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Edited Transcript of TTR.V earnings conference call or presentation 14-Aug-19 12:00pm GMT

Q2 2019 Titanium Transportation Group Inc Earnings Call

Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Titanium Transportation Group Inc earnings conference call or presentation Wednesday, August 14, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Marilyn Daniel

Titanium Transportation Group Inc. - COO & Secretary

* Theodor Daniel

Titanium Transportation Group Inc. - President, CEO & Director

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Conference Call Participants

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* Benoit Poirier

Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst

* Navdeep Malik

Industrial Alliance Securities Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to Titanium Transportation Group's Q2 2019 Earnings Conference Call. Thank you for standing by. (Operator Instructions)

Before we begin, I would like to remind everyone that certain statements made on this call today may be forward looking. In that regard, please refer to the risk factors and cautionary provisions outlined in the press release issued by the company yesterday as well as the filings made by Titanium on SEDAR.

Please note that this call is being recorded today, August 14, 2019. A replay of this call will be available until midnight on August 28, 2019. Details of the replay can be found on our website under the Investors section.

I will now turn the call over to Titanium's President and CEO, Ted Daniel.

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Theodor Daniel, Titanium Transportation Group Inc. - President, CEO & Director [2]

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Good morning, and thank you, operator. Joining me today on the call is Alex Fu, CFO; and Marilyn Daniel, COO.

Overall, we are very pleased with our second quarter results given the challenging economic conditions, which continued from the first quarter and persisted throughout the second quarter. Additionally, to put our Q2 results into perspective, I'd like to highlight that we are lapping a record-breaking year in 2018, which makes for unclear year-over-year comparable results.

The company posted its second highest Q2 consolidated revenues, remained profitable and generated solid free cash flow. This allowed management to reinvest in the business and reduce debt. The Truck Transportation segment continued to execute strongly despite the challenging market where rates were reportedly down 30% to 35% due to overcapacity. I'd like to highlight that Titanium's Trucking segment has limited exposure to the spot market as this segment is largely reliant on contract rates.

The Logistics segment improved slightly from Q1 and showed signs of stability as spot market rates and volumes have stabilized from the previous decline. While I do not expect this segment to rebound to 2018 levels of revenue and EBITDA within the year, I'm pleased that we've achieved our second highest Q2 revenue in this segment. We have and plan to invest further in technology to better serve our customers. These investments are yielding value-added insights for our customer base and allow Titanium to continue to become a trusted technological partner for our customers and our vendors.

To support further growth in our Logistics segment, our new brokerage location in Charlotte, North Carolina began operations during the second quarter of 2019 and exceeded internal revenue targets by an outstanding 45%. Our Charlotte office will serve as our U.S. head office, functioning as our hub for our expansion into the U.S. brokerage and logistics market. I would also note that this business inherently requires less capital than the Truck Transportation segment. So we expect the U.S. Logistics division to generate strong incremental positive free cash flows.

We remain diligent in staying at the technological forefront of the industry as we strive to improve the company's productivity and efficiency. The company has implemented further technological advancements during the beginning of 2019. The purpose of these initiatives is to recognize operational efficiencies and allow for future expansion. We continue to maintain a focus on technological investments in order to support our long-term growth strategies.

Now let's turn to our financial results for the second quarter of 2019. Consolidated revenue was $42 million in Q2, representing the second highest Q2 revenue in the company's history. This compares to record Q2 2018 revenues of $51.8 million. Softness in the Logistics segment largely drove the year-over-year decline as the Truck Transportation segment revenues were rather stable.

Turning now to our segmented results. In the Truck Transportation segment, revenue for Q2 2019 was $28.6 million comparable to $28 million in Q1 2019. EBITDA was $4.5 million or 16.8% margin. The segment remains profitable in spite of overcapacity and declining freight demand in the industry. In the Logistics segment, revenue was $14.1 million for Q2 2019, while EBITDA was $0.8 million, representing a 5.8% margin for the second quarter.

Notably, despite operating headwinds, we continue to manage our capital purposefully. Since the start of the year, we have paid off over $8.9 million in debt and intend to further strengthen our balance sheet. We believe that this is a vital ingredient in our continued success as it allows room for us to grow through potential acquisitions.

On that note, I will briefly discuss the current landscape in our industry. As I mentioned, we saw weak macroeconomic environment in the second quarter. We saw significant overcapacity and weaker volumes, which led to lower spot market rates. Typically, from a seasonal perspective, the second quarter is usually significantly stronger than the first. This was not the case this year. Trailer orders in the U.S. for the month of June were at their lowest level since 2009 and orders for Class A trucks fell to their lowest level since 2010. We are seeing a weak freight market and rate conditions persist in Q3 similar to what we witnessed in the second quarter. Consequently, market conditions have improved the environment for highly accretive M&A opportunities as we have seen valuations return to more attractive levels.

Given our strong free cash flow generation and solid balance sheet, we are well positioned to execute on acquisitions as the opportunity presents itself. Additionally, given our current low stock price, our capital allocation priorities may also include a repurchase of our own shares under the normal course issuer bid. During Q2, we were able to repurchase 248,200 shares at a weighted average price of $1.29 per share. As always, we remain disciplined in delivering profitable and sustainable growth and creating both short-term and long-term shareholder value.

Before opening it up for questions, I want to, again, thank all of our team members for their hard work this quarter and to thank all of our customers for trusting us with their freight.

With that, I will turn the call over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Benoit Poirier with Desjardins Capital Markets.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [2]

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First question, if we look at Truck Transportation, could you talk a little bit about what would you expect in terms of what you see these days in terms of contractual rates? And whether the softer sport rates will eventually influence the contractual rates? And also I would be curious to get more color about the fleet expansion. How many trucks you've added in the quarter? And if you expect to add more for the remainder of the year?

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Marilyn Daniel, Titanium Transportation Group Inc. - COO & Secretary [3]

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Benoit, it's Marilyn. In terms of your first question with rates, in the Truck segment, we're seeing rates still rather flat over the year contractually. If not flat, slight reductions. Trucking last year was not as drastically affected as the Logistics segment was in terms of rate increases. So naturally, the converse side is also not as drastic.

In terms of continued pressure in the Logistics segment for overcapacity affecting rates, it may have slight effect on it, but not typically because as I mentioned the rates were not as reflective of the capacity shortage last year as we saw in the Logistics department.

In terms of fleet size, in Q2, we added 9 tractors. In terms of our strategy for the upcoming quarters, we don't anticipate adding any tractors to our equipment other than via acquisition. We believe that our growth in truck size will be likely through acquisition.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [4]

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Okay. Perfect. That's very great color, Marilyn. And I was wondering when we talk about the ELD implementation, it has been delayed to June 2021. I was wondering if it's create -- it push further the [teases] around capacity tightening and push further the potential for any improvement in pricing. So would you expect pricing or spot rate to eventually improve in the back half or it might be a little bit longer?

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Marilyn Daniel, Titanium Transportation Group Inc. - COO & Secretary [5]

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Just to clarify, the ELD delay is only in Canada, there is no change in the ELD legislation in the U.S. that will have impact on rates and capacity that come to fruition December 31, 2019, or January 1, 2020, and that is the move from -- to AOBRD. So we expect that to have an effect in the U.S. Definitely, the Canadian delay has impeded some of the uptake we thought we'd see sooner, but we do believe that there are 2 major factors affecting the U.S. capacity, which will be the ELD implementation as well as the hair follicle testing that is coming to fruition January 1, 2020, which will have -- we believe and reports are telling us will have a significant effect on driver availability and therefore capacity.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [6]

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Okay. And in terms of M&A, my understanding is that the bidding pipeline obviously remains robust. Valuation is even more attractive, but given the current market conditions, how should we be thinking about the M&A given the kind of a pressure we see on the EBITDA? Obviously, your leverage ratio has improved down to 2x in terms of net debt to EBITDA. So what is kind of your support level or optimal level or your willingness to increase the level of debt when we look at the M&A opportunities?

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Theodor Daniel, Titanium Transportation Group Inc. - President, CEO & Director [7]

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Yes. So Benoit, I look at my balance sheet as my defensive strategy. As long as we are profitable, we keep paying down debt. We keep increasing shareholder value through profitability and an increase in equity. But in terms of M&A, I'm actually very positive about the M&A opportunity this year. I believe that it's okay to increase your debt for the -- as long as it's purposeful, right? If I'm going to increase my debt, I need to have a strategy, which means it's going to be either strong organic expansion or it's going to be for the purpose of acquisition. So we're not adverse to increasing debt for the purposes of an acquisition if it makes sense.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [8]

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Okay. That's great color. And the last question on the Logistics side. Could you talk a little bit about the ramp-up of your new facility or your new branch in Charlotte? And also whether you're looking to add another branch by the end of 2019?

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Theodor Daniel, Titanium Transportation Group Inc. - President, CEO & Director [9]

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Yes. So Charlotte is really exciting. They started roughly early to mid-May and they've generated significantly more revenue than originally anticipated in the early goings. They're just starting to really get going. In fact, they're planning on moving in within the next 1 to 2 weeks into their permanent space. So the landlord of the building has actually been kind enough to give us temporary space on a different floor, which is fantastic, but it's been very limited tools up in this point in time. So we definitely see significant growth in the future. That's a behemoth of a market. It's very exciting. And we do -- we would like to eventually open up our next 1 to 2 offices in the near future. We have a really, really great group down there. They're extremely competent. They're extremely skilled. They have excellent experience. So it's a very solid group both on the sales and the operations side. So our goal is to open another office, hopefully, before the end of the year, but if -- again, it is a spot market business. So if the expansion into the next office doesn't happen sometime during, let's say, late Q3 or Q4 2019, it will happen in Q1 2020. It's very likely.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [10]

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Okay. But would you say, Ted, is it fair to say that the expansion plan overall remains unchanged despite the soft market condition on the Logistics side?

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Theodor Daniel, Titanium Transportation Group Inc. - President, CEO & Director [11]

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Yes. It absolutely is, both the...

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [12]

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Okay. And from a margin standpoint, when we look at the logistic obviously and we compare year-over-year softer market condition makes pressure on the EBITDA. So I would be curious ballpark what kind of EBITDA margin we should expect on the Logistics side in the back half of the year? Whether it will be more comparable to what we saw in the first half or we might see an improvement on the sequential basis on the Logistics side?

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Theodor Daniel, Titanium Transportation Group Inc. - President, CEO & Director [13]

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So that's a bit of -- I think the approach I'm going to take from a business perspective is plan for the worst, hope for the best side. I would say that if we are able to still be profitable, generate good positive cash flow with a similar environment in Q3 and Q4 as we saw in Q1, Q2, I'm pretty happy about that. We make money. We pay down debt. They're running sure but steady, which is very impressive given the current pressure on margin and EBITDA in the Logistics environment. But I do think that there is going to be some improvement in, let's call it, busy season, right, for lack of a better term. Usually, when you don't have a stellar Q2 economically and it's -- essentially, your customers are kind of delaying their inventories, they're burning up inventories and so on, usually Q3 and Q4 tend to be a bit of a catchup. So they're usually a bit better. I'm going to say, I'm going to plan for similar and hope that there is a good chance that Q3, Q4 will be a better second half to the first half.

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Operator [14]

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Nav Malik with Industrial Alliance.

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Navdeep Malik, Industrial Alliance Securities Inc., Research Division - Research Analyst [15]

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I just wanted to maybe just delve a bit more into the conditions in the industry. In terms of that overcapacity, could you maybe just talk about, are you seeing any of that subside at all just given challenging conditions? Is that impacting other carriers to maybe be a little bit more disciplined? Or maybe just give us some more color around maybe seeing that overcapacity situation subside towards year-end or what are your thoughts?

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Theodor Daniel, Titanium Transportation Group Inc. - President, CEO & Director [16]

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I'm not entirely sure what all the other carriers are doing internally, but -- I mean what we're seeing from our perspective is that, one, our -- the carrier base on our load matching services are -- have dropped rates. So essentially, I guess, in an overcapacity environment, it's basically just more people fighting over the same amount of freight or less freight. Statistically, from what I recall, the -- about a year ago, Loadlink -- or sorry, TransCore Link Logistics was reporting something like 1.45 or 1.5 trucks to every load. A year later now, we're over 3.5 trucks in Loadlink for every load that's available. So you have 2.5x the amount of trucks on Loadlink that are fighting over the same amount of freight. That's pretty significant. So that's the pressure that we're seeing on rates.

And then in terms of the capacity, I can for the most part tell you that I know that carriers are still trying to shrink their capacity, and you see that on the used truck and trailer market. So we get reports from the supplier that we rely on, we rely on for the most part is the reports from Ritchie Bros. The used truck and trailer sales numbers are very high, but they're selling at very low amounts. So the prices are really low still, which means that, again, basic supply and demand. If the price for use trucks and trailers is really, really low, that means there's way too many of them. So until I start seeing those ingredients split, meaning not enough used trucks and trailers because trucking companies have plenty of freight and they're keeping their equipment busy and we're seeing rates come up on the spot market, I'm just not seeing that turn around quite yet. I'm not seeing that inflection point.

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Marilyn Daniel, Titanium Transportation Group Inc. - COO & Secretary [17]

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I'll also just add very quickly that following a very robust year, there were fleets last year that went ahead and expanded and bought new equipment and so on trying to meet capacity in the short term and that put themselves in a predicament now where they're into long-term leases, et cetera, with not enough work to do that. So there'll be an adjustment in the marketplace, which I believe is happening now and hopefully happens as quickly as it came on. So we'll see how that fares out.

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Navdeep Malik, Industrial Alliance Securities Inc., Research Division - Research Analyst [18]

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Yes. Okay. Kind of staying on the same line. So I guess, when you guys -- are you -- do you have sort of -- like would you turn away business like in terms of that's not profitable? Or would you just kind of maintain -- in terms of maintaining maybe relationships continue to -- given the environment, how disciplined would you be in maybe not accepting some business if the margins weren't attractive enough?

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Marilyn Daniel, Titanium Transportation Group Inc. - COO & Secretary [19]

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We are very disciplined. I think our technologies have made a huge impact on our business in being able to make intelligent predictive analytics that are able to tell us our costing very accurately. So we do not run at a loss in terms of operating a truck or taking on business. I think we're very good at that. We've always been very disciplined and conservative in that perspective. And conversely, in terms of the customers and business that we do deal with, we tend to attract customers that require some sophistication and a level of competency that they don't always get in the open marketplace with the cheapest prices out there. In addition, we run a very young fleet both in our tractors and trailers and have a quality driver environment, which, I think, in today's visible world, having a safe and reliable fleet is definitely the forefront of responsible customers.

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Navdeep Malik, Industrial Alliance Securities Inc., Research Division - Research Analyst [20]

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Yes. Okay. Okay. And then on M&A, I don't know if you -- I might have missed it, but in terms of M&A, are there specific -- like are there a specific area that you would want to enter into either geographically or type of service or where you're maybe seeing stronger activity or better margins? I mean is there some more color that you can give on the M&A front as to what types of carriers you would -- you're potentially looking at?

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Theodor Daniel, Titanium Transportation Group Inc. - President, CEO & Director [21]

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Yes. I mean so we are primarily a dry van, heated van and flatbed company. I mean it's easier for me to do an acquisition that's in Ontario. We're not adverse to doing one that's outside of Ontario, whether it be, I'd say, one in Montréal or Western Canada and as well now that we have -- we're establishing a -- let's say, in the level of comfort or expertise through experience in the U.S. in time, I'm also not adverse to doing an asset-based acquisition in the U.S. So yes, naturally, it's easier for us to do -- well, I mean accretive is a must. So we're definitely going to do our homework. But from beyond the accretive and the basic math, the tuck-ins are the easiest Ontario then Canada then the U.S. We definitely have room to add acquisitions into our current infrastructure. In addition, not just the physical room is capable of expansion in our terminals, but we also have technological room to be able to add capacity both from a truck and trailer perspective and a back office perspective.

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Operator [22]

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(Operator Instructions) Mike (inaudible).

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Unidentified Analyst, [23]

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Just wanted to ask 1 question regarding your CapEx plan over the next, say, 12 to 18 months. I know CapEx is obviously very lumpy based on prior annual CapEx. So do you have any visibility either in terms of CapEx budget numbers? Or just subjectively, how you're thinking about CapEx on the existing fleet?

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Theodor Daniel, Titanium Transportation Group Inc. - President, CEO & Director [24]

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Yes. So at this point in time because our average truck and trailer age is quite young, so for the next 12 months, replacement CapEx is not required. The CapEx that we have available to us is quite significant because we have very a strong relationship with our OEMs. And our OEMs understand that given the current climate, we needed some flexibility, so we did pushback on expansion CapEx. So that we did because we need to be, again, responsible as a capital-intensive business. On our Trucking segment, we need to make sure that we don't want to overleverage our balance sheet unless -- again, I mean I don't mind taking on some debt for acquisitions knowing that we're taking that purposefully and we're taking it on strategically. So in terms of CapEx, once we start seeing the overcapacity kind of turn the corner, then we'll probably start to trigger more expansion CapEx at that point in time. And then down the road, again, once we start replacing the fleet then that's when CapEx will come into play, but we're good for 12 -- essentially 12 to 18 months.

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Unidentified Analyst, [25]

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Great. And can you just remind me what the average age of the fleet is?

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Theodor Daniel, Titanium Transportation Group Inc. - President, CEO & Director [26]

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So right now, the average age of our trucks is about 3 years and the average age of our trailers is about 4.5 years.

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Operator [27]

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There are no further questions at this time. I would now like to turn the call back over to Ted Daniel for final remarks.

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Theodor Daniel, Titanium Transportation Group Inc. - President, CEO & Director [28]

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Okay. Thank you, operator. And thank you, everyone, for joining our call this morning. We appreciate your interest in Titanium. Regardless of the economic climate we operate in, I have no doubt that with our strong team, Titanium will continue to grow and succeed. I look forward to reporting on the rest of 2019. Enjoy the rest of your summer, everyone. Thank you.

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Operator [29]

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This concludes Titanium Transportation Group's Q2 2019 Earnings Conference Call. We thank you for your participation. You may now disconnect.