Earnings Call Transcript - TFIN Q4 2024

Operator, Operator

Good morning. It's 9:30 in Dallas, and we're excited to chat with you this morning. Thank you for your interest in Triumph, and thanks for taking the time to join us to discuss our Fourth Quarter and Full Year 2024 Results. With that, let's get to business. Aaron's letter last evening discussed the quarter's results and introduced a new segment. We are excited about many things happening at Triumph now, but probably most excited about the opportunities we see developing from the density established in our network. We are helping America's truckers get paid with greater speed, accuracy, and transparency than was ever possible before, and we're allowing our partners to benefit from our transportation technology investments. That quarterly shareholder letter published last evening and our quarterly results will form the basis of our call today. However, before we get started, I would like to remind you that this conversation may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to publicly revise any forward-looking statement. For details, please refer to the Safe Harbor statement in our shareholder letter published last evening. All comments made during today's call are subject to that Safe Harbor statement. With that, I'd like to turn the call over to Aaron for a welcome and to kick off our Q&A. Aaron?

Aaron Graft, CEO

Thank you, Luke. And thank you all for joining us today. As always, I hope that you found the shareholder letter valuable, both in looking back at 2024 and also looking ahead into the future. I am sure some of our announcements in the letter will generate many questions, so we will get to those quickly. But before I do, I want to say just a couple of things. Touching 50% of all brokered freight transactions in the United States is a big deal. It's worth celebrating. Eclipsing over $100 billion in total payments since we created our payment segment is also a milestone worth celebrating. And it's those milestones and all that went into doing those things that has paved the way for where we go from here. It puts us in a position to help the freight industry transact confidently; that is our brand promise. And then we know that if we do that with ever-improving offerings, then our investors are going to be rewarded, our team members will share in this success because our customers will be delighted, and that's the work we're excited to do. With that, we look forward to taking your questions.

Operator, Operator

Our first question will come from Timothy Switzer with KBW.

Timothy Switzer, Analyst

Now that we have entered 2025 and had a line of sight into which partners will be online this year, how much volume they will bring, are you able to provide some kind of quantified ranges around what payment volume will look like towards the end of the year and the associated pull through to revenue on that? Or perhaps like a broad range on what the growth inflection looks like in the back half of the year, particularly with CHRW coming online?

Melissa Forman, CFO

I think what is the most important metric to keep measuring and keep track of for the payments volume growth success is that of market share. And so, as we said in the letter, we've eclipsed the 50% market share goalpost and now we've moved that out for ourselves. And our goals at the end of this year is to be at 60% to 65% of market share and we have a clear line of sight into that. The other metric to look at is to continue to watch EBITDA performance and improvement as we will continue to improve those metrics throughout the year as well. Certainly, revenue associated with some newer deals will be in the second half of the year and new products. So yes, you'll look for that to be weighted there, but again, even improvement and 60% to 65% market share. Anything you want to add to that, Aaron?

Aaron Graft, CEO

I think it's a great question. Melissa hit on the things that we would call knowable. These are things we have enough history to predict and say with specificity. But I think what's embedded in your question and it's a question, frankly, I'm interested to see. It was just yesterday that our partner, C.H. Robinson actually began the rollout of this marketing campaign of Robinson Financial, which we're tremendously excited to support behind the scenes, because that's what we are as it relates to the market behind the scenes. And so they're reaching out to thousands of carriers on a rolling basis. Now what the pull through will look like from that in adding new factoring-as-a-service customers to Robinson Financial, which we support behind the scenes, and the pull through will look like on adding new LoadPay customers is impossible to tell you. What I can tell you this morning is in the Slack channels that we all monitor in real time with just what went out yesterday, there has been an explosion of activity, but you can't build a trend line off that. So I've said and tried to make it clear that the way we structured our deal with our partner, we want Robinson to be exceptionally successful in this. And for them, success means improving the carrier experience, and of course, that means monetizing it. But the way our deal with them works is we chose to take our opportunity, the financial incentive for what we're doing on the backend. We're going to see as we grow revenue through this density gain and FaaS and LoadPay and the things we're doing around it, you’ll start to see that in the back half of the year, but it is way too early to tell you what that's going to do to EBITDA margin or revenue growth; we just don't know. What I would point out to you is despite the fact that we're making all the investments required to do those things right now, our EBITDA margin is still improving. So we're trying to be really thoughtful about this. And we're really excited about the future and those two things have to live together; that's the tension between being profitable in the present and preparing for an exciting future. So that's how we think about it. I hope that gives you the color you're looking for.

Timothy Switzer, Analyst

And Aaron, also your comments in the shareholder letter, which is really helpful, it's great, about how AI and machine learning models that kind of reduce the value of network transactions for factors. Are you seeing any other areas where AI or other technology advances are maybe impacting your value proposition elsewhere or the moat you have in some of your products?

Aaron Graft, CEO

Let me clarify that further. There are two main factors affecting the monetization and adoption of network transactions. Initially, in the third quarter of 2023, I didn't fully grasp these aspects when we first proposed the concept of connecting payors and payees, which was fundamentally correct. However, our approach to monetizing this was not accurate, though we were on the right track. We initially underestimated how the value would shift from our original expectations to different areas. One important lesson we've learned is that our structured data pipeline is much smaller than needed, especially compared to the legacy software that most factors utilize. This software can only manage a limited amount of data, which is an inherent challenge of using older off-the-shelf products, even with new technology built around them. Asking factors to adapt their core systems during tough market conditions has proven to be a significant challenge. Consequently, if the data they can process is limited, the perceived value changes. The second point relates to our experience with the capabilities of models trained on our historical data. In 2023, I did not anticipate how effective these models would be. We are currently able to purchase 75% of our invoices for small carriers without any human intervention, a breakthrough that didn't exist prior. We've discovered that while structured data is beneficial, our models perform exceptionally well even without it, making decisions that are more accurate than human judgment. We’ve been focusing on what we call touch-free processing, which may not be something everyone deals with daily. Imagine if our audit and payment features can process an invoice and autonomously determine its payment appropriateness based on predefined rules, all without human interaction. This would dramatically decrease the time for the auditing process from days to seconds. On the payee side, if our decision-making model can quickly assess historical data and determine the validity of an invoice, and if these two systems can communicate and efficiently confirm approval, it represents a considerable advancement. This is how AI and machine learning are revolutionizing network transactions. Our technology has progressed significantly, and I believe we have the most advanced product in the market for factoring and brokering, with robust integrations and strong customer trust. The landscape is evolving, and we aim to be at the forefront of this change rather than being sidelined by it.

Timothy Switzer, Analyst

Really appreciate the in-depth answer there. And if I could get one…

Aaron Graft, CEO

I think we need to go to the next person in the queue, and we'll come back. If we don't hit them all, Tim, we'll certainly come back and answer it.

Operator, Operator

Our next question will come from Matt Olney with Stephens.

Matt Olney, Analyst

I want to dig more into the Intelligence segment that you discussed in the letter. I'm curious, within this new segment, kind of what's the go-to-market strategy for this initiative? Who are the clients you're going to be targeting, are they existing or new clients? And how will you target these customers? And just trying to get a better idea of what the revenue ramp could look like for this segment over the next two years?

Aaron Graft, CEO

I completely understand your question, Matt. We are starting with the 560 TriumphPay customers we already serve, but our reach will extend beyond that. I've mentioned before that the top 1,000 freight brokers control 90% of the $110 billion brokered truckload market. The customers we aim to reach will either be current Triumph clients or will be familiar with our name, as we serve all areas of truckload. The motivation for this initiative comes from our major customers expressing a need for specific data. They want this data from us because, unlike competitors, we are a bank and do not move freight. Many data providers lack neutrality, but we have that, which builds trust in how we handle their data. They want us to deliver this data in a manner that enhances their business efficiency. Additionally, they seek our data due to its breadth; we process payments for more truckers than anyone else, which they notice. Our data is accurate, reflecting actual payments rather than claims or surveys, reinforcing its reliability. We possess significant data through our existing services, allowing us to manage hundreds of millions of dollars daily. To support this, we must understand the data well, and we do. We're enhancing our current dataset with technology like the ISO acquisition, which merges their data with ours to create quantitative scorecards for our customers. This transparency into carrier performance is crucial for brokers, allowing them to assess their own effectiveness and that of their carriers. We're merely augmenting our existing data with advanced technology and decision-making tools. Our gross margin when launching this Intelligence segment is over 90%, as the data is ours, not purchased. We invest considerable effort into acquiring this data through our factoring and payment segment. This effort involves curating, anonymizing, and presenting the data so our existing customers can improve their operations, which was a direct request from them. While this may later facilitate expansion into brokerage and potentially reach clients outside transportation, our immediate goal is to enhance brokers' operations and expedite carrier payments. That's the audience we are targeting, and that’s the purpose behind this segment.

Matt Olney, Analyst

Aaron, to follow up on that regarding the revenue growth in this segment, should we anticipate any significant developments in 2025, or is it likely that the growth will not occur until a few years later?

Aaron Graft, CEO

The multimillion-dollar question. I'm always in favor of immediate action, but let's consider the bigger picture. As a company, we operate a core community bank focused on stability and efficiency, alongside a mature factoring business. We aim to accumulate all the revenue from these two sectors and increasingly from our payments business, aiming for our transportation-related services to exceed $1 billion in revenue. I can’t give you an exact timeline, but currently, using the exit 2024 run rate, we're generating $210 million, which puts us at 21% of our target. Out of that, $150 million comes from factoring, $60 million from payments, and nearly none from Intelligence. Looking at that $1 billion target, you can roughly break it into thirds. While we could be more detailed, I won’t go further on that. Factoring presents a market opportunity between $300 million to $400 million, and payments are actually larger than initially anticipated with the addition of LoadPay, despite our misjudgment on network transaction volumes. Payments have grown because we've found ways to compensate carriers and leverage that float and data along with exchange fees. The Intelligence segment represents a vast untapped potential, currently generating less than $1 million from a few existing partnerships, which needs to improve. I anticipate revenue growth in 2025, but given the small base, it won't be significant, and I hope to see meaningful growth toward the end of 2026. It's important to recognize that we have established the foundational elements; we just need to ensure that what we bring to the market meets the high expectations of our customers. We're not going to launch a half-finished product, even if that means I have to explain on earnings calls why growth is slow or absent. The truth is, we won't proceed until we can do it right, and we won't scale it until we can execute with excellence.

Operator, Operator

Our next question will come from Joe Yanchunis with Raymond James.

Joe Yanchunis, Analyst

So in your shareholder letter, you touched on how noninterest expenses are expected to increase. Now how should we think about the pace of increase in 2025? And can you provide additional color on some of the internal investments you're going to be making?

W. Brad Voss, CFO

So Joe, we have evolved quickly, so I can't provide detailed guidance beyond the next quarter. However, I currently expect modest growth from the $99 million level mentioned for Q1, projecting low to mid-single digits for the year, unless we decide on additional investments. Regarding those investments, some are just natural resets, such as the compensation resets that occur every first quarter. Over the last two quarters of 2024, we have been accruing bonuses below our full target due to not meeting all our financial metrics, and our bonus pool reflects that. We plan to reset that to 100% because we aim to achieve those numbers this year. We are also facing general inflation in healthcare costs, which contributes to the increase. The majority of the cost rise is related to compensation, and this includes a full quarter of ISO, as we closed that deal in December. Additionally, we have made investments in our Intelligence segment and will continue to invest in operational resources to enhance our Factoring-as-a-Service and LoadPay offerings. Depending on the pace of volume growth, we will adjust our plans accordingly.

Aaron Graft, CEO

I completely agree with Brad on that. One thing to watch for is the instant decision model and factors like factoring. Assuming the market doesn't decline again, we should be accountable for increasing our market share in factoring. No questions, no excuses; we will achieve this growth organically through FAS. What I'm observing and firmly believe will happen is an improvement in our gearing ratio as we implement this, since we can utilize the technology we've built to increase volumes without significantly raising personnel costs. There may still be some additional costs, but we expect our margins to improve. Our operating margin should grow, particularly if we experience a favorable market trend. The money we spent on technology was intended to support volume growth without needing to hire more people each time we expand. That’s something to keep an eye on, and I'll be updating you on our need to show efficiency as we grow.

Joe Yanchunis, Analyst

And then one more for me here. How should we think about increasing adoption of your Factoring-as-a-Service product, and how will that adoption translate to revenue? Just any sort of type of unit economics you can provide would be helpful.

Aaron Graft, CEO

Factoring-as-a-Service is currently being initiated with major brokers like C.H. Robinson. There won't be another announcement for a few months, but I expect other large brokers to follow suit due to their strong marketing capabilities and their focus on carrier relationships, which are crucial when it comes to payments. We may also see interest from companies outside the brokerage industry later this year. Each of these situations will involve negotiations about Triumph's unit economics, which are influenced by several factors. For instance, an average factoring invoice for a small carrier is approximately $1,600, generating roughly $35 in revenue. From that revenue, we still need to manage expenses like sales compensation and operational financing. Ideally, we will scale this process, handling thousands, then tens of thousands, and eventually millions of transactions. The key point about FaaS is that we have invested significantly in building a robust operational framework, supported by a talented team. This includes leaders like Melissa Free, who has been in the industry for 14 years and has cultivated her team effectively. The substantial investment made is intended to handle increasing volumes of business. If we keep personnel costs steady, which represent about 60% of expenses in the factoring business, we anticipate improvements in operating margins along with growth in revenue and volume. If the market stabilizes in favor of carriers, that poses an exciting opportunity for us. Although we might face challenges in the first half of this year, with C.H. Robinson as our sole FaaS customer initially, we aim to deliver exceptional service and learn from this experience. Our primary role as a FaaS provider is to support our customers while remaining behind the scenes. This gives you an idea of our perspective on the adoption and growth of this service.

Melissa Forman, CFO

I would add one thing to that, Aaron. And that's when we have control of the factory, right, the technology, and we talk about the pipe we build and the pipe that can receive the data, with FAS, we are in control of that. So we were able to take network transactions and push them out to the FAS clients so that it can be useful in their models as well. So it is serving multiple participants, but it's also serving the network to allow us to continue to grow density in those transactions that can be leveraged across the Triumph enterprise.

Operator, Operator

Our next question will come from Gary Tenner with D.A. Davidson.

Gary Tenner, Analyst

First, I had a follow-up on your comments, Aaron, on the Intelligence segment from the prior question. In the past, you've talked about finding ways to monetize data. It sounds like, though, from what you were saying, this is more of a pull from clients and maybe a departure from what you had thought about in the past. Is that accurate, so kind of the first step in monetization of the data?

Aaron Graft, CEO

Yes, I think we had some ideas. Looking back at the acquisition of HubTran in 2021, we entered this space with certain concepts related to the network. One of the key lessons we learned is the importance of understanding our customers' pain points directly, rather than making assumptions from a distance. Our aim is not to be disconnected; we do not directly move freight, but we have ideas on how to improve efficiencies. Therefore, we need our customers to communicate their needs and what would be valuable to them, as our role is to provide the service they require. Initially, we had ideas, but they were very much in a formative state, and our customers helped us refine them by expressing what matters to them and the challenges they face. This feedback is crucial, and we are eager to respond specifically to what they want from us.

Gary Tenner, Analyst

And then a follow-up, just in terms of LoadPay, you talked about Factoring-as-a-Service, no announcements near term, obviously, CHRW, the big focus there right now. Will LoadPay, will that broader rollout follow a similar pace as what you're doing with Factoring-as-a-Service?

Aaron Graft, CEO

Todd, do you want to take that first?

Todd Ritterbusch, COO

We're using the same channels to sell LoadPay as we are for Factoring-as-a-Service. The greatest value for the client comes from integrating those two services. The ideal situation is to have a client utilizing Factoring-as-a-Service while all their carriers are using LoadPay. This should be considered our main strategy. However, we also have various other channels to market LoadPay, and we plan to explore them simultaneously.

Aaron Graft, CEO

To provide you with specifics, we currently have over 8,000 customers in our factoring business, which translates to more than 8,000 trucks since some customers operate multiple trucks. We are developing an enterprise product that will not be launched in the near term, but it aims to cater to customers with 200 trucks and parent-child accounts. We have carefully considered various aspects for our long-term strategy, and our team is working diligently on it. We regularly engage with our audience three times a week. Additionally, we have over 20,000 active select carriers in TriumphPay who are non-factor carriers receiving QuickPays from all TriumphPay-enabled brokers. Together, these figures account for more than 10% of all carriers. C.H. Robinson also works with a significant number of carriers through their own QuickPay program, providing another extensive opportunity for us. I believe LoadPay has a greater chance of success than any other virtual wallet in transportation because it operates directly through a bank, allowing us to control the entire user experience without relying on Banking-as-a-Service. We created LoadPay to be more than just a fuel card; it enables our customers to move money however they wish, whenever they need to. Considering all these factors makes me very optimistic about LoadPay's potential, especially with features like 24/7 instant funding through sub-ledgered accounts at Triumph, which is challenging for competitors to replicate. We're committed to enhancing LoadPay as it is a central element of our strategy to facilitate instant money transfer from brokers to carriers, ultimately expanding our market presence. This is an exciting venture for us.

Operator, Operator

Our next question will come from Hal Goetsch with B. Riley.

Hal Goetsch, Analyst

I have a quick question regarding the key performance indicators for LoadPay. If you had to estimate, what would you consider to be good, better, and best spending levels for someone using this service over the long term? I’m curious about your thoughts on this since we can look at other public companies with similar products, but the spending could potentially be significantly higher on the lower end. When someone fills up their vehicle and uses a debit card, it's around $60. However, when a trucker fuels up, the amount is much greater. There’s considerably more spending in the trucking industry compared to their income; they likely spend more than they earn, right?

Todd Ritterbusch, COO

When considering the funds that go into the LoadPay account, one possibility is that through the integration with the fuel card, all fuel expenditures can become part of the LoadPay spending. Additionally, the debit card feature allows for the capture of all other expenses incurred by the truck driver. There is often a need to transfer money out of the LoadPay account or to meet other cash requirements, which adds to the overall value proposition. Essentially, if executed correctly, it is possible to capture nearly 100% of a specific carrier's spending through this system.

Aaron Graft, CEO

And Todd, please discuss how spending varies based on the exchange rate and where money is spent, as I think investors would find this information valuable.

Todd Ritterbusch, COO

What we are observing so far, although it's still early, is that LoadPay account holders are actively using their debit cards. The question is how they are using them and how that translates into interchange. Debit card interchange is typically very low for consumers but higher for business transactions, with some business transactions being more profitable than others. For example, so far in January, the average interchange rate is around 1.9%. If a user is utilizing their debit card approximately 50 times a month, with an average spending of $80 per transaction, you can estimate the impact even from relatively new debit card accounts that aren't fully mature yet. This is just one debit card from a single LoadPay account. Now, if you consider a LoadPay account with multiple cards, one for each truck, you can see how that adds up significantly.

Hal Goetsch, Analyst

So when you guys say accounts, it could be multiple cards; it could be a small firm; it could be on one account?

W. Brad Voss, CFO

A single unit owner-operator could have one card.

Aaron Graft, CEO

But it’s a single company that has 10 active users.

W. Brad Voss, CFO

At least 10 because once you get cards…

Hal Goetsch, Analyst

Are you going to report active users or accounts? I mean, are they one and the same?

W. Brad Voss, CFO

Not the same. Yes, we can report both, if you like.

Aaron Graft, CEO

Sure. We can report all of it, Brad, just report it. I think active users are important; we want investors to be treated the way we would want to be treated if the roles were reversed. Telling you that there's an account but it's inactive doesn’t help you. We need to inform you about who the active users are so you can see what we are monetizing on a per unit economics basis with active users. So I think that's the right information to provide you.

Operator, Operator

Our next question will come from Joe Yanchunis with Raymond James.

Joe Yanchunis, Analyst

We do have a couple of follow-up questions. Just to piggyback on some of the LoadPay questions that have been asked. You seem to have this large distribution channel. Is there any way to handicap what you would view as a success for either account or active user adoption kind of exiting 2025? Just trying to appreciate the opportunity over, say, the near to intermediate term?

Aaron Graft, CEO

I would say between 5,000 and 10,000; that's a broad range. If I were to narrow it down, people would be challenging me. But I think that I would consider that a really good start, somewhere in that range.

Joe Yanchunis, Analyst

Then just one more for me here. You discussed increasing market share in your factoring business, which I believe is currently around 15%. How quickly do you think you'll be able to raise your market share? Is something like 100 basis points a year achievable in your view?

Aaron Graft, CEO

I think you can definitely achieve around 1%. It's interesting, Joe, you’ve made me contemplate something regarding how we approach market share growth. Triumph has indicated that we plan to maintain a 15% market share in the open-loop network, believing that this was what mattered; we did not recognize that the bigger challenge was the integration of technology in the beginning. We allowed one company to expand while harming several others, but that won’t happen again. It’s not beneficial for the industry or anyone involved. I firmly believe this has yet to be established. While C.H. Robinson isn’t the first freight broker to enter the factoring space, they are the largest broker with their carrier base to express a desire to participate in carrier payments and execute this at scale using advanced technology. Their ability to promote adoption remains unproven. Naturally, we are biased and hoping for them to succeed significantly because it would benefit them in multiple ways. However, it’s also important to consider the market opportunity available. We gathered some metrics; Kim helped me with that. In what we consider a normal year, say 2019, our factoring business recorded 4,360 new client applications, consisting of both small and large clients. In 2021, we increased to 10,766 applications. When there’s a significant flow of applications and new entrants, that’s the prime opportunity to gain market share. In 2024, however, we’re looking at only 2,835 applications. I would even question how many of those are legitimate, as there are certainly some fraudulent applications attempting to infiltrate the system. The current market dynamics suggest that the motivation for truckers to change careers and start new businesses isn't present yet. The value proposition compared to the inherent risks doesn't align. Will that shift by 2025? We all hope for that. But as of now, the situation remains unchanged. Once the market starts to improve, we will be actively marketing in that environment, as will C.H. Robinson and other skilled competitors. I genuinely believe that will start to reflect in our results. So, yes, if we only gain 1% market share in a year, I would be disappointed. While we won’t double it in a year, I’m confident we can achieve more than just an additional 1%.

Joe Yanchunis, Analyst

And just to clarify, the factoring volume generated by C.H. Robinson will add to your invoice purchases and will be reflected in your factoring business. Is that the correct way to consider it?

Melissa Forman, CFO

Yes, that's the way we think about it, and all of the factoring as a service invoices will show up on the factoring division.

Aaron Graft, CEO

Now it sits on our balance sheet, so Kim and her team are responsible. We need to consider the credit exposure; it belongs to us, and we will apply the same processes we use for our regular factoring business. So yes, we will highlight this for you, and that's the plan. We will indicate what percentage of the volume is coming through a FaaS channel, but it will all contribute to the revenue that appears in our factoring segment.

Operator, Operator

And there are no further questions at this time. Thank you.

Aaron Graft, CEO

Thank you all for being with us. Have a great day.