Mullen Group Ltd

TSX:MTL

Earnings Call Transcript 2021-Q4

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Mullen Group Limited 2021 Year-End and Fourth Quarter Earnings Conference Call and Webcast. [Operator Instructions] I would now like to turn the conference over to Mr. Murray K. Mullen, Chairman, CEO, and President of the Mullen Group Limited. Please go ahead, sir.

[Murray Kenneth Mullen, Chairman, CEO & President]

Thank you. Welcome all to Mullen Group's quarterly conference call. So on today's call, we'll provide shareholders and interested investors with an overview of the fourth quarter financial results. We'll discuss the main drivers impacting our operating performance, and we'll close with the Q&A session.So before I commence today's call, I'll remind everyone that the presentation may contain forward-looking statements, which are based on our 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.So with me this morning is the executive team. I have Stephen Clark, who's our CFO; Richard Maloney, Senior VP; Joanna Scott, Corporate Secretary and VP of Corporate Services; and I have Carson Urlacher as our Corporate Controller.And -- first thing, we'll start with is a review of the Q4 financial results and operating performance. And what I'm going to do is give you a bit of a high-level overview of it, and then Stephen will get into the details a little more granular. So with the release of the '21 annual financial review in today's call, we'll officially put '21 in the history books. And as I said today, what we're going to do is focus on the fourth quarter. We'll provide insight and commentary on our results. A complete and full disclosure of the fourth quarter and full-year results can be found in the annual financial review, which has been prepared, reviewed and approved by the auditors and the audit committee. This document can be found on SEDAR and on our website, www.mullengroup.com.So a huge thank you to the entire team that worked just tirelessly to prepare this detailed document. So thanks, team. So clearly, the #1 highlight that anyone can glean out of the quarter has to be the 48% increase in revenues. And you'll recall that we completed a number of acquisitions earlier in the year, 6 to be exact. So, we had the full benefit of these acquisitions during the quarter, CAD 136 million of incremental revenues come from acquisitions.So Stephen will talk more about the numbers in a minute. So let me share with you a few comments about what these acquisitions actually mean to our company. First off, each of the companies we acquired last year will drive annual revenues. I think that collectively, they'll drive annual revenues of around CAD 500 million. So, I'm always proud that when we're able to acquire good companies into our network, but bringing 6 on board in a year is pretty amazing. And let me tell you that these are all great companies. We've got immediate access to new customers, new markets, excellent leadership teams and a quality workforce. And this is at a time when people are the most difficult obstacle to any organization's potential growth. So am I happy? You know what?So those business units, we have owned for over a year, let me talk a little bit about them. Let's call them our legacy BUs, business units. They generated just over CAD 305 million in revenues. And I just spoke about how the challenge is to grow your business due to the current state of the labor market. So, this shows up in our year-over-year revenue numbers, which are up only CAD 8 million after accounting for a drop of nearly CAD 14 million at our Premay Pipeline group. And I'll talk a little bit more about that later.Certain market segments such as LTL had some growth. But overall, there wasn't much growth in the economy, which if you think about it, it makes perfect sense because how can you grow an economy if there's not a lot of people available and with all the supply chain issues we had. So let me be clear. What I'm saying is that this doesn't mean that the economy was bad. That's not what I'm saying. What I'm reiterating is that the economic growth is difficult to achieve given the current labor markets and supply chain challenges. Because what we did with this was that the overall consumer spend was still pretty robust, providing solid freight demand for our LTL, Logistics & Warehousing and our newest segment, our US & International Logistics.I think what we saw, the big change that we started to see and emerge last quarter was in the capital investment part of the economy, especially the energy industry, as commodity prices have reloaded the balance sheets of these companies. So if this trend continues, and I believe it will, then we are in for some solid long-haul flat deck freight demand and we'll see some improvement in our -- in everything to do with the energy business, in our drilling services side.So productivity and demand for pipeline services delayed us. That hurt us last quarter, lots of delays, delays after delays and the pipeline business got hurt. It is noteworthy that I should reiterate and then in 2022, the pipeline business will most likely be about the same as what it is now. We've got to finish those big projects. But they really started in earnest in 2020. So, 2020 was just really robust for our pipeline side. And thankfully, it is because that is the impetus to fuel for the drilling services side, the drilling side and all of our other ancillary services that we provide.So in our business model, when one area falters and other steps up, that's what we have in a diversified business model strategy. So, Stephen will be providing additional details by segment shortly. But before he starts his presentation, I'll comment on the newest battle for business that is the inflation trend. No denying that it exists, the challenge that everyone has is trying to stay ahead of the curve on this emerging issue. Our business units have raised pricing, which is, why if you look at our margins, adjusted for our US & International Logistics segment, which is a non-asset-based 3PL. If we back them out, then you'll see that our business was pretty much in line with last year, which I think is pretty commendable considering the loss of the high-margin business we had in Premay Pipeline.So from my perspective, I'm very pleased. Now, however, as I've reiterated to all of our business unit leaders, this inflation issue is not going away and they must raise prices. And I've had to be pretty firm on this. I don't want to have any debate on this with me. So overall, a very solid quarter, which is precisely what I indicated on our last quarterly call, where I called for revenues to be strong and operating profits to track close to the Q3 results. So, we were pretty spot on with that.And Stephen, I think what I'm going to do is call upon you now to provide some additional details on the fourth quarter financial results. So with all the details, here is Stephen.

[P. Stephen Clark, Chief Financial Officer]

Well, thank you, Murray, and good morning, fellow shareholders. Firstly, like Murray, I would like to thank the over 7,000 people that made these results possible, and a special shout-out to all the people that joined our team this past year via acquisition. I trust your first experiences under the Mullen banner have been rewarding. Again, thank you.I'll get a little bit more granular. However, our 146 page Annual Financial Review contains the details that fully explain our performance. As such, I will only provide some high-level commentary on the quarter. For the quarter, we generated fourth quarter results -- record fourth quarter results with revenue of CAD 441.9 million. Again, this is a record revenue that far exceeded any previous Q4 by over CAD 100 million, and it was achieved through acquisitions and by modest, I'll call it, same-store sales growth within our LTL and Logistics & Warehousing segments, but this was somewhat offset by the decline in the Specialized & Industrial Services segment.Year-over-year revenue was up CAD 144.2 million. In total, acquisitions contributed CAD 136.1 million of new incremental revenue to the quarter. The remaining CAD 8.1 million of growth was due to the net effect of about CAD 7.8 million or about 0.9% of growth once adjusted for fuel surcharge fluctuations within the LTL section -- segment, sorry, an CAD 8.7 million or growth of about 5.9% once adjusted for fuel surcharge fluctuations within the Logistics & Warehousing segment; and then a CAD 4.5 million of growth within our drilling-related businesses within the Specialized & Industrial Services segment, being offset by lower revenue from our construction divisions, namely Premay Pipeline, which was down CAD 14.3 million and Smook, which was down by CAD 3.3 million. That resulted in net segment decline for the Specialized & Industrial Services segment of CAD 6.7 million. Of course, this is excluding acquisitions.Revenue also rose because of higher fuel surcharge. Consolidated fuel surcharge revenue increased by CAD 20.9 million to CAD 37 million in total as compared to CAD 16.1 million in 2020, with acquisitions contributing about CAD 10 million of incremental fuel surcharge revenue and the remaining CAD 10.9 million of increased fuel surcharge revenue being attributable to higher diesel fuel prices in our legacy businesses.I remind everyone this flow-through of higher diesel prices is actually detrimental to margin, and I'll get into that a little bit more detail later on. A bit more granular on segment revenue. The LTL segment revenue grew by CAD 52.5 million to CAD 168.8 million as compared to CAD 116.3 million in 2020. Acquisitions accounted for CAD 44.7 million, or 85% of the rise in revenue. The remaining increase of CAD 7.8 million was due to increases at all business units due to the rebound in the economy and fuel surcharge revenue increases.On a same-store basis, again, adjusted for acquisitions and fuel surcharge fluctuations, this segment experienced a 0.09% or nearly 1% increase as COVID again, specifically Omicron variant slowed the economy again in December, and we had challenges in November with flooding in the lower mainland. Revenue in the Logistics & Warehousing segment rose by CAD 35 million to CAD 131.8 million as compared to CAD 96.8 million in 2020 due to the CAD 26.3 million of revenue due to acquisitions, as well as the CAD 3.2 million increase in fuel surcharge revenue. So again, on a same-store sales basis, adjusted for acquisitions and fuel surcharge fluctuations, we were up by 5.9% during the quarter.Specialized & Industrial Services segment declined by CAD 2.8 million to CAD 82 million as compared to CAD 84.8 million in 2020, primarily again to lower revenue at Premay Pipeline Hauling that was down CAD 14.3 million. And Smook, again, was down, but it was partially offset by a return to strength in the drilling-related BUs and the acquisition of Babine in the spring of 2021. Again, more discrete numbers can be found on Page 61 of the MD&A for the breakdown by category in the S&I segment here.As for profitability, operating income before depreciation and amortization, commonly referred to as EBITDA, increased by CAD 13.6 million to CAD 65.8 million. This, however, is somewhat a misleading indicator as our results included CAD 5.2 million of CEWS, or government wage subsidies in 2021 in the fourth quarter as compared to CAD 5.3 million of CEWS in 2020. So, we measure the success of our strategic goals by measuring the underlying business performance without CEWS. So, we included within our MD&A, a non-GAAP measure, we called adjusted EBITDA. This definition and reconciliation to EBITDA or OIBDA can be found on Page 93, but essentially, we adjusted OIBDA for CEWS. The underlying OIBDA number adjusted for CEWS was CAD 60.6 million in the current quarter as compared to CAD 46.9 million in 2020.So how did we adjust -- how did we achieve growth of adjusted EBITDA by nearly 30%? From a high level, it was the CAD 13.9 million of new incremental OIBDA from our numerous acquisitions, being partially offset by lower profitability at Premay Pipeline and Smook. More specifically on a segment level, LTL, the adjusted OIBDA increased by CAD 8 million to CAD 25.7 million as compared to CAD 17.7 million in 2020. This increase, again, was really due to acquisitions, which accounted for the majority of the increase of CAD 7 million, being somewhat offset by higher cost due to inflation.As a percentage of revenue, adjusted operating margin, though, remained stable at 15.2% in the fourth quarter of 2021 and in the fourth quarter of 2020. Adjusted OIBDA in the Logistics & Warehousing segment increased by CAD 4.4 million to CAD 23.3 million as compared to CAD 18.9 million in 2020. The majority, again, of the rise of EBITDA or OIBDA, was due to our recent acquisitions as they added CAD 4.7 million of incremental OIBDA being, again, offset primarily by inflation, but you would see that manifesting in fuel and purchase transportation costs. Because of inflation, adjusted OIBDA margin decreased to 17.7% compared to 19.5% in 2020. Again, 17.7% being a pretty respectable margin for a trucking company though.In the Specialized & Industrial Services segment, adjusted OIBDA decreased by CAD 2.3 million to CAD 12.3 million as compared to CAD 14.6 million, largely due to the CAD 5.1 million decline in OIBDA generated by Premay Pipeline. Adjusted operating margin decreased by 2.2% to 15% as compared to 17.2%. Again, this is without CEWS. So, this is just comparing apples-to-apples, and it declined again due to that change in revenue mix, essentially the reduction of Premay Pipeline and Smook's revenue. But more specifically, the CAD 2.3 million year-over-year decrease in adjusted OIBDA in the Specialized & Industrial Services segment could be attributed to a CAD 3.5 million decrease relating to the business units providing specialized services, including Premay and Smook, a CAD 0.3 million or CAD 300,000 decrease in those business units involved in the transportation of fluids and servicing and wells, but a CAD 1.5 million increase in the business units tied to the drilling, drilling-related activity.So looking at adjusted OIBDA as a percentage of revenue or adjusted operating margin, as we've just fined it within our document, it's down to 13.7% as compared to 15.8% in 2020. Again, this is adjusted without CEWS. So trying to compare apples-to-apples. That appears to be alarmingly low, but we are comfortable with these results, given that CAD 61.2 million of our revenue was generated by our new US & International Logistics segment that achieved a 3.3% operating margin.But without this segment's lower operating margin, consolidated adjusted operating margin, again, without CEWS, would have been and without the US & International Logistics segment, would have been 15.4% as compared to 15.8% in 2020. So just a small decline in margin. And I would remind the listeners that our US & International Logistics segment generated CAD 4.9 million of OIBDA in the first 6 months of operations under our banner. That's not a bad return on a CAD 49.6 million investment. In fact, it's about a 20% annualized return, and we expect margin to improve over time. We have some work to do there, but that will improve over time.So in other words, this segment has low margin and is pulling our average down, but terrific returns on capital. Again, without our US segment, our adjusted operating margin was a healthy 15.4%, down just a little bit from the CAD 15.8 million. The other impacts on that margin, though, was the detrimental effect of the operating margins associated with the CAD 20.9 million increase in fuel surcharge that I mentioned earlier. That resulted in a corresponding increase in fuel expense. And that fuel surcharge now represented 8.4% of revenue. That generates little or no margin as it is a flow-through to compensate us for rising diesel fuel prices.So taking adjusted EBITDA and dividing it by revenue, excluding fuel surcharge revenue and US & International Logistics segment, margin was 17%. So take those 2 anomalies out, 17% is actually pretty good on a historic basis. This reinforces the underlying strength of our Canadian business. Further, the CAD 14.3 million reduction at Premay Pipeline revenue that resulted in a CAD 5.1 million decrease in adjusted EBITDA, you can clearly see that the margins there pulled us up in the past. But essentially, this change in revenue mix had a large negative drag on our operating margin.And I know this sounds like a lot of yes buts and yes buts, but these factors really explain the degradation in margin. It's not as bad as it appears. In fact, I would tell you that it's on par, in fact, without fuel surcharge, even better. And some of these factors that I mentioned that helped bring the margin down were offset by productivity improvements and the tireless effort by all of us to maintain or improve our margin in an inflationary cost environment.And if you make it to Page 146 of our document, you will see -- without falling asleep, you will see our geographic disclosure information. And so that essentially carves out our Canadian operations from our new US operations. And you will see that our Canadian operations, again, you'll see that discretely in the document where we achieve that 17% margin. So hopefully, that's a good understanding on why margin is down a little bit.Now looking at some other notable items. Net cash from operating activities for the period was up CAD 13.3 million to CAD 65.8 million. So, our borrowing on our credit facilities, though, did increase by CAD 3.8 million to CAD 89 million despite that great cash generation. But I would remind you all that we acquired DirectIT for CAD 9.2 million, and we purchased another great facility in Edmonton for our APPS, the newly acquired APPS acquisition for CAD 8.5 million. So essentially, we would have been very cash positive and repaying that line of credit if we didn't make these long-term investments on our line of credit. So, we acquired another great company, another great facility and really would have been cash positive without that. Bottom line is we generate a lot of free cash.And lastly, our basic earnings per share was up to CAD 0.21 as compared to CAD 0.10 in Q4 of last year, in part, because of the reduced share count as we bought back 3.5 million shares in the last 12 months. But also, we finalized our purchase equation during the fourth quarter, and you would have seen a change in the amortization. So, we reduced the amortization. We overbooked it in the third quarter. But once we did the analysis and finalized those purchase equations, we had trued up or adjusted fourth quarter down a little bit. So a little bit of an anomaly there when it comes to amortization. But nonetheless, a healthy pace, where we continue to increase our earnings per share on a continual basis, fourth quarter included.Lastly, a quick word on ESG, which I've been summarizing quickly for everybody on the call here lately. I'd like to maybe just address our carbon intensity. So, we've made these acquisitions, APPS being one of them, an intermodal player, and we have intermodal freight moving at Kleysen and others and Tri Point. This has really resulted in our carbon intensity being down to about 20 grams per dollar of revenue from about 23 grams per dollar of revenue in 2020. So again, we are managing everything well, profitability, and keeping an eye on ESG and reducing our carbon footprint, our carbon intensity yet again in 2021.So with that, Murray, I'll pass the conference back to you. Thank you. Well, this is where Murray usually gives us a nice summary of the quarter and opens up for Q&A. It appears we've perhaps lost him off the call here.

[Murray Kenneth Mullen, Chairman, CEO & President]

I'm here.

[P. Stephen Clark, Chief Financial Officer]

Here he is, back.

[Murray Kenneth Mullen, Chairman, CEO & President]

I was on mute. Sorry, folks. So thank you, Steph for that.As we look -- as I summarize this, just -- there's a lot of granular information that Stephen gave us there. But if you look at 2020, 2020 was a year in which we were able -- COVID first hit and where we slashed expenses. We didn't know what was happening. Nobody knew it. And this is across nearly every business and specifically to ours. And so we did that, and then we were very fortunate to have this really quality company called Premay Pipeline and they just did a fantastic job in 2020.In '21, everything changed. We brought people back. The moment we brought people back, you started to see this inflationary spiral, so -- really take hold. So what we took away in 2020, it came back with a vengeance in '21. And I think that ends up being the, I think, the biggest step change, if you will, in between '20 and '21. And then of course, on the corporate side, we did a number of acquisitions. So, I think that's really the 2 big themes that somebody can take away from the change on a year-over-year basis.Now if I take a look at the outlook, there's really not much I can add. I've got a lot of people and a lot of questions queued up here. So, I'm going to be short on the outlook. There's not much more that I can add that's not contained in the press release and the annual financial report or truthfully in our December press announcement, which referenced our '22 business plan, which, by the way, included an increase in the dividend. But I think what I'll just summarize the 2022 outlook is we're going to achieve record revenues. This is going to be driven by the full-year results from the 6 acquisitions we completed in '21. In addition, I fully expect we're going to complete additional acquisitions during '22, which will drive additional revenue growth. So, we're going to have record revenues in '22.We have a balance sheet that has over CAD 150 million of available credit available. And then, truthfully, when you think about the tightness in the labor market, acquiring good companies with great teams may be the best way that anybody can grow at additional capacity to service their existing customers. And from that perspective, we will do acquisitions so we can service our customers. But -- and I reiterate with the but, we need to see some pretty significant rate increases if customers want service.And speaking of rate increases, I'd tell you this is how we're going to grow profitability. So, this message has been delivered loud and clear to all of our Canadian-based companies. And I deliberately mentioned Canada because REITs here in Canada have lagged US rates by a significant amount, I'm thinking in the range of 20%, which explains why the US carriers have experienced such a great run over the last couple of years, strong earnings, outstanding stock prices. But in Canada, we did not see that same market adjustment. So, we live in [ envy ] of our friends in the U.S., which ultimately means, this is what I expect from our business units here in Canada as long as the -- as the fundamentals of freight command stay as they are and the labor markets remain tight. I suspect that will happen.So, we're going to have record revenues. And I can tell you we're going to focus on raising prices because that's the step change that we fundamentally see happening in the Canadian marketplace. It's going to happen throughout '22. And I think, whenever, you look at change, what's the change? Well, there it is. If I look at it from the logistics business, it's going to be on pricing. If I look at it in the commodity business or the energy space, the step change is pricing increases. That's providing the impetus for the step change there. And I think exactly the same thing is going to happen in the Canadian logistics transportation business. And our job is to manage that and to make sure that we drive margin improvement for our shareholders. So, that's kind of what we've got for the outlook.Now, what I expect to -- what I'd like to do now, we've got some new opportunities that we're working on. And what I want to do now is call upon Richard Maloney to speak to the joint press release we had with our trusted business partner, Canadian National here that we just did on Tuesday. I know, Rich, I've asked you to kind of just give an overview of what that really means and some of our initiatives, what we're going to do on the intermodal business.So Richard Maloney, I'll turn it over to you, and then I'll finish with closing comments before we go to a Q&A session. Richard?

[Richard J. Maloney, Senior Vice President]

Okay. Thank you, Murray. So on February 8, 2022, we announced that our APPS Transport Group entered into a multi-year agreement with CN in which the railway would continue to provide intermodal service to APPS. So why did we do this? Well, it's about messaging and communicating to our shareholders and the investment community that the strategic shift we made a number of years ago to becoming a North American logistics leader is still Mullen Group's priority.To begin with, both Mullen Group and CN believe that this announcement was important to emphasize the strong mutually beneficial working relationships CN and APPS Transport have developed over many, many years. It is also worth noting that a number of other Mullen Group business units have long-standing working relationships with CN as well. In addition, this announcement demonstrates Mullen Group's continued focus on building out our intermodal capabilities. Murray calls this the long mile, which really started in 2006 when we acquired Kleysen and was greatly enhanced with the acquisition of APPS Transport in 2021.In fact, concurrent with the APPS signing -- the APPS Transport signing the intermodal agreement with CN, we approved a sizable capital request to order new intermodal containers to support this planned work. This aligns directly with the capital expenditures we outlined in our 2002 business plan, specifically in investments towards sustainability initiatives. As many will know, intermodal transportation is an efficient and effective manner to move goods long distances, something ideally suited for Canada, an importing nation and particularly important as there are fewer and fewer long-haul truck drivers.Intermodal also greatly cuts down on fuel consumption and more importantly, reduces greenhouse gases emissions, a cornerstone of Mullen Group's ESG initiatives that Stephen pointed out with our carbon intensity and our continued focus on reducing that. So when you combine our extensive final-mile LTL network that services well over 5,000 points of service in Western Canada and Ontario with the focused and deliberate build-out of our long-mile service offering with the strategic partner like CN, we were able to provide a comprehensive service offering to our customers. Stay tuned, everyone.Murray, I'll pass it back to you now.

[Murray Kenneth Mullen, Chairman, CEO & President]

Okay. Thanks, Rich. I really appreciate that update for our investors, shareholders alike, is that we've got a dual purpose here. Stephen talked about it. We want to make sure that we're doing our part on climate initiatives. And I think that's an important part of ESG that we're focused on. But the second part is you've got -- we're going to have to be able to provide our shippers and our customers with a viable multiple service offerings, and then they can choose, which one is best for their requirements.So, I think we've got some great initiatives. These are the kind of things that you get that I spoke earlier about when you invest in really good quality companies. And let me tell you, I couldn't be happy with those acquisitions we did in '21. So we're ready for '22. We've got a list of -- a long list of questions.So, I'm going to turn it over to the operator and let's get right to the Q&A session.

[Operator]

[Operator Instructions] The first question comes from Michael Robertson with National Bank Financial.

[Michael Storry-Robertson]

Congrats on the solid quarter. I appreciate that it's still early days for the U.S. and International Logistics segments, and we should probably expect margins to bounce around a bit as you add station agents and build that out. But sort of just wondering at a high level what you saw there sequentially and maybe how you expect that to trend moving forward?

[Murray Kenneth Mullen, Chairman, CEO & President]

Well, I think it's -- we've got -- first of all, we've got a really good platform to build on there. A little bit of the noise comes in that our costs are going up because we're still involved in the carve-out process and got some additional costs that we've got to accrue as a result of getting the carve-out of the technology from Quad/Graphics into our own platform. So it's a little bit noisy on the expense side. Revenue side we're pretty strong. The economy in the U.S. is pretty robust. So on that front, doing well. It's on the cost side that we're going to have a little bit of noise on the cost side until we get that total carve-out done. And then what we're going to do is once we get that done, we'll just -- we'll really go into in the full throttle here and challenge that group down there to take this company to the next level. So we're in the right space. There's no doubt about it.They compete head-to-head with every one of the logic logistics companies down there, and they do very successfully, including new start-ups like Convoy and Uber Freight and all the others. So -- we've got a heck of a great team there, and I expect they'll continue to expand their market share down there once we get finished. We think we'll be done most of the carve-out by the end of June. That was our original plan, and I think collaborating with our group down there, they're pretty comfortable that we'll be on that. So all good from there. The U.S. economy still remains strong. Freight is still moving. And from that perspective, we -- what they watch very, very carefully is what's happening with the trucking rates in the United States because what they do is just they manage the spread between what the contract expense is to what they charge to their customer.So really, the margin should not change if the markets get a little competitive because then the availability of trucks becomes available and prices will go down there. But we have not seen any -- any degradation in pricing in the U.S. market yet. Not at all. Still pretty robust. And -- but we watch that every month for sure. it's a great platform. We needed to get another growth opportunity outside of Canada. This is just the start. And it's -- we're proving down there that you -- we just followed the same platform we got up here. You invest in good companies with great management teams and turn them loose, and reward them for their successes. So we'll probably continue to grow in the U.S., just watch what we'll do, but you've got to identify the right opportunity. There's no sense just growing to grow them and getting into a heck of a problem. So -- but we didn't get into a problem with this group. They're first class.

[Michael Storry-Robertson]

You also noted in the release last night that you're focusing on a new differentiated pricing model to help support margins. Sort of wondering what the bigger picture there is in terms of what you think that might look like.

[Murray Kenneth Mullen, Chairman, CEO & President]

I think what we've done in the past, this has been through history is you kind of charge the same price to everybody. And when I say a differentiated pricing model, we're saying to the customers if you want guaranteed service, you've got to pay a higher price. If you want to give us flexibility so that we can do it on our time and when -- when we got additional capacity, we'll sit on the dock, we'll get to it when we can, then that fits on our network. We'll give you that. But it's not going to come with that guaranteed service. So if you want service and you want commitment from this group, your prices are going up pretty significantly. If you want to give us flexibility, if you have got ability on that, then we probably won't move our pricing quite as aggressively on that side. So that's what I mean by the differentiated pricing model. If you want service, you got to pay for it.

[Operator]

The next question is from Konark Gupta with Scotia Capital.

[Konark Gupta, Analyst]

So maybe I want to ask you about the 2022 business plan that you rolled out in December, and we didn't really have a chance to kind of speak on that broadly. So you mentioned, Murray, last year's acquisitions are generating about -- will generate about CAD 500 million in revenue, and that's kind of up CAD 100 million I think from your Q2 disclosure. So if I simply take the incremental there given they were done midyear last year, you're probably going to see revenue go up maybe CAD 1.66 or so billion in 2022 just by those acquisitions and perhaps there is some organic growth across most of the segments. So how would you break up your kind of 2022 business plan that you laid out in terms of revenue and margin outbuy segments this year?

[Murray Kenneth Mullen, Chairman, CEO & President]

Steph, I don't think we broke that out by segment. I don't recall us doing that. Did we?

[P. Stephen Clark, Chief Financial Officer]

No, we never did give guidance to it. The previous year, we said it would be third of third of third and of course, that didn't turn out to be right. But it's going to roughly be probably, again, looking at the trend on the quarters, you can just adjust your models. But you can see what the pace of U.S. logistics is. You can kind of see what the pace of LTL growth has been. And again, I will give it with one caveat, you've got CAD 1.6 billion to CAD 1.7 billion in revenue. And again, you're not adjusting for any new acquisitions that we might do during 2022 here. So again, that mix is -- we can get a little bit more granular, Konark, maybe after the call once you've done your...

[Murray Kenneth Mullen, Chairman, CEO & President]

Konark -- I think the thing is you've got new acquisitions, they're going to add about CAD 500 million. So you take same-store sales in '22, you have CAD 500 million or '21, sorry, annualized revenues of CAD 500 million. And then I'm telling you we're raising prices. So if you're raising prices by 10%, that's quite a bit of money on a CAD 1.5 billion, CAD 1.6 billion company.

[Konark Gupta, Analyst]

And Murray is pricing coming along with organic volume growth or it's coming at a cost of volume decline?

[Murray Kenneth Mullen, Chairman, CEO & President]

No. It's right now -- we've never seen this cost curve like what we're seeing right now. So we raised prices and then you're mixing your costs are going up, so just about as fast or even -- and higher, so it's a little bit like the fuel surcharge. It's -- your price of fuel goes up, you raise the fuel surcharge. Costs go up, you raise your prices. And I would suggest to you, we're a little bit behind on that curve because our teams, we said, raise your prices. And they did and then all of a sudden, the costs -- it's very difficult to contain costs right now. So we're having to adjust rates. We do it once a year before. And now we're going to have to do it. We're already talking about adjusting rates kind of second quarter. I know for sure, we're going to adjust rates to maintain margin. Like I know that for sure.But our teams, I've said we're going to have this differentiated pricing model, I expect a higher margin in '22. So they'll have to raise above what the costs are going up for sure. So -- but let's just ballpark it and say prices are going to go up by 10%. That's on 1.6 -- that's CAD 160 million. Just... And then I mean that's going to flow through. The question then becomes how much of that is going to flow through on the cost side, too. And we tried to give you a reasonable guideline when we did our first blush at '22, which suggested that's what I think is going to happen. I gave a bit of a small bucket. But every 1% margin improvement now is CAD 16 million to CAD 18 million of EBITDA. So the business units know the game plan. We expect prices to go up because I think the Canadian marketplace has now changed. And the U.S. marketplace has already changed. That's already happened. They're not going to get big, big rate increases any longer in the U.S.But in Canada, I suspect we're going to get it. Some of the things that I'm seeing now are not 10%. Some of the stuff is you've got border closures, you've got blockades, you've got less drivers that can go to the U.S. because of new vaccine mandates. All of that reduces capacity. And when you reduce capacity and demand stays strong, price goes up. Our job is to manage the price. And I can tell you we're 100% focused on that in '22.

[Konark Gupta, Analyst]

And then perhaps my last question before I turn it over. On the real estate, a lot of your shareholders kind of wonder about what your strategy is with that real estate book value you have. I think it's about CAD 630 million or so at this point, and I'm sure with the kind of inflation we are seeing over the last decade or so, the real estate market value has probably gone up significantly for you guys. So a couple of kind of questions -- 2-part question there. What kind of real estate do you own at this time? And what do you see or what kind of plans you might have for leveraging the market values trend?

[Murray Kenneth Mullen, Chairman, CEO & President]

Well, we've got -- as you comment, I think Carson, Steph, you can chime in on this, but I think the book value, the stated value on our books is around CAD 620 million, CAD 625 million or something like that. Yes, CAD 630 million. So you've got the real estate that we hold in the crazy markets in Canada, which would be Vancouver, which would be the GTA and some of those markets are -- it's through the roof. We're talking about multiple -- multiples over our book value. And then we've got some absolute strategic assets in Calgary and Edmonton that are tied to rail. Those are irreplaceable assets. So we've got lots of -- our book -- our market value of our real estate is higher than the book value. Okay. Just -- I will just leave it at that.My strategy is real simple. We got one of a really, really great asset, and it's called real estate. You got to own real estate in a rising inflationary environment. And I suspect that when we go to renew our debt facilities that that's going to be a pretty darn good leverage that we'll be able to use with our debt holders to say this is a fantastic asset, and I think we'll be able to add some additional liquidity to our business so we can grow through acquisition. That's our strategy.

[Operator]

Our next question is from Kevin Chiang with CIBC.

[Kevin Chiang]

Just on the repricing opportunity you mentioned here, Murray, I just wonder like how much of the book of business do you think today is maybe below a pricing level you think is acceptable? And how much of that can you reprice? In other words, do you have contracts in place that maybe push out when some of that repricing can happen just because you're under a contractual obligation to provide that service under a previous rate?

[Murray Kenneth Mullen, Chairman, CEO & President]

Yes. I think we've got some of that. So never -- I think that in '21, Kevin, nobody that was pricing in Canada was factoring in an inflationary spiral that really happened, particularly in the last half of the year. It's just absolutely exploded. And by the way, we're not the only ones that are talking like that Bank of Canada Governor is talking about it and everybody is now. Inflation is now totally embedded within the Canadian landscape. So we -- I think what we were is basically behind the curve on some of that of a little cautious on pricing improvement. And you got to remember, this is the first time in decades where you've had an inflationary environment like this. I don't think that's the case now. I'm telling all of our business units don't be shy. And this is -- we expect pricing -- pretty significant pricing increases to happen.And by the way, we have to have that because driver salaries are going to go up quite significantly. We already know what's happening with fuel. You can't get new equipment. New equipment is going to be up a bit to 20%. So we're not talking about 5 anymore, Kevin. It's got to be significantly higher than that. And then our job then is to get a little -- just to get something higher than what the cost is. And that's going to be our job as a senior team is to improve the margin in '22, and it's got to come through pricing. And then hopefully, we can mitigate some of our costs by being smart, but you can't mitigate driver salaries. That's a market-driven thing. I mean, you got to pay what you got to pay just like for fuel. So, I think where you get some of our margin degradation, Stephen, talked about this, is we have moved our business away from owning the asset to being non-asset to being really asset-light.So -- in our asset-based businesses, we expect 20% margin plus. If we're buying the asset, the truck, the trailer, and everything, we expect 20% plus margin. If you're using all subcontractors, you're not going to make 20% because the contractor is going to make it -- make that. So in our -- in those where we have no assets, you have a much lower margin than what you would on there. And that's kind of our game plan because what we do is just manage the spread. So we have a nice mixture.I expect when we invest the capital, we expect 20% margin plus businesses. When we just have logistics or asset-light, then the margin goes down. And we've been moving more and more towards asset-light business where we're not making the capital investment. We love to invest in real estate because it's long term. We love the intermodal business because it's long term.

[Kevin Chiang]

That makes a ton of sense you can still generate good ROI on...

[Murray Kenneth Mullen, Chairman, CEO & President]

Yes. It's all about do we generate cash and a return on the cash we invested. We're still Warren Buffett cycles here at Mullen Group.

[Kevin Chiang]

You made a comment a few times that you think there's a structural change in the Canadian freight industry. It's been underpriced for a long time now, and maybe that's starting to change and maybe follow in what we've seen felt to the border. Are you seeing any behavioral changes with your shippers or your customers to the extent they have a crystal ball, they've seen how disruptive it has been to ship or sell to the border if they did not secure capacity ahead of time and if -- what you're calling for something maybe similar to what we've seen in the U.S. the past few years here. That incentivizing shippers to maybe, as you mentioned, maybe lock in some dedicated capacity, lock-in rates maybe at a higher level, but knowing that this consistency of service. Are you seeing that behavior change? Is what you're calling for is really what's happening?

[Murray Kenneth Mullen, Chairman, CEO & President]

Truthfully, Kevin, I haven't seen that yet, at least in the Canadian marketplace. By the way, no customer that I know of yet, and I've told this to all of our group has come to us and offered a price increase. We got to go ask for it. We got to go tell them, "if you want service, this is what you will pay." So these are awkward discussions when you haven't had these discussions for a long period of time. So you're going to win some. You're going to lose some, but net-net, prices are going up. Some customers -- I think generally, though, people are -- all the customers that we've had are receptive to the pricing increases.What we are still involved in nobody just accepts a huge increase. There's lots of debate and hey, can you mitigate? Can you do this? Can you do that? And that's where I want to give our customers the option of what do you want. If you can give us time and you want to move it intermodally, that's probably going to be a much more efficient, cost-efficient way for you than if you want truck and you want to deliver tomorrow. That service is going to cost you a lot of money. And so we have to manage it, Kevin. I know prices are going up. But the market will pay if they have to pay, not because they want to pay.

[Kevin Chiang]

That's a very fair statement there. I'll leave it there, Murray and teams. Congrats on a solid Q4.

[Operator]

The next question is from David Ocampo with Cormark Securities.

[David Ocampo, Analyst of Institutional Equity Research]

Murray, you mentioned that acquisitions should continue to be a story here in '22. But when I look at your outlook section in your annual release there, you called out being uncomfortable with the current valuation expectations. So how should I frame those 2 comments together?

[Murray Kenneth Mullen, Chairman, CEO & President]

Well, I think that's the tug pull that we're going to have, David, is that if you think about it, a seller is now saying, well, my -- I'm going to get pricing increases so I want a higher valuation. And that ends up being the -- I think that ends up being the difference between what we're paying for and what we expect. So we just have to manage that, David. You've got to find a happy medium as everybody tells me they're raising prices. All these guys that are trying to sell their businesses. Well, I'm going to raise my prices. Well, then go raise your prices and show me because I want to see how it works out before I invest money in your business.Where we would invest is when we think we get a really quality company with a great workforce and great leadership, just like we did last year. We'll continue to look favorably at that acquisitions like that. But I'm not going to go -- some of these businesses just -- they need to be -- they knew we get the ship together and raise some prices and get their margins up and they need to get out of the business. That's how simple it is.

[David Ocampo, Analyst of Institutional Equity Research]

And I guess just as a follow-up, if you can't get anything across the line this year, how would you prioritize your free cash flow? Is it just paying down debt, dividends, and buybacks?

[Murray Kenneth Mullen, Chairman, CEO & President]

Buyback shares? We already increased the dividend for this year, really comfortable with that. And I can tell you right now, we're really, really comfortable in making -- buying this really cheap company. It's called MTL.

[Operator]

The next question is from Walter Spracklin with RBC Capital Markets.

[Walter Noel Spracklin, MD & Analyst]

So just on your outlook for December, just to recap what I think I've heard here is that you gave an outlook for December. You highlighted that Canada was behind the U.S. We've heard from one of your key competitors here that, that was true, but now the gap is closing. Canada is getting as act in gear -- got getting it back together. And now conditions are -- have improved significantly that will allow you to drive price in Canada at a much better level than you saw in December. Is that fair -- is that fair to say to summarize?

[Murray Kenneth Mullen, Chairman, CEO & President]

I think that's the expectation, Walter, is that, is the gap was going to narrow between the 2 markets, Canada and U.S.? I think that's exactly what's going to happen. And I have not spoken with Mr. [ Badar ], but I can tell you, it's the market. So he sees it from his perspective. I see it from ours. So that tells me it's a market for us, is that prices are going up because they have to. And it's -- that gap is going to narrow. When that narrows, then I think that what you're going to see is margin improvement. So when people -- what's going to change in our business, there's not going to be substantially more revenue -- economic growth.The economy is kind of growing about what it can right now. It's -- you've got a tight labor market, you've got supply chain issues, you just can't grow much more. Where it is going to -- where we do see the step change is in the cost side and appropriate pricing levels. So how much -- I've just said, I gave my best guess that we're going to improve margin.We're going to strive to maybe improve margin by 1% or something like that. That's CAD 18 million. But that was just my best guess in December. And this is a very fluid market right now. Like some of the stuff I'm seeing, this is not like 1% margin is quite significant. So we'll have to see how it plays out. I'm just telling everybody prices are going up. I think there's a step change that's happening in the logistics and Canadian trucking business. And our job is to manage that and drive margin and it's going to come from pricing leverage. It's just that simple. So I think there's going to be a step change. And then you'll be able to monitor us every quarter, how are we doing on that.Now you start the year, yes, we've got pricing improvement, and then you're sitting at the borders waiting because there's backlogs, there's protests. Whenever there's a protest, it didn't matter if it was protesting the pipelines. It didn't matter if it's this protest, that protest. When there's protest, which are really labor disruption moves, then those are awkward times and they kind of -- you don't have good productivity and those kind of things during that period of time. But protest don't last forever. They'll go away. What I'm talking about is the trend. And I think the trend is higher prices, and I think that will be the friend for those people that know how to take advantage of that.

[Walter Noel Spracklin, MD & Analyst]

You highlighted your intermodal deal with CN. As you know and I know, I've seen this in the past. CN is currently examining how they're going to operate their intermodal segment from that trucking side, particularly with the TRANZACT, H&R and so on. You appear to be getting a deeper and deeper relationship with CN on the intermodal side. Does it stand to reason that there could be further partnership here if they do indeed go ahead with that kind of JV model that they've talked about? Or on the flip side, if they didn't go with, Mullen, on the JV model and went with another player, do you see that intermodal business that you've announced with CN at risk in the future depending on who they go with if they --- do JV with someone else?

[Murray Kenneth Mullen, Chairman, CEO & President]

I can't speak for CN. I'll let you can talk with them. They've got their strategic plans and their initiatives. And I'm not privy to them and whatever suffice to say, I'll look at any deal that comes up across our desk. So I can speak of what we would look at. And by the way, I looked at the H&R assets before and I looked at the TRANZACT assets before they bought them. So it's not as if this is new to us. But if it comes our way, we'll reengage and we'll look at it and we'll see does it make sense from Mullen shareholders and for our business and for our customers. Absolutely, we'll do that.Am I worried about we don't get it? No, because we don't have it now. So all we're talking about if it makes sense, then we will certainly put our best foot forward and whatever. But -- but the steps that we're taking, and Richard talked about it, we continue to get -- we're going to move more and more towards providing a full intermodal long mile service offering for our customers.Intermodal is the way of the future for the long haul, for the long mile. LTL, your regional network, that's delivering to the customer. So we've built out an excellent platform in LTL. Now, we're building out the long mile, and Intermodal will be a very, very critical part of it. CN -- we engage with our friends at CN because you can just see, look, they know that we're going to be a player -- and they want to engage with us because we move a lot of frame with them. They're a big subcontractor to our group. So we're going to continue. And then you saw we've already put some nice capital addition, a lot more capital into intermodal trailers than into trucks. Trucks use fuel, trucks have drivers, trucks have repairs and maintenance, all the 3 big costs in trucking, they're going through the roof. In Intermodal, it's -- we've signed a long-term deal with CN, which gives us price stability.

[Walter Noel Spracklin, MD & Analyst]

And finally, just on technology here and the continued integration a little bit on the edges, at least on intermodal with trucking and so on. I noticed that Union Pacific through its logistics has done some interesting moves here, acquiring transload facilities, but recently partnered with too simple to go down the path of autonomous driving and really taking what we all viewed as a conceptual down the road kind of idea and really now starting to invest dollars in it and test out equipment and so on. What's your view on that whole path? Are you going to be a wait and see and see how it develops? Or is it possible that you start looking at some ways to integrate more with rail by investing in autonomous driving?

[Murray Kenneth Mullen, Chairman, CEO & President]

Well, I think there's a way for autonomous vehicles. But probably in my career, the rest of my career, the autonomous vehicles will be on use when they're on a specific site, like in an intermodal yard where you can ring fence all the parameters in there. We already know that they're using autonomous trucks and a lot of the mining even in the oil and gas business. So up in the oil sands and when to be using autonomous vehicles on platforms where you just program it in and say here's which to. Going over the road, I'm not -- that's not going to happen on my lifetime, I don't see that. Our autonomous truck is going to be that intermodal platform. That's where we're going. Will you have autonomous trucks in our yards to move freight and equipment? Yes, I can see that happening, but it's so early stage.Right now, I'll tell you what we're really focused on. I'm really focused on making sure we have the right strategic assets and facilities. We're going to continue to invest in facilities. If you don't have facilities, you're not going to be a player in this game. So am I happy with our real estate portfolio, take it to the bank shareholders. It's fantastic. Do I want more intermodal? Yes. But boy, they're expensive. We've got some good platforms now, and we'll continue to add where we can. So -- but on the technology side, yes, technology is going to continue to evolve. We all know that. And -- it's -- whether it's going to be 1 big block chain where everybody in the world goes through 1 technology. I doubt it. I think there's going to be just a continued evolution of technology and integration of service providers into 1 platform. If you want to call that blockchain too, go ahead, but we'll be more integrated in with your service providers, no doubt about it.

[Operator]

[Operator Instructions] Our next question is from Matthew Weekes with iA Capital Markets.

[Matthew Weekes, Equity Research Analyst]

I just wanted to touch, first of all. You briefly mentioned disruptions from blockades and protests and that sort of thing in the business. I'm just wondering if this is anything that's been material so far in the quarter or if you, for the most part, been able to work around any blockades or disruptions of that sort?

[Murray Kenneth Mullen, Chairman, CEO & President]

Well, it's been a pain. There's no doubt about it. But as I said, we've endured many, many blockades over the last bit. In the fourth quarter, we endured the floods blockades. You couldn't get through the road. So this one -- the other one was Mother Nature. This one appears to be is man-made, but so it's a disruption, but you have to work around it and costs are going up. So you avoid those areas, but you have to tell the customers as well about.If you're stuck in the middle of it, yes, we've had some disruption there. But our business is totally diversified across so many different platforms. And we've had some disruption and then we've had some gain. So net-net, I don't -- I don't think you're going to hear me say, "Oh my God, these things destroyed our quarter." I don't think you're going to hear that -- are they a pain? Yes. But as I said, most disruptions are a pain. So we just have to work around them. I know one thing that happens if we're taking that freight and you're going to and from the United States as an example, I can tell you the rates are up pretty significantly right now.

[Matthew Weekes, Equity Research Analyst]

And speaking of rates and pricing, there's been a lot of talk on that today. So if I can just try and summarize it a little bit. Would you say that overall demand remains strong in the business, but on the volume side, capacity is tight? So Mullen will be able to leverage pricing to meet the higher cost and potentially even leverage pricing increases over and above capture incremental margin. Is that correct?

[Murray Kenneth Mullen, Chairman, CEO & President]

Yes. You've summarized it better than maybe I did, Matt, which is demand remains pretty strong. It's not growing. I want to make sure that I'm clear with everybody on that. I think it's kind of -- it's not bad, but it's not growing. Capacity is the thing that has tightened for the reasons we talked about. And so that tells me that price is going to go up. Our job is to -- is to move the pricing over and above our cost push. And myself and Richard particularly and even Stephen and Carson, we're on top of our business units all the time. You better make to ensure that you move your pricing, don't come in with your monthly numbers to me that says we were busy, but we didn't do well. That -- you wouldn't want to have that call with Murray and Richard these days.

[Matthew Weekes, Equity Research Analyst]

And my last question is more macro. I think if you look at the recent supply chain bottlenecks and inflation going on globally, it's highlighted some weakness in global supply chains and logistics networks. Would you say that this is positive for the business overall in the long term when you consider the investment needed to bolster these networks investments needed in technology and on the 3PL side of the business and that opportunity as well?

[Murray Kenneth Mullen, Chairman, CEO & President]

Yes, I think -- that's a really good point, Matt. I think where you're finding where there's huge pricing leverage is really not because of a lack of technology. What technology I think allows us to do is be more productive. Where you're having the bottleneck is, and let's look at ocean shipping, demand went up, but you couldn't add any supply. If you don't go build a ship in a day, you don't build a new port -- and then things got bottlenecked. So those container ships were coming from Asia over to North America, instead of being on the water and in port on total rounder being 45 days. Well, they're sitting in port waiting to get offloaded because it's bottlenecked because there's not enough capacity to move it out of there efficiently. So they're sitting out in open water for 15 days on both ends. Well, that adds 30 days. That takes away how many rounders you can do.So there was actually a capacity reduction of available ships because they weren't productive. That is kind of happening in trucking now. We're not as productive as we once were because there's all these new safety protocols. There's a vaccine mandate. There's this mandate. It's just another form of regulation. And you cannot add capacity today in anything. Nobody -- there's -- nobody is building a new facility in trucking. It's too expensive. So I think it's the capacity -- we can add supply, which means that if demand stays strong, price must go up. That's why I think it's a step change. And it could -- this could be -- it could a trend that's here for quite a while.

[Operator]

This concludes the question-and-answer session. I'd like to turn the conference back over to Mr. Mullen for any closing remarks.

[Murray Kenneth Mullen, Chairman, CEO & President]

Thanks, folks. We've taken up enough of your day today. I wish everybody well, and we've got a lot of work to do in '22. And I can tell you, our team is totally focused and you've heard how -- what we're going to be focused on. So thanks so much. We'll talk to you after Q1. Cheers now. Bye.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.