TFI International Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to TFI International's second quarter 2021 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 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 2020, and all dollar amounts are in U.S. dollars. Lastly, I would like to remind everyone that this conference call is being recorded on Monday, July 26, 2021. I will now turn the call over to Alain Bedard, Chairman President and Chief Executive Officer of DFI International. Please go ahead, sir.

Well, thank you, operator, and thank you, everyone, for joining us this evening. So today, after the market close, we released our second quarter 2021 results. TFI International, again, generated very strong performance with each of our business segments demonstrating growth and enhanced profitability over the prior year. This strong performance reflects not only the strengthening economic landscape, but our own favorable positioning in the transportation sector following the moves we've made to navigate the pandemic, and more recently, our game-changing acquisition of UPS Freight. Over the past year, despite unprecedented global challenges, we remain focused on what we do best. We get it right on the fundamental details of the business, we look to maximize efficiencies, and we seek strategic acquisition opportunities. This approach to the business, which we adhere to regardless of operating condition, is aimed at increasing returns on invested capital, optimizing our free cash flow, and growing our earnings per share in order to create long-term shareholder value and return excess capital to shareholders whenever possible. Already, our recent acquisition of UPS Freight, now branded T-Force Freight, under the TFI umbrella is outperforming expectation. This strong performance benefited not only from pricing, but our own focus on freight that fits. In other words, the right freight for our network. As a reminder, this acquisition we view as one of the most strategic in our history, turning TFI International into a top five North American LTL carrier. in addition to the leading position we hold in seven of our other operating segments. T4's rate is already having a positive impact on our overall results, which I'll now review. During the second quarter, our total revenue climbed to $1.8 billion, more than doubling from approximately $800 million the prior year, and even on an organic basis, reflecting a very strong growth of 27%. Our growth has been driven by a powerful combination of both volumes and pricing and both B2B, the return of industrial demand and e-commerce. However, as you know, at TFI, we're more interested in profitability than growth for SIG's growth and are pleased to also report operating income just over $310 million, including a bargain purchase gain of $123 million on the UPS freight acquisition. Our EPS on a diluted basis was up 361% to $2.63 per share, and our adjusted EPS on a diluted basis was up 89% to $1.44. Importantly, our net cash from continuing operating activity was up 78% to nearly $300 million, and we viewed this strong cash flow as strategically important, allowing us to invest in our business and seek attractive external growth opportunities. It should also be noted that we are not adjusting these results for the transaction expense of $7 million related to the acquisition of UPS freight, nor for the $5.9 million mark-to-market loss on our cash settled deferred share units, or DSUs, due to the rise in our share price during the quarter. Combined, these two items had a $0.10 impact on our reported diluted EPS, while in the prior year's second quarter, our diluted EPS included a net $0.04 of one-time expenses. With that, let's take a closer look at the operating performance of our business segment, all four of which helped drive our overall strong performance during the second quarter. Our PNC represents 9% of our total segment revenue and saw a 44% increase in revenue before fuel surcharge, versus the year-ago quarter. Operating income of $29.5 million was up an even stronger 80% with the operating margin jumping 410 basis points to 20.3%. This performance was driven by strengthening yield for B2C and B2B activity, both of which benefited TFI. Next, our LTL segment, now our largest at 39% of total segment revenue, produced revenue before fuel surcharge of $625 million, relative to $114 million a year earlier, or excluding a 481 two-month contribution from the newly acquired T-force freight, up 24%. Our LTL operating income of $203 million benefited from the previously mentioned bargains purchase gain of $123 million, excluding the bargain purchase gain. Operating income was $80 million, implying a margin of $12.8 million. The strong growth of this segment came despite a $9.7 million reduction in the Canadian wage subsidy as our Canadian LTL business grew revenue before fuel surcharge 26%, with an operating ratio of 77.9%. while our newly formed US LTL business generated revenue before fuel surcharge of $482 million with an OR of 90.1. Next, let's turn to our truckload segment, which is now a smaller part of our business following the UPS freight acquisition and representing 30% of total revenue and a 20% of operating income. Revenue before fuel surcharge of $482 million was up a very healthy 42% year-over-year, while our operating income reached $63 million, up 24%, despite a $9.9 million reduction in the Canadian wage subsidy, with an operating margin of 13% relative to $14.8 a year earlier. Taking a closer look, our U.S.-based conventional truckload operation grew revenue before fuel surcharge 29%, with an OR of 92.7% and our Canadian operation grew revenue before fuel surcharge 40%, with an OR of 86.5%. In addition, U.S. truckload took on the UPS freight truckload operation, which weighted a lot on our profitability. Specialized truckload also performed very well, with revenue before fuel surcharge up 55% as industrial markets rebounded, and with excellent margin as well. Our OR for our specialized truckload was 82.6%. Completing our business segment discussion, logistics represent 22% of total segment revenue and at a very strong quarter. Revenue before fuel surcharge more than doubled to $407 million. Our logistic operating income also more than doubled to $35.6 million and our operating margin increased slightly to $8.7. Our logistics strength was driven by our same-day package delivery business in the U.S. and in Canada and by the addition of T4's TFI International's balance sheet remains very strong and a pillar of our strength, allowing us to execute our growth plan both organically and through our discipline acquisition strategy. During the quarter, we produced free cash flow of $268 million. That was up over 69%, and we ended June with a leverage well below two times of our funded debt-to-EBITDA ratio. Well, turning to our updated guidance for the year, we feel confident in our outlook, knowing that regardless of economic condition, our ability to further optimize the recently acquired T-force freight operation is something we control. We expect earnings per share to be in the range of $4.50 to $4.60, up from our prior range of $3.80 to $4.00. We expect net CapEx to be in the range of $250 to $300 million and we look for free cash flow of $550 to $575 million above our previous range of $475 to $525. We also continue to expect our leverage defined as the funded debt to EBITDA ratio as calculated in accordance with our debt covenants and as set forth in our quarterly MD&A. to remain below two times the rest of the year. In closing, the year 2021 continues to be the strongest in our company's history following our listing on the New York Stock Exchange last year, and more recently, our pivotal acquisition of UPS Freight. Our continued success stems from already adhering to our principle, including our focus on the fundamentals of the business to optimize profitability in our cash flow. Our ultimate aim is to create and unlock shoulder value, returning excess capital to shoulders whenever possible. Well, thank you, everyone, for listening. And if you could now open the line operators, I'd be happy to take questions.

Ladies and gentlemen, to ask a question, you will need to press star 1 on your telephone keypad. To withdraw your question, please press the pound or hash key. Callers will be limited to one question. and the 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 compile the Q&A roster. Your first question comes from the line of Ravi Shankar of Morgan Stanley.