Triumph Bancorp : Q2 2022 Earnings Transcript

Triumph Bancorp 2Q 2022 Earnings Call

July 21, 2022

Luke Wyse:

Good morning, welcome to the Triumph Bancorp conference call to discuss our second quarter, 2022, financial results. Before we get started, I would like to remind you that this call 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 and earnings release published last evening. All comments made during today's call are subject to that safe harbor statement.

I'm joined this morning by Triumph vice chairman and CEO, Aaron Graft, our chief financial officer, Brad Voss, Todd Ritterbusch, president of TBK Bank, Geoff Brenner, our CEO of Triumph Business Capital, and Melissa Forman, our president of TriumphPay. With that housekeeping out of the way, I'd like to turn the call over to Aaron.

Aaron Graft:

Good morning, everyone. We hope that the shareholder letter we published last evening was helpful for you in preparing for this call. At this time, we're ready to open the call up for any questions.

Operator:

All right. If you have any questions, feel free to use the raise hand feature and activate your camera. Our first question comes from Michael Rose from Raymond James. Michael, feel free to ask your question.

Michael Rose:

Hey, thanks. Good morning, everyone. Thanks for taking my question. Obviously, a lot of moving parts this quarter, a lot of repositioning efforts, would love to get some context there, but first just wanted to dig into the average invoice size. It definitely held up better than I think we were modeling, and I think there's been a lot of chatter in the trucking space about invoice prices and trade costs and things like that. Can you walk us through the dynamics and maybe what you might expect for invoice prices as we move forward? It doesn't seem like they're going to get back down to where they had been pre-COVID, just given structurally higher fuel prices and labor costs. But we just love any insights into the nearer term direction of TBC. Thanks.

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Geoff Brenner:

Hey Michael, this is Geoff. I'll take that one. I think we've benefited from heightened diesel prices, and as you know, that factors into the average invoice size, and we think the imputed higher diesel prices and these invoices has held them up from what we had called for, which is a gradual return to normal. So, that dynamic certainly occurred in Q2, and looking into Q3 if diesel prices stay at or about their current levels and if utilization stays at or about its current level, which is about 96%, we would anticipate cautiously optimistic return or holding flat and then an eventual opt return back to what you'd seen several years ago.

Michael Rose:

Okay. Thanks. And then maybe as a follow-up, on the network side, I think the trends there may be a little bit weaker than what we'd modeled, but just as we think about the intermediate term, is there any updates to when you guys expect for the network to really break even, and then begin to generate some profitability? Because it does look like the ramp is perhaps a little bit slower than at least I was expecting, but we just love any updated color there. Thanks.

Aaron Graft:

Yeah. Great question. I'll take that. And if I say anything wrong, Melissa will correct it.

As we've tried to focus the market on there is a steady drip every quarter of clients coming into the TriumphPay ecosystem. It's just that the ones that really move the needle are the ones we describe as tier ones because they control such a large amount of business, each one of them individually and certainly collectively. We pointed out in the letter, we have over 15 billion in volume in the pipeline, and those are chunky because they come associated with large names. That's just the identifiable pipeline. So given where we are in the year where we are in the integration schedule, I would actually expect for Q3 the gross payment volume to be flat to perhaps down slightly, just if invoice prices do moderate even more.

We expect there to be a big spike upwards in Q4 when we go live with the first part of this group of new clients who are in the pipeline. And it's going to be chunky from there, or it'll be a step function each time a new one comes on just because of their size. And so revenue will move right along with that. And ultimately we believe we are on track to exit 2024 with a business that's doing over 75 billion in payment volume, an ever-growing portion of that being conforming transactions upon which we charge network fees. And we think at that pace or at that scaled size that gross revenues will be a hundred million, and this will be a business that generates positive EBITDA. So, that timing is still intact. You're just seeing the first quarter in a while where we didn't bring someone live onto the system, but that pause won't last very long.

Michael Rose:

Okay. Helpful. And then maybe finally for me, any updates on... You talked about the potential for the contract shipper market at some point. I didn't see much in the shareholder letter about that. I know there was some, but we just love an update there. You previously had slides, and I think you

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were 2% to 3% by your math of the volume there. What's the outlook there, and should we be thinking about that? And then just with the repositioning efforts, a lot of moves this quarter, could we expect moving forward much cleaner results because I think there has been a lot of noise in the numbers. Thanks guys.

Aaron Graft:

The shipper?

Melissa Forman:

Yeah. I think on the shipper market, we did have one tier one shipper come onto the platform in Q2. And so we've seen some growth in that business. We also made an additional investment in Intelligent Audit, which is a freight audit company, in that space to further our initiatives in that segment of the market. And so there's significant total addressable market available in the shipper space. When you look at the contract shipping, we size it around a $250 billion opportunity, so we're continuing to invest there. And the additional investment with IA has allowed us to really reposition our relationship there and then our strategy within the market to be more in line with our open network that we're building out for TriumphPay. So you'll see more coming soon on that side.

Aaron Graft:

Yeah. Mike, I wouldn't overlook that Intelligent Audit investment as being consistent with what we've always said of there is another market yet to go get more of. We have a couple billion of it, but there's a lot more to go get. And so things are happening. And then in response to your last question about expecting clean quarters, I can never predict quarter to quarter what opportunities are going to present themselves. But I think it is likely that the next few quarters won't have anywhere near this amount of noise. But as you said, and we want everyone to understand, we are still in a period of strategically turning this business towards where we want it to go. And as a result, there's going to be things along the way where we reallocate parts of what we're doing to things that are consistent with our future strategy. So there may be noise in quarters to come, but I don't expect it to be anything like this one.

Michael Rose:

Appreciate all the color. Thanks for taking my questions.

Aaron Graft:

You got it.

Operator:

And our next question comes from Matt Olney from Stephens.

Matt Olney:

Hey guys, good morning.

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Aaron Graft:

Good morning, Matt.

Matt Olney:

I also want to dig more into TPAY. I thought most of Q2 metrics showed some improvement or at least similar to what I was forecasting. We saw higher number of invoices, higher dollar amount of invoices, but the dollar amount of receivables was down linked quarter. And I'm not clear if the turn times increased or the discount rate declined any color you can give us on why the average dollar amount of the receivable declined in TriumphPay.

Melissa Forman:

Yeah, that would be in direct alignment with the average invoice price going down. The receivables themselves are tied to the amount of the invoice. And so as that has softened within the portfolio, we'll see that revenue drop.

Matt Olney:

Okay. And then within, TriumphPay also curious about the investment spend there. Appreciate that it's vital what you're trying to achieve, but help us appreciate the ramp of the expense in that TriumphPay segment. When do you expect that ramp to moderate? How close are we to that?

Melissa Forman:

So right now, our investment is primarily in our operations folks. So as we continue to grow the payment volume on the platform, it requires support and contact center support for the customer service side of that. As we look at our future growth and what's in our pipeline, as Aaron mentioned, we have $15 billion that's kind of stacked up ready to come onto the platform. That is a significant increase. And so we are in preparation of that volume, staffing our teams up so that we're prepared for it and have the training, et cetera, in place to be able to handle that smoothly for our customers. So you'll continue to see us invest operationally to support the growth and that will continue to go out through 2024.

Aaron Graft:

Yeah, I think, Matt, to your question on whether the glide slope is probably flattening a little bit. We did a significant amount of hiring and building with TriumphX, bringing in some very expensive, but very valuable team members to help us shape this strategy. So the go forward investments are always to update the software ecosystem. I mean, that's a living breathing thing, but most of the ads are in operational support. So it'll be a flatter growth from here.

Matt Olney:

Okay. That's helpful. Thank you for that. And then just I guess lastly, we've talked in the past about eventually doing some syndications within TriumphPay. Just remind us how close are we to seeing

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these syndications? Is this something we could see towards the end of this year or this more of an initiative that we'll see more impactfully in 2023?

Aaron Graft:

I think it's going to be more of a 2023 issue, Matt. We're not balance sheet constrained as you know, from all the repositioning that has been done. And so we're not in a position where we need to be selling those assets to make room for the balance sheet allocation we have for it. We think that's a future state problem when we have significantly more volume coming across the system. But nevertheless, just like we wanted to create the plumbing for equipment finance syndication opportunities, the syndication inside of TriumphPay, it would be wise of us to do one in 2023, just to demonstrate that the plumbing works for ourselves and our counterparties and investors. So I think even if we have the balance sheet room to hold it all, you'll see us do the first one of those next year.

Matt Olney:

Okay. Thanks. I'll set back in the queue.

Operator:

Our next question comes from Steve Moss from B. Riley.

Steve Moss:

Sorry about that guys. Morning.

Aaron Graft:

Good morning.

Steve Moss:

Just on the pipeline here, you guys mentioned that there's $15 billion in annualized payment volume here come online. Is all that just what is in integration or is some of that also include like contracted, but not yet started in terms of API integration?

Aaron Graft:

Yeah, it's a both and, right? This is volume that is in the contracting phase and we have already started integration, but we haven't signed the final contract or completed the integration.

Steve Moss:

Okay. And-

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