Mullen Group Ltd. (MTL) Earnings Call Transcript

Thank you for standing by. This is the conference operator. Welcome to the Mullen Group Limited 2026 Second Quarter Earnings Conference Call and Webcast. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Murray Mullen, Chair and Senior Executive Officer. Please go ahead, Mr. Mullen.

Well, welcome, everyone, to Mullen Group's quarterly conference call. This morning, we released our second quarter interim report. It's a nice 60-page document full of detailed numbers and analysis prepared by our team headed up by Carson Urlacher and Nick Woodworth. So this document contains updated information is available on SEDAR+ and on our website, www.mullengroup.com. So I'll remind everyone this morning that today's presentation and commentary contain forward-looking statements, and they're based upon current expectations and are subject to a number of risks and uncertainties. As such, actual results may differ materially. Further information identifying the risks, uncertainties and assumptions can be found in the disclosure documents. With me this morning, I'm joined here in Ocotopes by the majority of the senior executive team. Richard Maloney is out traveling this morning, so he's not available. But I have Carson Urlacher, he's our Senior Financial Officer; Joanna Scott, who's our Senior Corporate Officer; and Lee Heller, who's our Senior Commercial Officer. For today's call, we'll follow a similar format as the last few conference calls, all in an effort to make sure that this call is as meaningful and productive for everyone as possible. All prepared remarks by Carsten and myself can be found in the second quarter interim report, the financial report and the press release documents, which were released earlier this morning. We have nothing further to add. So we will head straight to the Q&A session as I suspect that you will have some interesting questions. Now not only was last quarter one of the very best ever for our organization, it appears that there are several major projects, all that have a significant logistics component to them. These are actively being contemplated at this time. This bodes very well for the economy, and I think it bodes very well for our organization. So I see some of you have already joined the queue. But before I hand it back to the operator, let me just summarize and give you a few opening comments. Let's start with the discussion on the state of the Canadian economy. From what the data tells us and what it told us, the demand for freight and related services suggest the economy is doing reasonably well, not robust by any stretch, but there was just enough economic activity to keep the markets in balance and just tight enough that we were able to pass through those credit fuel surcharges that our customers just -- really, they pushed back, but we were able to pass them through. And you saw that was a pretty big number last quarter. But because these surcharges were so high, it just wasn't feasible to pass through general price increases. Our customers can only tolerate so much at one time. They'll come another day when we can negotiate higher general rates, but that was not last quarter. This will happen if, and I reiterate if the economy can continue to expand. When it does, we will push through higher rates. Until then, and this is basically what we're doing today is that we will focus on high-grading the freight we handle, demarketing low-paying freight. This in itself helps drive margin improvement. Moving on to the S&I segment. Results were okay, but they really weren't up last quarter over last year. But this didn't bother me too much because there's a lot of momentum building in terms of major capital projects that will fuel this segment to higher revenues and margins in future years. So all good for now. Enough said, operator, would you please open the lines?

Our first question is from Konark Gupta with Scotiabank.

\ Great results, of course, and glad to hear you're calling off the fair recession here after 3 years. Maybe just first one for me. On the second quarter, I mean the second quarter was the first quarter where we saw a huge volatility in the fuel price in a long time. And we are still seeing some of that volatility continue into July at this point. June was a little bit better. What have you seen from your business perspective? I mean, you have a very diversified portfolio. Some parts of the business might do well in this environment, some may not do as well. What have you noticed how is the fuel price or surcharges impacted demand or pricing discussions in different parts of your business?

I can't quantify exactly how it's impacted demand. I think that will play itself out over the next bit, Connor, to be honest with you. What we've seen thus far is is that it really doesn't help spur demand. It just reshifts where the demand goes to. So I think basically, it hurts the general consumer economy because too much of their disposable income has to go to energy related. But I guess maybe that's the reason why the S&I in our oilfield services business looks so productive because obviously, the world needs more energy if you're going to keep prices in line. So I think that's the beauty of our diversified portfolio. I would suspect the general economy will continue to do okay, but not super good. There's just not enough -- there's just not enough impetus for a huge increase. So -- but anything to do with capital projects and with the building and these others, I think we're probably in the right space in terms of that. So the markets are pretty much in balance from our perspective, but not growing. I don't see it. The growth opportunity is if it's anywhere, it's related to capital projects, as I said, they're required to address this high energy cost environment that we're putting in now. Part of it's risk, there's no doubt with the war and part of it is driven by just increased demand for energy all over the world.

Okay. No, understood. And on your CapEx budget, I guess, you guys are increasing it by $50 million, and that happens this year, but sounds like that will support your volume or demand growth in 2027. Where is that CapEx -- incremental CapEx going? And is that in anticipation of some of the contracts that you were bidding on like Alaska LNG or even a new pipeline that's being contemplated between Alberta and Ontario or something else?

Yes. I think the majority of it, Lee, Lee is on top of this file as much as anybody is that the majority of it that we're allocating is for major projects. And the reason is is let's just assume that all the projects that are being planned that some of them start to go, well, the industry is short of capital equipment, particularly, let's take the Alaska LNG project. There is no capacity in the system right now to be able to execute on that project, excess capacity in the trucking industry. It has to be new additional assets. And we said, look, just to make sure we can execute that contract, we've got to make sure we got the equipment. So I asked Lee to take a look at it and make sure that we could make sure we were prepared. And lo and behold, the Class 8 truck market got very tight. So Lee, you might just want to comment on that, just how much it's changed and why we had to move quickly on that front.

Yes, Konark, it's Lee. Certainly, the Class 8 truck order board tightened very, very quickly. A lot of discussion around prebuys for 2027, of course, with the new emissions change coming. So it is our full intention to fully deploy the $85 million that we had initially budgeted for. And then to Murray's point, the $50 million directed more towards nation building projects, whether that's here in Canada or as he stated, possibly the Alaska LNG project. The order board did tighten. And as Murray said, we wanted to make sure that we're in a good position that when those projects hit the ground running, that we are in a position to hit the ground running with it. So if you wait, we were fearful that the trucks would not be here in time. So we're in a good position.

Konark, these projects are extremely large. I got lots of Bs involved with them. By that, I mean billions. And -- but they're extremely complex. There's lots of parties at the table and lots of things. So there's been nothing formally announced, but we're -- we have to make a call. Do we get prepared for them or do we sit and not be prepared. But if you're not prepared and it comes your way, you can't execute. So we're taking a measured approach to this. And that's on the assumption that we think they're going to go because the world needs energy. So that's our thesis. And I think the majority of our shareholders will buy that will buy into that strategy that we've employed here. We're going to make sure we're prepared. So we can say to the customer, we can do it. Don't worry. We got you covered. We can execute when it goes.

Konark, I'll just add that they've been spec so that they can be deployed across many of our business units, not just any one in particular. So we make sure that if one project does or does not go, we can redeploy assets.

Yes, we've hedged our bets on that to make sure that it's not all in. We've got options. But primarily, we're getting ready for the Alaska LNG project. And then if that goes, we're ready. If it doesn't go, we'll redeploy in the rest of our business. That's a good hedge in my book.

The next question is from Benoit Poirier with Desjardins Securities.

Congratulations for the quarter. Just to come back on the previous question about the $50 million increase in CapEx and those nation building projects. Could you maybe, Marie, give us more color about the timing and the potential revenue contribution that could be coming from this increase in CapEx that we see?

The timing is we're deploying the capital, it will be later this year, right, Lee, that the trucks come in. That's correct. So what we had to do already, you had to get ahead to get the build slots. So we're committing the capital this year. Any of the revenue that will be generated Benoit, I think what we'll do is we'll wait to see if we get the contract. If we do, we'll press release that and we'll say, here's the quantum and here's what we've signed and whatever. So it's premature to talk about how much we're going to do and whatever. All I can tell you is folks, shareholders, investors, we're planning. And that's -- I think we should -- that's what we're doing. So as soon as we know, Benoit, we will press release that out and say, here's what we've signed, either we got it or we didn't get it. If we didn't get it, we'll redeploy those assets in the rest of our business, and that will be our 2027 CapEx.

Okay. And looking at the margin performance, LTL segment was quite strong, and you call out the greater land density demarketing, lower margin freight, but also cost recovery efforts. So is it fair to believe that this is a sustainable margin going forward for LTL? Or could we even see greater benefits and more upside from the LTL segment?

Yes, that's a good comment, Benoit, is that, yes, LTL, I think we hit pretty good stride last quarter, and that's a function of, as we say, really, it's 3 things. I think our business units are generally doing a great job on the cost side. We did get full cost recovery on fuel surcharge. That was -- that helped bring the margin up. And then the third is there's just enough freight in the system, Benoit, that we don't have to take some of that other low-paying freight to fill the trucks. We're demarketing that because it costs -- it's just not adding any value. So even though revenues didn't really go that much higher, the quality of the revenue improved, and that's what helped drive our margin improvement. Now if you get any growth in the Canadian economy, any -- as the market has tightened, that will give us the go sign to maybe raise some prices. We're already seeing that happen in the United States. We haven't quite seen that happen up here in Canada yet. But hopefully, that happens, but that will probably be a '27 situation. I don't think that's going to happen later this year. There's too many headwinds with trade issues and with people just not investing the capital in the general economy at this moment. So it's in pretty good balance. So I think we can maintain that margin. That's our expectation for the balance of the year.

Okay. And maybe last one for me. In terms of M&A, you mentioned some words in the press release around the interest to look at tuck-ins and confidence that you could close some by the end of the year. So could you maybe provide some details about the size of those tuck-ins that you're looking at these days, the business segments also that you're looking at and whether valuation is still reasonable given the seller expectation and the more favorable trucking market?

Yes. I think on the expectation side, it's kind of a tale of 2 worlds here. clearly, every seller wants to get the best price and every buyer wants to get the lowest price. I mean that's the game that has played. It's kind of a tale of 2 worlds here. Eastern Canada -- it's a little bit better, Benoit, but it hasn't proved -- improved substantially. So expectations are still reasonable still reasonable. And truthfully, there's a lot of people of our peers that have got their balance sheet stretched. So they're not -- we'll take a look at whether we think that those business units fit into our network where we can find synergy. Those are really the only ones that we're really contemplating at this time because we don't think the economy is strong enough to to justify just getting a bigger entity. Where we might kind of stretch out is in the S&I segment because we expect that in future years, that there could be a lot of activity. That's what we're telegraphing. So we'll continue to look on the S&I side. And that will give us -- you got to invest for the next cycle, not for the next week or quarter. So we'll be -- if we do them, you know that we're optimistic about the future for S&I. The rest of it has got to be tuck-in so we can find synergy. Without synergy, we're really not that interested. I can't give you the size and which ones we're looking at. But I can tell you, we're looking at a number that we do a lot of smaller ones that just are real tuck-ins, Joanna. You're working on a number of files on those. Those individually are not really that significant. But when you layer them in, I expect it's going to help our margin. And that is what I got to keep telling everybody. That's what we're focused on. We're not really focused on the top line. We're focused on how do we improve the margin. And we've got to make some smart business decisions on that, put capital work so we can get our margin up. we're not comfortable with -- even though we had a good quarter, Cars, we are still focused on how do we keep getting that margin going up. Absolutely -- and that's our primary focus, Benoit. Not so much the top line, how do we drive great acquisitions to improve our margin. That's our focus.

The next question is from Kevin Chiang with CIBC.

Not to beat a dead horse. And again, I'll reiterate the congrats on the good quarter here. Maybe if I -- on the back of Benoit's question on LTL margins, just over 20% in Q2. If I look back even before the pandemic, when you started disclosing this as a stand-alone segment, I think the only other time we saw margins as high ex CEWS was back in 2022 when we're kind of a year into that freight up cycle. It feels like we're in the early innings of this current freight up cycle. I mean looking at that trend, it seemed like you're able to expand margins, let's call it, 200, 300 basis points as we kind of work through these -- the innings of that ball game. Is there any reason why we shouldn't be able to think of Mullen doing something similar just at a higher base? Like could this not be a, let's say, a low 20s or maybe low to even mid-20 EBITDA margin segment, just given where you're starting from here at 20.2% in Q2?

Parson, I think that Kevin is -- I've been sitting in some of our executive meetings where we talk about our call. So...

I've got the...

I would say to you, this is -- that is a topic that we talk about around our senior executive table is the market just getting tight enough that will help support that thesis to get back up to 20%. And are we doing the right things to get it to 20%. And of course, I think it's -- we're pretty close on saying we should be able to meet those targets, right?

Yes, yes, for sure. I would say that you've done your homework, Kevin, when you look back the last 10 years, once we start getting into that 20% margin range on LTL, that's kind of a top end that we would have seen over our last decade. I would say that we budgeted at the beginning of the year to come in around 17% for fiscal 2026. And I'd say that we're ahead of that. And I think kind of the trend that we saw in Q2 is kind of consistent in the early innings, what we've seen in July so far. Nothing's really changed from that perspective. So I would say that by the end of the year, we're looking at being able to beat what we originally budgeted for back in January.

Yes. Once again, not so much because there's huge growth, Kevin. It's just that we are -- we've got all the business units focused. Take the business that is higher value freight, higher margin, that's how we're going to drive margin. Less lower margin, a little bit higher margin doesn't mean that we're really increasing the revenue significantly. Once again, focus on margin and our business units, we're high fiving them. We're saying folks, not only do they listen, they actually executed. And I would -- once we start that trend, they don't want to go back either, Joe. They want to see high margin because we reward our business units based upon performance. And I can tell you, they're liking the performance as much as we are at corporate. So I don't know why we wouldn't keep working towards that. So some of it's going to be market-driven, but a lot of it is going to be because we make some good business decisions.

That's very helpful color. And just my second question, again, maybe following up on some of the previous questions on your M&A pipeline and the increased capital spend here or capital that you budgeted for. Like if I think back to last year, you divested of your hydro -- or maybe a little bit more than a year ago, you divested of your Hydrovac business. And I think the narrative was you're just going to get scale there, so better to redeploy capital into areas that you have a competitive moat or advantage. When you think of -- like you said, you're preparing for the next cycle, is it spending capital on areas that you currently already have a strong position in? Is it looking at services you don't have a great position in and thinking that the next cycle might give you the opportunity to maybe deepen that expertise? Just trying to get a sense of is this doing more of what you do already? Or is it part of maybe a product or service expansion plan here just given the optimism around a lot of these nation building projects?

Yes. I think our primary focus, we're open to look at everything when we -- if the margins are correct and if we can get the appropriate returns on it. But the best way and our primary focus is building on those verticals that we're already in. So if we can get stronger, bigger, gain market share, put new capital to work in those verticals that we've already got a position in. We know them. That's probably the easiest path towards not only growth but higher margin. So that will be our primary focus on that. In terms of the CapEx, look, it's really going to be focused on -- the first is probably going to be pipeline business because you've got to build the infrastructure before we build the business behind it. So you got to build the highway before you get the cars on pipelines, that's all you're doing is you're building the highway for for the oil and gas business, and that's got to go. So our first objective and the first leg of this uptick is pipelines. We've got to be prepared. And what we're seeing in the pipeline business around the world is they have to build new pipelines. And it doesn't matter whether it's in Alaska, whether it's in Canada, whether it's in the Middle East, in the United States. There's going to be a build-out of infrastructure over the next bit. That's the first leg of this, and we've got to have the capital for that. And then we'll redeploy that capital once the pipelines are built into filling the lines, and that's the thesis. So we think we're in a good long-term trend here. It's not a one and done. Pipelines are one and done, but not the behind to fill the pipelines is not one and done. That is where your sustainable business comes in long term.

Our diversity as well, too. We don't want to participate in a large capital project just on one phase of it. We look to be able to participate in every phase of those large capital projects, right, from the construction of them to delivering LTL freight to the support staff that need to build it. And then like Murray's point, after you get it built, that requires drilling activity. So we can move those assets around quite nicely, and that's kind of the way -- why we diversified our business model the way we have.

- The next question is from Cameron Derkson with National Bank.

I guess certainly, a very strong Q2. It sounds like the trends you saw in June have continued into July. So a pretty optimistic outlook for the back half of the year. I guess, what's your level of confidence that the original sort of EBITDA guidance that you put out at the beginning of the year, $365 million that you're going to be able to exceed that? It sort of sounds like you're trending towards that.

Well, I think if you extrapolate out second quarter, you could probably buy into that thesis. But for us, the way that we manage the business and we articulate it, we come out at the first of the year and say, here's what we think the year is shaping up to look like. And so far, it looks like we were pretty close to our thesis, and it looks like it's maybe gaining a little momentum because we did say that our numbers that we said early in the year did not including any nation building projects. To the extent that they start to accelerate, Cameron, then yes, it's a reasonable conclusion to say that we'll do better than what we originally published. But look, so far, a lot of talk and -- but I haven't seen all the action, but the talk is getting louder, and it looks like it's getting closer. So I suspect that the majority of the real momentum that's building is going to carry into '27. You know what, and we'll build our budgets and talk to everybody in October, November time frame as once we get through this quarter to make sure that, that trend that we started to see happen in the second quarter is maintainable. Lots of moving parts, as you know, in this economy, but let's make sure that the trend is well entrenched before we get too ahead of ourselves.

Okay. That's fair enough. Maybe second question, just on the Logistics and warehousing segment. I mean, it seems to me that maybe that's the segment that would be more positively impacted by some of the regulatory enforcement actions that we're seeing across Canada, which presumably would help pricing. Have you seen any, I guess, evidence that pricing in some of the sort of truckload businesses are starting to improve? And I guess maybe has your level of confidence increased from the last quarter that we're going to see some pricing improvement there just due to some of this enforcement action?