Mullen Group Ltd. (OTC:MLLGF) Q1 2022 Earnings Conference Call April 21, 2022 11:00 AM ET
Company Participants
Murray Mullen – Chairman, President & Chief Executive Officer
Richard Maloney – Senior Vice President
Joanna Scott – Corporate Secretary & Vice President of Corporate Services
Carson Urlacher – Senior Accounting Officer
Conference Call Participants
Michael Robertson – National Bank Financial Risks
Walter Spracklin – RBC
Konark Gupta – Scotiabank
Kevin Chiang – CIBC
Matthew Weekes – IA Capital Markets
Miguel Adera – Cormark
Operator
Thank you for standing by. This is the conference operator. Welcome to the Mullen Group Limited First Quarter Earnings Conference Call and Webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]
I would now like to turn the conference over to Mr. Murray. K. Mullen, Chairman, CEO and President. Please go ahead.
Murray Mullen
Thank you. Welcome everyone to Mullen Groups quarterly conference call. Once again, we’ll provide shareholders and interested investors with an overview of out first quarter financial results. We’ll discuss the main drivers impacting operating performance, our expectations for the year. And we’ll close with the Q&A session.
Before I commence today’s review, I – always reminded, but I need to remind you that everyone that the presentation contain forward-looking statements that are based upon current expectations and are subject to a number of risks and uncertainties. And as such, actual results may differ materially. Further information identifying the risks, uncertainties, and assumptions can be found on the disclosure documents which are filed on SEDAR and at www.mullen-group.com.
So with me this morning I have the majority of our executive team. I have Richard Maloney, he is the Senior, VP, Joanna Scott, Corporate Secretary and VP of Corporate Services. And Carson Urlacher, as our Senior Accounting Officer. He is filling in for Stephen Clark as he recovers from the side effects of multiple surgeries on his ankle, son of a gun. So Steph was taking some well needed time to try and get that looked after. Carson has been filling in for Stephen, as I said and will until Steph comes back to fulfill his normal duties.
So as I turn to the next section, I’m going to talk about Q1 ’22 financial and operating performance. I think the way to start this, as the numbers really tell the story. We had record revenues, we had higher operating profitability.
And if we can base the future, on our March results, I will tell you, we have a lot of room to improve. And oh yes, you will notice we have fewer shares outstanding. So to all of our loyal shareholders, we had a very good quarter. And if I’m right, then many more solid quarters are in our future, but more on this on our outlook commentary.
If you looked at our MD&A, you’ll see it has a new look to it. It’s crafted by Carson Urlacher and he’ll provide the additional commentary in just a few moments explaining in detail the reasons and events influencing our Q1 performance. In my opening comments, I’ll summarize the important highlights and themes impacting the economy and our business in the quarter.
Let’s call this my Twitter version. So what did we see in quarter one? Let me start with the obvious acquisitions that we completed in ’21 provided the growth. But the numbers do not tell you is the quality of these new acquisitions. They are all first rate companies and I’m delighted that they’re part of our organization. And truthfully, based upon what I see in this market acquisitions are the clearest path to growth, especially in a market where there is near full employment, new equipment is virtually impossible to obtain.
And if you’ve talked with any transportation service provider, they’ll most likely tell you, the warehouses and docks are running at full capacity. I know ours were. In other words, internal growth is difficult to achieve. Now this might just explain why inflation is running so hot. We’ll talk about more about this shortly.
So here’s what we’ve witnessed in the first quarter from an overall economic and market perspective. You know, when I analyze our results in the data is pretty evident the economy continue to show some pretty good resilience, with consumer spending still remaining strong, freight demand elevated and tight labor markets. But truthfully, we did not see any real growth.
There were also a few issues. For example, inflationary pressures started to really alter consumer behavior, high food prices, the rising cost of ownership. And of course, fuel prices have doubled year-over-year. So of course, consumers must alter their spend.
I can also say that some of these inflationary pressures we didn’t plan on, like the huge jump in oil prices, which only accelerated when Russia invaded its neighbor. This impacted costs, but more importantly, the rate increases we implemented early in ’22 did not take into account the surge that occurred in the quarter. As a result, margins got squeezed by a couple of points.
Now let me spend a few minutes on the fuel story. Year-over-year fuel prices have doubled. We all know this because as individuals who go to the gas station every week or so, but to the trucking industry, we go to the fuel pumps every day. Fuel expense is now the number one issue for the trucking industry. Generally we are indemnified from increases in fuel with fuel surcharges. But this always lags the real time price that shows up in the pumps. So we’re behind in quarter one because fuel prices just kept rising.
As they moderate the surcharges will catch up to the cost. The result- another issue related to the rise in fuel price and that is inefficient trucks. If you operate an older truck, and let me tell you, there are lots of older trucks on the highway, your fuel mileage will not be where it needs to be. Even the fuel surcharges won’t be enough to cover your increased costs.
So I predict there will be a huge shakeout of the inefficient carrier, small and large, especially a freight demand slows and rates fall. So stay tuned to this. This could tighten trucking capacity even more.
Now, what about the supply chain? Obviously, it starts with the demand. And as I commented, overall freight shipments were generally quite strong in the quarter. But this may or may not be a negative, because consumer demand did not appear to grow.
So if spending cools for a period, then the supply chain can regroup, productivity can improve and costs could moderate helping the inflation but the in the quarter, there was lots of freights to haul. However, it appears some of this most certainly was tied to backlogs associated with the supply chain bottlenecks that continued deep into quarter one. This kept the trucks moving and warehouses full.
It does appear that end demand was virtually pretty stagnant. So I suspect the supply chain will start to improve in quarter two with improved weather, fewer employee absences and the expected change in consumer spending habits.
And what about flat deck freight or more accurately, let’s call that the demand for goods related to capital investment. I’ll tell you this part of the economy and our business was quite strong as evidenced by our logistics and warehousing segment. Whenever you’re still struggling with service activity related to oil and gas investment as a drilling rig count really never took off in the quarter. And this is – this part of our business change little year-over-year. And most likely because only gas companies simply bought back shares or paid higher dividends rather than go through the drillbit.
But this too may be changing, as they need for additional crude oil and natural gas continues to grow. At least this is what the commodity prices are telling us. Now this has to occurred then our specialized industrial service segment – will be a big beneficiary. I suspect we will know more in the next few quarters. If a new cyclical uptrend emerges into our long term investors. You all know we have had a successful history in the oilfield services business. As for last quarter, however, the industry was basically flat year-over-year.
With all of this as a backdrop, I admit we did not improve our margins as expected, most of which I attributed to increased costs and lower productivity levels that were really tied to unplanned events. Issues such as weather, blockades, COVID related absenteeism, and vaccine mandates. These all costs money and margin.
For example, we had 10% fewer trucks, drivers – sorry qualified to cross into and out of the US border. All in all, however, I take the view that our business units did a pretty good job of managing the issues. And those that didn’t, I will tell you this, they’ll get it right the score.
Our biggest issue today is inflation. As I look back to 2020, we had the COVID search. In ’21, we had freight [ph] search, in this year we have a cost surge. So we just adapt, we stick to our long term strategy. We manage our business, and we capitalize on miscalculations by our competitors. Carson, we were up, take it away.
Carson Urlacher
All right. Thank you, Murray, and welcome everyone. I’ll provide a bit more of the detail whoever our first quarter interim report will fully explain our financial performance. So as such, I’ll provide you with some of the financial highlights.
For the quarter, we generated record revenue as compared to any previous quarter, which was largely driven by acquisitions. Year-over-year, revenue was up $166 million, or 57% to roughly $457 million.
Our revenue growth can really be broken down into three factors. The first and most significant of which is the $135 million of incremental revenue we generated from acquisitions. Our growth from acquisitions really started to commence in the third quarter of 2021.
Secondly, we also experienced modest internal growth of approximately $17 million, or 6.4%. That was mainly attributed to the strong results experienced within our L&W segment. While our internal growth from the LTL and S&I segments remained largely flat when compared to the prior year.
And lastly, our revenue from fuel surcharges, excluding acquisitions rose by $14 million, due to the sharp increase in diesel fuel prices. In terms of total fuel surcharge revenue, which includes the amounts for of acquisitions, this was $45 million, an increase of $25 million compared to the $20 million we recorded last year.
Most of the increase in fuel surcharge revenue occurred in the LTL segment. So the average wholesale rack price for diesel fuel, this isn’t the price that you see at the pump. But the average of our wholesale rack price in Canada for the first quarter of 2022 was approximately $1.17 per liter, and ended the quarter at $1.36 per liter. Needless to say, the wholesale rack price for diesel has continued to climb in April. It’s important to note that virtually no margin is made on fuel surcharge revenue. So this is actually detrimental to our overall margins, but more on this in a bit.
Now going a bit deeper into our segment revenue. First, starting with our largest segment in the LTL segment. It grew by $55 million to $175 million compared to $120 million in 2021. Acquisitions accounted for $44 million or approximately 80% of the rise in revenue. The remaining increase was mainly due to an $8.6 million increase in fuel surcharge revenue and a modest $2 million of internal growth, as consumer spending remained strong but did not grow.
Revenue growth was challenged by unplanned events including severe weather conditions in northern Ontario and Manitoba, and freight bottlenecks and major distribution hubs of Vancouver and Toronto.
Revenue in the L&W segment rose by $51 million to $142 million as compared to $91 million in 2021. And this was due to $29 million of incremental revenue from acquisitions, as well as a $4 million increase in fuel surcharge revenue.
We also experienced almost an $18 million of internal growth, as demand related to capital investment and infrastructure projects was strong. This translated into an overall improvement in freight demand and higher spot market prices at virtually all of our business units within this segment.
Moving over to the S&I segment, it increased by $4 million to $83 million as compared to $79 million in 2021, primarily due to $4.5 million of incremental revenue from of acquisition of Babine and a $1.1 million increase in fuel surcharge revenue.
Revenue from our established business units declined by $1.6 million to 9 – mainly due to a $9.3 million decrease in pre made pipeline hauling which came off a stellar performance in the first quarter of 2021. This decrease was almost entirely offset by greater revenue being generated from our drilling related services and from out – those business units involved in the transportation of fluids and servicing wells, as higher commodity prices lead to a slight improvement in activity this year compared to 2021. Drilling activity recovered a bit, but not enough to really provide for any meaningful growth.
We also experienced greater demand for our Dewatering and Water Management business at Canadian Dewatering, which had an excellent quarter in what is traditionally a slow period for that business unit.
Revenue generated by our US 3PL segment were strong coming in at $57 million for the quarter, as consumer spending remained robust, and the supply chain was still recovering from bottlenecks that were noted in 2021. Our team at holistic continues to grow in the 3PL space by adding new additional station agents to our Silver Express technology platform.
Now moving over to profitability, our adjusted OIBDA was $60 million in the current quarter, an increase of $19 million as compared to $41 million in 2021. The $19 million increase was largely due to acquisitions which generated $13.4 million of this increase. We also generated $5.8 million from internal growth. Now, internal growth was mainly experienced in the L&W segment and to a lesser extent in the S&I segment.
So let’s take a look at adjustable OIBDA by segment for a minute. In the LTL segments, adjusted OIBDA increased by almost $5 million to $23 million, as compared to $18 million in 2021. Now this increase was due to $6.8 million of incremental adjusted OIBDA from acquisitions, which was somewhat offset by higher fuel and purchase transportation costs. The $8.6 million increase in fuel surcharge revenue in this segment had a detrimental impact on our margins.
As a percentage of revenue, adjusted operating margin decreased by 2% to 13.2% as compared to 15.2% in 2021. This margin erosion is due to higher operating costs and lower productivity levels that resulted from inclement weather, protests and blockades, freight bottlenecks that I spoke up to earlier and surging costs, most notably being fuel.
Overall, the segment did experience a stronger month of March. As the weather improved, volumes recovered, and a number of price increases were implemented.
Adjusted OIBDA in the L&W segment increased by $10.8 million to $25 million as compared to $11.7 million in 2021, $5.1 million of this increase was due to incremental adjusted OIBDA from acquisitions, which the remaining increase was largely attributed to internal growth of $5.7 million, and across virtually all of our business units within this segment.
Adjusted operating margin increased by 1.8% to 17.9%, compared to 16.1% in 2021, as our business units did an excellent job mitigating the cost surge with general rate increases and fuel surcharges.
The cross border freight market between Canada and the US saw the largest freight increase. This coupled with government mandated vaccine requirements for drivers traveling to and from the US, reduce the capacity of qualified drivers resulted – resulting in customers paying higher rates to get their freight moved.
Adjusted OIBDA in the S&I segment increased by $2 million to $13 million, as compared to $11 million. The $2 million increase is attributable to approve – improved results at Canadian dewatering and from those business units involved in drilling related services and the transportation of fluids and servicing wells. These increases were somewhat offset by $2 million decline in OIBDA, a pre-made pipeline.
Adjusted operating margin improved by 1.9% to 16% from 14.1% due to the strong performance of Canadian dewatering. Adjusted OIBDA in the US 3PL segment was $1.1 million or 1.9% of gross revenue.
During the first quarter, the availability of contractors was extremely tight, which led to higher spot market prices, and which negatively impacted our margins. Operating margin as a percentage of net revenue was 23.4%. And from strictly a cash perspective, adjusted OIBDA in the segment is virtually the same as earnings before tax.
So as I summarized our margin on a consolidated basis, adjusted OIBDA as a percentage of revenue was down by 0.9% to 13.2% from 14.1. And this 9 – 0.9% reduction is explained by really two factors.
First, accounting rules require us to report gross revenues on our US 3PL segment, which in the quarter generated $57 million of revenue, and a margin of 1.9%. By excluding by the financial results of this asset light segment, our overall margins would have actually improved by 0.7% to 14.8% compared to the 14.1%.
So excluding the US 3PL segment, on a consolidated basis, our rate increases and change in business mix enabled us to more than offset the surge in inflationary costs in the quarter by a bit.
Secondly, including acquisitions, we generated $45 million of fuel surcharge, which was increased by $25 million compared to the $20 million last year. If we were to exclude that $45 million of fuel surcharge in the first quarter of 2022, our adjusted operating margins would have actually increased by almost a point and a half to 14.6%. Similarly, in 2021, if we excluded the $20 million of fuel surcharge revenue, out adjusted – our operating margins would have improved by just over 1% to 15.2%.
Looking at some other notable items. We continue to generate cash in excess of our operating needs, as net cash from operating activities for the period was $18 million, compared to $39 million in 2021. So this decrease of $21 million is due to our revenue growth and business expansion as we are now a much larger organization. And as a result, we need to finance our working capital requirements.
We have a total of $250 million of bank credit facilities available to us, and we had $111 million drawn at the end of the quarter, thus leaving us approximately $140 million worth of room.
Our earnings per share was up to $0.17 as compared to $0.13 on a reduced share count, as we bought back and cancelled roughly 926,000 common shares in the quarter at an average price of talent $12.01 per common share. The main reason for the increase in earnings per share was due to the $13.2 million increase in OIBDA and the $1 million increase in earnings from equity investments and these were somewhat offset by a $3.4 million negative variance in our change due to our US debt swaps, and a $3.3 million increase in income tax expense due to our – due to greater earnings.
With respect to ESG, I’d like to remind everyone that posted on our website is our 2021 ESG report that outlines our approach for ESG, along with some of the measurements that you can use to benchmark our performance.
In the first quarter, we continue to make progress on some of our ESG initiatives by committing $9.5 million of CapEx towards our sustainability goals. The majority of these cutbacks are expected to be received in 2022 and 2023, and consist of additional CNG powered trucks, along with containers to support our investment in the intermodal space that will assist us in moving customer freight, while reducing emissions.
So Murray, with that, I will pass the conference back to you.
Murray Mullen
Well done, Carson. Now, if you read our new look, MD&A, you’re going to see that our outlook for each segment is well explained. So I don’t need to reiterate it word for word. And in the interest of your time, I want to make sure we leave the rest of today’s discussion for the Q&A session.
Now I’m sure everyone is wondering about the so called freight recession that has been talked about in recent weeks. My personal view is yes, consumer spending on discretionary items will slow, by how much no one really knows. But I would be very, very surprised if it doesn’t slow.
Now, I do expect this was going to impact van carriers the most which we are not highly leveraged to. I do expect our LTL segment to slow somewhat, but we have a very good critical mass and most lanes. So we will just simply adjust schedule, we’ll focus on operating margin, we’re going to get productivity levels back which will help margin. And I can also tell you, there’s another round of rate increases that are absolutely required.
We know that the supply chain is quickly recovering. Now this takes the pressure off of shippers and retailers meaning they do not need to over buy, which they have done for over a year now. And all this did is really exacerbate an already overstretched supply chain.
So this is where I believe that trouble may occur. I think inventories are bloated. We know this because our warehouses are jammed. So I wouldn’t be surprised to see a few quarters of adjustments to clear out the backlog. You know, if you’re a buyer of discretionary consumer goods, I’m betting that there will be some good sales on soon.
Now if there’s one lesson, everyone should learn by now, it’s that anything can happen anywhere in the integrated supply chain ecosystem. So I wouldn’t get too comfortable when things sort themselves out over the next month or so because trouble will just simply find another home. As such, I anticipate structural changes in the supply chain are still required.
How we’re going to handle this, we’re going to focus on building out our LTL network. We’re going to expand our warehousing and intermodal service capabilities. And we’re going to look at adding it to our 3PL business, which really this keeps us close to the customer without the CapEx.
What our shareholders also know, we are a diversified logistics provider. And we service multiple different verticals. Now earlier I spoke about the other end of the economic spectrum, which is let’s call that capital investment.
In terms of an economic outlook here, I’m actually quite optimistic because I believe that industry needs to retool, and infrastructure needs to be built. Two critical factors of productivity is to improve unnecessary ingredient for inflation to be tamed. So I’m in the camp, that we’re entering a strong capital investment cycle. And that implies that our logistics and warehousing segment should be able to continue producing some pretty strong results.
And this stuff dovetails nicely into our specialized industrial services segment. Which as you know, no one really liked for the last 10 years or so. But evidence is mounting that oil and gas, mining, old economy needs to reinvest. And when they do, we have a decent footprint from which to capitalize on the renewed demand. So I’m quite optimistic for oil and natural gas business units in particular.
The service industry is really no different than the oil and gas companies. It has been starved of capital, so any additional demand will be welcomed with open arms, but it will be costly, as I say to our customers. Just saying, folks.
Now let’s open up the phone lines for the Q&A session. So operator, I’ll turn it over to you and to the Q&A. Thank you folks.
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Michael Robertson of National Bank Financial Risks. Please go ahead.
Michael Robertson
Hey, good morning all. Congrats on a solid quarter. And thanks for taking my questions. I was wondering maybe we could kick it off. I was just wondering if the M&A backdrop has shifted at all given that that spike on the cost side, maybe shifting to a more favorable buying environment given some of those pressures? Murray, in recent calls, you weren’t exactly sure with some of the asking prices out there. So any color on that would be great?
Murray Mullen
Yeah, thanks, Michael, for the question. That’s one that you know, I quite regularly get asked about us M&A. And let me just take a step back. Last year, we were very, very active on M&A. And it proved out to be, you know, as you can see, by our numbers, pretty good.
What about today? I think part of the reason, the part of the challenge you’re having with M&A right now is the forecasting, what do we think is going to happen with the overall economy and then expectation. So I suspect that M&A is going to be very, very active.
Its what’s the, what’s the expectation of the sellers. And it’s, that’s, that’s, I think, going to be the rub. We always take a long term view. And I’ll be honest with you, with all of our, with everybody on the line, look, we don’t just buy companies to grow the revenue side, we buy it because it’s strategic. And it’s in the areas where we see the future opportunities are going to be – are going to be pretty, pretty good.
So we just don’t buy it buy. Everybody knows we’ll look at consolidating LTL, because that just strengthens your critical mass and those networks. We also know that, you know, the supply chain is changing dramatically. Because it’s not, you can’t just rely upon the supply chain on just in time today, if you’re in a global marketplace. And as I said in my press release, so look, you can access the goods anywhere globally, but you’ve got to be able to deliver the goods locally. And that requires being close to the customer. And that implies warehousing. We’re seeing a boom in warehousing all over. That implies more inventory in the system, so you can get it closer, you can get to the customer.
So we’ll continue to look at warehousing and the long mile with intermodal, as a service offering, because we can tie it in with our LTL network. Very, very few companies can do that. So feel pretty good about that side.
Yeah, we get we get, M&A every day, every week. But we’re pretty selective of which ones that we go after, it got to be quality companies, they’ve got to be some type of synergy that we can – we can we can find so that that’s how our investors – our or investors win.
If you don’t, what you do is just buy a company, you really don’t get a good arbitrage for the shareholders, you got to find some synergy that at least you got to identify it so that you can say, look, I can get one and one is more than two. So that’s just a long explanation for there’s going to be lots of M&A activity over the next bit. That’s nearly baked in the cake. But we got to be very, very sensitive to what’s the price we pay on behalf of our shareholders.
Michael Robertson
Got it. That’s helpful color. Appreciate that. And one more from me, just maybe a quick one for Carson. I think you touched on this at the end of your prepared remarks. I just wanted to get provide some additional color on the spending surrounding the sustainability initiatives. Particularly was one of those were hybrid or CNG, or hybrid hydrogen fuel cell powered or maybe a combination thereof?
Carson Urlacher
Really, they’re compressed natural gas trucks. Michael there’s, I think we have six on order. We’ve had some good success with the ones that we’ve bought previously. So we’ve added to that order. In terms of timing, not exactly sure if we’ll get them all in 2022 versus 2023.
The other – the other large order that we put in was for our intermodal containers. And that’s for growth from within to extend our intermodal footprint within our apps group. And again, timing on that, it’s going to be 2022, 2023. It’s really difficult to say, you know, some of them will probably start trickling in throughout the remainder of the year, but I suspect there’ll be some coming in 2023 as well.
Michael Robertson
Got it. Again helpful, color…
Carson Urlacher
I am going to have Richard just step in here and talk a little bit about CNG, compressed natural gas, and why do we need that investment, and Rich maybe just want to talk a little about what the equipment fuel mileages within the cost of CNG…
ESG component to Michael, but there is also business component that want Rich to just find a little bit to get some color to all of our listeners on why we are investing in CNG.
We want to do the right thing for the environment, but we also got to do the right thing for the bottom line. Rich can you give some additional information to that….
Richard Maloney
Absolutely. So it was roughly about a year and a half to go, a year to go when we first looked up to order with the CNG trucks to hack our channels and then we’ve looked at it and with the compressed natural gas we put in some modern truck in and they are predominantly going through the up and back [indiscernible] we’ve have very good success on the miles on that, consistent with the newer trucks that we’re seeing with the 680s with the [indiscernible]
But the difference in what Murray is alluding to is when we’re seeing the seven miles per gallon range for what we’re able to do with these newer trucks, but as Carson pointed out, when you’re seeing diesel prices approaching 140, a leader the cost for us for the CNG or the equivalent is $0.79, so we are looking – continuing to invest in this and this we build out these units and as stations are built to help fuling in the partners we have with those groups we suspect and we know that the cost of that CNG will be coming down as well.
So this is as Murray said, during his prepared remarks, that you know, fuel pricing right now is a single biggest cost that is impacting the transportation industry and CNG works predominantly when you’re trying to you know, between major centers and such as well. So that is something that we’re looking at to continue to build out to LTL type of network and parts of our logistics and warehousing network as well.
So real simple, these trucks CNG used in local markets because the infrastructure there to do in lot to do in long haul basically, number two is, they are basically getting about similar mile equivalent to mileage as a diesel engine but the prices down at half from diesel and what they – what the guys were talking about as a rack price of diesel but the pump price is actually higher. For example, in [indiscernible] of BC diesel is over $2 a liter which equates out to nearly $10 a gallon.
Michael Robertson
That’s super interesting color. I appreciate the details. I’ll turn it back.
Operator
The next question comes from Walter Spracklin with RBC. Please go ahead.
Walter Spracklin
Yeah. Thanks very much. Hi, everyone. Just a question on how do you looking at the quarter in terms of your plan and the guidance that you provided there back in and whether this you add in any acquisition opportunity or acquisition that have done perhaps…
Murray Mullen
Based upon the first quarter, I would say we’re more than on target for what we originally applying to our shareholders at the first of the year, we’ll be on target. But if I use March as the parameter, then I could make a pretty good case that you know, we might be above the – what we originally came up with.
But I think we need to see whether that sustainable or not. The economy is pretty fluid right at the moment. I’m optimistic. But I’m reluctant to really, you know, to say this is exactly what’s going to happen for the rest of the year. I think what we’ll be able to do at the end of the next quarter is be able to say, okay, we’ll give an update on you know, what, what our overall plan was with a row on target or above target, , we will not be below target, whether we’re on target or above target. And we’ll be able to give that you know, better color on that at the – after the second quarter.
The first quarter is typically not our best quarter anymore. Typically, the second and third quarters are our best quarter. So I’m expecting better, but we’ll give a will give a full update at the end of next quarter. I think rather than me guessing. I’d rather say that. So I know, we’re not going to be below target. Well, to make it look better, of, you know, a better overview, once we really see how how’s inflation really impacting the consumer right now that everybody’s talking about it. And everybody has a viewpoint, we’ll be able to go to the real time information in a couple of months.
Walter Spracklin
And, and looking at March, what really stood out, would you say was it your operating performance, was your pricing that you were able to achieve, was at the volume level of volume demand? Perhaps some improvement in fluidity levels? What really stood out in March as being exceptional? If you had to boil it down to one or two?
Murray Mullen
Really, I think it was demand came back pretty strong. You know, there was some real crappy stuff that none of us, none of us planned on. You know, when I when I did our budget up and it gave, you know, here’s what we’re going to do. Are all of you did your analysis up. Did you really count on blockades affecting the supply chain and all of the productivity and all the costs associated with that we just couldn’t move freight.
Did anybody count on more absenteeism, 10% absenteeism because of COVID. I mean, I wasn’t counting on that. And then we had some real crappy weather in northern Ontario and Manitoba, that really hurt our guard wine group in January, February, particularly. They recovered nicely in March, but they got swapped around pretty good.
And I’ll be honest with you, a lot of freight got stopped. It just wasn’t moving with that crap weather. So those were things – those impacted the margin, if I normalize those things, margins would have been up by about two points in the quarter. We’ll see if we get that in this quarter. We better get it I’ve told our business units I expected. So…
Walter Spracklin
And my last question is just on the M&A side and whether I know you touched on it, but just with all the unprecedented and really, structurally different ways things are happening here in the transportation logistics center that you had pointed to in the your prepared remarks.
Are you are you revisiting what you’re looking for anymore? Is it you know, could you could you look at different operations than what you otherwise would have? Are you more emphasizing certain types of companies or in different geographies than you otherwise would have maybe a year or two ago?
Murray Mullen
No, not we’re not looking anything different. We haven’t changed our strategy. We know precisely what we’re looking for. But we don’t chase them. And, you know, we’re very selective and will continue to be so.
Okay, and none of it none of our numbers that we’ve given any, any guidance on or talked about, have included any if we do any M&A activity this year. And we’ve got a – we always have files under consideration. Every quarter we have files under consideration, but we don’t always move them along. Sometimes we don’t like what we find you know, but we’re always in. We’ve all got some files that are active.
Walter Spracklin
Okay, that’s all my questions. Thanks very much for the time.
Murray Mullen
Thanks, Wal.
Operator
The next question comes from Konark Gupta with Scotiabank. Please go ahead.
Konark Gupta
Thanks, operator. Good morning, everyone and congrats on a good quarter. Also thanks for splitting out individual segment at outlook. That’s really helpful. So maybe bring my first question is on the broader market and spot rates especially, given the spot rates have been sparking a lot of fear among investors that you know, there’s going to be a freight recession and obviously, a lot of trucking companies and your competitors have reported recently. They calling out that they are not seeing the weakness in the contract market.
So what do you understand in terms of your business, certainly the L&W segment seems to have a spot exposure. How would you characterize your spot business across your three trucking and logistics segments, compared to what we are seeing out there in the spot markets, broadly published by different platforms?
Murray Mullen
Well, that’s a good – you know, that’s a good observation Konark. And, and here’s what here’s what we think. We know, there was some surge pricing that happened in the first quarter, and it needed to know. We use a lot of subcontractors. And in – we got caught a little bit on that with some of our, you know, you make a commitment to the customer, maybe in December, and then all of a sudden, you know, you have vaccine mandates that come in – 10% of drivers going across the border.
Where you saw a lot of the surge pricing was crossing the border. And those prices have still remained elevated, because the drivers still are not able to come back to work, you know, across the border. So we’ve really had about a 10% reduction in the amount of capacity going to and from the United States, at the same time that demand has stayed relatively flat. So that’s where a lot of that surge pricing happened.
And we got caught a little bit some of our business units in January, February. But they made that, you know, they recovered and to what the market was in March. And I think they’re probably doing the same thing today.
When I talk to our business units real time, it’s softened a little bit, but not we’re not going back to where we were. That’s absolutely a fact. So I think generally, prices are going to be elevated from where they were over the last over the last decade. But I think some of the surge pricing might come out of it temporarily, perhaps, because the wildcard here, all right, is what happens with fuel prices.
If fuel prices double, I will predict right now that well over 10% of the trucks that are on the highway right now should be parked. They are not efficient, and they are losing money going to work every day. That cannot last for very long. And you heard Carson talk about, we cannot just go get additional capacity. The industry cannot add new trucks fuel efficient trucks today. Which Rich what are we at seven, eight mile per gallon is that is what the new units, a new unit will get you. And at least 10% of those trucks out there. There’s a two to three fuel mileage mile per gallon arbitrage. Those trucks at four are going broke.
They – now that our prices have to go up to keep go up to keep them in business, because they’re the marginal provider. So which way is it going to work out? Short term? I don’t know. Long term. It fuel prices stay up and elevated. You got to have new equipment and that fits pretty good with a company like a professional company like ours. So we’re – that’s where I think it’s going to happen. I think we’re going to lose a lot of independence. They just can’t make it costs are too high. And they can’t retool
Konark Gupta
No, that’s good color, Murray. Thanks so much for that. And then maybe switching gears to your SMI segment. Now, if we go back, you know, historically, and not even very far back, just you know, pre-pandemic, that segment has typically done north of $400 million in revenue. And it’s sitting somewhere near about 300 plus level right now.
And then you talked about drilling activity and you know, the oil and gas market capital investment cycle could probably start rebounding in the second half. And while your pipeline business seems like it’s still kind of softer than last year, but kind of stabilizing perhaps.
What’s your operating leverage and what’s your torque to do the oil and gas commodity prices for that segment? Where can that go to basically see what what’s happening right now and drive capital spending?
Murray Mullen
Carson, what’s our what’s our leverage to the drill bet? Maybe 150 million somewhere around there above revenue right now in that ballpark. So you’d be looking at maybe 10%?
Carson Urlacher
Yeah, 10%
Murray Mullen
Of our revenues. I suspect that goes up. I think where you’re really going to see the change contract is this industry has been starved of capital for virtually a decade now. So if the oil and gas producers decide they are now going to go and increase production, and they can only increase production through the drill bit, if they decided to go and put more capital to work on the drillbit, then the assets in the business we have our pricing, this will be a pricing game, not a growth game.
And I will remind our oil and gas company customers is that just as you have seen a surge of your price of your commodity, I can tell you, you will see a surge in the price of our service. It takes a little bit of incremental demand, and it’s not. And it looks like the market needs increased supply of commodities. I’m not making that up. That’s what the commodity prices are telling us. So you either are going to have to have increase in the drillbit or consumers are going to have to quit consuming. I’ll let you decide which one that is.
Konark Gupta
No, that makes sense. Thanks for that.
Murray Mullen
Thank you.
Operator
Next question comes from Kevin Chiang with CIBC. Please go ahead.
Kevin Chiang
Good morning, everyone. And thanks for taking my questions. Two from me, just wondering, you know, just what I can feel pricing, and that impacting the all in freight rates that that shippers have to pay. Just what do you say the modal shift perspective? Are you seeing more demand for intermodal versus over the road? Just given the former should be cheaper? I think any changes should be taken from that perspective.
Murray Mullen
You know what, I mean, we know that the long term trend is towards intermodal like that. I don’t I don’t think that is something that is, you know, is revolutionary shouldn’t be to anybody that’s in the logistics and freight business.
Free tasks to move more efficiently, particularly as the price of fuel goes up and makes intermodal that much more competitive. Because trucks and you know, trucking, the rates are going through the roof because drivers costs access to equipment and fuel, so intermodal becomes more competitive. So it’s just makes more sense.
So, you know, we’re going to continue to expand our footprint in that rather than buy trucks to go long haul, we’ll invest in the container and we’ll invest in warehouses and infrastructure so that we can provide that service to the customer.
So in [indiscernible] one of the real beneficiaries of this freight demand surge, you’ve seen it in the United States, you’ve heard it from CNCP, intermodal is pretty strong. And then that might soften a little bit as the as the inventory management, you know, supply chain kind of rectifies a bit. But I think the long term trend is well entrenched there. At that, that’s my thesis.
Now, there’s always ebbs and flows in the market. But the long term trend is undeniable. And I know it is with us, is, you know, and that’s one of the reasons why we strategically invested in apps. You know, just there are an exceptional intermodal provider with a good footprint with good warehousing capabilities. And so that’s a good long term investment on behalf of our shareholders.
Kevin Chiang
That That makes sense. And then the second one for me and it was really an observation from Knight Swift last night. They were talking about the US – US brokerage market and it made an observation, the base on and I recognize that they’re also talking their own book here is, you know, a shift away in the brokerage market away from asset like brokers towards any asset heavier brokers that offer a power only solution.
So when I think about growing your us 3PL one, is that something that you’re seeing or maybe because you’re starting from a smaller position, you know, this potential shift that might be happening in the market, in some ways would be relevant to you because you’re building off a small, small base you, just wondering like, I guess I guess based on some of the comments, some of your peers have said in the brokerage market in the US that maybe what you’re seeing what that means bigger growth overall, within US 3PL?
Murray Mullen
You know, what can I’ve seen, I’ve seen some of those articles, the same ones that you’re referring to. And honestly, I think it depends who the author of the article is. So if you’re a hard asset business, you’re going to take the view that not we’re going to win the game, if you’re an asset, one, you’ll say, hey, we’ll still find the arbitrage out there. Because you’re always still got to find the best price in the market for the customer.
And so I think there’s room for both, to be honest with you. We enter that market, as you know, in the US has to give us another growth platform down the road, and we’re just in the early innings of capitalizing on that, you know, on that strong book of business that we got.
I mean, they continue to grow their business and get access to customers. What we want to do is add more service offerings to it, which will be part of our longer term game plan. But I think there’s, I think the market is still going to, you’re still going to have to find the best price and best arbitrage out there. Smaller shippers are going to have a very difficult time going to big companies, big carriers. Probably the big shippers will either do their own freight transportation, you saw what Walmart did, for example, to get drivers. I mean, they’re paying drivers, what up to $100,000 a year now in ’20.
So the big shippers are probably going to do their own supply chain. I know Amazon’s doing more of their own. So I think there’s a place for both to be honest with you. And we’ll try and carve out our niche.
Kevin Chiang
No, now makes a ton of sense. Congrats on a good start to the year.
Stephen Clark
You know, Kevin, just on your – you know, I know we were off on your, on your expectations for the quarter, but I’m sure when you did your expectations, you didn’t count on the blockades or some of the things either, so I think we probably would have been a lot closer to your expectations in the absence of those one time events that I didn’t count on either.
Kevin Chiang
So that makes a ton of sense. That that makes a ton of sense. But nonetheless, it was a good quarter.
Stephen Clark
Thank you.
Operator
Next question comes from Matthew Weekes with IA Capital Markets. Please go ahead.
Matthew Weekes
Good morning. Thanks for taking my question. I think I just have one that at this point, most of might have been answered. But just thinking about acquisitions and the asset integration piece of the outlook here as you go forward.
I was just wondering if you have the typical timeline that you look at in terms of integrating the assets and achieving the synergies that that you would normally expect?
Murray Mullen
Yeah, typically, Matthew, good question. Some, some of the business units we don’t integrate. First of all, we don’t integrate right off the bat, the first thing we do when we do an acquisitions, we get it. And then we learn. Okay, where is it best to integrate with another business unit? Or is it best for us to integrate another business unit in with that, when it depends on who’s got the best footprint, best management teams, et cetera, et cetera. It takes about a year to learn that.
But I can tell you, we’ve been very active over the last bit, streamlining, our businesses and we did a bunch of, again, this first quarter, which is aligning the business units, where we think we can find those synergies, that’s what we do.
But when we do an acquisition it takes a little bit to learn, you got to make sure I don’t slap them together, and then hope it works. We learned then we put together ones when, where it makes sense to do it. But we’re always doing it to look for synergy.
And it’s not just it’s not just we save a couple jobs. We’re looking at for real synergy how we can provide a better long term service offering to our customers. Because we do that, then we win the long game. That’s what we’re really after.
Matthew Weekes
Okay, thanks. That’s makes a lot of sense. And I think I’ll actually just ask one more, and you provide some good commentary on the market dynamics on the call, given some of the concerns that that certain industry participants have been raising and you talk about if you see sort of a bit of a tempering of consumer demand, there’ll be opportunities for productivity improvements, offsetting a bit of that, as supply chain bottlenecks ease a bit. I was wondering if you could just comment specifically on what some of those productivity improvements might be.
Murray Mullen
Well, first of all, we got to get people back to work. So because when you have 10% of your workforce off, all you do is you, you’ve got higher – we’ve got more costs related to sick days. But worse than that, you burden the other 90% that they got to pick up the pick up the slack. Usually that means in our business with the hourly workers, you’re paying overtime, quite a bit.
So – and then we just aren’t as efficient. We’re, just moving, we’re handling the freight twice. You can’t get it in to get it offloaded, you’re reloading it here. So we’re handling freight too many times and too much overtime. That kind of explains what happened on that front.
And when you put that across the whole system ends up being a lot of a lot of cost. So I suspect as it slows down a little bit, that we’ll – you know, we’ll be able to, to be able to get those productivity improvements back and get our costs back under control. They were they were a little bit squirrely in the first quarter to be blunt with you in a number of number of our business units.
Yes, I think that demand is going to slow a little bit. But as I said to you, the offset is what happened with supply, the offset is, I think at least 10% of the trucks are going to be broke, because it cannot, they just can’t be competitive, even at elevated fuel price levels, they’re still not making any money.
So they’re not going to last. So supply is going to shrink because we cannot add additional capacity right now you can’t get you just can’t get it. So I think, you know, overall, if you’ve got a good fleet, you got good capacity, I think you’ll do just fine.
Matthew Weekes
Okay, thanks. I appreciate the answer on that. And I think solid quarter overall, despite some of those supply chain challenges. So that’s it for me, I’ll turn the call back next.
Murray Mullen
Thank you.
Operator
[Operator Instructions] The next question comes from Miguel Adera with Cormark [ph] Please go ahead.
Unknown Analyst
Hi, good morning. The first question I had I just wanted to talk about the margin delta between logistics and warehouse and LTL. Is this just a function of the markets being served? Or is there other dynamics involved here? Thanks.
Murray Mullen
Well, I think, first of all, we think logistics were just they had a fantastic quarter, they didn’t get quick, didn’t get hit as hard as our LTL business did. And when I talk about LTL, I’m really talking about our guideline group, there’s such a big component of that, right.
And they really got hit hard, really with some, some bad weather and some productivity problems. And, and to be blunt, they were a little slow coming out of the gate on the pricing, they put pricing increases in, but they got caught with the cost surge.
So January, February, we’re not kind to, to guard wine [ph] and they’re a big component there. I think if we normalize that course, we would have been probably a lot closer to flat on flat. And in that section, if I’m not mistaken.
Richard Maloney
Yeah, for sure. And, and Matthew, if your, your question more of a, you know, why is the margin a little bit lower in the LTL segment versus the LTL segment versus the [indiscernible] The LTL is predominantly assets that we own, so it’s more company equipment. So you’re seeing that the margin on that side is a little bit lower in the first quarter. A lot of that fuel surcharge flowed through into the LTL segment versus the L&W segment which is which is detrimental the margins.
And as Murray mentioned, you know, we you know, one of our largest business units within that segment, we lost several operating days within the first quarter just due to inclement weather and in their, in their main operating areas, which is going to impact your margins.
Coupled with that is the issue that we have with the drivers, you’re going to see that wages it may might look like in our chart that wages is down as a percentage of revenue, but, but you almost have to couple that with purchase transportation given the fact that if we don’t have a company driver to put in a seat, now we’re farming that out and saw our purchase transportation increased in that segment as well, too. So…
Murray Mullen
Yeah, so, just to follow up on that. I don’t think there was anything structured we did get hit some with some one timers in that first quarter. And you know, really, I think outlined those pretty good as to what the main drivers are those main issues, not the main drivers of that.
So, longer term, I don’t think we’re going to you know, our longer term objective So we’re still going to get move on LTL margins up. They’re not going down. I’ve told all our business units very firmly won’t accept lower margins.
So, no, we did have them. And I said this, I acknowledge we’re behind the curve in the first quarter that I don’t want to be talking about that every quarter. That’s what I told our business units.
Richard Maloney
And typically LTL is weakest in the first quarter as well, just given consumer demand after the holiday season drops off. So it’s really it’s, you got the combined impact of lower demand season like the seasonality impact of it. And then this year, we got the double whammy with the issues that the Murray talked about.
Unknown Analyst
Got it. That’s great color. And then last from me, just a housekeeping item. But you mentioned some one time costs in the US 3PL, do you mind elaborating or providing a number to sticking to the model?
Richard Maloney
Yeah, there was. First of all, they, they use all subcontractors, so when they bid to a customer, and then the spot market goes against you loosened margin in there. So they’re behind the curve, because there was some real surges in the first quarter, you’ve seen that in every everybody’s press releases is that, you know, the spot market was pretty high.
So they got trapped a little bit there. And then we have some one time healthcare expense costs that happened as regards in regards to moving, transitioning those medical expenses over to holistic from the previous owner, which was quad graphics. So there was some one time ketchup costs there, those will not be there just one time costs.
But exclude those out, you know, they were pretty much in line with where they have been since we since we acquired them. But yeah, there was a couple of one time costs that they got hit with and that quarter as we drew up. And we’re ending our one year transition agreement with quad graphics. I think Joanna [ph] expires at the end of June because we bought them a year ago. And so there’s always a bit of true up that happens and debates that you have so we just took the cautious approach and booked those for the inter
Unknown Analyst
Perfect, that’s all for me. Appreciate your time.
Richard Maloney
Thank you.
Operator
This concludes the question and answer session. I would like to turn the conference back over to Mr. Mullen for any closing remarks.
Murray Mullen
Thanks, folks for joining us. We look forward to giving you a more fulsome update as to what the whole rest of the year will look like at the end of next quarter. Lots of moving targets right now. Some positives, and I think the positives outweigh the negative soul. Thanks for joining us. Really appreciate it. Take care.
Operator
This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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