the segment that I see you, you say that less than truckload second half will be equal to or better than the first half, when you say logistics and warehousing will continue to produce strong results.
And Specialized & Industrial should be better than in the first half. When I reflect all that in on a segment basis I’m coming up with north of $315 million, and that’s assuming, you might have a little bit of conservatism in those segmented commentary, which would mean it might be above $315 million. So am I reading something wrong into deserve some corporate elimination or something like that, that is going to offset the segmented commentary that you provided? Or is the guidance that you provided just have a nice dose of conservatism, even if you add up the commentary on the segmented basis as you provided it?
Well, How do I say, so we said we can, I probably wouldn’t say we could do $300 million of about that we weren’t going to do $300 million. So we always under command and trying to over perform. So, I think, you have a pretty good analysis and pretty good take on it. What you said and if it plays out as we think it might, you could be spot on in your analysis. I’ll leave that to you to kind of make your best guess. But, I’ve given you our best take on what we see and how we see it. And, clearly we’re on target for a good end of the year, so long as there’s no job losses, unless there’s no major capitulation in the real economy, which I’m not predicting, but I think, Carson, we’ve talked about, I think last year, our Q3 was our best quarter.
Yeah, typically, traditionally, our third quarter is now our strongest quarter. And then Q4, obviously falls off, because you lose half of the month of December with holidays and that sort of thing.
Okay. That’s great color.
It is plausible, Walter, although I’m not – I’m reluctant. It’s a very fluid market. But it’s plausible that third quarter could be our best quarter then the fourth quarter falls off typically. But, if I’m right, that the drilling rig count is going to hit that cyclical high of $250 million to $300 million, then are all our S&I segments going to have a good fourth quarter? So, yeah, we’ve got the stars are lining up pretty good for this business model right here. Yeah, we feel pretty good about it.
All right. And then on the non-core assets you’re in a quiet period. But I want to ask whether that sale is an indication of what you’d like to…
Sales.
Sorry, say it again.
Sales, more than one, not just one. Yeah.
Is this an indication of a broader strategy to, because you own a lot of your land? Are you looking to monetize more of your balance sheet in your holdings? It is this an indication of further of a strategic shift in that regard?
No, I don’t think it’s strategic, from that it’s just the opportunity came up. And the opportunities that came up were just too compelling for us not to consider on behalf of our shareholders. So and then it’s just as I said, if they come to fruition, everybody – we were always in LOIs on acquisitions. In this case, we’re in LOIs of divestitures. You never know how they’ll play out, you got to go through due diligence, and you got to come up with funding and all these kinds of things. So I’m just highlighting is that, if it comes to fruition, that’s a game changer for our balance sheet. And then we’ll figure out whether it just we just reduced that by 60, or whether we use it to grow in 2022, 2023, which is further acquisitions. I can tell you, we got good options on both sides.
Yeah. And that was the next part of my question is that, let’s just say it comes to fruition. You’re generating a lot of good free cash, you’re holding back on acquisitions right now. I mean, you’ve got the option of shareholder return, but I didn’t hear you say much about that. So in the form of dividend or even buyback, so it sounds like you want to maybe reduce debt knowing you can always scale it back up, reduce leverage, effectively part that dry powder, and keep it on hand for either a bigger CapEx spend next year, if the opportunities present themselves, or acquisitions, am I reading that correctly?
Yeah. We got really four good uses of cash. But we are just totally steadfast that I’m not going to go try and grow this company and leverage the balance sheet, given the uneasiness in the capital markets, that is gambling, and we do not gamble with our shareholders money. It’s too risky. So we’ll just take a prudent look at it. Clearly, we’re not an issue about stock. I mean, investors don’t believe that when our business model, I guess, that’s what our stock price is where it’s at. But so we have to be, and I’m not going to leverage the balance sheet. So we’ll just do it one step at a time.
But there’s not many other ways to do it, Walter. Acquisitions are damn expensive, and they don’t pay themselves off in 1 year. It’s a long-term investment. And I don’t see where the investors or the debt markets want to make long-term commitment today. So why – would we – we will just manage our business. We got a great business. It’s twice what we were when we entered COVID twice and our stock price is not up. I rest my case.
Okay, that’s all my questions. Thanks very much, Murray.
There was nobody in the forest to hear the trees fall.
Yeah, I hear you. Thanks again. Appreciate the time.
Thank you.
Our next question comes from Kevin Chiang of CIBC. Please go ahead.
Thanks for taking my question. Congrats on a very strong set of results for Murray and team.
Yeah, we did a pretty good one. Yeah, we hit it out of the park. And so, every analyst missed that what was the average like 66. I think, the one thing that most nearly everybody miscalculate, everybody got kind of a top-line, right, except for one thing, nobody believed that we were going to get the pricing increases. And pricing increases, if increased by 10% and $450 million, there’s $45 million of incremental revenue. And we took and we maintain margin actually we growth, I think that’s where most everybody missed that they thought we were going to do the same as last year, which is where the 66 came in, maybe beat it by a little bit. So, yeah, I felt pretty good about our quarter, for sure.
No, no, no. You’d be definitely hit it out of the park there. Maybe I could ask, Walter’s question differently, because it does feel like you saw accelerated pricing growth in Q2, and maybe less so in Q1, which was also impacted by Omicron to start the year. But if I just look at the $94 million of EBITDA, it sounds like again, this is outside of some sort of economic slowdown. So maintain the status quo, which looks pretty good for you. It’s hard to see how your normalized earnings on an annualized basis is in something like $350 million, or something north of that, and I know you’ll give us a business update sometime in December this year. But is there anything off about just taking what you did in Q2 applying what could be normal seasonality for your business. And assuming, again, kind of the economy status quo that you’re not like a mid-$300 million EBITDA company, or my often might be a very simplistic math.
Yeah, sure. Feels like it. If prices remain sticky, which I’m predicting they will, then we made a major step change in the revenue side with the acquisitions. And then in the pricing side, we’ve done that our business units, it was really difficult for all of your businesses that have lived in a non-inflationary environment for 20 years, to adjust on at time to the rising inflation. We talked to them about it, but it was really difficult for them to have those discussions with customers until it became so painfully obvious that inflation was running rampant, that we had to raise the prices. And those were tough discussions we had with our business units. In March, they finally had the wherewithal to go and implement them. And you can see the end result of that, not only did we cover up the inflationary pressures, but we actually added the margin and I suspect that. I don’t want to go back, I don’t think they want to go back. And unless the market forces us to go back, and I’m not – I don’t think it will then we’re not going back.
And then just on the pricing, if I kind of look at it from a yield perspective, so you mentioned pricing of 10%, was any tailwinds related to mix to that, because I have to think that and tell me if I’m wrong, I just think that Q2 you probably saw a major better recovery in B2B volumes, just have things reopened, I kind of think of that as being heavier. And that’s generally a positive mix shift, when I think yield. Was that something that also helped in terms of the broader unit revenue trends, or is that something that wasn’t material in the quarter?
I don’t think so, Kevin. Carson?
I didn’t see any one off type changes that that really impacted the quarter there can…
So the one-off change – Kevin, the one-off change was pricing increases. Yeah. That is not something we’ve seen. Now, we used to see that when the oil and gas sector was booming. So that means we haven’t seen it in over a decade in our company, when in the general economy haven’t seen it in two decades. So yeah, I would say you didn’t want to change was pricing increases. But now, we’re not going to have another 10% rate increase in Q3 over Q2. But Q3 – about pricing increases will be 10% above Q3 of 2021.
Great. That’s makes a ton of sense. Just last one for me, I have noticed port congestion, or the West Coast ports here in Canada, the rail dwell times have been kind of picking up here. Just wondering what you’re seeing within your intermodal franchise and just anything concerning, why do you think that you’re worried about as you kind of think about fluidity in the back half of the year, and as you kind of progress to $300 million plus of EBITDA? How much of a risk is this, is it something that seems manageable? Or is it something that’s concerning in your eyes?
That’s a really good observation, Kevin. We’ve monitor this daily, let me, I think the supply chain is still subject to some real bottlenecks. And I think now the bottleneck is now starting at our warehouses. So our warehouses, Kevin, I can tell you, I talked to, but they’re jam packed. So that means we can’t get any more inventory in, but there’s inventory in the water, there’s inventory on the trains. So you can’t bring the container to us, because it can’t handle. So then if you can’t bring it to us, you can’t get out of the railway station, we can’t get out of the railway station, they can’t. So there’s always a bottleneck. And it appears that the freight is not moving out of the warehouses at a fast enough clip to let new freight. And so that that’s why I say to you, I really feel for the retailer right now, because they’re in a bit of disarray. The railways, they’re good friends of ours, we use them a lot, but it’s a mess.
And now you’ve got particularly issues down in California that could more into other parts, which is labor disruption. And you’ve heard about AB5. And, the independent contractors are striking in California, because the State of California has ruled that independent contractors can’t be independent contractors and their freight mat [ph] and the port union workers, and hope one will not cross the picket lines. Freight is not moving until this gets resolved. And so it’s a Mexican standoff. It’s a shoot of the O.K. Corral. I don’t care what the hell you want to call it. It is going to bottleneck the supply chain. That means you can offload the ships.
Right. That makes sense. That makes sense. I’ll leave it there, Murray. Congrats again on the good Q2. I’ll say we all heard the tree fall on this quarter. Thank you.
Okay. Thanks, Kevin.
Our next question comes from Matthew Weekes of IA Capital Markets. Please go ahead.
Good morning. Thanks for taking my question. Congrats on the good quarter. I think most might have been answered at this point. But I just want to ask and you talked about sort of the different dynamics you’ve seen between spot and contracts rate a little bit recently here. I’m just wondering if you could provide any kind of commentary or color on, how much of your business would you say roughly is exposed to spot market versus how much is typically contract?
Like I would say, nearly all LTL business is contract rate. It’s either book rates, contract rate, whatever. So LTL is very sticky in terms of whatever the rate is what the rate is. In the Logistics & Warehousing business, so the long-haul business, the spot market, a lot goes on load boards, and it’s posted, the trucks post the trucks, and the freight broker would post what their freight is and, that kind of sets what the market is for the spot market. That’s soft, but still it’s the independent contractors that are taking it on the chin in the spot market, not bigger companies, because we typically don’t play on the spot market.
Our logistics business place the spot market. But as I said to you, we just manage the spread between what the market pays and what we can buy a contractor on the market for. So we still manage the spread, our spread hasn’t changed, I don’t think as, Carson. The price of the contract has went up, we raised the bus for the customers, the spot market changes, we don’t get as much from the customer, the trucker doesn’t get as much. It’s the independent contractor that’s at risk here as the spot market. Adjust to whatever the economy is at that day. Whereas the larger carriers, we typically don’t play the spot market that much with our company equipment.
Yeah, margins in the LTL – sorry, the L&W segment actually improved here in the last quarter year-over-year.
Okay, thanks. Appreciate the commentary on that. I’ll turn the call back. Thanks.
Thank you.
[Operator Instructions] Our next question comes from Michael Robertson of National Bank Financial. Please go ahead.
Hey, good morning, all. Great quarter. Cognizant of the time here. So I’ll just have a quick follow-up, I guess. Just wanted to touch on your updated guidance for the year, if I look at those numbers and back out, what you’ve done in the first half of the year? It looks like you’re pointing to margins, going down from what we saw in Q2, and I guess in H1 as a whole? I was just wondering if you’re seeing some specific drivers behind that you can speak to or maybe that’s just, as you noted earlier, airing events on that the conservative side?
Well, I think we were conserve – I’m always conservative, Michael. I’m not a promoter. We tell people this is our best analysis. I can tell you that, I don’t ever want to perform – underperform what we told the market. So I would say to you, I would think that, I would not say $300 million, if I didn’t think it was baked in the cake.
Got it. Got it. So you don’t see, I just wondering if maybe there was like a cost creep or something that you saw catching up in the back half of the year that might put pressure on those margins relative to what you see.
I don’t see that, because I think that the prices are sticky for the reasons I’ve explained. I don’t think that freight volumes are increasing. Yes, freight volumes are increasing. And demand is increasing in the specialized industrial side. There’s no doubt about that. That’s because the drilling rig count is going up. In fact, we’re seeing it go – the rig count is going up like 10 a week right now. So we’ll hit that $250 million to $300 million. And that’s kind of the peak where I think that industry settles out up and we’ve raised the prices, we’ll have good margins in a good second half for our S&I side.
And the rest of our business, we’re going to bust here to make sure the margins that we had in the second quarter are maintained throughout the balance of the year. But the whole market softens a little bit as we go into fourth quarter with the consumer spend. So take what we do in the fourth quarter of last year in our logistics and warehousing and our LTL side, and say, well, we still should improve it by 1%, Carson, I mean, we’ve improved 1% in this last quarter. And that’s with our 3PL in there. But if you take the 3PL out and we’ll have a nice increase that’s our expectation. It’ll be up by at least 1% or 2% the margin over last year. Not over the second quarter over last year. We’re talking about the rate of change year-over-year.
Got it. Got it. Appreciate the color, as always great quarter.
Thanks, Mike. Appreciate that. Thanks, Carson.
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Mullen for any closing remarks.
I just want to say wrap-up and say thanks folks are early start to the day we got the numbers out, we’re already focused on Q3. And the other stuff we got working on we got a lot of work ahead of us, but we feel pretty good about the last half of the year. But we watch carefully. We got a keen eye on the capital markets just in case the capital markets are right and the world is coming to an end. So we watch it carefully, but we don’t predict it. Take care. Have a great summer. Stay safe.
This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.