A weak freight market led to a weak earnings report at Triumph Financial, the trucking-focused bank, but CEO Aaron Graft’s quarterly letter to shareholders continued to emphasize long-term strategy over short-term earnings.
Graft’s letter, which this quarter ran 11 pages of text, graphs and charts, opened by labeling quarterly earnings “anemic” and said the primary reason is that “expenses have risen while revenue has stagnated.”
But a possibly more important measure for Triumph Financial’s (NASDAQ: TFIN) growth is earnings before interest, taxes, depreciation and amortization at TriumphPay, the division at Triumph Financial that houses its TriumphPay Network. The network processes transportation invoices and generates revenue via fees, as opposed to generating revenue through interest payments tied to quick pay activities, which is also part of TriumphPay.
The EBITDA margin at TriumphPay was negative 10% in the second quarter, a 3-percentage-point improvement from the first quarter. EBITDA margin was flat in the fourth quarter of 2023, the only quarter it has not been negative.
Graft said TriumphPay still expects a positive EBITDA margin by the end of 2024.
The focus of Graft’s letter was on the growth of TriumphPay and the hurdles to get there. It is coming off a quarter in which it announced the network had pulled in the biggest fish of all in the brokerage world: C.H. Robinson (NASDAQ: CHRW). But Graft also disclosed that LTL carrier ArcBest (NASDAQ: ARCB) has become a user of the TriumphPay Network.
The ArcBest addition had not been announced by Triumph Financial previously, and Graft noted that the disclosure of the C.H. Robinson signing, six to nine months before the company actually goes live on the network, was unusual. “Given the size of CHRW, we wanted to inform investors,” he wrote.
“We are in the density building phase of our network development, which is the most difficult phase,” Graft wrote. “We will be in this phase through the rest of this year and much of 2025. We will remain primarily focused on the task of building density regardless of freight recessions, Fed tightening cycles or any other events outside of our control.”
Shooting for 50%
Along with positive EBITDA, there is a clear numerical goal TriumphPay hopes to reach in the medium term: having its network “engage” with more than 50% of all brokered freight, based on an internally generated estimate of the size of the market. Triumph Financial’s estimate is that it reached 47% of the market this past quarter.
“With the announcements this quarter, we have a trajectory towards network engagement with over 50% of all brokered freight by the end of this year,” Graft wrote. “Long term, we intend to achieve well beyond 50% network engagement.”
Other statistics: Network transactions were up 13% sequentially from the first quarter. Total network volume hit $5 billion for the first time. The first “conforming” transaction that utilized all the capabilities of the network that was enabled by Triumph’s purchase of HubTran in April 2021 occurred in January 2022. “That is an impressive rate of growth for any business beginning with a cold start,” Graft wrote.
Although Graft made reference in his letter multiple times to staying the course, he acknowledged that the rise in expenses in the middle of a freight recession, the primary cause of its earnings miss, needs to be reined in. “A cap on expenses is appropriate for the next several quarters,” he said. “We have roughly doubled our expenses over the last five years as we morphed from a community bank into a financial technology platform. Despite that remarkable change, we must remember that we are a bank, and banks are supposed to consistently make money.”
According to SeekingAlpha, GAAP earnings at Triumph Financial of 8 cents per share missed targets by 14 cents, though revenue of $105 million topped estimates by $1 million.
Stock price on a roll
Investors appear recently to be buying into the long-term story of Triumph Financial. The stock hit its 52-week high Wednesday at $95.46, and it’s up about 42.9% in the past 52 weeks and 21.1% in just the past month. The weak earnings report appears to have had no impact on investor sentiment; even after the earnings were released, the price of Triumph Financial was unchanged.
The other part of Triumph Financial’s business, its factoring operations, provides a wealth of data into the state of the freight market. And for Triumph Financial, there was little sign of overall improvement but there were signs of life as the quarter came to an end and July began.
Operating income for the factoring segment was $4.6 million, down $2.5 million from the prior quarter. Interest income grew by slightly more than 5%, but that was offset by lower average invoice prices.
The average invoice size factored by Triumph Financial was $1,738. The industry has been talking of an imminent turnaround in freight markets for months, but the invoice size declined from the first quarter, which came in at $1,771. A year ago, in the second quarter of 2023, it was $1,773. In the first quarter of 2023, it was $1,911.
But Graft also reported that for the 16 days of July leading up to the release of the earnings, the average invoice size had risen to $1,796.
Within the overall numbers, there also were some signs of a freight recession recovery. Graft said carriers “locked into the spot market” had a mid-April low average invoice of $1,296, but the figure had risen to $1,399 by the end of the quarter. Triumph Financial customers with more exposure to contract markets recorded an average invoice size of $1,998 in mid-April and $2,158 by the end of the quarter.
Diesel prices have an impact
Some of the increase, Graft said, was a result of the rising price of diesel fuel by the end of the quarter, as the cost of fuel is part of the invoice to be factored. The average retail cost of diesel as measured by the weekly number published by the Energy Information Administration opened the second quarter at $3.996 a gallon, fell as low as $3.658 for the price published June 10 and was $3.813 for the price published July 1.
Reflecting a market where the general consensus is that the weak market is a result more of excess capacity than weak demand, Triumph Financial reported that invoice purchases per client were up 10.4%, and total transactions increased by 4.7%. Triumph reported that purchased invoice volume in dollars was up 2.9% compared to the first quarter, but with transaction volume rising faster than total invoice dollars, the result is a lower average price per invoice.
Graft said carrier capacity “continues to leave the market, and we are starting to see the pressures of the environment affect even solid and seasoned operators. However, capacity is still not exiting quickly enough and some sources I see assert current attrition rates won’t reach 2019 levels of capacity until late Q4 of this year.” Specifically, Graft said Triumph Financial lost 2.5% of its “small carrier clients” compared to the first quarter, though the cutoff point for what constitutes a small carrier was not disclosed.
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