TFI International Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the TFI International's third 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 aware that this conference call will contain several statements that are forward-looking in nature and associated 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 now in U.S. dollars. Lastly, I would like to remind everyone that this conference call is being recorded today Friday, October 29, 2021. I will now turn the call over to Alan Bedard, Chairman, President, and Chief Executive Officer of TFI International. Please go ahead, sir.

Thank you for the introduction, operator, and thank you, everyone, for joining us this morning. Yesterday, after the market closed, we released our third quarter 2021 results. TFI International further built on our solid performance all year by completing another strong quarter. Each of our businesses segments performed well, and many are now surpassing their pre-pandemic levels of revenue and profitability. We continue to successfully integrate UPS freight now under the TFI umbrella as T4 freight, and we're heading into year end in the strongest position in our company's history. The past few years have been like none other but TFI International rose to the challenges. Those of you who have followed our company for many years know that this means we simply maintain our focus where it's always been. We get it right on the fundamental details of our business, we look to maximize efficiencies, and we seek strategic acquisition opportunities. Ultimately, we're looking to drive strong returns on investment capital, Optimize our free cash flow and grow our earnings per share in order to create long-term shareholder value, and then we return excess capital to shareholders whenever possible. This is our focus regardless of operating conditions, so even now with North America facing supply chain disruptions, labor shortages, and of course ongoing pandemic-related disruption, we at TFI International feel very confident in our ability to navigate the road ahead. On a more granular basis, right now we remain focused on details such as optimal pricing, driver retention, and what we call freight and network that fits. Another important current focus of ours is on the integration and fine-tuning of T-Force Freight following the largest and most strategic acquisition in our company's history. While already having a positive impact on our positioning as we've improved quality of freight, we still have much work to do, especially with regards to cost. This also means that we therefore have significant remaining upside from this recent acquisition, and yet we're still able to produce the strong quarterly results that I'll now review. During the third quarter, our total revenue climbed to $2.1 billion, up nearly 125% over the prior year, with most of the expansion from M&A but with some positive organic growth as well. This organic growth was driven by rebound in trade volumes and our strong positioning, allowing us to price appropriately and benefit from ongoing strength in B2B and e-commerce. At TFI, we've always been more focused on profitability than simply growth, and therefore pleased to report operating income of $193 million, up 65%, and adjusted fully diluted EPS of $1.46 of 55%. One of the key financial areas of strategic focus for us is net cash from continuing operating activities because of the flexibility it provides to invest in our business, seek attractive acquisition opportunities in a disciplined manner, and return excess cash to shareholders when possible. So we generated $211 million of net cash from continuing operating activities during the quarter, which was up 50% year-over-year. We also increased our return invested capital across all of our four business segments, a metric that we consider a high priority. Similar to last quarter, we're not adjusting these strong results for the $5.5 million, or four cents per share, mark-to-market loss on our cash-settled DSU. due to the rise in our share price during the quarter. In the prior year, third quarter, our results include a smaller loss from DSU of $2.7 million, or two cents per share. Next, let's take a look at each of our four business segments, starting with P&C. This segment represents 7% of our total segment revenue and saw a 9% increase in revenue before fuel surcharge versus a year-ago quarter. Operating income of 23.9 million was up 12% with the operating margin up 40 basis points to 17.9. Results benefited from continued strengthening yields from both B2C and B2B activity. For PNC, our return invested capital was a very healthy 23.2, up 210 basis points from the 21.1 a year ago. Our LTL segment, our largest, which is 47% of total segment revenue, generated revenue before fuel surcharge of $861 million, as compared to $133 million a year earlier, with the increase mainly due to the acquisition of T-Force Freight. Our LTL operating income was $85.1 million. was up 224%, and the operating margin was 9.9, with significant upside potential as we further integrated and optimized T-force freight. This operating income was reduced by a non-recurring $10.8 million purchase accounting adjustment, and further, last year's third quarter includes $6 million from the Canadian emergency wage subsidy, but we received none this quarter. Our Canadian LTL business grew revenue before fuel surcharge 2% and produced a very impressive adjusted operating ratio of 80.3%, while our recently formed US LTL business generated revenue before fuel surcharge of $727 million with an OR of 90.7%. Our return on invested capital in the US LTL was exceptional, but we believe it makes sense to wait for a full year's worth of resolve from T-Force Freight before considering this measure. Our return investor capital in our Canadian LTL was 16.7, up 370 basis points from 13% last year. Turning to our truckload segment, which represents 26% of total revenue. Our revenue before fuel surcharge of $489 million was up 19% over the prior year, third quarter. Our operating income was $56 million, was essentially flat. and our operating margin was 11.4 relative to 13.7 a year earlier. These results include a drop in the Canadian emergency wage subsidy from $8.1 million a year earlier to only $200,000 this quarter, as well as a $4.6 million operating loss generated by T-Force Freight truckload division. Digging in on truckload, U.S.-based conventional operation grew revenue before shield surcharge 21% with an aura of 91.9% while absorbing lingering operating loss from the acquired T-force rate. Primarily as a result of these losses, return invested capital in U.S. truckload only improved 40 basis points to 5.6%. Our Canadian conventional operation grew revenue before fuel surcharge 15% with an OR of 88.4, again, reflecting the loss of $1 million of Canada emergency wage subsidy versus the prior year period. Here, our return invested capital improved 80 basis points to 12.4. Our specialized truckload operation grew revenue before fuel surcharge 19% with an OR of 85.8, despite the loss of nearly $7 million of Canada emergency wage subsidy versus the prior year period. In specialized structural, our return invested capital improved 130 basis points to 10.8. Our fourth business segment to discuss is logistics, which represent 20% of total segment revenue and sell revenue before fuel surges nearly doubled to $408 million. Our logistic operating income more than doubled to $45.3 million, although this includes a $12 million bargain purchase gain related to certain logistics assets at T-Force Freight. This strength in our logistic business was mainly driven by our same-day package delivery business in U.S. and in Canada, and by the addition of TFWW, which continues to perform really well. Our logistic return on investment capital was 24.3, up a robust 630 basis points over the prior year. We continue to maintain a strong balance sheet at TFI International, which we view as a pillar of our strength, facilitating our ability to grow over time both organically and through our discipline acquisition strategy. We produced free cash flow of $169 million during the third quarter, which was up 38% relative to the prior year period, and we ended September with leverage ratio well under the two times in terms of our debt to adjusted EBITDA. With one quarter to go in a year, we're again raising our full year guidance reflecting our confidence in our operational strategy, our focus on what matters and the continued opportunities to optimize the force rate where we see significant potential following the recent acquisition. Keep in mind the usual seasonality should also be expected during the next two quarters. That's it. We expect full-year earnings per share to be in the range of $4.75 to $4.85, up from our prior range of $4.50 to $4.60. We expect net capex in Q4 to be in the range of $75 to $100 million, and we're also increasing our outlook for free cash flow from $5.50 to $5.75 million to a new range of $6.75 to $7.00, again reflecting our ongoing strong performance. and confidence in our ability to navigate what's ahead. We expect our leverage defined as funded debt to EBITDA ratio as calculated in accordance with our debt confidence to remain below two times. Before I conclude, I'd like to take a moment to highlight some recent personal moves at TFI International, starting with two well-deserved retirements from the industry. Well, first, Louis Gagnon was established who had a long and productive career and joined our team more than 10 years ago, announced his retirement this summer. Louis joined us in 2009 as a VP of Business Development and was promoted to EVP in 2016. He took on even more responsibility in recent years, overseeing several of our division and subsidiaries. Also, Brian Coart, who has been with us for more than 20 years, has announced his intention to retire at the end of December. Over the past two decades at TFI, Brian worked his way up to become one of our esteemed EVP, most recently overseeing our package and courier segment across Canada. We wish both Louis and Brian highly fulfilling retirements, and on my behalf and everyone at TFI, We thank them both for their countless contribution and for playing such an important role in our success over the years. I'm also very pleased to announce several promotions across our organization. First, our EVP, Bob McGonigal, will be assuming Brian's responsibility upon Brian's retirement at the end of the year. Bob, as you know, has been with TFI for many years since 2004 and currently oversees several of our LTL business units. We congratulate Bob on his new role. Next, to take on many of Bob's prior responsibilities, I'm proud to announce that Chris Trakus, one of our operating managers and currently president of FITRAN, has been promoted to executive VP effective January 1, 2022. Chris has been with TFI since 2017, brings a wealth of experience to his new role, and we congratulate him on his growing responsibilities. Lastly, I'm equally pleased to announce the promotion of Junior Roy. To EVP, Junior has been with TFI for 23 years, during which time he has led several business units within specialized transportation and logistics services. He has an in-depth understanding of our business and the transportation industry and will now be responsible for various TFI divisions in the province of Quebec. We congratulate Junior and look forward to his many contributions in the years ahead. In summary, TFI International continues to generate record performance, and we expect to finish the year strong. Importantly, the strategic acquisition of UPS freight earlier this year should have an even more favorable impact on our growth and profitability as we move forward. You can rest assured we will continue to focus on what we got us here, including our attention to the fundamentals of the business in order to optimize profitability and enhance our cash flow. And as you heard me say many times, our ultimate aim is to create an unlocked shareholder value, returning excess capital to our shareholders whenever possible. With that, operator, if you could now open the lines, we can begin the Q&A.

Ladies and gentlemen, to ask a question, you 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 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 compile the Q&A roster. Our first question will come from the line of Jordan Alliger with Goldman Sachs. Please go ahead with your question.