Triumph Financial : Q2 2023 Earnings Transcript

Triumph Financial, Inc. Q2 Earnings Call | July 21, 2023

Luke Wyse:

Morning. It's 9:30 here and a beautiful day in Texas. We're looking forward to discussing our second quarter earnings with you. I'd like to open today by thanking you for attending the call and sharing your feedback with us to help us continue shaping and developing this communications process. We appreciate it, and keep the suggestions coming. Also, you'll notice Melissa is back with us at the table today, and she has a lot of great things to talk about in TriumphPay.

With that, let's get to business. In our results. The second quarter continued to present a challenging freight environment. However, there is a lot to be excited about at T Fin when the analysis moves beyond the headline. Last evening, we published our quarterly shareholder letter. That letter 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 while comments made today 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 P. Graft:

Good morning. Thank you for joining us. I hope the letter published yesterday afternoon was helpful. I have a few comments before turning this call over to investors for questions, and they are as follows. How you view this quarter entirely depends on your horizon. If your investment horizon is short, then our earnings are not welcome news. There is a freight recession, and all of us who are exposed to the freight market face the same headwind. And that problem is compounded by the fact that our funding costs are going up. This is true of almost every bank, and it will continue to be true until the Fed changes direction. Those factors combined to bring our earnings down relative to prior periods.

Now, on the other hand, if you have a long-term horizon, then there are definitely things to celebrate. I believe that our results from this quarter answer the question of whether TriumphPay will become the payments network for trucking. I also believe it demonstrates that we can grow profitably in our payment segment despite a very difficult market. When the market turns, whether it takes two months or two years, we will be poised to profit from that. With that introduction, we will turn the call over for questions.

Moderator:

We will now go to Q&A. If you have dialed into the Zoom window and would like to ask a question, please use the raise hand feature on the bottom of your Zoom window. Once called upon, please feel free to unmute and ask your question. Our first question comes from Tom Wendler from Stephens. Tom, please go ahead.

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Tom Wendler:

Hey, good morning, everyone.

Aaron P. Graft:

Morning.

Tom Wendler:

I wanted to start out with a... Good morning. With getting a little color around the supply chain financing within T Pay. With this being more of a closed loop business, is it more of a shorter term opportunity or a longer term part of T Pay's growth story?

Aaron P. Graft:

Yeah, great question, and I attempted to address that in the letter. So, a couple different ways to look at it. In the short term, it is certainly an opportunity for us to generate revenue for the payments network. Beyond that, it's one of the few financing opportunities that you will ever see where the payment you are already handling, we are being paid a fee to handle the payment irrespective of whether we provide balance sheet liquidity. And so, it is an extremely efficient form of finance. As we go forward, I think supply chain finance will be with us for some time and will contribute materially to revenue alongside the fee income growth we generate inside the payments network. As the payments network scales beyond our own balance sheet, I think you will see the opportunity to do supply chain finance, both exist on our balance sheet and be syndicated out to other capital providers for the network. So, it's with us for the short term, and I think a piece of it will exist with us for the long term.

Melissa Forman:

And I think, Aaron, I would just add to that we had provided supply chain finance before with our quick- pay opportunities, and with the state that the market is in right now being recessionary, we are just answering the call for our customers, so we will be there to meet them where they need us to help them get through this recessionary period.

Tom Wendler:

That's great color. Thank you. And then, one more for me. We saw a step up in broker deposits last quarter. Could you maybe speak to the term of these deposits and how you're thinking about the funding profile of the company now that the supply chain financing will likely drive increased balances of T Pay?

W. Brad Voss:

The question about brokerage funding, if you dig in under that just a little bit, you'll see that that corresponded with a pretty considerably decrease in our use of federal home loan bank advances. We took out several hundred million of home loan bank advances in March in the wake of the Silicon Valley failure and the related issues in the banking sector overall out of an abundance of caution. But if you look at those two funding sources, they're very comparable in cost, and we will sometimes use them interchangeably. Each has its own advantages, but the brokerage CDs have the advantage of being fully insured, FDIC-insured deposits, so all else equal, we would gravitate there. And the term, as you asked, is generally pretty much a ladder between about one month and about a year. So, those will be kind of a

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rolling form of our funding base. And I think that over time, you'll see some form of wholesale funding be a part of our funding strategy because it does provide a lot of flexibility to us going forward.

Melissa Forman:

I think I would add to your question about how it impacts T Pay. T Pay is already self-funding, so we are using our own deposits to be able to leverage for our supply chain financing and are able to contribute some of that now back to the bank. So, we have plenty of room to grow in our supply chain financing with our own deposits at this point.

Tom Wendler:

All right. I appreciate the color, and thanks for answering my question.

Moderator:

Our next question comes from Joe [inaudible] from Raymond James. Joe, you may unmute and ask your question.

Joe:

Morning.

Aaron P. Graft:

Morning, Joe.

Joe:

So, T Pay announced several big customer wins inter quarter, and then, in the shareholder letter, you called out some incremental volume coming from some mid-tier brokers, assuming a static market, how much payment and audit volume do you expect that you'll add from these customers that are currently live and ramping on your payments network?

Aaron P. Graft:

Yeah, there's two things, Joe. First of all, from a revenue standpoint, and I think we disclosed that at the end of last quarter, the runway was 38 million. As we sit here today, revenue is just under 43 million, so a pretty dramatic step up on an annualized basis. Some of that's tied to the supply chain financing initiative. That does not include all of the revenue that comes from those wins, and for what's contracted and going live, it's roughly 9 billion in payment volume that should come on in the next few quarters. We would hope by the end of the year, some of that may spill over into the first quarter of next year. So, a significant amount of volume.

Joe:

And how much audit volume?

Melissa Forman:

I would say the majority of that would also be in the audit network as well. What I would point out is that regardless of whether they're on our audit product or have their own internal solution, they will be contributing to the network as a fully conforming broker. So, full network broker.

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Joe:

Got it. What I'm trying to understand is end of quarter, the interchange fee had a nice increase, and I understand the customer mix, and there's the payment versus audit mix, how can impact that number. Are recent customer wins expected to be accretive to that fee?

Melissa Forman:

Yes, they are.

Aaron P. Graft:

And just so we're clear on that, yeah, as Melissa said, yes, definitely they are. What you should understand, and I think we've talked about this in past, but I just want to reiterate it. When someone goes live and we announce them, especially a tier one broker, especially someone in the top 10, the full monetization of that relationship may take up to a year because they have multiple divisions. It doesn't just switch on like a light switch day one. So, the things you've seen us announce, that incremental revenue will come on over the next two, three, four quarters. And it may even come on beyond that because what we've also found is the longer we go with someone as a part of the network, the more things we find that we can help them with, which increases our revenue per customer.

Joe:

Understood. And then, lastly for me, the corporate segment expenses had a pretty noticeable increase in the quarter. Can you provide more color on the increase and remind us of the composition of that segment?

W. Brad Voss:

Sure, Joe. The composition of that corporate segment is really everything that supports the enterprise as a whole. That would include the executive team, that would include our technology, finance, human resources, those sorts of activities. The growth that you're seeing in that segment over the last year or so is largely driven by our investments in technology, both people, and hardware, and software to support our growing and transportation efforts.

Aaron P. Graft:

And one thing I want to... Brad said, "The executive team." That would include Brad and me. That would not include Melissa, Tim, or Todd, each of whom would be allocated to the segments that they lead along with their teams and their specific technology teams. All of those live inside the segments.

Joe:

Perfect. And thanks for taking my questions. I'll hop back in the queue.

Moderator:

Our next question comes from Hal Goetsch from B. Riley. Hal, you may now ask your question.

Hal Goetsch:

Hey, good morning, everybody.

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Aaron P. Graft:

Speaker 3:

Morning, Hal.

Joe:

Hey, my question is, could you just give us a feel for the long-term impacts of adding Highway in your investment [inaudible]? It seems to me that you're assembling all the functionality all the platform participants would want to have in a payment audit and fraud prevention network. As of right now, it's hard to see those pieces coming together from just our knowledge. We wanted to get your perspective on this [inaudible] in your announcements in the last 90 days. Thanks.

Aaron P. Graft:

Sure. Let's start with our shipper strategy. That's a 250 billion dollar market. There are some legacy players in that market who are banks that have been in that market for a long time. Our strategy is threefold. Number one, go find companies who are operating in that space who've developed more advanced technology than the legacy players, partner with them and invest in them and equip them to go compete against the legacy players by giving them access not just to the payments capacity of a bank, but to the payments network itself. There's a big distinction between those two things. It's one thing to have access to the fed rails and be able to make payments, and 4,000 other banks can do that. There is no other bank in the United States of America who's paid 280,000 truckers in the last few years, or in the last quarter we paid 127,000 truckers.

What happens is you take that audit functionality and you complement that with our payments data, and it allows these tech-first freight audit and pay providers to go aggregate market share. They win, we win. That's that part of the strategy, and it should generate a significant amount of float over time. It generates a significant amount of data, and it also expands the reach of the network because a day will come, even in an environment like this, where supply chain finance opportunities will exist for shippers. They may want to extend their days to pay. Whether we hold that on our balance sheet or that gets pushed out to the capital markets, we can facilitate that transaction because we understand it. That's a very powerful way for us to go to market, not altogether different than you having a merchant acquirer or go out and expand the Visa network for them. You could look at a freight audit and pay company in that way.

Turning to Highway, because I think I heard you ask about that, if you take what I just said, that we paid 127,000 carriers in the last quarter, we paid 280,000 carriers inception-to-date, 160,000 plus have registered on TriumphPay, we know a lot about the active carrier universe. We know more about the active carrier universe than any one broker or shipper could possibly know. When you take that payments data that we have, the audit data we have, and you have a 360 degree view of the market, maybe we don't have 360 degrees yet, but it certainly grows every time we add one of these large players, and you license that data to someone like Highway who has built a profile that tells you how much equipment a certain carrier presumably has, you can very quickly see carriers that are hauling five to 10 times the amount of loads that they should be able to haul.

With that data, you can start to make decisions, risk decisions. If you're in the business of procuring capacity, you have to think long and hard what loads am I willing to give to a carrier who apparently is hauling more freight than they have equipment to haul? They are likely engaged in double brokering, which could ultimately lead to fraud, and it could ultimately lead to a service standard that's below

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