TFI International Inc. (NYSE:TFII) Q4 2023 Earnings Call Transcript

TFI International Inc. (NYSE:TFII) Q4 2023 Earnings Call Transcript February 9, 2024

TFI International Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to TFI International Fourth Quarter 2023 Results Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] Please be advised that this conference call will contain statements that are forward-looking in nature and subject to a number of risks and uncertainties that could cause actual results to differ materially. Also, I would like to remind everyone that this conference call is being recorded on Friday, February 9th, 2024. I will now turn the call over to Alain Bedard, Chairman, President, and Chief Executive Officer of TFI International. Please go ahead, sir.

Alain Bedard: Well, thank you, operator and thank you, everyone, for joining us today. Our results released yesterday after the close reflects strong performance by our talented team, beating our expectation and once again, we’re entering a new year in the strongest position in our company’s history. This comes despite weaker market demand throughout much of the year and is a testament to our adherence to long-standing operating principle, regardless of cyclical freight demand. In particular, I’ve referred many times to our overarching focus on profitability and cash flow, which is apparent in the fourth quarter results that I’ll walk us through. It’s this profitability and cash flow that permits us to execute on overarching principles of our growth strategy, which involve investing in the business, pursuing attractive M&A opportunities, and consistently returning capital to shareholders and doing all of this even when the market is weak.

This approach to the business is apparent in our fourth quarter results and indeed our performance throughout 2023. In fact, we were able to allocate roughly $2 billion of capital to announce acquisition and share repurchase during the year. Let’s turn to fourth quarter results, which include operating income of just under $200 million compared to $217 million in the year ago quarter. Our operating margin of 11.8% compared to 13.4% a year earlier and I should mention that these results include a $23 million reduction in the contribution from assets held for sale. Our adjusted net income of $147 million was down only slightly from $152 million in the fourth quarter of 2022 and adjusted EPS came in at $1.71, down $0.01. Given our intense focus on generating healthy cash flow, we’re most pleased with our net cash from operating activity, which was $303 million, up sharply from a year ago, $248 million and bringing our full year total to just over $1 billion, again, up over the prior year despite market conditions.

Equally important from a strategic standpoint, our free cash flow of $244 million was up significantly over $188 million in the prior year fourth quarter. For the full year 2023, we produced more than $9 per share of free cash flow, which is remarkable given our company’s size, which is again a reflection of the hard work of our team throughout the year. Now, gig in deeper into our four business segments, starting with P&C, which represents 7% of our segment revenue before fuel surcharge. The number of package was down 4% with pricing a little softer as well, resulting in a 5% decline in revenue before fuel surcharge. Similarly, our operating income of $35 million was down just slightly from $38 million in the prior year, and our margin fell by 70 basis points to 28%.

Return on invested capital for P&C was 28.1%. We believe this solid performance by our P&C business in spite of the weaker demand environment reflects unique market exposure and as always, our close attention to cost controls. Next, let’s discuss LTL now 41% of segment revenue before fuel surcharge. Our topline revenue before fuel surcharge was down 3%, while our operating income of $71 million compared to $88 million a year earlier. This includes $7 million net loss on assets held for sale. Digging deeper within LTL, Canadian revenue before fuel surcharge growth grew 12% year-over-year and a 12% increase in shipment benefiting from the STG acquisition in 2023. Return on invested capital for Canadian LTL was 20.1%, relative to 24% a year earlier.

Regarding our ongoing turnaround at US LTL, the name of the game for us in addition to all the cost and efficiencies we have discussed over time, is quality of revenue through improved service. This is evidenced by our last quarter claim ratio of 0.5% for US LTL, 0.5% of revenue for US LTL, down from 1.5% a year earlier and our second Canadian LTL claims ratio of just 0.1% of revenue. Our revenue before fuel surcharge of $563 million was down from $601 million in the fourth quarter of 2022 and while volumes were down 5%, we were able to increase revenue per shipment as weight increased by 10%. Our operating ratio of 91% compares to 90.4% in a year ago period, and our return on invested capital for US LTL was 15.1% compared to the prior year at 23.8%.

Next, let’s discuss truckload, which is 24% of segment revenue before fuel surcharge. Benefiting from acquisition, our volume were slightly higher than a year ago, while rates were weaker. Truckload revenue before fuel surcharge are just under $400 million, was virtually flat with the year ago period, down just 1%, while operating income of $51 million was down relative to $72 million last year and our operating ratio of 87.3% compared to 86.1%. Taking a look within truckload, our specialized exposure remains a plus. We were able to capitalize on self-help opportunities and increased revenue per truck. Benefiting from this revenue before fuel surcharge, almost entirely flat at $324 million. Our specialized truckload operating ratio was 87% relative to 87.4% in the prior year period and our return on invested capital was 10.3% compared to 13.4%.

Turning to our Canadian-based conventional truckload business. Revenue before fuel surcharge also held almost entirely flat at $78 million. Miles driven were up slightly, while rates were up about 7%. Our adjusted operating ratio of 89% compares to relative to 81.1% a year ago, and our return on invested capital was $12.6 million, down from $21.3 million. Let’s finish up our business segment review with logistics, which was 28% of segmented revenue before fuel surcharge and turned in a remarkably strong performance during the quarter. Revenue before fuel surcharge climbed 24% year-over-year, while operating income jumped 60% to $55 million. These strong results benefited from our very successful JHT acquisition, along with strong execution by our team, including effective cost control in response to market conditions.

Our operating ratio was 88.4%, while return on invested cap was 18.8% versus 21.9% a year earlier. Let’s shift gears and discuss our strong balance sheet and liquidity, which we view as a strategic asset. During the fourth quarter, we drove free cash flow of $244 million, as I mentioned, and also completed the private placement of $500 million of fixed rate interest-only debt as I referred to in our last call. As a result, we ended the year with a funded debt-to-EBITDA ratio of 1.49 and a weighted average interest rate of 4.4%, that’s entirely fixed, with an overall weighted average duration of 8.3 years. Looking ahead, it’s this strong financial foundation that will allow us to continue to make timely and intelligent investments regardless of the cycle, and especially during time of market weaknesses.

An excellent example of our recently announced acquisition of Daseke expected to close during the upcoming second quarter and one of the 12 announced M&A transactions during 2023. We very much like this highly complementary acquisition as it scaled our truckload segment into a leading North American provider, while bolstering our capability in the specialized market. Our other major focus this year is the ongoing turnaround of our LTL operation. And longer term, we see the potential opportunity to allow investors to own a separate specialized truckload business, in addition to a very attractive LTL, P&C, and logistics business. Another advantage affords us by a strong financial position is the ability to return excess capital to our shareholders whenever possible.

And we are pleased that during the fourth quarter, our Board of Directors raised the quarterly dividend by another 14%. So, with that, operator, we’re ready for Q&A. If you could please open the line. Thank you.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Scott Group with Wolfe Research. Please proceed with your question.

Scott Group: Hey, thanks. Good morning.

Alain Bedard: Good morning Scott.

Scott Group: Alain, it’s Friday morning, so I may have missed it. Did you guys provide any — did you provide any earnings guidance? I know you typically do?

Alain Bedard: No, Scott. We have not provided any guidance, okay. So, what we’ll do is we’ll do that after Q1. As you know, we’re looking at this Daseke acquisition. So, this is why we are very cautious in terms of talking about 2024 with this major acquisition. But what I could say is that, for sure, when we come up with our guidance, let’s say, sometimes in April, this year, we did about $6.18 EPS — diluted EPS in 2024, what we could say is that our EPS guidance will not start with a $6, will probably start with something like a $7 somewhere. But because of — we’re very cautious about Q1 and the Daseke acquisition. So, this is why we prefer to — and like most of our peers, okay, just stay silent right now for 2024 guidance. We’ll happily give more guidance, okay, for 2024 after we came out with our Q1.

Scott Group: Okay, fair enough. And then I’m guessing there’s going be a bunch of questions on LTL. But we haven’t heard from you since the Daseke acquisition, maybe just sort of talk through the rationale of that deal, sort of what you see in terms of the margin potential and how that fits in with some of the stuff you talked about in the release regarding potential spend?

Alain Bedard: You know what, Scott, we’re very happy with this transaction at Daseke. I mean when I look at all the different business units that these guys are operating today, I mean, we’re very happy. I mean these guys run a pretty, pretty good operation, I’m talking the operation. If you exclude the head office costs, okay, which is a very high burden for the Daseke numbers, if you exclude that, I mean these guys are running a pretty good operation in 2023 when you look at market conditions. I mean if you look at our global specialty truckload OR in Q4, we’re running at 87% OR, okay, in a very difficult environment, right, okay? Our Canadian van business is running an 89 OR in Q4, again, in a very difficult market environment.

Just look at our peers in the US, and you will understand that. I would say that these guys running the show over their business unit, the guy that runs the operation like the Lone Star, the Boyd, and the RMG and all these guys, they run pretty close to what we do. Now, it doesn’t show because an office is a big burden on the results of the company. I’m very, very happy with this acquisition that’s going to close in Q2. And these guys will all even help us on our own US operation because now it’s giving a size. And like we said publicly, Scott, we believe, okay, that down the road, okay, this conglomerate discount at TFI that we see today. If we do, okay, like we’re just talking about trying to have TFI into two business units instead of one, I think that this will also create some very interesting issues for our shareholders down the road.

So, Daseke helps us create size, okay, in our US truckload operation — specialized truckload. We don’t want to be in the van world. A year and a half ago, we sold CFI to Heartland, okay, because we didn’t want to be in the van, but we really like specialty truckload, the flatbed operation, the tank, and all that. We do really well. And we believe that the US and Canada down the road, 2024, 2025, 2026, a lot of investment will be done in infrastructure, roads, buildings, schools, et cetera, et cetera. And for sure, that will help the Daseke operation and our own Canadian specialty truckload. So, I think our timing is really good, like our timing of selling CFI was really opportunistic, okay? I think that this one is also in the same league.

Operator: Our next question is from James Monigan with Wells Fargo. Please proceed with your question.

James Monigan: Hey. I just wanted to ask one of the questions on the US LTL today. Just — can you just give a sense of what you’re expecting in terms of like OR improvement across the coming year? And given the sense that there is some uncertainty — understanding what you might be able to get in like more flattish volume environment versus a place where maybe volumes improve more significantly?

Alain Bedard: Yes. Well, you know what, James, we said it. I mean the 2024 plan for us is to deliver a 88 OR, right? We’re a 91 OR right now in Q4. This is not acceptable for sure. I mean the guys have worked hard because you have to understand where we were three years ago — two years ago, okay? 91, okay, is acceptable, okay. But 2024 91 is not acceptable, and our plan is to be an 98 OR for 2024. Also part of our plan, okay, is stop shedding volume, right? So, if you look at our Q4, volume is down, again, 4%, right? Year-to-date, we’re down 13%; in Q4, we’re down 4%. So, we took action in terms of improving our service, okay, like I mentioned on the script there. Our claim ratio is down like there’s no tomorrow. We’re a 0.5% of revenue.

So, that helps the customer experience with us. We made a major improvement in our asset base, our fleet in terms of training, our drivers, et cetera, et cetera. So, we believe that we can deliver in 2024, something like 98 OR and stop losing volume, okay? The market has been under pressure in 2023. Yes, ORC is gone, okay, that helped the market, but still. And us, we are working on improving our service, reducing our costs, and being more efficient. And our goal, like I said many, many times, for 2024 is to run an 88 OR global for US LTL.

James Monigan: Got it. At this point, do you think you’ll be growing shipments in 2024 based off of where you are now?

Alain Bedard: Well, I don’t think that this will come in Q1, Q2. I think that we have a change in leadership, okay, of our sales team. We have refocused our people there. So, we believe that this company should be running by the end of 2024, 24,000 shipments a day, right, to 25,000 shipments a day, which is very low compared to when we bought the company. When we bought UPS Freight, they were doing about 32,000 shipments a day. Now, like we said before, a third of those shipments didn’t make any sense, right? So, we had to do a lot of cleanup over the years of freight that don’t fit, freight that was not for us, but that is mostly done, 99% done now. So, now it’s tough for us to start growing again with the market by improving our service, we have more linehauls now on the road than ever, right?

So, we use less rail. So, our road service is way better than rail. So, that’s going to slowly help us improve because when we bought the company, a lot of the lane haul was done on rail. So, now slowly, we’re moving less on rail and more road that will help improve our service. The fact that our equipment is in much better shape. Our average age is about a little over four years down compared to seven and a half, eight years average when we bought the company. We had to make some major investment there. Same thing also with our terminals. Same thing with our training of our people. So, — and don’t forget that for two and a half years, we were also very focused on our TSA moving away from UPS. Now, this is done. I mean, in April of 2024, this is going to be the three-year anniversary of our acquisition of UPS Freight.

So, we’re done, okay, with our TSA with UPS. So that helps us, okay, focus more of our IT resources into building the IT of the future instead of the IT of the 1960s.

James Monigan: Thanks very much.

Alain Bedard: You’re welcome.

Operator: Our next question is from Ravi Shanker with Morgan Stanley. Please proceed with your question.

Ravi Shanker: Great. Thanks. Morning Alain. If I can just push you a little bit on the guidance commentary or lack thereof. I completely understand that the — there’s very little visibility on macro, but at the same time, you have been able to give us several kind of moving parts and targets on the guide for 2024, and you don’t have a large US LTL business. So, what exactly are you kind of — what are the moving parts? Or kind of what are you waiting for more clarity for before we know what the 2024 number is? And I also wanted to confirm that the $7 handle that you said is an organic number?

Alain Bedard: Yes. Yes. So, really, Ravi, the big thing for us is what we said when we acquired Daseke is that it’s going to be neutral to our EPS in 2024, right? So, I just want to make sure, okay, this is going to be the case. So, let’s say we take over April 1st, we came out after two or three weeks, we’ll be in a better position to know exactly, okay? Is this going to be EPS neutral okay? Or is this going to be like maybe $0.10, $0.15 for 2024? We said that it’s going to be about $0.50 minimum for 2025, the Daseke acquisition. So, what I’m saying that this is like — our EPS, probably we’ll start with a $7. This is organic. This got nothing to do with Daseke because like we said, Daseke is neutral, right — so, in 2024, right?

So, the reason is we’re looking at market condition, we’re looking at our truckload operation that is really suffering not so much on the OR, okay? But on the volume, the topline because if you look at my OR, my specialty truckload, my truckload, okay, my specialty truckload, even more. I mean, it’s a topline that’s killing me, right? Because my OR is very close to what it was in 2022, but we lose so much topline. So, this is why to give a guidance right now for 2024 — when we look at so far what we’ve seen in January, it’s a tough January. I mean, weather-wise, it’s been terrible, okay? So, that’s why we want to be cautious like most of our peers, right? And — but what we can say is that we believe that 2024’s EPS — diluted EPS is not going to be a $6 thing.

It’s going to be a minimum of $7 now. I mean we’ll quantify that after Q1 because we want to know also if we are still in a very depressed volume environment because don’t forget, if you look at our P&C, again, we have what, a 71, 72 OR in our Q4. But we lose topline, we lose 4% volume. Now, one of my peers came out in North America with 7% loss of topline, volume-wise, right? So, it’s the market is soft. And before giving a guidance, I don’t want to make the mistake that I made in 2023 when we were probably a little bit too optimistic about volume and we missed two quarters in a row, the consensus.