Various metrics released in the quarterly earnings of trucking-focused bank Triumph Financial showed a company that had a strong fourth quarter by some operational measurements, but Wall Street didn’t agree.
Banking stocks in the last year, as measured by the S&P Dow Jones Banks Index, have risen about 45% in the last year. In the last year, however, Triumph Financial is up less than 2%.
That weak trend continued Thursday in the wake of the earnings report released late Wednesday, with the stock dropping about 14.2% on the day.
But in his quarterly letter to shareholders, Triumph Financial CEO Aaron Graft seemed to be anticipating the fallout from the earnings report, which showed diluted earnings per share falling to 13 cents per share from 37 cents a year ago.
“We have chosen to invest in the continued build and improvement of our network at the expense of current earnings,” Graft said. “These investments include enhancing our existing technology and laying the groundwork for products yet to come to market.”
On the ground, where Triumph interacts with the trucking and brokerage industry, the reports suggested strength.
Financially, EBITDA at the company’s Payments group rose to $1.29 million, for a positive EBITDA margin of 8.6%. Graft, in his letter, said that margin was the highest in company history.
The margin in the prior four quarters, starting with the fourth quarter of 2023, came in at 0.3%, negative 13.2%, negative 10.4% and 0.5%, respectively.
The Payments group at Triumph Financial (NASDAQ: TFIN) is the segment that performs the open loop processing and auditing of invoices. It is separate from the legacy factoring business of Triumph Financial and has long been touted as the key to the company’s future.
Graft’s letter to shareholders in conjunction with the earnings release is a mix of explanation of the recently completed quarter but with a strong message delivered every three months: we’re focused on the future.
Headwinds but a strong value prop
But Timothy Switzer at Keefe Bruyette & Woods summed up the Wall Street view of Triumph Financial in reiterating its underperform rating after the earnings release.
“We still foresee some headwinds in the near term, particularly the potential for continued credit weakness, elevated expenses, a slow pickup in Triumph Pay volume, weak conversion of volume to revenue, bank net interest margin compression, and ultimately weak profitability,” the report said.
But at the same time, Switzer said Triumph’s “value proposition to the freight industry longer term is expanding.”
The letter also discusses various benchmarks the company has set for itself. One of them is that Triumph was shooting for — in the short term — to have 50% or more of all brokered freight transactions “touch” the Triumph network in one way or another, whether it be auditing, payment or other services. Graft said in the letter that it believes it is at that level. (Triumph uses its own internal measurements to determine the size of the network which it says is now $110 billion).
In the company’s earnings call with analysts Thursday, Melissa Forman, president of TriumphPay, which includes the payments Network, said the company’s goal is to have that “touch” rate at 60% to 65% by the end of this year. She also said EBITDA is a key metric for her group, “and we will continue to improve those metrics throughout the year as well.”
The fourth quarter also saw the highest payment volume on the system in its history, $7.63 billion up from $7.1 billion in the third quarter. Invoice volume was down, to 567,258 from 661,6278 in the third quarter, but Graft said in the letter that was primarily as a result of the departure of one large unidentified factoring client who also used the Payments capabilities.
Update on LoadPay
The earnings report also gave Triumph Financial executives to talk about the status of LoadPay, a new initiative that aims to put the faster payments to drivers from factoring immediately on to a debit card for use on the road. On the same day as the earnings release, C.H. Robinson (NASDAQ: CHRW) announced the launch of C.H. Robinson Financial, a payment service that is built in conjunction with LoadPay.
Graft’s letter said in the quarter, truck drivers opened 109 accounts with LoadPay and spent $208,000 from those accounts. At the end of the year, there were 192 LoadPay accounts. “This is a small sample set, but the trends support or surpass the unit economic predictions we made in our shareholder letter last quarter,” Graft said in the letter.
Triumph Financial used the occasion of the earnings to announce the launch of its Intelligence segment, which Graft said should have gross margins “higher than anything else we do.”
“Data service companies are often judged by gross margin because they can rely on a digital infrastructure that allows for revenue growth without increasing the direct costs of adding additional users,” Graft said in the letter.
The Intelligence segment will be powered by the capabilities of a fourth-quarter acquisition, Isometric Technologies (ISO), which Graft said “provides service and performance scoring and benchmarking capabilities to the freight industry.”
“A primary use case of ISO is a broker understanding objectively how they perform for their shipper customers and similarly assessing the performance of each carrier in their network,” Graft said. “To do this, ISO aggregates, calculates and analyzes key metrics such as on-time pickup and delivery for each carrier on every lane.”
Other highlights from the Triumph Financial earnings report:
- The average invoice size processed by the Triumph factoring segment was $1,767. That is up from $1,724 and $1,738 in the third and second quarters, respectively. That increase is more impressive than it seems, because diesel prices are built into the invoice size, and they declined over the quarter as measured by the Department of Energy/Energy Information Administration’s average weekly retail diesel price. The average for the fourth quarter compared to the third quarter was down about 3 cents/gallon, so the increase in the average size of the invoice got no lift from diesel prices, which instead worked to hold it back. Graft said in the letter that the average invoice size by the last week of the quarter topped $1,900.
- The weak freight market is resulting in some conditions where even some larger fleets are needing to turn to factoring to get funds faster. It’s resulted in a sales pipeline for Triumph’s factoring business that Graft said is “robust, as many larger fleets who previously had working capital relationships with traditional bank lenders have fallen out of favor with them.” Those poor economic conditions mean even a large fleet “may trip debt service coverage ratios, choking availability of (a lending) facility and potentially impacting collateral requirements.”
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