TFI International Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to TFI International's third quarter 2020 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 in order to get to as many callers as possible. Further instructions for answering the queue will be provided at that time. Before we turn the call over to management, please be advised that this conference call will contain several statements that are forward-looking in nature and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. All dollar amounts are in Canadian dollars. Lastly, I would like to remind everyone that this conference call is being recorded on Friday, October 23, 2020. I would now like to turn the call over to Alain Delors, Chairman, President, and Chief Executive Officer of TFI International. Please go ahead.

Well, thank you very much for the introduction, operator, and I appreciate everyone joining us for this morning's call. Yesterday, after market close, we released our third quarter results. If you need a copy of the press release, please visit our website. TFI International had a very strong third quarter. As I mentioned on our last call, we had seen several positive developments that bodes well for our performance going forward. These played out as expected during the quarter and our strong financial and operation results came despite of the ongoing pandemic and despite our continued focus on the health and well-being of our employees and customers. As you frequently hear me mention, a hallmark of TFI International's operating philosophy is our relentless focus on the fundamentals of the business, consistently getting the details right. We constantly seek opportunities to enhance efficiencies and increase returns on invested capital. We also look to optimize our free cash flow and our earnings per share, adding to our strong financial profile. This position of strength then allows us to strategically expand our business with a long-term goal of creating shareholder value, and this includes returning excess capital to shareholders whenever possible. During years such as this, when macro uncertainty is elevated, we believe that maintaining our culture and adhering to these principles is even more important. You see it in our quarterly results that I'll next walk you through, and you also see it in our continued identification of strategic accretive acquisitions opportunities to expand and enhance our platform. During the third quarter, we completed four acquisitions, and we agreed to acquire an additional business expected to close during the fourth quarter. In addition, subsequent to September, we completed two additional acquisitions In total, that's seven well-timed and highly strategic acquisitions since our last call. I won't walk you through the compelling rationale for each, but I do invite you to read more in our recent press releases as we extend our long and successful track record in this regard. Turning now to TFI International's third quarter results, let's start with our higher level performance. And as a reminder, these Results are despite the continued absorption of COVID-19-related costs and our continued focus on health and safety. Our total revenue of $1.2 billion was down 4% compared to the prior year's third quarter. This was a significant improvement over the second quarter's negative 17% year-over-year growth. More importantly, our operating income increased 18% to $156 million last And our adjusted EPS on a diluted basis expanded 20% to $1.25, up from $1.04 a year earlier. Our net cash from continuing operation activities was a healthy $190 million, and that was up slightly over the prior year. We view cash flow as strategically important as it allows us to invest in our business and seek expansion opportunities. Overall, we were very pleased with our performance. More specifically, let's look at how each of our four business segments perform, beginning with our P&C, Package and Courier. Our Package and Courier represents 14% of total segment revenue and saw a 5% increase in revenue before fuel surcharge versus the prior year. Operating income of $28.5 million was up 1% as the segment operating margin of 17.5 compares to the 18.2 the prior year. These year-over-year P&C results were much improved over our second quarter performance. Throughout the third quarter, we saw a pickup in B2C activity, and even B2B, which has slowed significantly due to the effect of COVID-19, improved as the quarter progressed. Going forward, we believe our P&C segment is emerging even stronger from the pandemic with a more balanced mix of B2C and B2B demand that we are well prepared to accommodate. Moving to LTL, this segment represents 16% of our total segment revenue and generated revenue before fuel surcharge of $177 million down from $205 million the prior year. That rate of Year-over-year decline is much improved, and in fact, half of that was during the prior quarter, reflecting a rebound in demand. Importantly, our operating income grew 36% to $35 million, and our operating margin expanded more than 700 basis points to 19.7. This 36% year-over-year growth in operating income was a result of not only the Canadian wage subsidy of $8 million, but our significant success driving operating leverage, for example, by merging our Canadian Freightways and TST Overland Express operating companies in May. These ongoing efficiencies significantly benefited our margin and more than offset the weaker demand environment. Next, turning to truckload, this is our largest segment representing 47% of our total revenue. Revenue before fuel surcharge declined 2% year-over-year, which was a sharp rebound from the 17% decline in the prior quarter. Truckload operating income declined just slightly to 75 million from 76 million in the year earlier quarter, and our operating margin was up slightly. It should also be noted that we had 6.4 million of higher gain on sales of real estate in the year-ago quarter. Within this segment, Our U.S. truckload operation grew revenue 2.5% over the prior year period, while our Canadian and specialized businesses each saw a single-digit percentage decrease in revenue, which led to a Canadian wage subsidy of $11 million. Rounding out our segment discussion, logistics is our second largest segment at 22% of total revenue. We saw year-over-year growth of 9% in revenue before fuel surcharge. Our operating income more than doubled in the quarter versus a year earlier at $30 million compared to $14 million the prior year. Our operating margin came at 10.7, well above the year-ago 5.4% as our margin improvement initiatives have produced solid improvement on the bottom line. E-commerce and same-day package delivery demand remains a powerful organic growth driver for us. Turning to our balance sheet, it remains a meaningful source of strength for us, allowing us to execute on our business plan. We further strengthened our financial profile in August with a share offering that provided growth proceeds to TFI of approximately $290 million Canadian. Our strong liquidity benefited from our strong cash from operations during the quarter. All in, we ended September with our long-term debt down 27% since the start of the year and a total of $1.5 billion of liquidity. Given our continued strong operating performance and very solid financial position, I'm pleased to be announcing today that our Board of Directors has announced a sizable 12% increase in our next quarterly dividend payable in January. In addition, I'm pleased to report that as business conditions have improved and TFI International has continued to perform, during the quarter we reinstated full five days work week for 486 employees and we re-hired 298 employees full-time who had been furloughed. Lastly, wrapping up my prepared comments today, I want to update you our full outlook for 2020. We now expect diluted earnings per share to be a minimum of $4, up from our previous range of $340 to $375. And we expect our free cash flow, which is a non-RFRS measure, to be a minimum of 600 million, up from 425 to 460 million previously. On summary, as I mentioned at the start of the call, at TFI International we focus on the fundamentals of the business and optimizing our capital allocation regardless of constantly changing macro conditions. Specifically, we invest in a highly disciplined manner where we see the best risk adjusted return while also paying our quarterly dividend. On a day-to-day basis, our entire team looks to drive efficiencies and produce not just growth, but profitable growth. Our ultimate aim is to create and unlock shareholder value, returning excess capital to shareholders whenever possible. I want to thank the entire team at TFI for generating the results I just outlined and for their continued dedication to this unprecedented year. And with that, operator, if you could open the lines so we can begin the Q&A session.

Thank you, ladies and gentlemen. To ask a question, you will need to press star 1 on your telephone keypad. To retry a question, please press the pound key. Callers will be limited to one question and a follow-up in order to get to as many callers as possible. Again, that is star one plus a question. Please vote while we compile the questions. And your first question comes from the line of Ravi Shankar with Morgan Stanley. Please go ahead.