TFI International Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 22, 2024

There are 17 speakers on the call.

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to TFI International's Third 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.

Operator

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 would like to remind everyone that this conference call is being recorded on Tuesday, October 22, 2024. I will now turn the conference call over to Alain Bedard, Chairman, President and Chief Executive Officer of TFI International. Please go ahead, sir.

Speaker 1

Well, thank you, operator, and thank you, everyone, for joining today's call. Yesterday, after market closed, we reported quarterly results that reflects industry wide challenging condition. We generated strong free cash flow, which has always been one of our primary areas of focus with a year over year increase of 37% to more than $270,000,000 This continued strong cash flow, as I've said many times, allows us to opportunistically consider strategic M and A, intelligently invest in the business and return excess capital to shareholders. We do this while maintaining a conservative balance sheet and indeed during the quarter we were able to significantly pay down debt as I'll discuss later on. Let's begin with a review of our consolidated results, which as always reflect the skill and hard work of our team members, especially during cyclical challenges for the industry.

Speaker 1

During these times, we collectively redoubled our focus on the important details of the business, striving for added efficiencies through quality of freight, optimizing weight and revenue per shipment and other important operating fundamentals that have served us well over time. For the Q3 of 2024, our overall revenue before fuel surcharge was up 17% year over year to $1,900,000,000 benefiting from the April acquisition of Daseke. Operating income of $203,000,000 was up slightly from $201,000,000 in the prior year quarter. And this equate to an operating margin of 10.7 versus 12.3 a year earlier. Note that last year's operating income include higher net gains on sales of assets held for sales of 15,000,000 dollars We generated adjusted net income of $137,000,000 up slightly from $1.36 a year earlier along with adjusted EPS of $1.60 up slightly relative to 1 0.57 In addition, as referenced, we have strong cash flow with $351,000,000 of cash from operating activity, well above the $279,000,000 in the year ago quarter and free cash flow of $273,000,000 also well above $198,000,000 of the previous year.

Speaker 1

Big picture on the quarter, our logistics segment performed really well and our truckload operation held their own as did our Canadian LTL and P and C operation. Going forward, the hardworking men and women of TFI International will continue to focus on improving operating performance while working to get the most out on recent acquisition. This will be our focus regardless of broader market condition as we see long term opportunities ahead. So with that, let's discuss LTL, which was 40% of segmented revenue before fuel surcharge during the quarter. Relative to a year ago, revenue before fuel surcharge was up 7% and operating income was down 24%, although this was largely due to higher gains year on asset held for sale.

Speaker 1

In addition, in the year ago quarter, we had benefited from an early spike in freight from yellow, which also weighted on the year over year quarterly performance. For U. S. LTL, our revenue before fuel surcharge was $531,000,000 relative to $581,000,000 the prior year and operating income was $48,000,000 down from 68,000,000 dollars This performance reflected a 2% drop in tonnage, a 3% increase in revenue per shipment excluding fuel and a 35% decline on GFP revenue. Our operating ratio for U.

Speaker 1

S. LTL was 90 2.2% compared to 90.8% a year earlier and our return on invested capital was 15.4%. Turning to our Canadian LTL, our revenue before fuel surcharge of $138,000,000 was down 2%, while our operating income rose slightly to $33,000,000 Our number of shipments was up 3%, although our weight per shipment decreased 7% and revenue per shipment decreased 5%. Our Canadian LTLOR came in at a 76.3 percent, an improvement relative to 77.2 percent a year ago, while our return invested capital was 17.6 dollars Wrapping up our LTL discussion, P and C operation also saw a slight decline in revenue before fuel surcharge to $109,000,000 from $112,000,000 with operating income up slightly as well at $24,000,000 versus $25,000,000 Our P and COR was 78.2, which was up 80 basis points while our return to vessel capital was 22.2. Percent.

Speaker 1

Moving on to Truckload. This business segment was 38 percent of segmented revenue before fuel surcharge at $723,000,000 as compared to $402,000,000 a year earlier, reflecting the April acquisition of Daseke. Truckload operating income of $72,000,000 was up from $50,000,000 and our OR was $90,300,000 compared to $87,700,000 in the Q3 of last year. Taking a look within truckload, specialized operation generated revenue before fuel surcharge of $648,000,000 up from $325,000,000 and our operating income of $64,000,000 was up from $40,000,000 a year earlier. In terms of performance metric for specialized truckload, our revenue before fuel surcharge per truck per week was up 5% over the prior year at $4,453 and brokerage revenue more than doubled to $94,000,000 dollars Our operating ratio was 90.4% compared to 87.8% the prior year and our return on invested capital was 7.9%.

Speaker 1

Overall, we see room for operational improvement within specialized truckload following the Daseke acquisition. Switching to Canadian based conventional truckload, we produced revenue before fuel surcharge of $77,000,000 down slightly from $79,000,000 a year earlier with the brokerage portion increasing 20 percent to $30,000,000 Our operating income of $8,000,000 compares to $10,000,000 as mileage and revenue per miles were under pressure. Our OR for Canadian truckload was 89.9 percent and our return on invested capital was 7.7%. Lastly, in our review by business segment, logistics was 22% of segmented revenue before fuel surcharge and continues to perform. While revenue before fuel surcharge was up just 2%, operating income was up 19%.

Speaker 1

Our 3rd quarter logistics operating margin was 11.4%, which was up from 9.8% the prior year and return on invested capital was 17.4%. Percent. With that review by segment, I'll next provide an update on our balance sheet. As I referenced earlier, we had a very strong free cash flow of $273,000,000 during the quarter, well above the $198,000,000 a year ago. We use our strong liquidity to pay down $130,000,000 of debt during the quarter and ended September with an improved funded debt to EBITDA ratio of 2.07 versus 2.15 as of the end of June.

Speaker 1

Our solid financial footing is an important aspect of our approach to the business, allowing us to strategically invest regardless of the economic cycle with DESCY as a good example, while returning significant capital to shareholders whenever possible, which has long been one of our guiding principles. In terms of capital allocation during the quarter, in addition to debt reduction, we completed 2 small bolt in acquisition and last month our Board declared a quarterly dividend of $0.40 per share paid on October 15. I'm also pleased to announce that just yesterday our Board of Directors both raised our quarterly dividend by 13% and authorized a renewal of our share repurchase program, the NCIB, for an additional year subject to the approval of the Toronto Stock Exchange. I'll wrap up with an update on our full year outlook that reflects the continuing challenging market condition. Year to date in 2024, our performance has been largely consistent with the prior year and we expect this trend to continue throughout the year end.

Speaker 1

As a result, we also expect our full year performance to be largely similar to 2023. And now operator, if you could please open the line, I'll be happy to take questions, please.

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer Our first question comes from the line of Ravi Shanker from Morgan Stanley. Go ahead please.

Speaker 2

Thank you. Good morning, Alain. So obviously interesting times in the industry. Just on U. S.

Speaker 2

LTL, are you able to distinguish how much of the earnings pressure there is purely cyclical and will snap back with more reordering stuff versus maybe some evolving industry dynamics in a post yellow world with new capacity coming in and players jockeying for share, etcetera?

Speaker 1

Yes. That's a difficult question, Ravi. So our focus is really to improve our cost basis. So the market condition we know it's been challenging for the last probably like 18 months. So we don't control market conditions.

Speaker 1

Our focus is really to improve our cost base and also improve our service. If you look at the last report from Mastio, I mean, our service according to this survey is the worst of the top 7 carriers in the U. S. So it's really a focus of ours. For sure what we're proposing to our customer is okay, we proper our proposal is good in the sense that okay, there's a match between the service that we provide which is has to improve, okay.

Speaker 1

And the rate also is still a good proposal for our customer because our rate on average is much lower than our peers. So this is why our focus us not notwithstanding the market condition, we have to improve our service, which as a matter of fact, we've started to move more freight away from rail onto the road, but also we have to improve our missed pickup. If you look at our claim ratio, we were going in the right direction, but then whoops comes a Q3, we dropped the ball, right. So our claims ratio is at 0.8% of revenue. Our Canadian LTL, our claim ratio is 0.2%, which is like best in class.

Speaker 1

We used to be at 0.4%, 0.5%, now we're at 0.8%. So guys, let's not drop the ball. Let's focus on service. Let's not miss any pickup. Let's be on time with our deliveries, etcetera, etcetera.

Speaker 1

Now if you look at this purchase that we did 3 years ago, 3.5 years ago, okay, and you asked me the question, hey, Helane, you think that you made a mistake with this purchase? Not at all. I mean, the only mistake is that we probably underestimated the time it will take us to turn this thing around, the culture. Now we're improving the management skill of our guys by training, by providing them financial information that we could continue to improve our cost basis, following metrics of service, etcetera, etcetera. Things that probably in the past were not a big focus of the management team at the time.

Speaker 2

Understood. That's really helpful. And maybe for my follow-up, I just want to clarify, did you say that 2024 is now looking like 2023 level of EPS? If you can just kind of clarify the 2024 guide, that would be great. Thank you.

Speaker 1

Yes, Ravi, that's what we're saying. I mean, if you look at where we are, I mean, we're basically flat year over year, okay, as of Q3. So we believe that we thought that we would do a better job in 2024 than 2023. But with market condition, with what we're looking at when we look at Q4, the first forecast that we're looking at, I mean, we believe that 2024 sadly will be a reputation of 23.

Speaker 2

Okay. Thanks a lot.

Speaker 1

EPS. Yes.

Operator

Thank you. Our next question comes from the line of Walter Spracklin from RBC. Go ahead please.

Speaker 3

Yes. Thank you very much, operator. Good morning, Alain.

Speaker 1

Good morning, Walter.

Speaker 3

Yes. Just on that guidance, looking out to next year now, if I look at consensus is up at it's come down a bit, but it's still at 8.50%, which is almost 40% above your new guide for 2020 4. I'm just curious if you're comfortable with that. I know there's a lot of operating leverage in your company. So when we do I know a lot of what to do with that question is dependent on how the economy does.

Speaker 3

But to the extent that from your outlook right now and where consensus sits, how do you feel about the consensus level of $850,000,000 for next year?

Speaker 1

Very good question, Walter. It's too early for us to really talk about $25,000,000 I mean, we're going through our budget season right now. But what I could say though is that we've been under some kind of a freight recession for close to 2 years now, right? Normally the cycle is between, I don't know, 18 months to 24 months. We don't see some major, major improvements so far in 2025.

Speaker 1

We believe that at some point it will happen, right? So if we have a normal environment in 2025, not 2022, but just a normal trade environment, okay. I think that getting close to $8 a share EPS like we did in 2022 is normal because in 2022 that was a great year, but we didn't have Daseke, we didn't have GHT. There's a few assets that we didn't have at the time. So to say that around $8 in 20, 25 in the normal environment, I think it's attainable, which is about the same as what we've done in 2022 in a great environment.

Speaker 1

But now we have assets that we didn't have at the time, right? The other thing also to consider Walter is that we will be reducing our debt like there's no tomorrow, right? So our debt in Q3, we've reduced it by 130,000,000 dollars In Q4, we will reduce that again by at least another $250,000,000 to $300,000,000 to get close to our target of reducing our debt since the acquisition of Daseke for about $500,000,000 And then if we don't do anything major until the end of 'twenty five, I mean our debt will be reduced another $500,000,000 during let's say Q1, Q2 by the end of Q3 in 'twenty five. So our interest costs, okay, will reduce dramatically because if you look at Q3, our cost of financing is like double what it was last year, right. And that will continue to come down as we pay down debt, which is our focus.

Speaker 1

And also hopefully the interest rate will start to drop a little bit and that should help us reduce again. So we said Daseke 2025 in our mind will contribute at least $0.50 a share. Okay. And if we have a normal environment, our U. S.

Speaker 1

LTL should perform better. Our specialty truck load overall should perform better. Canadian LTL and P and C will perform a little bit better. I mean, we're running 77, 78 OR right now. It's just a top line that we're missing, right, on the lower activity.

Speaker 3

Okay. And looking out to 2024 outside of just in terms of capital allocation, when you look at that debt reduction level, you're creating a lot of dry powder for acquisitions and or buyback. Do you have in your mind how much you would allocate in 2025 to buyback and how much you're keeping of that powder dry for I know you just alluded to a larger acquisition potentially at the end of 2025. How much you'd be allocating to M and A in 2025?

Speaker 1

Well, the usual thing that we do, Walter, every year we always invest US200 $1,000,000 to US300 $1,000,000 on tuck ins, M and A, etcetera, etcetera. And you'll see us doing the same thing in 2025, okay? So that's why I'm saying that our debt will reduce only by so much now. In terms of buying back the stock, we're just waiting to see the reaction, okay, to our Q3 results, the reaction over the next few months. And for sure, if we see an opportunity, I mean, so far this year, our buyback was really, really low.

Speaker 1

I think we bought back only 250,000 shares in 2023 so far. We're ready depending on where the stock price goes. We know what the value of TFI is down the road. We know that this freight recession is going to end at one point. We just don't know when, but we know it's got to stop at one point and we will be very well positioned with all these assets that we've added like the GHT, like the Daseke, etcetera, etcetera.

Speaker 1

We're also reducing our costs both at the Daseke level, at the T Force rate level. So if there's an opportunity to buy back the stock, absolutely, but this is all based on price. Depending on the stock price, I mean, we'll be active or we won't be active. But in 2025 for sure we will always invest between $200,000,000 to $300,000,000 on tuck ins of some kind. Mostly we're trying to invest in logistics sector in the U.

Speaker 1

S. Where we like to make 10 points like we're doing now, right. We're not going to invest in logistic business that makes 2 points. That's not for us. We'll leave that to the others.

Speaker 1

So logistics and LTL, if we could find the right target in the U. S. That makes sense for us, we'll jump on it in 2025. Appreciate

Speaker 3

the time as always, Eli. Thank you.

Speaker 1

Thank you, Walter.

Operator

Our next question comes from the line of Scott Group from Wolfe Research. Go ahead please.

Speaker 4

Hey, thanks, Elaine. I know I get the focus on service and costs on the LTL side. Maybe just can you touch on the pricing backdrop, right? If I look at just yields revenue per shipment both down a little bit from Q2 to Q3. What's the pricing environment right now?

Speaker 4

I know you announced the GRI, just talk about pricing broadly.

Speaker 1

Yes, absolutely. So for sure, we're feeling a little bit of pressure on the pricing right now. Although our proposal to customer, if you look at pricing versus service according to the master report, I mean, we're our proposal is really fair. But you're absolutely right. We're feeling a little bit of pressure right now because don't forget some of our peers have invested on a lot of real estate, okay.

Speaker 1

So for sure there's a little bit of fight. Don't forget that we have a lot of shipments that are moving to truckload right now, larger shipments, because the truckload guys are looking for freight big time. They're not that busy. We'll see our peers in Q3 coming out very soon, but we know that the market for truckload is very light, right, the demand. So we are losing that.

Speaker 1

So for sure we have a little bit of pressure. So this is why our focus is, guys, we cannot continue to have service that is subpar, okay. So we have to improve that. And like I said on Q2, we still have our costs that are not as good as they should be. So that's got to be our focus.

Speaker 1

And we don't control the market. We're just a small player. We're probably number 5, number 6 in terms of volume at 22,000 shipments. We're not big. But we know one thing is that this market at one point will start to turn and us we have to be ready with our service and our cost improvement.

Speaker 4

Makes sense. And then just a follow-up on Walter's question about M and A. What are the sizes of deals you're looking at as you think about 25? And then I feel like it's been a while since you've given us any update on the potential to separate the business and the spin, maybe just any thoughts or color there as well?

Speaker 1

Yes, yes, very good question. Listen, in terms of M and A size, if we look at TFI at the end of 2025, okay, in a normal environment, okay, without issuing any paper, right, no stock, no paper. When we talk to our Board, we could look into a $4,000,000,000 to $5,000,000,000 deal in the U. S, right, on a target. And if the deal is more than that, then we have to resort to paper, which we don't like to do, right.

Speaker 1

But it depends on the target, depends on the transaction. In terms of not mixing a return on invested capital between 15 25 versus a return on invested capital of 8 to 15, the truckload and the rest, for sure, the discussion we're having with the Board is that right now TFI's market cap is too small to do some kind of a split. Okay. So let's say our market cap is 12. You do a split 6, 6, 6 is too small, right.

Speaker 1

So that's why the discussion that I'm having with our Board is Alain, you got to do this next transaction and then let's say that you do a $4,000,000,000 or $5,000,000,000 deal, the market cap changed from $12,000,000,000 to $15,000,000 or $18,000,000 whatever it is. You got to get closer to $20,000,000 to start thinking about splitting into 2. But it makes sense, okay, not to have return invested capital of 8 to 15 mixed up with return invested capital of 15 to 25. So it's just a matter of time. We have to get to a certain size, Scott.

Speaker 1

And once we get to that size, I mean, I think that this is where we're going to go. We're getting ready. We're getting ready. I mean Steve Brookshire that runs our truckload operation. I mean he knows where we're going.

Speaker 1

So as much as we can right now we are splitting the real estate, okay. We're splitting the assets. So because that takes time. So we're getting ready. Is this something that's going to happen in 2025?

Speaker 1

I don't think so. Is this something potential the end of 2026 into 2027? First we have to do this deal that makes sense for our shareholders probably late 'twenty five into 'twenty six maybe and then okay then we'll be ready to go to the next step.

Speaker 5

Thank you, Alain.

Speaker 1

Pleasure, pleasure, Scott.

Operator

Our next question comes from the line of Konark Gupta from Scotia Capital. Go ahead please.

Speaker 6

Good morning, Alain. How are you?

Speaker 1

I'm good. I'm good, Gunnar. How about you?

Speaker 7

Thank you. Thanks for taking

Speaker 6

my question. I just wanted to verify on the P4, Salain. If we look back in the 1st few years of the acquisition, you started to reprice the book, which happened decently well. Then you started to optimize the costs, obviously, and I think you're still kind of looking at the costs here. I'm just trying to figure out, like with the Mathieu survey and obviously the service focus and the cost focus you have, What's really required here to move the operating ratio in the U.

Speaker 6

S. LTL business to 85% or so? I mean, do you need the volumes only or do you need the volume service cost and all those things come together? And how should we kind of play that roadmap in the next couple of years?

Speaker 1

Yes. Hey, Ocala, absolutely. If we would get from 22,000 to 25,000 shipments a day, for sure that would help our cost basis. But the problem that we have within T Force rate today is that our business is too fixed, is not variable enough, okay. So this is why we have to work with our team, our terminal managers to really adjust on a daily basis our costs versus the volume that we have.

Speaker 1

Okay, that's number 1. And for sure down the road if we can hit the 23, 24,000, 25,000 shipments for sure that's going to help us. But this is where it's the chicken and the eggs. So if you talk to our sales guy and they say, well, it's tough for us to get more business because the service is maybe not up to par to some of our peers, right? So when we talk to our operation guys, guys we got to fix the service.

Speaker 1

We have to improve the service. Now you say, yes, well if we improve the service maybe there's a cost to that. No, no, no, no. You have to improve the service and reduce the cost at the same time. So this is quite a challenge and this is where the talent of your management team comes to play.

Speaker 1

If you look at our management team in Canada, I mean this is a team that's been educated, trained, focused, etcetera for years years years. And if you look at the results, okay, in Canada we're doing very, very well. Even with the Kindersley acquisition that was not a star, okay. I mean our Canadian operation is still running sub ADOR in a difficult environment. Why?

Speaker 1

Because we have a very, very educated talent team to manage our business. And this is the key for us in the U. S. Where the terminal management team lack this training, lack this education. Now they have the tool, now they have the financial information.

Speaker 1

So now they have to act according to it, so that our cost is less fixed and more variable according to the volume. That's number 1. Number 2, in order to bring our cost down, we need our sales team to understand the mission of trying to get more freight per stop. I mean I've been like preaching that for 3 years now. And so far it's like I'm preaching to a desert, right?

Speaker 1

So we haven't done anything good on that. We've done the only thing good we've done with the sales team so far is we moved the average weight per shipment from $10.75 to $1200. So we have a little bit more dollars per shipment. Okay, that's good. Well, dollars 1200 is not the optional.

Speaker 1

It's not the top where we should be, but at least it's a move in the right direction. But by having more freight per stop, at the same time, okay, you split the cost of that stop over 2 shipments or 3 shipments instead of 1 or 2 shipments. So that helps you with your cost basis and you become more competitive. So this is a mission that we've been saying and repeating, but it seems to be difficult to accomplish. So this is why we're continuing to educate these guys to go.

Speaker 1

Our GFP is down like there's no tomorrow. This is a diamond way in T Force rate. Now for sure we've lost all the revenue from the reseller because most of these resellers were cheating our partner. So now we have to rebuild that business with our own account. We cannot deal with the resellers that are cheating, okay, because our partner does not accept that anymore, right.

Speaker 1

So let's have the sales team focus on our growing our GFP and also growing the number of shipment per stop. So that's going to help our cost basis. So it's not just the market that is maybe not the strongest today. Us, we have a lot of work to do ourselves, okay. I mean the market is difficult in Canada, okay.

Speaker 1

It's probably even more difficult in Canada than in the U. S. And if you look at what we do over there, I mean we do pretty good. Why? Because we've got the real strong management team.

Speaker 1

This is what we're trying to build in the U. S. Right now.

Speaker 6

Okay. That's great color, Helane. Thanks so much. And if I can follow-up on Daseke. You talked about $0.50 accretion next year.

Speaker 6

I just wanted to clarify, the $0.50 accretion next year is incremental to what whatever cost improvements you have achieved at the closing of the acquisition. And do you expect another upside to that $0.50 from the debt you are paying or that's included in $0.50

Speaker 1

No, no. Dollars 0.50 that is based on operation of Daseke only. It's got nothing to do with our interest costs, okay. So the deal we have with the Daseke team there and I've been seeing the plan for 2025, but I would be very disappointed if those guys don't come up with the $0.50 based on the operation because we are making some major, major improvement right now on the Daseke finance team. We will be moving all this financial system away from our Dallas headquarter into Toronto, we're going to be moving that to Infinium.

Speaker 1

So by the summer of 2025, everything is going to be run like at the Contrans style operation, right? So that represents huge saving for us. I mean the 2 Canadian companies that used to be managed by Daseke by the end of 'twenty four will be managed by our Canadian team. Those two companies, one is in Toronto, one is in Winnipeg, will be managed by our Canadian team now, which our Canadian team knows more about the Canadian market than the U. S.

Speaker 1

Team in Dallas. So now we have a lot of good things that were Steve Brookshaw and his team are working. And for sure, you look at Daseke with TFI legacy business, we come up in Q3 with a disappointing 90 OR or 89 something 90 OR. Well, it's because the Daseke group is still running like a 96, 97 OR or 95, 96, 90 7 depending on the division. I mean our legacy business is running more like an 80, 83, 84 OR in a difficult environment, right?

Speaker 1

So what we have to do is we have to bring those daskey operating metrics closer to our own. And this is going to be happening during the course of what's left of 2024 and into 2025. For sure, if you look at the revenue per mile that we have in Q3 versus Q2 on the U. S. Flatbed market, I mean the rates per mile have dropped again, right.

Speaker 1

So the market is weaker in Q3 than they were in Q2. Now, okay, so there's so many storms right now that the U. S. Had to go through lately. So for sure that probably is going to help us in Q1 of 'twenty five because they will have to start rebuilding, but we'll have to see.

Speaker 1

But on the cost basis, on the Daseke operation, we have a lot of work to do with the team there.

Speaker 6

That's great. Thanks for the time and all the best for the winter season. Thank you.

Speaker 1

Thank you, Kennard.

Operator

Our next question comes from the line of Jordan Alliger from Goldman Sachs. Go ahead please.

Speaker 5

Hi, good morning. This is Paul Stoddart on for Jordan Alliger. I guess the question that we have is where can we expect U. S. LTL to go for the remainder of 2024 and how can we expect this for the Q4 just given the previous guidance around 90 for the year?

Speaker 1

Yes. I think Paul is that we'll probably show up Q4 basically an improvement of Q3 and probably closer to a Q2. So we won't break the $90,000,000 EUR in 2024 Q4, 2024.

Speaker 5

Got it. Thanks. And I guess to follow-up on that, when we think about the cost takeout in the U. S. LTL business, I know that service has been a big focus, but there's also been a lot of different initiatives such as getting the financial management systems to the terminal managers, trying to take out improve the different systems, investing in the different assets.

Speaker 5

So I guess are there other things aside from service that you can be doing to take out that cost?

Speaker 1

Well, there's one thing that, I mean we're implementing early 2025 is the master file and the billing because one major problems that we have with our customer is we can't build customer properly, right. And this goes back a long time. So we've been looking at all kinds of system to help us. And finally, we found the right one, which is the one that's being used by one of our peers that we'll be implementing early 2025. So for sure that should improve customer satisfaction because now we should be in a position to build customer properly, okay, number 1.

Speaker 1

And number 2, it should also help us with our bad debt or our revenue adjustment or all this bad experience that we are providing to our customer because we cannot build customer properly. It's unimaginable that in 2024, we still have issues billing customer, but it's a fact, right? So we're changing that. So that's the additionally to what you just said, that's another thing that we're fixing in 2025. Also the other major improvement that we see in 2025 is the fact that our fleet maintenance, okay, we went from 100 shops to about 15 shops now.

Speaker 1

Now we are really in control of warranty claims. We don't have 100 shops that were completely out of control. So we should see some major improvement with also the CapEx that we've done over the last 2 or 3 years in terms of the age of our fleet. Right now we're running a fleet that's about 4 years old compared to when we bought the company it was 7 years old. So based on that and with better management and better software that we've implemented also into 2024, we should see some improvement on fuel and on maintenance.

Speaker 1

So that's something that hopefully we'll be able to accomplish in 2025. I'm really comfortable with the management, the fleet management team that we have now and we should see some major improvements. So it's a lot of small things, okay. But there again, I mean, we have to invest in our team, invest in our talent, okay, because we got to deliver that for our customers and our shareholders.

Speaker 5

Great. Thank you.

Speaker 1

Pleasure.

Operator

Our next question comes from the line of Ken Hoexter from Bank of America. Go ahead please.

Speaker 8

Hi, good morning. This is Adam Ruskowska on Ken Hoexter. All good. I just want to drill in first on the LTL, U. S.

Speaker 8

LTL pricing. So I think you'd previously noted that contract renewals had decelerated to the low single digits. Yes. Is that about still the case in 3Q? Yes.

Speaker 7

Okay. Got

Speaker 8

it. And also just sequentially from a I mean you spoke about the kind of 4Q OR impact sequentially. In the last year there was even into October some impact from a cyber outage. How are you thinking, I guess, just tonnage shipments at these depressed levels? Is it fair to still see a reasonable seasonal step down into 4Q?

Speaker 1

Well, I think Q4 should be like I just said better than 3 and probably something like a line with 2 for our U. S. LTL. But we had a difficult start of October because of all the storm that hit the East Coast. Now that's behind us, okay.

Speaker 1

So I haven't seen too much, okay, but it's still if I look at October, the start of October was a little bit depressed in terms of volume. And the reason being is that we had issues in the Carolinas, we had issues in Georgia, we had some issues in Florida, etcetera, etcetera. So, but that notwithstanding that, I'm going back to the earlier comment is that we will do better in 4 than in 3 on our U. S. LTL in terms of operating ratio and probably closer to 2, right.

Speaker 1

But we won't break the 90 in 2024 like we thought we would, okay. No.

Speaker 8

And I guess, is there a baseline way that you're thinking about potential OR improvement in U. S. LTL next year? Maybe you spoke about some of the focus on service, some of those cost maybe lower hanging fruit impacts. Is it reasonable 200, 150?

Speaker 8

What's the kind of steady run rate once you can get some of these issues under control?

Speaker 1

Yes. I haven't seen the plan of our guys for 2025, but I would be really disappointed if we don't break the 9 EOR in 2025. I mean, with everything that I just said on the fleet cost, on the labor cost per shipment that the guys are working hard on improving our service. And a big help that we're not getting is from our sales team that they don't seem to understand and we've been trying to educate them to get more freight per sub. This would be a tremendous help for our costs for shipment, right?

Speaker 1

So if we can accomplish that to educate those guys to, hey, we get on average 2 shipment per sub. So we have to move to 3, right, on average. So by doing that, I mean immediately it's accretive to your cost. It reduces your cost per shipment like crazy. But the focus has never been there and the mission probably these guys never understood it, but we've been preaching that for a long time and so far we've not been successful.

Speaker 1

So that's a key for us of our success in 2025, okay. And the excuse that we get sometimes from the sales team is well service. Okay guys, we must not provide excuse to our sales team. Okay. That's why we'll be correcting once and for all this mess around our billing and master file of customers in 225 to eliminate another excuse.

Speaker 1

Okay, for not growing the business.

Speaker 9

Thank you. You're welcome.

Operator

Our next question comes from the line of Kevin Chiang from CIBC. Go ahead.

Speaker 10

Hi. Good morning, Elaine. Thanks for taking my question this morning.

Speaker 1

Good morning, Kevin.

Speaker 10

Maybe just on the P and C front, if I look at revenue per shipment, it's moved up, I guess, sequentially 3 quarters in a row now. Waits have been or average weight per shipment has also been trending in the right direction in the past couple of quarters. Any color or any comments on what you're seeing in P and C, just given it feels like the underlying backdrop is still pretty challenging, but it looks like you're seeing some improvement in your own operations?

Speaker 1

Yes. So what happened, Kevin, in our P&C, in the summer of 2023, the management team at P&C made some mistakes, right, because the market was very weak, okay, and we were trying to hold the line and we lost a lot of business, okay, But that is the summer of 2023. So the effect of that shows up in Q1 of 2024, right. So if you look at our Q1 of 2024, a major disappointment. So with new leadership there, okay, with Chris taking over and Michael over, okay, that we moved up in terms of taking care of our P and C with Chris, I mean, we've corrected the situation.

Speaker 1

So from Q2 and in Q3, you see the trend, but the market in Canada is still very, very, very competitive, right? The demand is still not there. So what the guys have been able to do is keep improving the yield or keep to a certain degree, but work very hard on the cost side, right. So that's where we are and we will see some improvement into 25. We are opening up a new center in Edmonton, okay, in early 2025.

Speaker 1

So that should help us reduce our costs with better technologies, etcetera, etcetera. We're going to be looking at Vancouver probably 2026, 2027 doing the same thing in Vancouver to improve our technology there. So the guys are working on the costs. We're having some discussion with some partners of ours to move some freight from let's say one of our peers to another of our peers with better service and better rates. So the guys are really working hard to move freight in a very lean and mean way in terms of cost.

Speaker 1

Our service is great. Our coverage is adequate. So it's just like some mistake that were made in 2023, in the summer of 2023 puts us back a little bit in Q1 and in Q2, but the team is rebuilding the business base and adjusting in a very difficult environment.

Speaker 10

That's great color and very helpful. Maybe just a follow-up question, just on a comment you made earlier around, I guess, the U. S. LTL or T Force Freight sales initiative to get from 2 shipments to 3 shipments. It sounds like that might be that conversion has been a little bit more difficult than you anticipated.

Speaker 10

Just

Speaker 2

do you

Speaker 10

think you need to change like the compensation structure to incentivize the sales force to drive towards that improved density to get that cost per shipment lower? Or is there something else to maybe incentivize them to move towards this sales model that should drive better cost efficiency?

Speaker 1

Yes, that's a very good question Kevin. And we've been working at the compensation of not just the sales team, okay, but the terminal managers and all that. So it's an evolution from the UPS days to where we are today and 2025. I've not seen their plan yet, but for sure, I mean the compensation package of our terminal managers, okay, of our sales people probably will have to be reviewed and updated in 2025 so that people understand clearer what the mission is, right. So if you go back to what you just said about the sales team, they must understand that we need more freight per stop and for them to understand, they understand money, right.

Speaker 1

So you're right, if the compensation is based on getting more freight per stop, hopefully they will start to understand that this is mission critical and this is what you have to do guys. Not open up new account, let's try to get more business with the existing account that we already deal with. They know us, okay. They know our strength. They know our weakness.

Speaker 1

They accept that because they do business with us. So let's try to grow with existing customer and not try to chase customer all over the place. And that is one way that's going to help the operation to reduce our costs. But there again, also we have to look at our terminal managers incentive program so that they understand that we must not miss pickup, because a missed pickup is you miss the revenue. The pickup is the generation of the revenue.

Speaker 1

If you miss the pickup, you don't get the revenue. So you need the revenue, don't miss pickup, right? So again, it's an evolution because where we started 3 years ago and where we are going to be in 2025, our incentive program, our bonuses will be way more aligned, okay, to what we want these guys to perform on versus 2024 or 2023 because this is an evolution. When you talk to a terminal manager that used to be his bonus used to be based on global UPS and you say, well, we have to change that based on your terminal now, it's difficult to do. So you need some kind of an evolution, right?

Speaker 1

So step 1, you say, well, you guys are not part of the big brown machine now, okay? You're part of PFI. Well, step 1, okay, this is what we're going to do. Step 2, and that takes time to adjust.

Speaker 10

That's very helpful. Thank you very much, Elaine. Best of luck as you exit this year.

Speaker 1

Thank you. We need luck.

Operator

Thank you. Our next question comes from the line of Jason Seidl from TD Cowen. Go ahead please.

Speaker 11

Thank you, Robert. Good morning, Elaine.

Speaker 1

Good morning, Jason.

Speaker 11

I wanted to talk a little bit about the service on the U. S. LTL side. You said obviously you're disappointed in the little bit of a step down. I was wondering what you guys are doing to make corrections to that and your commentary on sort of low single digit price increases.

Speaker 11

Does that assume that you get improvement in the service or would improvement in your service provide potential upside to that number?

Speaker 1

No, I think that the improvement of our service will provide us down the road some potential improvement on the quality of our rates, the quality of our pricing. What are we doing to improve service? Number 1, okay, is as I said, we are moving as much as we can more freight from rail to road to improve the service, because we know that if you give the freight, your line haul freight to a 3rd party, you're dependent on the service of that 3rd party, right? So my best peers don't give a lot of freight to the rail because they want to provide good service to their customers. So more freight we give to the rail, the more dependent on the service of the rail, okay, versus your customer and the service that you provide to the customer.

Speaker 1

So we've started, okay, in 2024 to do that, okay. But we still give the rail more than 30% of our freight today. So it's still too much. So the goal is to bring that down closer to 20%. So some of our peers are around 20%.

Speaker 1

Some of our peers are close to 0%, right? So we got to go step by step. So that's number 1. Number 2, it's a culture of not less effere kind of thing, right. So guys, you cannot miss pickup.

Speaker 1

So we started to monitor that, I would say like 8 months ago. But we still miss about 400 pickup a day. So we have to change that culture of, yes, well, it's kind of normal. We were overwhelmed with a customer. So we've missed 50 pickups today.

Speaker 1

Well, no, you have to adjust ourselves. So what are we going to do about that? Well, because you're a union shop, you cannot sub call a 3rd party. Well, maybe we can. Maybe we can have this discussion and change this mentality of abandoning the customer, okay, because you were overwhelmed by another customer in terms of volume.

Speaker 1

So you could not service 2 or 3 customers. So that's not good for your service image, right? So we have to work with our guys to have them understand that this is not acceptable. You cannot miss pickup. This is a no no, right?

Speaker 1

If you look at our Canadian operation, okay, we don't miss pickup in Canada. And we have a union environment too. So I mean, why would why are we missing so many? Because it's not part of our emergency culture that no, no, no, we cannot miss pickup. So we but until 8 months ago, nobody was monitoring that.

Speaker 1

So now we monitor it. So now we know, okay, who's missing the pickup. So that's another area where you lose the revenue and you have customers that don't like you, right, because you didn't show up, right. So we have to change that because this is something that's not helping us. When you look at Massimo report, some people are saying, well, these guys I give them a pickup they don't show up.

Speaker 1

And we have all the excuse in the world. Well, we play a no excuse game. So we got to change that culture. We have to show up and be there to pick up the freight because that's the revenue generation, right? So these are all things that down the road will help us on our cost basis, getting more freight per sub.

Speaker 1

This is you don't have to be a rocket scientist to understand that. This is what we're trying to say to our sales guy. Guys, if you have 2 shipments, you divide the cost of that pickup by 2. If you have 3, you divide by 3. So you become more competitive, okay, by doing that versus your peers.

Speaker 1

And more competitive you are with better service and more freight you will get down the road. So it's like an education, a training, a culture that has to change at our T Force rate. The guys are working hard, but we got to walk the talk and like we always said, the proof is in the pudding. And right now, okay, I mean, we still have issues, right, to fix.

Speaker 11

I appreciate the explanation. Wanted to also key in on you called out Truckload continuing to steal some LTL freight. I guess 2 things. 1, did you see a sequential increase in that? And 2, when would you expect that to improve?

Speaker 11

Is this like a back half of the 'twenty five event?

Speaker 1

The minute the truckload guys got busier, I mean, so when is this going to happen? I don't know. Okay, hopefully in 2025, but we know. I mean those guys are not busy. I mean, we haven't seen any peers so far except one.

Speaker 1

And those guys are not really big into the day to day truckload world, but we know the market is really weak. And now for sure, I mean this will disappear once these guys become busy. Now when is this going to happen? Maybe late 2025, early 2025, I don't think so, summer 2025, we'll have to see. But don't forget that interest rates have come down a bit and they will come down more and this should improve, okay, the customer disposable income for customers because inflation is less today than it was 6 months ago.

Speaker 1

So that helps the disposable income, interest rate going down, again that helps disposable income, more disposable income than the consumer can spend more, he spends more, it helps us.

Speaker 11

Always appreciate the time, Lane. Thank you.

Speaker 1

Pleasure, Jason.

Operator

Our next question comes from the line of Daniel Imbro from Stephens. Go ahead please.

Speaker 12

Yes. Hey, good morning, Lane. Thanks for

Speaker 6

taking the questions. Good morning.

Speaker 12

I wanted to continue on the U. S. LTL pricing discussion. You mentioned that obviously one of the headwinds was service stepping back, but also that some of the competitors had added capacity. Can you maybe rank order which of those sequentially worsened through the quarter when you look at maybe the step down from the first half mid singles to low singles?

Speaker 12

And then just curious as you're talking to customers and you're making these improvements to service, do you think your pricing will have to step further down to get customers to try and come back to T Force again? Or how are those customer conversations going as you navigate the cost for service changes?

Speaker 1

Yes. So I think that you need the service. This is step 1 to try to convince a customer, right? So you can attract the customer with rates, but if the service is poor, I mean the guy is going to run and he's going to go somewhere else because yes, service is very important. Price is very important, number 1, but service is also key, right?

Speaker 1

So when you're trying to get more freight, the guy will say, yes, how's your service? Well, my service is great. Okay, I'll give you a chance. And then if you don't provide the right service, then he's going to walk. And you're going to have lots of churn.

Speaker 1

So that's one thing that at T Force rate we have, right. We have too much churn. So customer try us and we fail a bit, okay, the guy goes away. So by improving service, okay, you reduce the churn. By reducing the churn, you improve your volume, right.

Speaker 1

So this has been key to us. In terms of our peers, the fact that some of our peers are invested heavily in real estate. I mean, we haven't seen anything so far. But I'm just saying that the market is really soft. So people are some people are trying to chase rate and grow the volume.

Speaker 1

Our focus us is not to chase freight is we have to fix our service first and reduce our costs and then reduce the churn so that we start growing organically because if you get 3,000 shipments more a day, but you lose 3,000 because of the churn, well you're back to 0. So you got to fix the service so that you can reduce the churn of customer.

Speaker 12

That's helpful. And then as a follow-up, just on the balance sheet, you mentioned you're paying down debt like crazy in the near term, but you do need to scale up, it sounds like to kind of move forward with this spin. So curious how your appetite is on M and A at this point and how active the environment is out there given we're 2 years into a down cycle? Are you seeing more sellers come to market? How are multiples changing on the M and A side?

Speaker 12

Just curious what you're seeing out there when you're talking to potential targets?

Speaker 1

Yes. So, yes, reducing the debt for us is key, right, because our debt is where leverage is about 2 point something, okay. We want to be under 2 by year end, okay. So that's the focus of ours and also to get ready for something of size down the road in 2025 into 2026 maybe. In terms of M and A, I mean, we've always been very patient.

Speaker 1

We have a saying with NTFI, you make your money in the buying, never on the selling. So for sure, if you look at our last trade, those are really accretive to us. The Daseke one will be very accretive to us down the road once we do all the adjustment that needs to be done over there. And in 2025 notwithstanding anything major by year end or into '26, we'll do another $200,000,000 to $300,000,000 of investment into some targets. Our pipeline is solid.

Speaker 1

We have lots of opportunities. It's just that we have to be patient. If you go back to 'twenty four, we walked away of one deal because we couldn't agree on the valuation. And that's it. I mean, we're very, very patient.

Speaker 1

And for sure the environment because the freight environment has been so weak, the environment for M and A is good for us, right? But again, because of the DESE transaction, step 1 for us right now is to reduce the debt by year end to go with a leverage on the 2, keep reducing the debt if something good shows up in Q1 and in Q2 in our, let's say, logistics sector, maybe some tuck ins in Canada on the specialty truckload where we're so strong. Yes, we'll continue to do that and get ready for something of size hopefully that we could have something good for our shoulders by year end 2025 into 2016.

Speaker 12

Great. Appreciate the color and best of luck.

Speaker 7

Thank you.

Operator

Our next question comes from the line of Brian Ossenbeck from JPMorgan. Go ahead please.

Speaker 12

Hey, good morning, Elaine.

Speaker 9

Thanks for taking the question. Good morning, Brian. So I just wanted to understand a little bit more of the what you see in the Q4 in particular, I think the guidance for flat earnings would imply decent sequential step up into 4Q and historically it's sort of been flat to down a little bit. So maybe you can walk through some of the assumptions or maybe there's some M and A or something else in there that would make that a little bit counter seasonal to get a nice pickup here into the Q4?

Speaker 1

Well, it's because Brian, our Q3 was not good, right? Our Q3, if you look at our specialty truckload, I mean, we did a better job in 2 than in 3. And the reason being is that in the U. S, our specialty truckload operation was affected badly with some major accident from the Daseke team, where this culture of having a student driver, okay, created a mess in our accidents level. So this has been corrected.

Speaker 1

I mean, we don't really like students driving our truck and getting into an accident that's going to cost us a fortune. So my specialty truckload should have done a much better job in Q3 and they will do a better job in Q4. So if you look at my Q2, I was an $83,000,000 of OE and in Q3, I'm down to $70,000,000 That's not normal. That's not normal. And that came from our U.

Speaker 1

S. Operation from Daseke and also a little bit of TA dedicated. I don't see that coming into Q4. So we should go back to closer to a Q2 number in our truckload. The same story is true logistics will probably be the same as Q3.

Speaker 1

Why is that? Because GHT is starting to suffer from our customers, PACCAR and Freightliners reduce construction, right, because the market is weak. So JHT will perform not as good as the 1st 3 quarters of the year. So logistics will be down a bit in Q4 versus Q3 and Q2. But if you look Q2, Q3, we were stable at about $50,000,000 of OE on logistics, right.

Speaker 1

So but we'll be down a bit into Q4, but we believe our LTL, U. S. LTL and Canadian LTL and Parcel will do better in Q4 versus Q3. So we did about close to $100,000,000 in Q3 and we did about $110,000,000 in Q2. So I think that will be closer to 2 than to 3 in Q4.

Speaker 1

So all in all, you should see us improve Q4 versus Q3 being closer to 2.

Speaker 9

Okay, understood. Thanks for that. And then just one follow-up, you can talk about capacity additions and maybe some additional pricing pressure in U. S. LTL, but we've got the remainder of the yellow assets coming up for a bit.

Speaker 9

I know in the past you said you wanted to be bigger player in the market, but I don't know if that necessarily means here in the near term. So maybe give an update in terms of the footprint for T Force Freight and if you're looking at the latest round of auctions to be a potential area where you could pick up a pick up a little bit more and optimize a little bit better? Thanks.

Speaker 1

Yes. So Brian, I mean in that auction, we are bidding on one site, very small site, very small transaction, less than $1,000,000 okay. And that would be replacing a site that we are tenant, okay. So basically nothing of importance to us. We keep adjusting, okay, our portfolio.

Speaker 1

So during the course of Q3, we sold one of our terminal to one of our peers and we sold another terminal that we have in San Diego in California to a kind of developer. So we keep adjusting in terms of number of doors that we have, trying to get rid of leased terminals and buying terminals. So that's where the yellow one where we put in the bid. But we have the terminal capacity to do 40,000 shipments a day and we do only 22. So I mean and it's going to take us probably a long time unless we do some M and A on the union side, which there's not that many, okay, to do anything with the real estate or we keep adjusting, right.

Speaker 1

So that is always been the plan is to grow organically from the 22,000 shipments a day slowly into the 23, 24, but that basis is always on service and trying to grow with existing customer because they know you, right. So that's where we're at. So we're not going to be very active on the auction block with YRC. It's only one terminal, very small terminal that we're in there for. And the rest is we've got always way too much real estate that we are adjusting whenever possible.

Speaker 9

Okay. Appreciate it Lane. Thanks for the time.

Speaker 1

Pleasure, Brian.

Operator

Our next question comes from the line of Ariel Rosa from Citigroup. Go ahead, please.

Speaker 13

Hi, great. Thanks. This is Ben Moore on for Ariel Rosa at Citi. Hey, Elon. Thanks for taking our question.

Speaker 13

You just mentioned a few minutes ago, you'd be disappointed if you don't break 90 OR in 25. At your 2Q earnings call, you were saying targeting under $90,000,000 for the first half of twenty twenty five. Do you think maybe just to kind of fine tune this, the under $90,000,000 target is now more like second half of twenty twenty five? Or do you think the under ninety could still be a target for first half of twenty twenty five?

Speaker 1

Yes, it's a very good question. Like I said, I've not seen the plan, okay, for twenty twenty five from that team over there at T Force rate. But what I would say is this is that we have to break this glass ceiling of 20 OR. So to me it would be great if we could do that in the 1st 6 months, but I don't know. I don't know.

Speaker 1

But I would be very concerned if we don't do that at least on the 2nd part of 'twenty five. With everything that we're trying to do, accomplish, improve service, trying to educate the sales team like I said earlier in trying to get more shipment per stop etcetera, etcetera, I would be very disappointed. And for sure, I mean it all relates to beefing up the team, improving the talent, the management talent because we have a team in Canada that is second to none, okay. So we have the A team in Canada. So in the U.

Speaker 1

S. We don't have the A team, right. So we have to build an A team and that's what we're trying to do is improve what we've got continuously provide them with better information, but if a manager sits on his hands and you give him all kinds of information and he does nothing with it, then you have the wrong guy, right? So and it's an ongoing process that's going on right now. The mistake I made guys is when we bought UPS Freight, I thought that we could bring this company within 5 years into an 85 OR which is normal.

Speaker 1

I mean we do less than 80 in Canada in a union environment. My mistake was it's not that we're not going to get to 85. It's just it's going to take us more time because our team over there, the talent that we have, the tools that we have, the financial information, the focus was not as good as I thought it would have been. So that's why it's going to take us more time.

Speaker 13

Great, great. Appreciate that color. Maybe as a follow-up, you've been asked a lot about service and service improvement on this call. Maybe just to ask slightly differently, it looks like your customers' perception of your service level is roughly where it was this year and last year, roughly the same, still sort of unfortunately at the lower range compared to your other public LTLs where some of them have actually improved from 2024 23 into 2024. Why do you think after all the work, very hard work that you and your team has been doing, why hasn't that shown an improvement from 2023 to 2024?

Speaker 13

And do you think we should see some dramatic improvement on any of those things, damage, the shortage, the on time pickups deliveries from 2024 to 2025?

Speaker 1

Yes. Well, like I said earlier on the call, I mean, it's a disappointment to me when you look at the claims where we were heading in the right direction and then path, I mean over the last 9 months, a year, now our claims cost is going in the wrong direction. So guys, let's refocus on that. So that does not help us, okay, with the evaluation that our customers are doing of us in terms of service. Claim is a problem, right?

Speaker 1

Because when you break the guy's stuff, he doesn't like you, right? So that's number 1, where we have not improved. So this is why we are at the bottom of the pack, number 1. Number 2, if you don't show up for pickup, nobody likes that because then you're stuck with the fridge on your dock, right? And then you have to either call someone else or hopefully T Force rate shows up tomorrow.

Speaker 1

Customer don't like that, right? So this is under our control and we have to do a much better job at it. So this is why we have not improved, okay. And this is why like I was saying earlier, there's an evolution in the bonus program that we have with our sales team and our management team. So it shows that the program that we have right now in 2024 is not good, because we're not getting the result that we're supposed to get, right.

Speaker 1

So we will have to improve the bonus plan so that these guys' bonuses aligned to what we want them to perform. So being improved service, don't break the stuff, don't lose it, show off for pickup, etcetera, etcetera. And then the guys will have to take that seriously because then the incentive, the bonus is gone, right? But that's an evolution because where we were with the bonus system when we bought the company was just, I mean, unacceptable, right? So it's been an evolution, but I mean this report, this MasTU report is a major disappointment for me and I'm going to be with the team tomorrow as a matter of fact.

Speaker 1

And for sure, we'll be talking about that. Guys, I mean, we're still at the bottom of the pack. We have not improved.

Speaker 13

Great. Appreciate the time as always, Alon. Pleasure.

Operator

Our next question comes from the line of Cameron Doerstin from National Bank Financial. Go ahead please.

Speaker 9

Yes, thanks. Good morning.

Speaker 14

Just a couple of quick ones for me. I wanted to ask you about, I guess, the free cash flow. Maybe you've sort of provided some updates here on your kind of EPS outlook for 2024. Is there any change on the free cash flow you still think you can be within the original range that you're expecting?

Speaker 1

Well, free cash flow, I mean, it's probably going to be the same as last year. Last year, we did about $775,000,000 So I think that the range that is reasonable is between $750,000,000 to 800 $1,000,000 of free cash for 2024 with CapEx of 300,000,000 net CapEx of 300,000,000

Speaker 9

Okay, perfect.

Speaker 14

And I know it's still early in your planning process here, but I mean, I guess, how are you thinking about, I guess, the CapEx requirement for 2025? I mean, you've invested quite a bit in making your fleet younger. Should we see some easing of spending on CapEx in 2025?

Speaker 1

Yes, yes. You'll see some easing of CapEx. Number one reason is because the life of a truck has been extended because the market is so weak that we don't run as many miles. So let's say in a normal environment, a truckload truck is good for 4 years and now it's going to be more like 4.5 years. So that delays a little bit the CapEx in that sense.

Speaker 1

So probably you should see 2025 CapEx same business more like 250 instead of 300.

Speaker 14

Okay. That's perfect. I'll it's been long call, so I'll leave it there. Thanks very much for the time.

Speaker 1

Thank you, Cam.

Operator

Our next question comes from the line of Benoit Poirier from Desjardins Capital Markets. Go ahead, please.

Speaker 15

Yes. Good morning, Alain.

Speaker 1

Good morning, by the way.

Speaker 15

Yes. There was some great comments about we read a lot about heavier freight that was earlier moving toward LTL that has moved to TL. I'm just and you mentioned some points about that the fact that we need to see eventually a recovery of the TL. What are the first things the freight industry needs to see in order to get a more normal freight environment. Is kind of bankruptcy the first thing indicator that you look at that could help TL and eventually LTL?

Speaker 1

No, I don't think so. Bankruptcy, I mean, we saw that in Canada with Pride. A lot of people thought that Pride in Canada would disappear, but they have not disappeared, right? Because the banks kick the can down the road, right? So, no bankruptcy, it's minimal.

Speaker 1

It's really the freight will start moving once the consumer spends more. This is very simple. North American economy is based on consumer, right? So the consumer right now is disposable income is not where it was a few years ago. So I mean with lower interest rates, lower inflation, improve salaries, okay, that is going on right now, down the road he will spend more.

Speaker 1

And hopefully he spends less on trips and flying all over the place like he did in 2023, 2024 and spends more at home. So that will help freight, freight will help us, right?

Speaker 15

Yes. No, that's great comment. And for the follow-up question, you mentioned some color about M and A size close to $4,000,000,000 or $5,000,000,000 towards the end of 2025, early 2026. I was wondering if you could share more details about segments that you would tap. Is it more related to LTL or could you do something in specialized TL?

Speaker 15

And are there any comfort level in terms of leverage and milestone you would like to achieve before pulling the trigger on something more sizable?

Speaker 1

Yes. So our preferred M and A target is in the U. S, number 1. And number 2, it's always been, like I said, LTL, we have to do more. I mean, we're a small player in LTL in the U.

Speaker 1

S. We're the dominant player in Canada. So we will probably never be the dominant player in the U. S, but we have to be more of like maybe a number 3 or number 4, another number 6 or number 7, that 22,000 shipments a day, we're too small. So for sure LTL down the road and logistics, I mean, us, we love logistics because the return on invested capital is huge normally.

Speaker 1

Although we don't like logistics making 2 points, I mean we're not in that league, we're not in that business. But if you look at our logistics, we're running 90 OR, 88 OR something like that. So that's really interesting. So logistics that makes money, but not logistics that makes 2 points. Logistics that makes money and that we can grow with, I mean that's all we love that.

Speaker 1

If we could find let's say an LTL that's asset light, okay, down the road, that would be fantastic because if you look at our LTL in Canada because of our intermodal, the Bytran, the Clark and all these guys, I mean, we run a very asset light model into our Canadian LTL sector, right? So if we can find a nice business in the U. S. That could be asset light, as an example, that would be interesting for us, right? Because then you don't have to worry that, oh yes, but Alain you run a union shop and then you buy a non union shop and the union will try to unionize the non union shop.

Speaker 1

I mean that's always the concern, but if it's asset light that concern does not exist, right? Although to me, we run union shops and non union shops in Canada and the union does not unionize the non union shop. But in the U. S, it's a big concern or if you buy, let's say, a non union shop or the union will try to unionize it. I mean, we run Hercules right now.

Speaker 1

It's small. It's only $100,000,000 in revenue and we just bought it a few months ago and it's still non union, right. So but asset light, non union probably would be a good target of ours down the road. We'll see.

Speaker 15

Okay. And just in terms of comfort level for the leverage, Alain, any thoughts there?

Speaker 1

Leverage is going to be under in the U. S, we have to keep the leverage on the 3. Okay. So this is why I said $3,000,000,000 $4,000,000,000 $5,000,000,000 maybe we could do that without paper. If we have to go above that, then we have to issue paper, which we don't like to do, right.

Speaker 1

So we don't like to do. In terms of leverage, we could go all the way up to 3. Why is that? Because we could delever quite fast. If you just look at this DESKIE acquisition that we bought in April, we took on $500,000,000 of debt additional to the debt that we had and you'll see us down $500,000,000 by year end.

Speaker 15

That's great color. Thank you very much for the time, Alex. Pleasure, Benoit.

Operator

Our next question comes from the line of Bruce Chan from Stifel. Go ahead, please. Again, our next question comes from the line of Bruce Chan from Stifel. Go ahead please.

Speaker 5

Hi, can you hear me?

Speaker 2

Yes.

Speaker 16

Okay, great. Hi, Alain. This is Andrew Cox on for Bruce. You mentioned some impact expecting in the Q1 from the relief efforts from the hurricane, especially given the Daseke exposure. We were just kind of wondering if there if you're expecting anything here in the Q4 as well or is that more of a 1Q event for you all?

Speaker 16

Thank you.

Speaker 1

Yes, very good question. So far what we know is that right now it's cleanup phase that these guys are going through right now. So it's more like the waste guys that are taking are busy with the situation there. So we don't know the cleanup phase. Is that going to be a week?

Speaker 1

Is that going to be a month? Okay. So once the cleanup phase is done, then they start reinvesting, rebuilding, etcetera, etcetera. So this is why maybe we'll see some benefit in Q4, but who knows, we don't know. But one thing is for sure, if it's not Q4, it's going to be Q1.

Speaker 16

Okay. That makes sense, Helane. Thank you. And then just as a follow-up, I wanted to get your thoughts on the impact of a potential FedEx freight spend given your experience with the big brown machine in UPS. Do you think the spend would be a bigger hurdle, smaller hurdle or comparable from an unbundling standpoint?

Speaker 16

And over the course of time, do you expect this spend to be a net positive or a net negative

Speaker 5

for the group? Thank you.

Speaker 1

I think it's going to be a net positive, but it's not easy to do. I mean, don't forget, to do the spin off of a division like UPS has done with us, it's not a very easy process. We've done it, us. We know how to do it, okay, but it's not easy to do. I could tell you that.

Speaker 1

So So I think it's good for the FedEx shareholders, okay, depends on the valuation of the freight division, but I think it's a good move. I think it makes a lot of sense. I think it's also going to be good for the LTL industry.

Speaker 16

All right. Thanks, Alain. That's all I had.

Speaker 1

Thank you.

Operator

Our next question comes from the line of Ken Hoexter from Bank of America. Go ahead please.

Speaker 7

Hey, Elena. Good morning. I guess almost good afternoon. Just a couple of clarifications on some numbers, just some confusion. And I know you've kind of hit this a couple of times, but just when you answered Ravi at the beginning, you said flat earnings year over year and then you kind of clarified a couple of things throughout the call.

Speaker 7

Were you talking about a normalized $6.34 or Bloomberg has you at $6.18 year over year? Just trying to get clarity on the 4th quarter target. I know you said it was more like 2nd quarter, which was I think $1.71 So just trying to clarify that for some investors.

Speaker 1

Yes. Right now what we're saying Ken is that probably is going to be more of the same. So that's for the year. So I don't remember what we did last year. I think it was $6 something $6.18 $6.20 okay.

Speaker 1

So I think that's where we're going to end up the year.

Speaker 7

Okay. Because that would be a significantly weaker, I guess to clarify that that would be a weaker 4th quarter than I think I guess, the normalized $634,000,000 that's floating out there as well. Okay. So you're comparing against the $618,000,000

Speaker 1

Yes.

Speaker 7

And would you be able to state then to clarify what your first three quarters has been just because there's a lot of normalization going on?

Speaker 1

You know what, Ken, I don't have this number. I'll have to get back to you on that or David will have to get back to you on that. But overall, okay, if you take what we have, I think at the end of Q3, just hold on for a second, we're at $4.55 so Yes, dollars 4.55. So $4.55 plus 1 point $6.

Speaker 7

About $6.3. Yes. Yes.

Speaker 1

Which is basically what we've done in Q3. But I think that we'll do a little bit better in 4 than in 3 like I was just saying about our specialty truckload, a little bit less on the logistics, a little bit better on the LTL and P and C. But to be conservative, what we're saying is that, okay, let's say that 23 and 24 are the same like 6.18, 6.20.

Speaker 7

Okay, perfect. And then when you talked about the kind of 91 ish OR for the Q4, I guess you're looking at improvement sequentially for the U. S. LTL. Can you talk about what gets you there?

Speaker 7

What gives you the confidence? I mean it sounded like you're concerned and should we be concerned with where pricing is headed? It sounds like the renewals are low single digits. So I'm trying to mesh the kind of pricing concerns, service concerns with how you show improvement?

Speaker 1

No. I think it's not a market, it's not the market. The problem that we have that we have to improve versus Q3 is our cost. I mean, we had way too much cost in our claim. If you look at our claim in Q3 at 0.8% of revenue, I mean, this is completely unacceptable, okay?

Speaker 1

And I think that we're going to do a better job in Q4. That's number 1. Number 2, again, our fleet costs are improving in Q3, but for sure they will keep improving on Q4. So labor cost per shipment, we took a little bit of a setback in the 1st 2 weeks of October, but September, okay, our labor cost per shipment was the best so far in the year. So we did really, really well in September, but then the 1st 2 weeks of October, it's a little bit a step behind, a step back.

Speaker 1

But I think that we're on the right track in terms of doing a better job on our labor cost per shipment, Q4 versus Q3, because we were heading in the right direction except the 1st 2 weeks of October because of all these storms. That's the excuse that we have right now. But I'm looking at the 3rd week of October so far and we're back on track to where we should be. So I think that we'll do a better job on the LTL OE in Q4 versus Q3. Okay.

Speaker 1

Same volume. All right.

Speaker 2

That's a great one.

Speaker 7

Same volume. That's a great one. So it's really focusing on those costs and improving performance. Yes. Okay.

Speaker 1

Yes.

Speaker 7

Thanks for the clarification. Appreciate it, Lee.

Speaker 1

Pleasure, Ken.

Operator

Thank you. There are no further questions at this time. I'd now like to turn the call back over to Mr. Bitarz for any final closing remarks.

Speaker 1

Thank you. So well, thank you very much operator and thanks everyone for being on this morning's call and for your interest in TFI International. As always, if you have any follow ups, please don't hesitate to reach out. Enjoy the day and we look forward to speaking again on our next quarterly call. So thank you.

Speaker 1

All the best.

Operator

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line.

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Key Takeaways

  • In Q3, TFI generated strong free cash flow of $273 million (up 37% YoY), using it to opportunistically pay down $130 million of debt and maintain a conservative balance sheet.
  • Revenue before fuel surcharge rose 17% YoY to $1.9 billion, and operating income edged up to $203 million, although operating margin narrowed to 10.7% from 12.3% a year earlier.
  • Logistics and truckload segments performed well, while U.S. LTL faced higher costs and service challenges, resulting in an operating ratio of ~92% and prompting a renewed focus on service and cost efficiencies.
  • The board approved a 13% increase in the quarterly dividend to $0.45 per share and renewed the NCIB share repurchase program for another year.
  • TFI expects full-year 2024 results to be in line with 2023, with continued emphasis on strategic M&A, investing in the business and returning excess capital to shareholders.
AI Generated. May Contain Errors.
Earnings Conference Call
TFI International Q3 2024
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