Is This Trucking Market Different? Why Capacity Won't Flood Back In

[00:00:00]Well, Aaron Graft, the CEO and founder of Triumph, one of the most important financial institutions to serve the trucking industry, particularly the brokerage industry, is with us today.

[00:00:09]First of all, Aaron, I got to say congratulations are in order. You guys absolutely killed this quarter. Uh congrats to the Triumph team uh and and what you guys have been doing over there.

[00:00:21]>> Thanks, Craig. Appreciate you having us and after 4 years of running against the treadmill, it's kind of nice for it to reverse course and carry you along. I'd almost forgotten what that felt like.

[00:00:32]>> We all have. It's been a miserable winter. We're out of winter, it's spring. I think the question that we've been asking, even talk about today, uh and our prior guests talked about it, is this question about how long does this cycle last? I know you don't have a crystal ball, but do you have a perspective on whether this cycle is going to go on for a while or we're going to, you know, we can't have nice things in trucking?

[00:00:56]>> You know, as as a younger man in the last cycle in 2021, uh I made some bold predictions that were incredibly wrong. So, I think one of the things when you get older, you should get a little wiser. Um and and, you know, you more than anyone nailed this and were bold enough to step out and make the call on this cycle.

[00:01:17]Uh what's different, and I wrote about it in the letter, and I'm not the only person to say this, you see this, but this is a supply driven market. Um and and I don't see a antidote to litigation, regulation, legislation risk that's just going to allow capacity to flood in the way we saw it happen last time. So, it feels more structural. We know it's a cyclical business.

[00:01:45]Um and and who's to say when it would end, but it feels like it has more legs perhaps than what we've seen in the past.

[00:01:54]>> Yeah, I think that that certainly aligns with what what we've been saying and thinking. The barriers to entry have certainly risen for those it's going to be significantly harder to add more capacity. But let's talk a little bit about state of freight demand right now, where you sit inside the data, what you're seeing overall.

[00:02:11]I know you said you you don't want to talk about how long it's going to last, but can you give us some headline numbers on >> He's not going to be so bold to come out. He's a public CEO. He's got to be careful because his stock trades like a trucking stock versus a bank. You know, it's a bank that seems to headline more with how the trucking in tandem with the trucking operators than the than the banks do.

[00:02:31]>> But I think there's probably some really good examples of how strong the market is right now and some indicators in your data to back that up.

[00:02:38]>> Sure. Sure. I mean, the Let me and here's what here's a something that surprised me and didn't surprise me.

[00:02:48]So, the average invoice size in our factoring business, which is 15% or more of the entire market, is up 26%.

[00:02:59]Now with all the headlines we heard and to have seen that, what I would have expected is our customer count to constrict.

[00:03:09]For all the reasons we've talked about, people being put out of service, brokers not tendering freight to carriers who don't meet heightened compliance standards, etc. And what we actually saw is we grew customers in the quarter by 4% and we didn't see a lot of our long-term customers disappear. We certainly had some going active and I can't tell you why they did or didn't go inactive.

[00:03:35]And and so, the first thing I would say to you what the data says is the market is tighter.

[00:03:42]What I don't at least have the data to point you to is who exactly left to create the tightness. I know it happened. We saw less freight tendered to owner-operators, our one-to-four segment. Um but I can't point you to a bunch of people leaving the system, but they must have because demand didn't go up and supply obviously tightened to drive that sort of quarter-over-quarter increase.

[00:04:05]>> Every channel every channel check we do talking to the largest carriers are telling us how tight the freight market is in terms of recruiting. We had a very large motor carrier said this is it's been around for decades one of the largest has all the advantages said it's the tightest recruiting market in their entire history. Says a lot for anyone who's been around trucking. And I I think Aaron, the question there is to your point, the cycle if you can't get drivers, you're not adding trucks cuz nobody wants to have unseated trucks.

[00:04:37]>> Right.

[00:04:37]>> Which I think makes the case that the cycle is going to go on a lot longer than I think some of the folks who have been around it for a while would would otherwise think.

[00:04:48]>> Yeah, it's it and and you know, in the last cycle and in every cycle I've seen in this industry, it was he who had the cheapest capacity would win.

[00:04:57]Right? You just you would put somebody in the truck. I mean, think about what we've lived through uh in these last few years is they would put unqualified, undocumented, unverified people in the trucks and and almost treat them like indentured servants, which is good for no one. It's not good for highway safety. It's not good for the people being taken advantage of.

[00:05:17]Now it's so different.

[00:05:19]I mean, clearly we have what the government's doing and then we have what the plaintiff's bar is doing and will do and and some of that's good, but it's also very difficult as a business owner when you're getting paid $2,000 to move freight or paying $2,000 to move freight to wrap your head around the fact that you might be still staring at a $30 million verdict on the back end of it despite the best efforts you use.

[00:05:43]Like it's just in it's in it's added this what we are calling the defensibility of who you hire and and I know you and many others are are on to this.

[00:05:54]And so you're right. I mean, it's one thing to say we didn't see a lot of motor carriers surrender their licenses, at least the ones we do business with, their registration, but it's another thing to say the demand is out there to go get freight at revenue that would be accretive to their bottom line above their cost of capital, but they can't find a qualified driver to put in the seat and that's that's a different thing than we've seen in the last several years.

[00:06:20]>> Well, immigration's been the is the relief valve. I mean, that's really what's enabled fleets and we've been talking about it since I was since I was a young boy in trucking, uh is just how I the average age of truck drivers of the traditional demographic is older and older.

[00:06:35]And then what I don't think anyone really expected was the massive explosion of you know, unregistered folks that took advantage of the lack of compliance, the lack of standards and frankly, the proliferation of freight brokers to provide freight access to to these operators. But many of these operators were off the radar. I mean, it's interesting cuz when the non-domiciled CDL conversation started popping up, I was talking to a lot of CEOs of the of the largest carriers, they weren't even aware of the term non-domiciled CDL. It never registered them. Very few of them believed it was a real factor.

[00:07:13]>> Yeah, you're totally right. And if you're a shipper who is moving freight, you have to ask yourself, unless it was high-value freight, like what what what was your duty of inquiry beyond the freight broker? I mean, you hired a freight in the in the instances where you're using brokers, they're the experts, they're on the ground, they're sourcing capacity, licensed capacity, and and there was really no need to to extend your your I mean, I'm I'm sure certain people did but but generally speaking liability stopped there and we all know what happened with the Montgomery case. We see what's happening and and so now the everybody is paying attention and when everybody pays attention it gets harder to operate in the gray areas and that's what we're seeing. I mean the numbers clearly support that.

[00:08:04]The kind of move we've seen I mean diesel explains part of it but it does not explain all of it and I just don't see if we're all going to operate in a black and white environment where the cost of doing business is higher and the risk to not meeting that standard is even higher. I don't see how we fall back into the gray area anytime soon.

[00:08:29]>> Yeah, I agree. I want to talk a little bit about more about brokerage and I believe it's true that both your shipment volume and number of invoices you know processed your your invoice volume were both up in addition to you mentioned earlier the revenue per invoice being up.

[00:08:45]What did you see when it came to actually brokerage margin and how they are faring over the last quarter with capacity being tighter even with spot rates going up from the shipper side?

[00:08:56]>> Sure. Well, in Q1 we saw margin compressed because you know all the contracts broke down and then in Q2 we saw something interesting happen and this is where the real world is is often more interesting than than those of us who sit around and opine and predict.

[00:09:15]The total gross dollars that a broker was earning per load went up because the load size went up more than their margin compressed.

[00:09:24]And if you think about that you know it's it's the question of if historically I made 15% on a $1,500 load well you know that that's that's going to be $225 of revenue.

[00:09:39]If I make 10% on a $3,000 load, my percentage margin went down, but my gross dollars went up. And when you run a business and you have expenses, you have to meet at the end of every month payroll, you have to make percentages are are lovely, but it's gross dollars that matter. So, because so much freight spilled over into the spot market and the spot market gapped out, even though broker margins compressed to between 10 and 12% for those that we track, the actual dollars they were recognizing per load went up.

[00:10:11]>> So, Aaron, one of the things that I think is interesting that you you make clear in your comments, uh John Kingston, our reporter who covers Triumph pointed out, is that you, you know, we're certainly we all benefit when the freight market is doing better.

[00:10:25]Triumph is one of those beneficiaries as well. But, you also made the point to remind your investors that a lot of the improvements you guys have made have been specific to your business and are not just market-driven. Tell us a little bit about those improvements that you you guys feel like it really highlights the the operating improvements, the unit economics that you uh improvements that you guys have made.

[00:10:47]>> Yeah. I I look, if if you followed Triumph's journey, what comes naturally to us, or at least what's come naturally to me, is being creative and trying to use what we built to solve difficult problems that banks never tried to solve before.

[00:11:03]But, at some point you scale that business to a size where instead of just using technology as doing the next creative thing, we need to harness that technology to make sure we're delivering an incredible customer customer experience and creating operating leverage. And you and I both lived through the last cycle when people were like spin faster, spin more, do more. And And it's our job to hear that, but not be persuaded by that. And And so, what we've done is improved our processes, we've upskilled several positions, and we've used technology to create a dislocation between as revenue is growing, as more invoices are coming in, we're not just throwing people at the problem because that's that's not the way you create sustainable margin that lasts through the cycle. And so we've done that. I mean, we've we've probably eliminated 30 million plus of of inefficiencies in the business. We've reinvested some of that into things that we think are going to be revenue producing, and it's been a very healthy experience for us, and it was frankly brought on by a market that was so soft that you had to quit looking outside, and you needed to look more inside and find the margin there.

[00:12:15]>> Yeah, it it is amazing. Julian and I talked about this just in our own business, uh how how much better because we we're all forced to make sacrifices, we'll call it, or change the way we think of it, get the business lean and mean, how much better your position is as the market recovers because you're not having to add those costs back. AI uh these automation tools that are available has made it so much easier to grow the business without adding humans, and I think that's a something a testament that certainly shows up in your data.

[00:12:43]>> Mhm.

[00:12:44]>> Uh and there's really not a more, I mean, uh taxing part of the freight market in terms of human touches than factoring. I mean, that's a part of the business I shocked when I when I came out to Dallas and just saw how many people manage invoices because the expectation is that factoring is a pretty should be a pretty easy business, but historically, you guys have had large teams of people that have been required to manage it. What do you see in in terms of improvements that you're able to use technology to lower the amount of human touches that you have in a factored invoice?

[00:13:17]>> Yeah, well, let me be clear. We still have large teams of talented people, and I think we will forever. Um my goal is for those people to be talented and empowered in a way that we can continue to grow our factoring business without making that team bigger. But, the the complexity, if you it's the the amount of revenue we generate per invoice is somewhere around $25.

[00:13:43]So, every time you touch it, you're losing. Right? We're not talking about tons of margin to go around. We're talking about something that you have to get incredibly efficient at touching something where you're only making $25 in order to do it at scale on a repeated basis.

[00:14:01]So, yeah, I mean, something you wouldn't think about unless you did this for a living. We have an incredible team doing cash application. Imagine a large broker sending us a payment weekly of 10 or 15 million dollars that needs to be applied across 3,700 invoices belonging to 2,000 clients, and you got to go do that $2,000 at a time. Like, that is an incredibly manual, difficult process, and you've got to do it immediately because you've got to apply that cash so your customer can see that the payment came in. And those are the areas where we think automation should materially change the way we do business. Um and it's just a it's just a high-volume business that that unless you live it and you understand we're trying to get payments out in the same hour that the invoice comes in when we can, it just never stops.

[00:14:58]>> So, Aaron, coming off of your earnings call last night, um which parts of your business are you seeing the most strength in right now, and then conversely, where are you seeing the most pressure?

[00:15:08]>> Factoring and payments uh are are doing great. Factoring, of course, that revenue is highly indexed to what the average invoice size is, and the average invoice size is perfectly correlated to what revenue per mile is. So, that that's doing great. Payments continues to scale. We touched 56% or I'm sorry, 65% of all brokered freight. One thing you all might find interesting, we resized the market.

[00:15:35]There is no perfect measure of what the truckload brokerage market is. When we talk about the size of the market, we're talking about what brokers pay out, you know, not not what they charge.

[00:15:47]And we took it from 110 billion to 135 billion just because everything has inflated.

[00:15:54]So, that business we're still touching 65% of invoices, I think doing 54 billion in annualized payments. And so, that business is doing great. The things that have gone more slowly are intelligence business. I think we're excited about the products we have, but you know, it's one of those businesses where I think our the customer base, there's only so many vendors they want to deal with and you've got to distinguish your value proposition to them. I mean, you know this. Um, in order to to scale that business. And so, we've taken more time than I thought to build the products we need for enterprise intelligence. I'm excited about where we are and where we're going from here, but among our transportation related businesses, that is certainly the slowest growth.

[00:16:39]>> All right. Aaron, I you're not going to let you out of that since you teed it up uh just Scott free here.

[00:16:45]>> Sure.

[00:16:45]>> You you made a big transaction last year. You guys bought GreenScreens. Um, it has, you know, in terms of of what you paid, big number. By the way, thank you for that cuz we like big comps in our industry as someone who has Sonar.

[00:16:57]We do compete, in fairness. So, my questions are certainly biased in some ways.

[00:17:01]Uh, but in terms of what you paid, where you guys are at in terms of the the size of that business today, hasn't really grown year over year. What what is the story for for the old GreenScreens or or Triumph Intelligence business?

[00:17:16]>> Yeah, I think there were GreenScreens did a lot of things well. Um, green screens was really good at selling to the SMB market of brokerage. Triumph is good and where we live is in the enterprise market. And so what we had to do and we knew this was going to happen, we needed to change the go-to-market strategy to meet the needs of an enterprise player. All right, so that takes a certain amount of time. It has taken longer than I would have liked.

[00:17:43]Um, so you know, Craig, I've done a lot of deals since since I've got into banking. Some deals we bought great, some deals we bought average, some deals work out faster than you think, although that very rarely happens and some deals work out more slowly than you think. And I mean nobody's hiding the ball. I think that's true of us and intelligence. But I continue to believe that the industrial logic of using the data we have to give insights back to our customers works. And I do believe in the in in the products that we have announced and where we're going.

[00:18:19]But at the end of the day, my belief only carries us so far. It's got to show up in the numbers. And and we we don't hide it. We lean into it.

[00:18:29]Um, just like we celebrate our successes, we own things that aren't going as quickly as we'd like, but that doesn't change what I think the long-term value proposition is.

[00:18:37]And so we're committed to go get that.

[00:18:39]>> Well, I think it I mean, you should get a ton of credit for what you guys have done in your payments business. I mean, even a margin's improvement uh up 14% year-over-year in terms of of 26% year-over-year. LoadPay is something that is I think it's really caught on.

[00:18:55]What exactly is LoadPay for those that aren't familiar with it?

[00:18:59]>> Yeah, I mean, it started as the idea of Venmo for trucking, but it's expanded into a digital business companion for truckers.

[00:19:08]So, it's a place where a trucker can go to consolidate their workflows. if they need to upload factoring invoices, if they want to see about equipment finance. It's a virtual wallet for their card. And since it's connected to the back end of our network, we can fund 24 hours a day, 7 days a week. So, we don't depend on ACH rails. We don't charge wire fees. We can move money instantaneously.

[00:19:32]And so, when you couple that, the fact that that we can do that because it lives inside the walls of our bank, with the fact that our distribution network involves everyone from C.H. Robinson, you know, to several of our partners who who are, you know, prefer to pay via Load Pay to their carriers, um that's a compelling proposition.

[00:19:54]It's a It's a great product. It gets you instant liquidity. And it's a preferred provider for many of the large vendors, and that's why I think it's positioned to grow.

[00:20:03]>> Revenue up 49% for the quarter. I mean, that's a fantastic growth trajectory. Obviously, being a bank, you're managing money. And being a bank certainly helps you guys do that uh for people that can trust that it it it is going to be safe. You've got the compliance and regulatory uh elements that you you get the luxury of dealing with uh having uh the regulators. Uh but that gives people confidence in the fact that money's going to be safe.

[00:20:28]>> Credibility.

[00:20:29]>> And I think in this market, you know, with all the fraud going on, I want to know my money's safe.

[00:20:34]>> Yep.

[00:20:35]>> Like it's it's really important. Aaron, I got to ask uh outlook for the rest of the year. How you guys feeling about the market in terms of uh perspectives on the the balance of the year?

[00:20:44]>> Well, I'm just following the Craig Fuller forecast, right? I mean, I'm rooting You've been right. Um I I think that and you and I've talked about this. I think the market's better than people think or fear or predict.

[00:20:59]There are certainly weak patches in it, but there are strong part uh you know, things that are strong.

[00:21:04]Um I think it's a very brittle market right now, so any uptick in demand, there's not a lot of available properly verified, defensible capacity to haul it. So, I think that the market risks another leg upwards. In the absence of that return of demand, I still think the market stays strong and and I just want to point out everybody's like, well, the the invoice prices are up 26% quarter over quarter or whatever percent year over year.

[00:21:36]What I If this is a healthy marketplace, then the revenue per mile or the average invoice size ought to be at a level where a small carrier can earn their cost of capital while complying with legislative with with legislation and regulation. And it hasn't lived there for 4 years.

[00:21:56]>> Amen.

[00:21:57]>> it that the numbers like look like they're up a lot, but if you inflation adjust those numbers, if you allow for what diesel's done, equipment input cost, small carriers still are not pocketing a lot of money here.

[00:22:10]>> Aaron, you're you're exactly right.

[00:22:12]>> up.

[00:22:12]>> And we have a regulator, the FMCSA and DOT, that are actually watching the freight market uh data. I mean, they they are now a subscriber to SONAR, tracking the rates, tracking the market.

[00:22:25]And what they will say, very similar to the STB, what they'll say is, we want motor carriers to make a profit because we want the ones that are compliant to be profitable. We want the market to be healthy because we know if it's healthy, it will be safe and secure. That is directly from Derek Barr's own words.

[00:22:43]And it's unusual to have a regulator tracking trucking that cares about the freight market, which I think is pretty remarkable. Shawn Duffy and the Louisville truck show said the same thing. And I I think that's why you got to make the bull case on the market of this cycle is not going to turn over anytime soon. I think the fact that the regulators care about where the market is and market health is something we have not enjoyed I I can't frankly forever.

[00:23:09]>> Forever.

[00:23:11]Forever.

[00:23:11]>> Aaron, thank you so much.

[00:23:13]Congratulations on a fantastic quarter.

[00:23:15]I think a lot of confidence in what you guys are doing there in Dallas. We'll have to come visit. We've talked about that.

[00:23:20]>> Yeah. Dallas is fun.

[00:23:21]>> love going to Dallas.

[00:23:22]So, Aaron, appreciate it.

[00:23:24]>> in July.

[00:23:25]Oh gosh, yeah. Let's Let's wait till it cools off, yeah.

[00:23:28]>> Hey, we got to do it. I got to go to the Baylor game. You know, he's a Baylor Bear. Aaron Aaron That's one of one of the smartest one of the smartest executives in the space. All the smart executives go to Baylor or went to Baylor.

[00:23:39]>> So, all of them.