TFI International Inc. (NYSE:TFII) Q1 2024 Earnings Call Transcript

TFI International Inc. (NYSE:TFII) Q1 2024 Earnings Call Transcript April 26, 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 day, ladies and gentlemen. Thank you for standing by. Welcome to TFI International’s First Quarter 2024 Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Callers will be limited to one question and a follow-up. Again, that’s one question and a follow-up so that we can get to as many callers as possible. Further instructions for entering the queue will be provided at that time. 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 can cause actual results to differ materially. Also, I’d like to remind everyone that this conference call is being recorded on Friday, April 26, 2024. I will now turn the conference call over to Alain Bédard, Chairman, President and Chief Executive Officer of TFI International. Please go ahead, sir.

Alain Bédard: Well, thank you, operator, and welcome everyone to today’s call. Our results, released yesterday after the close, show continued performance to start the new year in the context of a particularly weak freight environment. Our self-help opportunities, along with the continued hard work of our many talented team members, have again helped TFI International deliver solid performance. Especially during weaker freight cycles, we sharpen our focus on the long-held operating principle that we — that have helped TFI expand rapidly over the years through organic growth and very strategic M&A, while always maintaining a strong financial foundation through our emphasis on profitability and cash flow. We then use our excess cash to intelligently invest and return excess capital to shareholders when possible.

Starting with a high-level overview. During the first quarter of the year, we produced operating income of $152 million versus $166 million a year earlier, with an operating margin of 9.4% relative to 10.7%. Our adjusted net income of $106 million was down from $116 million in the first quarter of 2023, and our adjusted EPS of $1.24 was down from $1.33. We produced just over $200 million in net cash from operating activities versus $232 million last year, and we generated positive free cash flow of $137 million relative to $196 million. Taking a step back, I’d like to point on these results. First, they reflect a solid performance given the economic cycle of the US LTL business, which is picking up steam. The ongoing transformation is rooted in our overreaching focus on service quality and revenue per ship.

In particular, we saw tonnage inflect positive in the quarter, leading to a 12% increase in revenue per shipment. A second observation is that we see very tangible opportunity ahead to drive much stronger LTL results. There remain much work to do on cost all while being only in the early innings of our service-driven sustainable top-line improvement program. With that overview, let’s take a closer look at each of our four business segments. P&C now represents 6% of our segment revenue before fuel surcharge. As you know, this market is experiencing softer volume across the industry and our revenue before fuel surcharge was down 8%, driven primarily by a lower weight per shipment and slightly fewer shipments. Our P&C operating income came in at $18 million or a margin of 18%, down from $27 million or a margin of 24% in the prior-year quarter on lower operating leverage.

Our return on invested capital was still a very solid 25.7%. Moving on to LTL, which is 42% of segment revenue before fuel surcharge, we generated revenue before fuel surcharge that was down 1% over the past year, while our operating income, despite lower gain on assets held for sale, actually grew significantly to $67 million, which was up 15%. This reflects a 140 basis point increase in our operating margin. Looking more closely at these strong results, our Canadian LTL revenue before fuel surcharge grew 8% year-over-year on a 9% increase on shipments and our claim ratio remained low at 0.2%. Return on invested capital for Canadian LTL was 19.1%. Turning to US LTL. Revenue before fuel surcharge of $552 million was down 3% over the past year, with the decline driven by our asset-light operation GFP.

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Q&A Session

In the core LTL business, we drove tonnage up 7%, weight per shipment up 13% and revenue per shipment up 12%. In addition, our operating ratio for US LTL improved significantly, up 310 basis point to 92.6%, and our return on invested capital was 15.2%. Truckload is up next, now 24% of segment revenue before fuel surcharge. This market remains weak and we produced revenue before fuel surcharge of $398 million, which was down 4% year-over-year, reflecting a decline in miles with pricing stable and specialized, but under some pressure in the Canadian van division. Looking closer, within Truckload, our specialized segment generated revenue before fuel surcharge of $321 million, which was down 5%, with an operating ratio of 89% versus 85% last year.

Return on invested capital for specialized truckload was 9.5% compared to 14.1%. Moving on to the Canadian base conventional truckload, we slightly grew our revenue before fuel surcharge to $78 million, with an adjusted operating ratio of 91% compared to 81% a year earlier and our return on invested capital was 10.4%, down from 21.3%. Speaking of Truckload, as you know, earlier this month we closed the acquisition of Daseke, a business very complementary to our own, serving many attractive specialized and industrial end markets and providing us even greater scale. You’ll begin to see the Daseke contribution in the second quarter, and similar to other acquisition of ours, we see an immediate opportunity to enhance financial results. Rounding out our business segment review, Logistics is 27% of segment revenue before fuel surcharge and again produced very strong results this quarter, outperforming the industry.

Our revenue before fuel surcharge climbed 24% over the prior year and our operating income grew 27% to $40 million. Our acquisition last summer of JHT continues to benefit our results. For the quarter, our Logistics operating ratio was 91% and return on invested capital held steady versus the prior-year period at just 19%. Moving right along, I’ll provide an update on our balance sheet and liquidity. For starters, we generated free cash flow of $137 million during the first quarter. Adding to our liquidity near the end of March, we closed a $500 million term loan at an attractive rate with tranches due March 25 to March 27. We ended the quarter with a funded debt-to-EBITDA ratio of 1.6. This very solid financial foundation is a core part of our strategy, allowing for smart investment cycle in and cycle out.

In addition to the fourth quarter acquisition of Daseke during the March quarter, we completed acquisition of Hercules, a well-run LTL carrier that adds to our cross-border capabilities. We also were proud to declare another dividend during the quarter with our Board of Director, again, approving $0.40 per share paid on April 15, a level 14% higher than the prior-year quarter. Wrapping up with guidance, today, we introduced our 2024 EPS outlook range of $6.75 to $7, and we expect full year free cash flow in the range of $825 million to $900 million, with net CapEx of $275 million to $300 million. We also plan to pay down $500 million to $600 million of debt, targeting a fund debt-to-EBITDA ratio under 1.7 by year-end. All right. With that, operator, if you could please open the line, I’d be happy to take questions.

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Brian Ossenbeck with JPMorgan. Please proceed with your questions.

Brian Ossenbeck: Hey, Alain, good morning. Thanks for taking the question. So maybe you can just start with..

Alain Bédard: Good morning, Brian.

Brian Ossenbeck: …some of the assumptions under the EPS guidance, because I think last quarter you gave us a little bit of a preview before the Daseke acquisition closed. EPS probably start with a $7, so that’s still within the range, but a little bit lighter than that on the lower end. So just wanted to see what had changed and maybe what you saw with Daseke initially.

Alain Bédard: Yeah, well, Daseke really has nothing to do with that. What we saw is in Q1 has been way, way, way worse than we anticipated would be, right? Because if you look at our EPS of Q1 versus last year, our EPS is down. Why is that? Well, because the Truckload in Q1 was just a disaster, okay, in terms of — just look at our peers in the U.S. or our Canadian peers, I mean, it’s a very, very difficult market right now in the Truckload. So, this is the reason why instead of coming out with $7 — better than $7, I mean, now we have to come to maybe more like $6.75 to $7. I mean, our P&C in Canada has a very disappointed Q1, but we believe that we’ll be able to change that over the next few quarters and get back on track to where we are normally.

But our P&C business is really small. I mean, when you think about with the Daseke acquisition, our P&C is going to represent maybe 4% of our revenue. But P&C is not — it’s not going to be the issue for us in ’24. I mean, we’ll get back on track with our P&C. The problem is the market of our Truckload. Now, on the Canadian side, as I’ve said many times, I mean, we’re fighting the Driver Inc. cancer that we have in Canada, whereby, well, we have competition from our — from these guys, that don’t pay — they don’t pay any benefits to their drivers. So that is really killing us. If you look at my OR, I’m down 10 points of OR year-over-year. So, that we don’t anticipate that this is going to improve very much unless the market gets way better in terms of the freight environment.

On the U.S. side, I mean, we do pretty well. If you look at — if you compare us with our peers, okay, we do pretty good, but we still anticipate this freight kind of recession will not change probably before ’25. We have an election year in the U.S. I mean, a lot of our customers are just waiting to see what’s going to happen, et cetera, et cetera. So that’s why we had to adjust a little bit from, let’s say, $7 and better to $6.75 to $7.

Brian Ossenbeck: Thanks for that, Alain. Appreciate it. So, the follow-up would be just on TForce Freight. In that backdrop you just outlined with the freight recession continuing, maybe you can talk about some of the momentum that seems to be building there, especially with the weight per shipment moving up? Looks like some nice movement in yields and volume and just things moving looks like in the right direction. So, can that continue even if you do have that sort of backdrop you outlined with the broader us freight market?

Alain Bédard: Well, you see, Brian, we’ve been educating our sales team to bring freight that fits the model, right? So, we’ve been saying, guys, don’t bring us freight that average weight is 1,075 pound per shipment like it was. So finally, for — I mean, don’t forget we bought this company three years ago, right, in May. So, it took us, let’s say, two years just to try to convince these guys that, because you’re paid by the weight, why would you haul light shipment? I mean, this is stupid, right? But it change — it takes a long time to change this mentality. The pricing also was bad, okay, and that puts us in a very non-competitive when the shipments were heavy. So we’ve — we had to change that. We had to change the culture.

We have to change a lot of things. Now, we’re not done. Because we still drive too many miles between each and every stop. That kills our density compared to what we have in Canada. We still don’t pick up enough freight per stop, okay? So this is also part of the major improvement that we need to happen for TForce Freight to come into an 85% — 80% to 85% operating ratio down the road, right? So, the job is not done. Now, for sure, we understand that the freight environment, even in the LTL, is soft, right? Our focus right now is, like we just said on these three factors, weight, okay, density, et cetera, et cetera. But also at the same time, we are working hard — very hard at reducing the cost. We say that the tiger is always the last one to survive in the jungle.

And at TForce Freight today, I mean, we’re a bunch of fat cows, okay? We are way too fat. We have too many clerks. We have too many — because our technology is old, okay, that it takes an army of people to service our customer. And this is something that is ongoing right now. Okay? So, as an example, we will be improving our freight billing system, our master file, okay, by the end of the year, which is causing us a lot of problem right now with billing our customers, right? We have too many issues with that and we have too many people at the same time. So, this new tool that’s supposed to be implemented by year-end is going to help us with that. Our new tool on the linehaul, because one of the reason that we’re going to be doing better is our services are also improving.