TFI International Inc.

Good morning ladies and gentlemen. Thank you for standing by. Welcome to TFI International's first quarter 2021 results conference call. At this time our 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 one follow-up in order to keep to as many callers as possible. Further instructions for entering 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. Also as a reminder TFI changed its presentation currency at year end and all dollar amounts are in U.S. dollars. Lastly I would like to remind everyone that this conference call will be recorded on Wednesday April 28th 2021. I will now turn the conference over to Alan Bedard chairman president and chief executive officer of TFI International. Please go ahead sir.

Well thank you very much for the introduction operator and I'm pleased to welcome everyone to this morning's call yesterday. After the market closed we released our first 2021 results, first quarter 2021 results. So TFI International had an exceptionally strong quarter to begin the new year. A quarter that marked the one year anniversary of our listing on the New York stock exchange. During the height of the pandemic we made the right moves to preserve our long-term growth opportunities and we are beginning to see the benefits. We maintain a relentless focus on fundamentals of the business and on getting the details right. We look for opportunities to enhance efficiencies as we do in good times and bad. And as always we look to increase returns on invested capital optimize our free cash flow and grow our earnings per share. This in turns place us in a position of strength with a strong financial profile that allows us to strategically expand our business with the ultimate goal of creating long-term shareholder value and returning excess capital to shareholders whenever possible. The identification of strategic and creative acquisition opportunities is another important part of our strategy. In a highly disciplined manner we have continues to selectively seek acquisition candidates that are both accretive and strategic to extend TFI International's long and successful track record growth through M&A. As you know in January we announced an agreement to acquire UPS rate in one of the most strategic transactions in our company's history. The acquisition immediately propels TFI as international to become one of the five largest North American LTL carrier. It will strengthen our service offering, accelerate our strategic expansion across the U.S. and fortify our ongoing relationship with UPS. This transaction is on track to close this quarter. Now let's turn to our first quarter results. That includes strong -over-year growth in both revenue and operating income despite very solid results a year ago. Our total revenue for the quarter, for the first quarter of $1.1 billion was up a very robust 24% compared to the prior year's first quarter. Again, despite much of the prior year's quarter being before the pandemic. Just as important to us given our focus on profitability and despite significant one-times item, I'll discuss our operating income grew 17% to 102 million and our adjusted EPS on the diluted basis expanded 26% to 77 cents. Our net cash from operating activities was $155 million, up 13% over the prior year. As you know, we consider the strong cash flow to be strategically important, allowing us to invest in our business and seek out attractive expansion opportunities. Regarding those one-time items, the first relates to the -to-market of our cash-sale director's shares unit or DSUs due to the rise in our share price during the first quarter. This had a seven-cent impact on our adjusted diluted EPS, which was further impacted by a cent per share of transaction expense related to the acquisition of UPS rate. In total, that's eight cents of combined one-time cost. Let's now take a more granular look at the operating results for each of our four segments, all of which contributed to our strong overall performance. Starting with our package and career, PNC represents 13% of total segment revenue and saw a 26% increase in revenue before fuel surcharge versus the prior year. Operating income of $18.3 million expanded an even greater 58% with an operating margin of $13.9 up 280 basis points. This strong growth was driven by improved yields on both B2C and B2B activity, which have continued to rebound this year. We're pleased with our more balanced mix of B2C and B2B following the pandemic and see additional growth opportunities ahead. Our LTL segment also 13% of total segment revenue generated revenue before fuel surcharge of $132 million, especially flat compared to the prior year quarter. While demand is still feeling the effect of the pandemic, most important to us, our LTL operating margin expanded more than 700 basis point to 16.8 from the less than 10% a year earlier, driving a nearly 70% increase in operating income to 22.1 million. This strong growth in operating income benefited from strategic consolidation in our over the road operation as well as a 2.7 million contribution from the Canadian wage subsidy. Next is our truckload segment, which represents 41% of total segment revenue. Revenue before fuel surcharge was up 7% year over year, while operating income was up 8% to 50 million, reflecting a slightly higher operating margin of 11.8. Our growth in this segment was driven mainly by business acquisition as well as strong spot pricing and tight capacity in the U.S. market offset by severe winter weather. Within truckload, our U.S. operations saw a 1% decline in revenue before fuel surcharge, while our Canadian operation grew 6% and our specialized business grew 13%. We also had a 2.7 million overall benefit from the Canadian wage subsidy. Rounding out our business segments, logistics represent 33% of total segment revenue. Our revenue before fuel surcharge jumped nearly 90% driven by e-commerce strength in Canada, as well as acquisition over the past year. Our revenue before fuel surcharge was up 7.8 million, reflecting a slightly higher operating margin of 7.7%. Now turning to our bond sheet, it remains a significant source of strength for TFI International that allows us to execute our growth plan by making disciplined investment both in organic growth and attractive M&A opportunities. Our strong free cash flow of 143 million allows us to end the quarter with more than 1.3 billion of liquidity benefiting from January's private investment of 500 million in senior notes, which also substantially extend maturities to between 8 and 15 years at fixed rate. Lastly, I wish to provide our outlook for the year, a range which includes a range of $3.80 to $4 of earnings per share, and 475 to 525 millions of free cash flow. In addition, despite the anticipated closing of the UPS freight acquisition, we expect our leverage to remain below two times next quarter and for the rest of 2021. Please note that this leverage calculation refers to the funded debt to EBITDA ratio as calculated in accordance with our debt covenants and as set forth in our quarterly M&A. In summary, the past 12 months have been like no others, but at TFI International, we stuck to our game plan throughout. We focused on the fundamentals of the business to maximize profitability and cash flow, and we carefully considered capital allocation to further enhance value. The economic outlook remains fluid, but you can rest assured that we will stick to our approach no matter what future holds. Today, we are in the best position in our company's history, and the pending acquisition of UPS freight will make us even stronger. Together, we look to create additional shareholder value by constantly driving efficiencies and focusing on profitable growth. Ultimately, our goal is to create and unlock shareholder value, returning excess capital to our shareholders whenever possible. And with that, Operator, if you could please open up the lines for Q&A.

Ladies and gentlemen, to ask a question, you will need to press star one on your telephone keypad. To withdraw your question, please press the pound key or hash key. Calls will be limited to one question and a follow-up in order to get to as many callers as possible. Again, that's star one to ask a question. Please stand by while we have the Q&A roster. And your first question is from the line of Scott Group with Wolf Research. Hey,

thanks. Morning, Elaine.

Morning.

Can you just walk us through some of the revenue and margin expectations for each of the segments within the guidance and just clarify if you're including UPS freight in that guidance or not?

Yeah. Yeah. Well, absolutely. So for sure, UPS freight is included in the guidance, okay, let's say for about seven months. But if you remember, I mean, the profitability of UPS freight is very limited, okay. And so, yes, it's in there, okay, that's for sure. Now, in terms of the rest of our, you know,

business,

I mean, what we see so far, if you look at our P&C, revenue is up, okay, was up about 20% in Q4, about the same thing in Q1. And we anticipate the year to be probably in the same kind of fashion. So our P&C, we see a lot of organic growth there. And as you could always take a look when you look at the results, it shows also on the operating earnings. LTL, excluding the acquisition of UPS freight, we believe that the revenue is going to be flat, okay, but the profitability will stay on the same kind of neighborhood profitability that you see now, because we're more about making money than chasing volume. You know, that's a religion at TFI. Then if you look at the USTL, we think that Q1 was a little bit of a disappointment in a sense that, you know, February was tough for us. But when we look at the rest of the year, we see that the situation should keep improving. Same story for our Canadian truckload and our specialty truckload. On the logistics side, I mean, the acquisition of DLS last year was a major plus for us. We're still working to unhook ourselves from the previous owner through the TSA that we have with them. Probably it should be done by the summer. And then we believe that the overhead should reflect a more better efficient cost basis, I could say. Now, all in all, this is why we feel pretty good about the $380 to $4 of EPS in the rest of, you know, for the total 2021 year. Again, this is based on what we know today about the UPS rate contribution, which is minimal, okay? It also reflects about a $325 million USD of CAPEX, which is way more than we normally would do because there again, we're investing more dollars into the UPS fleet than would be normally done, right? So it's still a conservative, I think, forecast that we have for the year on terms of APS and pre-casual. But also the important thing is our leverage will stay under two, even with the acquisition of UPS. And when we say under two, it's probably like more like $175 to $2, $2 being maximum. We're not going to get there to $2, right? So we feel really good about the $21, what we can do about that. But there again, I mean, we still have to close this transaction with UPS, which we anticipate is going to be really soon. And then, you know, Paul and his team over there at UPS rate, I mean, they're fully, fully aware of the plan, what we want to do, how we're going to approach this. And I've said it many times, our first approach at UPS rate is to work on the cost and to bring new trucks in will help us on maintenance costs, will help us on safety, because these equipment have the safety features of trucks that are built in 2022, you know, the forward-facing camera. Also the driver experience in driving a new truck versus an old one. I mean, it's day and night. So all of this, we believe that our first step working with the team there to reduce costs and be more efficient, and then slowly, for sure, we'll address the situation of rates that maybe not reflect market rates today.

Okay, so I just wanted to, that was my second question was about UPS rate. You know, as you've done more work since three months ago, ahead of closing the deal, has anything changed in terms of your near and long-term margin expectations? Maybe have you had conversations with customers about revenue retention, things like that? Just any thoughts there? Thank you.

No, no change, really. I mean, it's just a confirmation. What we've been able to do over the last few months is just to confirm the plan that we have. And we feel very strongly that this is a great plan. And we have the support of the management team there. They understand, okay, where we want to go. And, you know, this is why when we say that within a year, we believe that UPS could be a 97-OR, okay, we still very firmly believe that. And within three years, we don't see any reason why this company, with the potential, the customer base, the relationship that we have also with UPS, there's no way. I mean, we still feel very, very strongly that we could be a 90-OR within three years.

Your next question is from the line of Karnat Gupta with Scotiabank.

Thanks, and good morning, Ali.

Good morning, Karnat.

So, Ali, maybe first on the CapEx clarification. You said 325, I guess. Is that a gross number, or is it net of any expected features?

Yeah, it's net of disposal. Canadian dollars is about 400, U.S. is about 325, something like that.

Great. Okay, thanks for that. And so my first question is on the UPS acquisition. So UPS reported, obviously, this week, and I think they were saying the freight segment had a pretty good quarter. I think they had record profitability there for them. I just wanted to hear your thoughts in the sense that, you know, how is the UPS freight doing right now where, you know, you saw them when you were acquiring them? And how does that kind of actually push up your goals or aspirations with the margins?

Very good question, Karnat. But those were very conservative. So I'm not going to say something different from the UPS management team. I mean, they still own the company. So when they said that they had their best quarter, I mean, you know, they know what they're talking about. So for sure, the trend, okay, is improving over there. For sure, market condition is also improving. So if you ask me the question, is the company today better, okay, in Q1 of 21 than it was, let's say, in Q1 of 20 or for sure, okay. So we are buying a company right now that the trend is improving every day. Yeah. But we're still coming out with something very conservative, right? This is the culture at TFI has always been under promise but over delivered, right? So we're not going to say, oh, we're going to come up with 450 or whatever. No, 380 to 4. And then, you know, we may revisit that after Q2, okay, or after Q3, after we have a little bit better, you know, control of the situation at UPS rate. Because don't forget, this is also based on a plan when we look at UPS rate that we are not in control today. I mean, we're looking at the trend, we're looking at the plan, we think that right now, probably, you know, the guys are doing a fantastic job. We'll just work with the team to improve that, right?

Yeah, that makes sense. That's good, color, Alan. And then secondly, if I can ask you on the pricing, you mentioned about the strong spot pricing in the truckload market, especially, I think, in the US.

Yeah.

Which is no surprise to anyone here. No. One thing, what are your thoughts are on the pricing going forward? I mean, what are you seeing with obviously fuel kind of rebounding? And I think the demand function remains pretty strong at this point. But curious to your thoughts into, you know, how pricing trends over time here and for the next few quarters in the US in the truckload, as well as any of the segments, I think you mentioned about P&C, where yield was pretty strong and B2C and B2B both. What are we seeing in the pricing on the pricing side in P&C as well?

Well, on the P&C, I mean, our Q1, we saw price increase about 7%. Okay. Volume increase about 15%, but price 7%. Now, like I said to our friends at UPS, those guys did a better job than us because their price was about 10%. The price increased 10, 12, depending if it's domestic or international. So I mean, the leadership of UPS is helping everybody in the industry, okay, to adjust price to a level, which makes way more sense. Okay. So pricing environment P&C, really good pricing environment in our USTL for sure. I mean, there's every morning if you talk to our EVP response for USTL, he says, I've got more freight than I can handle. Right. It's been going on like that for at least the last four months. So for sure, this put pressures on rates. I was just listening in the anticipate maybe fuel costs will go higher because they are short drivers, okay. You know, fulfilling the service station with fuel. So it's a global North American situation whereby we are short, not afraid, we are short of drivers, right? So the rates are being pushed up. Okay. And at the same time, us also we have, and in the industry, we're also adjusting salaries to our drivers, right? So it's just a normal phase. But for sure, I mean, if you look at the freight environment right now in the USTL, there's more freight, okay, available that we could haul ourselves. Right. So every morning we're overbooked by 10, 15, 20% of what we can handle. And customers are, you know, can you help us? We're trying, we're doing the best we can. But, you know, it's hard. I mean, the schools, okay, because of COVID, I mean, it was like a big issue to have a school, right, trying to educate those people to be drivers. It's a sum of all this thing that happened over the last, say, 12 months that create pressure. And now the US economy is doing really well. I mean, we anticipate that the GDP will grow maybe seven or 8%. Okay, the numbers I'm looking at. So for sure, we got huge demand. The same story is true also in Canada for our truck to division. I mean, Q1 was okay. But wait till you see Q2. I mean, oh, yeah, sure. We have lockdowns right now in Canada. I mean, Ontario, big time, big lockdown there. Quebec, not as bad, but very close. Now we have issues in the Maritimes and some little bit in the US, but we have a lot of people in the US, and also in BC. But vaccination rollout is taking on more speed. So we believe that Q2 is still going to be, you know, maybe a transitional quarter, but then three and four, our Canadian activity is going to be roaring really, really strong. So the pricing environment, really good. I mean, we look at our logistics, it's the same story. And this is why, you know, when we come up with the guidance on EPS or free cash flow, as usual, I mean, we'll try to beat the guidance, right?

Your next question is from the line of Alison Landry of Credit Suisse. Alison, your line is open.

Thanks. Good morning. Sorry, I'm just on another call this morning. Elaine, so we obviously, you know, we're talking about the EPS freight acquisition, you know, sort of about to close shortly here, but presumably you're still evaluating small tuck-ins. Just could you give us a sense of the pipeline and whether the opportunity set has changed over the last few months, and then just sort of what types of businesses or end markets you're looking at?

Yeah, that's a very good question, Alison. So our pipeline is always full in terms of M&A, but these are small transactions. I mean, right now, you know, we're looking at about three or four transactions in Canada. We're looking at maybe two, two or three smaller ones in the US as well. So our pipeline is always full, but they're again, nothing of the size of UPS for us in 21, and probably not in 22. So we're, you know, these are nice tuck-ins that we do, small and highly profitable for our shoulders. And we're going to keep on doing that. Absolutely. Now, for sure, our big focus is going to be on working with the UPS management team, approaching the costs. Like I said many times, we have to reduce the cost there to be a lean and main carrier at UPS rate. And that will be a big priority of ours. But, okay, small tuck-ins, it's in our blood. I mean, we do that all the time.

Okay. And just a follow-up in terms of the free cash flow guide. You know, could you maybe just help us think through sort of the cadence over the next few quarters? Or, you know, do you expect it to be sort of relatively stable? Or sort of any sort of difference in the second half versus the first half?

No, the only difference that we have between, let's say, the first three months and the next nine months of 21 is the fact that Q121 was affected by a lot of taxes that were paid by the company, okay, for a reason that we were allowed to delay some payment because of COVID, you know. But we've remitted all those taxes that have to be remitted in Q1. So this is why our free cash flow has been a little bit affected by that. But we don't anticipate anything similar in the next nine months. The only major thing for us in the next nine months, okay, will be CapEx, okay, for sure. Like I said on the call, we're going to be investing this year about $325 to $350 million net CapEx USD, you know, depending on the timing because, you know, because of the chip situation and the shortage. I mean, we're not sure if everything's going to come in on time. But no, that's a ballpark figure.

Okay, that's really helpful. Thank you, guys.

Thanks, Allison.

Your next question is from the line of Kevin Chang with CIBC.

Hey, Elaine. Thanks for taking my question here.

If

I could ask, maybe the longer-term outlook for free cash flows. So I think your guidance of $500 million, if I look at consensus revenue for this year, about $6 billion, you know, that's about 8% free cash flow margin. You know, but you've highlighted, you know, elevated CapEx with UPS. You obviously have a target to improve profitability in a number of your operations. You know, when you're kind of through a lot of this heavy lifting, do you have a sense of where your free cash flow margins could level out here? Is this like a low, double-digit free cash flow margin business, -double-digit free cash flow margin business, you know, looking out the next three, four years?

Well, absolutely, Kevin. I mean, $500, I mean, it's been handicapped a little bit this year, okay, on the exceptional CapEx that we have to do in 2021 with this acquisition. We'll also have to do a little bit also in 22 of catch-up CapEx for this UPS rate acquisition. But I would say that normally, normally in a normal environment, okay, with all the improvements that we see coming at UPS rate down the road, okay, absolutely. I mean, this should be a double-digit free cash flow company, right? Our capital intensity, okay, you'll see that change big time because of the mix that's going to change. Also, we believe that at UPS rate, we could do more with less, okay. We believe that in terms of the assets, in terms of the real estate, in terms of all kinds of stuff. I mean, we could do more with less. The business is quite stable right now at UPS rate in terms of, you know, the volume. So, you know, things are going well, like the management team said on the UPS call. But I think we believe that we could do more with less. So, over time, I believe that we're going to be absolutely, you know, a double-digit free cash flow as percentage revenue. Now, also the important thing, Kevin, I'm sure that you guys will take a look at the return on invested capital, okay, which is a first. We're looking at trailing 12 months, okay, we're publishing that now. And if you look at that, I mean, every division we have are all running double-digit except our USTL operation, right? So, I mean, if you look at our PNC, okay, I mean, PNC, wow, this is fantastic. I mean, our PNC is just above the 20, you know, 20. Our LTL is above 15. Our logistics is 18.6. Our specialty truckload is close to 11, right? So, the combined is about 12, 12.4, something like that. Return on invested capital after tax. And don't forget, this is also based on all assets, not just the art asset. It includes all the intangible assets as well, right? So, I mean, this is a fantastic company when you look at, and adding UPS rate to the mix, okay, for sure, return on invested capital at UPS rate is going to be low, okay, year one. But I'm telling you, I mean, there's too much asset, there's too much real estate, and we're going to work on

it. For the revenue,

right?

For sure. That's helpful color, and I appreciate the ROIC disclosure this quarter. Maybe just to my second question, you know, one of your Canadian competitors is consolidating parts of the Canadian LTL market. I know in the past you've talked about this market being irrational. Just wondering if you're seeing anything at a high level in terms of any change in industry behavior that suggests maybe a little bit more rational behavior in this marketplace, just given what's happened with one of your competitors out there?

Well, we believe that finally, I'm happy to see that the other company is doing something. You know, we can't buy them all, right? So, you know, it's a good thing. It's a good thing for the industry, you know, but we're really happy with that. I mean, we have a great relationship with the other company. We work together. I mean, we have very high respect for the other group, and it's fine. I mean, we can't buy them all, right? So, it's good that somebody else is showing up and doing something about, you know, the Canadian LTL is day and night versus the US LTL. Why is that? Well, first of all, because we don't have a lot of industrial LTL in Canada, so that's a big problem. It's mostly retail. And number two is that there's way too many small companies that are about making one or two percent. So, we're happy because the other company that's buying those two companies right now, their focus has never been to make two points, right? So, for sure, they will have a job to do over there, and happy to see that the two companies will be part of this group now, and the focus is going to be to improve profitability. Absolutely. That's all good for industry.

Excellent. I appreciate the call, Arlene. Thank you very much.

Your next question is from the line of Sadie Chalmon with BMO Capital Markets.

Thank you. Good morning, Ella. So, question on, I mean, the ROIC, you just talked about being pretty strong pretty much across all divisions except the US TL. I'm just wondering, where does the segment kind of sit in terms of the capital allocation priority? It's a very competitive segment, obviously. Your position is typically top player in most of the other segments, you know, LTL in the US and Canada, obviously, and parcel and so on. Is this something you want to put more capital in? You want to grow that business, US conventional TL? Is this something potentially candidate for a divestiture? Just wondering, where does that sit in the capital allocation priorities for you?

You know what, Sadie? I mean, this is a tricky question because, you know, everybody understands that if you generate less than 10 and you're part of TFI, for sure, you're not going to be the first line to get capital, right? Our logistics and our PNC, you know, absolutely, they come first, our LTL as well. And this is why we're buying UPS freight. Now, what we have in the US right now, okay, is to keep and are we going to grow it through M&A? Probably not because our focus right now has always been to grow our special TTL. And if you look at our special TTL, return on capital, I mean, we're just above the 10 mark. I mean, we're 11, 11.5, something like that. I mean, and this is fine, because I think we could do better and we'll do better over time. Now, in terms of the regular VAN, if you look at the best company in the US, okay, the best of the best, and you look at the return on capital, it's less than seven. Us, we're at 5.5. It's not great, okay. But we're not that far away from the best of the best. So our goal is slowly get closer to the best of the best. And I believe strongly that we have the A team, okay, under Greg Orr. And also, the acquisition of UPS freight gives us another small truckload division that's not doing too good. Okay, they probably run a 98 OR, okay. And now we have a plan of working TCA, this UPS truckload division with our CFI management team. And we're going to do a combination, okay, by the end of 21, that should help us get closer to a six or six and a half and be the best of the best. Now, don't forget that, you know, our introduction to the truckload market, okay, five years ago, six years ago to the US market, there was a goal behind that is to give us some size in the US so that we could, you know, one day listed in the US. Now with the UPS freight acquisition, I mean, most of our revenue, okay, will be US domestic. I mean, as a matter of fact, in Q1, we have more US domestic revenue than Canadian, right. So we'll be probably like 75, 25, 75 US. And then we'll see over time. I mean, we're not in the business of selling companies, okay. Well, we've done that before. We've done that with our waste division. So, but it's not in the card for now. What we're trying to do working with Greg and his team over there is to get closer to the best of the best in terms of the return of the vested capital.

Okay, that's great. My follow up just on the PNC network side, I mean, you know, you're seeing very significant organic growth, which your signaling will continue. I mean, I don't recall having seen that kind of growth in this network, you know, in a long time, obviously, for you. And I'm wondering, is this, like, how is the PNC network handling this type of growth? Is this predominantly coming kind of from the asset flight side of things? And how are you handling kind of this kind of environment we're in right now? And if there's going to be any need for capacity or expansion there?

Yeah, very good question, Fadi. I mean, for sure. I mean, our Toronto hub, okay, is very, very, busy. It's never been that busy, okay? And we're working on a plan right now to see what the next step is going to be. So we're getting close to capacity over there. So this is why, you know, we're looking at what can we do more, okay, in Calgary? What can we do more in Vancouver? What can we do more in Montreal? So, you know, Calgary, we have a new sorting center. We just opened that up a year ago. So there, we're doing fine. But in Toronto, for sure, we will have to do something there. The JC centre, we're really busy. But, I mean, we could do more. And for sure, this is why we're growing about 14, 15% in terms of volume right now. We were skeptical at first that changing the mix from B to B to B to C, you know, with the pandemic there, that would erode our margin. But if you look at our Q4, it was great. If you look at our Q1 this year, again, we feel good. You know, we have some divisions that are not at capacity like ICS, like TFIS. We could also do more within our Loomis operation. So, I mean, we could still see a 20% or 15% growth in our e-commerce in 21 and into 22. But then we will, you know, get closer to a capacity crunch, right? So this is why we're working now to see how we're going to resolve that.

Thank you.

Tim James, TD Security.

Good morning, Ilana. I mean, why don't you talk about how your progress is with the DLS acquisition, the integration of that, and kind of how the, just maybe update us on the opportunity set, which I think is quite compelling and how that's shaping up relative to your expectations when you acquired it.

Yeah, you know what? DLS, we're really happy about what's going on now. In terms of the transition agreement, we believe, like I said earlier on the call, that by the summer, I mean, we're going to be a standalone, you know, with running our financial on Oracle instead of SAP. But in terms of revenue growth, I mean, we're quite surprised to see how this team is doing. I mean, I was looking the last month that we closed in March. I mean, revenue growth was pretty impressive, right? So, I mean, to me, it's really a fantastic acquisition because it gives us market intelligence on the US domestic LTL market so that we can understand, okay, what the rates are, what the value is, et cetera, et cetera. So, you know, but over and above that, I mean, we have a fantastic team there based on an agent model. And we feel that, you know, we're running about a $600, $650 million business right now. And is it possible that we could do a billion dollar within the next two or three years? Absolutely. The way we're growing right now, I feel pretty good about that. Now, for sure, the margin is slim. We're running a four, four and a quarter margin right now. But the guys are working. We're going to be working on reducing our overhead costs as soon as we can unhook from Donnelly. And then work also on the margin with some of our customers and working with the transportation company and providing a great solution. For example, DLS or what we call now WTW, T-Force WW, they were never involved in the transborder LTL.

They

were just focusing on domestic shipment. But for us, the transborder LTL into Mexico or into Canada, it's very important to us. So now those guys have put a plan and they're working on it now to see how they can grow that, right? Because to us, this is one of the greatest market of the LTL is the transborder between US and Canada and Mexico. So feel good about this acquisition. It's really strategic to us. And now with the UPS freight acquisition, now it gives us asset on the ground, okay, and working with the team there. Then we could, I feel that we could grow this UPS freight. As soon as we have a very solid foundation, which will take us maybe a year, 18 months to be really, solid in control there of all of our costs, I feel good that we could grow this company. We have the team there and we have the assets. We have the real estate to grow probably 40% or 50%. That's not the goal. Really, the first goal is to be lean and mean and very cost efficient. But I'm just saying that we have the asset to do it if the market can bear it. But I feel really good about the future over there.

Thank you. And just one follow up here on the return on capital in the business, which as you pointed out, is very strong really across most parts of the business. So how do you think about in the future adding more capital versus increasing returns? I mean, are there any areas of the business now where you really don't, I mean, it sounds odd to say it this way, but you don't want higher returns on capital or your preference is actually just to put more capital to work? Or is your thought that it's still better off to kind of squeeze the assets, get more or push your returns on capital higher?

Yeah, that's a very good question. If you look at our PNC, I think that a 20% return on capital, net of tax, it's difficult to do better than that. I mean, if you look at, as an example, if you look at the return on invested capital, the best LTL company in the US, the best, the one that trades at 35, 40 times earnings, they're going to be in that 20% neighborhood. So to me, if you ask me, could you do better than 20% on your PNC, I would say, it's going to be difficult. I mean, we're working on it, but it's not going to be easy. Now on the LTL side, I believe that what we're doing in Canada, I mean, it's got to be at least that in the US over a period of two to three years, right? So because, you know, you got the best of the best is at 20, you got another one at 15. So we're about 15 ourselves in Canada, which is not as good of a market as the one in the US. So we believe that LTL, we could do better because of this UPS freight acquisition. In terms of the truckload, the idea is really to try again to do more with less. So how do we do that? Well, we could do more with the owner operator model, we could do more with our brokerage operation. And this is the focus of our, this is why when we bought CFI, they had no brokerage operation whatsoever, right? It was Menlo. So Menlo stayed with XPO. So us, we end up with no asset-led operation there. So we've built CFI logistics, okay? And it's doing well and it's growing. So that's going to help, again, get a better return on invested capital because it's all organic. So it's always a balance, okay? And me working with the team, it's always, you know, where should we invest our capital? And this is why a lot of times we say, okay, well guys, M&A is going to be our first priority. Buying back the stock if we feel that the stock is under pressure and we see an opportunity, yes, we'll do that, right? To improve again, our return, we'll invest on assets as well. So it's a balance, guys.

Great. Thanks very much,

Elaine. Pleasure.

Our next question is from the line of Jason Settle with Calin.

Thanks, Harper. Good morning, Elaine. I wanted to touch back on P&C and see your margins over time as some of your B2B business actually does start coming back. Because historically that was, you know, good margins because you guys have a lot more packages stopped than the consumer market.

Yes, yes, yes. Well, absolutely, Jason. So for sure, our B2B is still affected, okay, because Ontario, okay, and Quebec are under, you know, some major lockdown right now. We've started to see some improvement at ICS, which is mostly B2B, but then it fell through again just lately, about two, three weeks ago. We believe that probably by the end of Q2, things should be back to normal. So we have two divisions within our P&C that are not running, you know, on all cylinders right now. It's ICS and TFIS. Why? Because they're mostly dependent on B2B. So you're absolutely right. Down the road, let's say in Q3, we're more closer to a normal situation in Canada, Ontario, Quebec, which is, you know, the largest provinces in terms of population. So yes, our margin would probably help us in Q3 and in Q4 with the right mix also of balance between B2C and B2B at our Loomis-Kampar operation.

Yeah,

you know, don't forget we did about, what, 19% in Q4 in terms of OE at our P&C operation. We did, yeah, about 19% in our P&C. So can we do better than that? Let's say if things are back to normal in Q4 of 21, probably. You know, it's the same story with LTL.

Okay, that's

pretty common.

I also

want to

focus a little on the U.S. operations. Can you give us an update about some of your marketing initiatives?

Where is that Jason? Are you talking about UPS3?

Logistics.

Oh, logistics. Okay, yeah. Logistics. Well, in logistics, you've got the two sectors. Our last mile operation in Canada is doing really, well. Our U.S. operation in terms of top line, I mean, we're basically flat and we're just starting to see some growth opportunities. We're working on a few projects, but our bottom line is definitely improving there. We're getting closer to a double digit EBIT there, okay, which is, it's got to be our goal within, let's say, the next 12 to 18 months. So our operation is really humming. Our guys are working on all the costs and being more efficient. And our sales team is also working on adding more business to our network. In terms of our DLS or, you know, our WW company, I mean, those guys are organically, they're growing quite well. And the margin is still, you know, we look at 4% us and we say, why are we at 4%? But then we look at some of the other players in the industry. And, you know, one of the best guys also at 4%. So, but we say, you know what, guys, we have to work on the overhead. I mean, for sure, we have to do more with less there as well. So over time, our logistics sector, you'll see because of this acquisition, a lot of growth, but at the same time, also, overall, our EBIT there is running between seven and eight. Over time, we believe that we could get closer to 10, okay, with some organic growth as well. So let's say we're seven to eight right now. Over time, within 12 to 24 months, can we get closer to 10? We believe so.

Okay. Really appreciate everything and all the best to you guys, as you said.

Thank you, Jason.

Your next question is from the line of Cameron Dorickson with National Bank Financial. I apologize.

Thanks. Good morning.

Hey, good morning, Cameron.

So just a clarification on the expected CAPEX, the net CAPEX for 2021. Correct me if I'm wrong, I think it's the way you're indicating that 325 million US is higher than what was the case a quarter of ago. And I'm just wondering if that implies that there's some pull forward of spending from 2022 into 2021. Because I think that maybe a lot of the sort of significant UPS CAPEX was originally going to be planned for 2022. So just if you can just clarify what that means for, I guess, CAPEX over the next 18 months, as opposed to just 2021.

Yeah. Yeah. So you see, Cameron, what we were able to do with the supplier is to get 1150 trucks into 2021. So we put a lot of pressure on those guys, the supplier, to make sure that we get all these trucks into 2021. So you're right. At first, okay, we were saying that within 12 months, okay, we should get 1150 trucks. But now we put pressure on these guys. So it's going to be, instead of being 12 months, over 12 months, it's going to be over the next seven months. Let's say we take over in May, sometime in May. So we only have seven months. We believe, according to the builder, they're starting building for us in July, right? Because the order is already out. I mean, everything is out. We know how much it's going to cost us, et cetera, et cetera. So it's ongoing. We believe that we should get all those 1150 trucks before the end of 2021. So this is why you're right. It's a little bit of a change versus going over 12 months. Now it's going to be over seven months. Yes.

Okay. So what does that imply, I guess, for 2022? Should we expect, I guess maybe the question is, what's a kind of more normalized run rate capex in 2022, if you're making this huge investment in 2021?

I think, Cameron, it's going to be more the same in 2022, because we cannot do the catch-up capex only in one year. So I think in your model, you should expect that 2022 is going to be the same as 2021, okay? Because we want to bring the age of this fleet closer to four to five than seven and a half to eight right now, right? So 21 and 22 are probably exceptional years of catch-up, and normal should be more like, normally like 23.

Okay, got it. Now that makes sense. And just if I could just squeeze in a question about the, I guess, driver issues. I mean, I think it's well known what's going on, but I'm just wondering if you can maybe comment on what your expectation is for the ability to kind of keep and hire drivers in the US LTL. Obviously, that's going to become more important for you. I'm just wondering, is it less challenging or more challenging in LTL in the US to find drivers?

LTL, I mean, US and Canada, I mean, the turnover is not absolutely not the same. I mean, we have no issues whatsoever in Canada with our LTL or package and courier guys finding drivers and replacing the ones that are retiring. In the US, I mean, we look at the statistics for LTL. I mean, it's not an issue. It's not an issue. I mean, it's truck load. It's a big issue, but not LTL.

Okay. That's what I thought. Appreciate the time. Thanks very much.

Thank you, Cameron.

Your next question is from the line of Benoit Parriere with Desjordians Capital.

Hey, good morning, Elaine.

Morning, Benoit.

Yes. Just to come back on the previous question, obviously, very strong fundamentals, but the question on the driver shortage, what can you say about the wage inflation and the ability to pass through those wage inflation on pricing and potentially direction on the margin, whether it's impacting your margin?

Yeah. So, I mean, right now, the pass-through is easy because there's more freight than drivers. So, we are adjusting salaries to the drivers over the course of 21, and the spot rate is just through the roof, and the contract raise has been renewed with 7, 8, 9, 10, 12 percent right now. So, it's not an issue. So, if you look at, you know, we just bought six months ago MCT, okay, which is a refer division, and we had about 200 drivers, and we're doing really, really, really well with this division right now. I mean, this division operated in sub-85 OR into one of 21, and we believe that those 900, 8 to 900 drivers in the truckload division of UPS that Greg Orr and his team will take over soon, okay, and those guys are running a 98 OR right now. I mean, we firmly believe that this is going to be a huge asset because we're adding those 8, 900 drivers in a market that is, it's a fairly great market for the truckers. So, we believe that we could use these drivers in a better way that they're being used today, if I can say that, right, because the freight is abundant, and those guys are hauling freight probably at rates that don't reflect the market. So, on the truckload world, we believe that we can turn this truckload division around much faster than we can turn around, okay, the LTL division, because truckload is more of a reaction faster than the LTL. LTL, our focus is going to be more on cost, and yes, pricing too, but the big focus is mostly on the cost side. But the truckload is on cost, but also market pricing very fast there.

Okay, that's great caller, Alain. With respect to your leverage ratio, 175 to 2, does it take into account the cash and given it's pretty LTL, any caller about the capital and load for the Tuckin M&A for the remainder of 2021 and be the opportunity to pursue share buyback?

Right now, when I say our leverage is going to be between 175 to 2, there's minimal M&A in there, except the UPS thing there. And right now, there's no share buyback. Okay, so we did some in Q1. Okay, we may do some in Q2, Q3 and Q4, depending on the valuation of the stock. For sure, we have a target in mind. We know, I've been involved with this company for more than 25 years, so we know where we're going. So if we see weakness in the stock, absolutely, I mean, we will be active on the buyback. I mean, we bought back what? I think 642,000 shares in Q1, which is minimal. Okay, but can we buy another million shares in between now and the rest of the year? Absolutely. I mean, our leverage is going to, in our plan, is going to be much closer to 175 and 2 anyway.

That's great, Coller. Thank you, Alain.

You're

welcome.

Your next question is from the line of Walter Spackler with RBC.

Hi.

Morning, Walter.

So I'd just like to come back to P&C, and I think your strategy is a good one in the sense that, you know, you've got capacity, you're going to grow into that capacity at a fairly healthy clip in the near term. You mentioned in an answer to a prior question that you start to get up to your capacity limits perhaps next year. Obviously, you'll have higher EBITDA once there. My question is more longer term. I know, Alain, you've indicated longer term some challenges with regards to growth after we're through this systemic growth period, you know, driven by the lack of acquisition opportunity. How has your thinking changed around that division longer term? Do you double down and invest heavily in adding capacity after you hit it next year, or do you look at other alternatives for that division?

You know what, Walter, that's a very strategic question. If you go back in time, the reason we sold our waste division was because we could not grow it anymore, right? Because our valuation was so low and buying assets, it was diluted to us. So finally, we didn't want to do that, but we had to do it. So we sold our waste management company at the time. Okay, so you look at our P&C, we're really doing really, really well. But then, as you just said, we'll come to a point in 2023 where, okay, and we're already looking at the possibility, what do we do in Toronto, right? So Toronto is the big hub for us, and this is why we're looking at the question right now. For sure, we have capacity in other markets, but we're getting tight in Toronto. So then we'll come to a point, is there some M&E possible? Is there something that you could do on M&E? Is there partnership that you could do with somebody else, right? So if you take, for example, some of our competition have major hubs, okay, is there any way that we could do a deal with them and help them and help us at the same time? So don't forget that this discussion that we're having with our friends in Atlanta, I think it could be way more than just this transaction that we should be closing on soon. I think that because we have a relationship with those guys, can we expand more of this relationship in Canada working with them? Is there anything that we could do? You know, time will tell, but we're looking at every opportunities of what we can do, okay? And I'm not a big fan of investing, you know, 100 to 200 million dollars with low returns, right? We could do it, we could invest 200 million, no question, but I need the returns. And we're not very patient, so if the guy tells me, well, the return is going to take 15 years, we're going to try to find other issues, other opportunities, right? Absolutely,

that makes a lot of sense. And just administrative here, the effective tax rate, I know you mentioned there was some movement in your tax rates there, but going forward, what effective tax rates should we build in? And is most of that cash taxes or should we look at a cash tax rate that's somewhat lower than your effective?

Yeah, I would say I'm not a big specialist, Walter, on cash tax or tax, but I would say that what you see right now around the 25 percent mark, we don't know what's going to happen with the tax rate in the U.S. There's some discussion there with Mr. Biden's that they may change that. So right now, I think that if you work with a 25 percent, I think it's reasonable, that may change. You know, we don't even know what Mr. Trudeau could do in Canada, I mean, because they have a huge deficit there. So maybe there's going to be some changes there. But I don't anticipate anything major for 21. We'll have to see for 22.

OK, appreciate the time as always, Alex. Thank you.

Pleasure, Walter.

And your last question will come from the line of Sanjay Ranaswami of Bank of America.

Great. Thanks for squeezing me in. Just with regards to U.S. truckload, I mean, you mentioned that obviously one key was a bit of a disappointment. So revenue per total mile up around about 8 percent. It's on your peers, you know, up in the double-digit ranges and the big teams. I would just ask you, is this more of a function of, you know, the more contract business that you guys have and less of a spot market exposure? Maybe some columns there would be helpful.

Yeah. So I think what happened in Q1 is that in one of our division, TCA, I mean, there was some issues with some dedicated work that we've lost and we were able to replace quite fast enough. Right. But if you look at going forward, if we look at April into Q2 and into Q3 and Q4, we believe that this was just a one-time event for us in Q1. And also the fact that we're getting about 900 drivers through the UPS acquisition in our truckload division. And also the demand is really there. So in the consolidation that we're going to go through in 21, we believe that this will also have an effect of reducing our overhead. You know, the overhead we get from the UPS truckload division on top of the CFI overhead and on top of the TCA. If you sum that up, for sure there's going to be some saving there to bring us back to more of a sub-90 or around 90 than being a 92, 93, 94 guy.

Yeah, that's really helpful. And just for my follow-up, in terms of the employee count that you guys have, it was down around about 1,600 -on-year, I think about 350 sequentially, noting that was mainly in the LTL businesses. I mean, how do we think about that kind of moving through 2021X, the UPS freight acquisition and the employees coming on there? Is there room to, are we going to see that employee count continually come down despite the volume environment or how do we think about that?

Well, it's too early to say what we can do there. But one thing is for sure is we believe that we have to do more with less. That's what we've been doing all the time. It's a religion and TFI. Every day you ask yourself, how can you do more with less? And less means less asset, means less people, better technology, better tools. Because we're competing in Canada with some very fierce competition, both in the PNC, LTL, truckload. We look at the LTL market in the US and there's some very, very good transportation company over there. So we have to compete with these guys. And right now, I mean, although, like UPS management said on the call yesterday that the division did better in Q1, we're still a far cry from where we should be. I mean, the trend is good, okay, fine. But probably once we take over the company, we're going to have to accelerate, okay, the change and the improvement that's been taking place right now. Right.

Thanks.

And that does include our Q&A session. I'll turn the call back over to Alan Bitter for any closing remarks.

Okay. Well, thank you, operator. And I want to thank everyone for joining us on this morning's call. So on behalf of the team at TFI International, we appreciate your support and we're working hard on your behalf each and every day. I look forward to updating you on our progress next quarter and hope that you remain safe in the months ahead. As always, please don't hesitate to reach out with additional questions. Thank you again, and I hope that you enjoy the rest of your day. Thanks. Bye.

Thank you. This does conclude today's conference call. You may now disconnect.