TFI International Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the TFI International Second Quarter 2022 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. Again, that's one question and a follow-up so that we can get to as many callers as possible. 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 could cause actual results to differ materially. I would like to remind everyone that this conference call is being recorded on Friday, July 29, 2022. I will now turn the call over to Mr. Alain Bedard, Chairman, President, and Chief Executive Officer of PFI International. Please go ahead, sir.

Our remarkable performance so far this year reflects our long-standing adherence to our principle operating philosophies, as well as the many internal or self-help opportunities that we see, regardless of economic condition, not the least of which is the continuing successful integration of T-Force Freight acquired just a year ago. In addition, Our favorable quarterly results reflect strong execution across our diversified business, driven by the many dedicated individuals at TFI International. We look forward to having you meet some of our many talented leaders at our upcoming Investor Day on November 10th, with more details to follow. For the second quarter of 2022, we reported a 76% increase in our adjusted net income over the prior year and an 81% increase in our adjusted diluted EPS, along with more than $300 million in quarterly free cash flow for the first time in our company's history. All four of our business segments contributed to this strong outcome by producing very strong returns on invested capital, And today we are again raising our outlook for the full year. The economic headwinds, as I'm sure you're all aware, include the rising interest rates along with inflationary pressure at multi-decade highs, continued elevated energy prices, unprecedented labor shortage, resurfacing regional pandemic outbreaks, and of course, the ongoing global supply chain challenges. Especially during uncertain times, this is when we re-sharpen our focus on our long-held operating principles, which bear repeating as they are so instrumental to our strong performance. We have a relentless, detailed focus on getting the fundamentals of our business right in our quest to maximize efficiencies. Everything is with an eye towards optimizing our free cash flow generating strong returns on invested capital and growing our earnings per share. Why do we do this? Well, because it facilitates achievement of our ultimate goal, which is to create long-term shareholder value. Specifically, our strong cash flow and solid balance sheet permits the strategic identification of accretive acquisition opportunities while returning excess capital to shareholders whenever possible, which we did aggressively during the second quarter. Given the choppy economic environment, we are especially fortunate to have many self-help levers to pull, as I referenced earlier. Just one example of this, during the second quarter, we sold a Southern California LTL terminal. This facility with 78 doors on approximately 14 acres. Not only did we realize proceeds of $83 million on the sale, but our existing usage of the terminal will be easily absorbed by our other nearby facility. This is just one example of our internal opportunity to drive efficiencies. Before turning to our segment-by-segment result, on a consolidated basis, TFI International total quality revenue were $2.4 billion, up 32% over the prior year quarter. And given our focus on profitability rather than growth for growth's sake, We are very pleased to report, as I mentioned earlier, a 76% increase in our adjusted net income and an 81% increase in our adjusted diluted EPS and also a 16% increase in our free cash flow to $310 million. It's important to note that in the year-ago quarter, we had a large bargain purchase price gain of $284 million, which impacts the year-over-year comparison on a non-adjusted basis for our reported result, not only on a consolidated basis, but for our LTL and logistics segments specifically. This year ago, one-time gain is reflected in our reported operating income, which was down 17% as a result. In addition, our net cash from operating activity came in at $248 million relative to $299 million a year earlier. due to another quarter of elevated working capital needs associated with high fuel surcharge. I also wanted to note that our deferred share units, or DSUs, provide a favorable $13 million variance to our reported earnings this quarter, given the decline in our stock price. Let's now turn to our poor business segment, all of which generated impressive returns on invested capital that helped drive our overall strong performance. Our P&C segment represents 7% of our total revenue before fuel surcharge. Despite a 14% decline in revenue before fuel surcharge related to a slower e-commerce activity, P&C benefited from better B2B density and our increasing diversity that allowed us to benefit from strong industrial activity for our specialized operation. P&C is a good example of self-help nature of our opportunities. we produced a 25% increase in our operating income to $37 million, with the operating margin up a noteworthy 910 basis point, and our return on invested capital came in at 27.6%, up 460 basis point. This much improved profitability reflects our own internal focus on driving density and productivity, which is part of our active management style. Turning to our LTL segment, which is 45% of segment revenue before fuel surcharge, we generated $870 million of revenue before fuel surcharge, up 39% over the prior year quarter, which includes just under two months' worth of contribution from T-Force Freight acquired in early May last year. LTL operating income of $187 million includes a gain of $55 million associated with the aforementioned Southern California Terminal State. This compared to the year-ago figure of $351 million that included a $272 million worth of the bargain purchase gain. Drilling down further into our LTL business, our Canadian operations continue to benefit from solid onshore industrial activity, and we're able to grow revenue before fuel surcharge just slightly over the past year. More importantly, given our focus, Canadian LTL produced a noteworthy operating ratio of 69.1, an improvement of 880 basis points over the past year. Equally impressive, our return on invested capital came in at 20.4, up 410 basis points. Our US LTL business, was created just a year ago with the acquisition of UPS Rate. We see opportunities similar to the Canadian LTL within this business, and we are very pleased with our continuing integration progress. Revenue before fuel surcharge for US LTL was $725 million with an OR of 88, a more than 200 basis point improvement over the year ago quarter. Meanwhile, our return on invested capital was 24.5, which is already quite strong after just one year as part of TFI family of businesses. Let's move along to our truckload segment, which is 29% of our segment revenue before fuel surcharge. For the second quarter, our truckload revenue before fuel surcharge was $557 million, which was up 16% year-over-year. Our truckload operating income reached $127 million, more than doubling the prior year figure, and our operating margin was 22.9, expanding nearly 10 points, driven by broad basis-based improvement in our specialized Canadian and U.S. truckload operation. Digging deeper within truckloads, starting with our specialized business, which grew quarterly revenue before fuel surcharge a very healthy 18% over the past year, to $273 million as our improved diversity allowed us to benefit from strength in the industrial end market. More important to us, our profitability measure will also improve with an adjusted OR of 76.9, an improvement of 570 basis points, and a return on investment capital of 13%, an improvement of 180 basis points. Our Canadian-based conventional truckload business generated a 43% jump in revenue before fuel surcharge to $88 million, along with an adjusted OR of 73.4, once again an improvement of well over 10 points compared to a year ago. Similarly, our return on investor capital of 16.7 was up 420 basis points. Lastly, within our truckload, our U.S.-based conventional business had revenue before fuel surcharge reached $198 million, up 5% over the prior year. Our U.S. OR improved sharply to $82.5 on these significant revenues. That's just over 1,000 basis points, better than last year, although gain on sale of equipment that accounted for $19 million of operating income. In addition, return on investment capital for this business reached $8.2 million, relative to the prior year, 5.5. Much of the improvement here relates to our dedicated business, where we've made significant progress under Gregor's leadership. We still have more work to do, and we've been referencing last year. In that regard, one very notable move is we are now making it as to a separate out of our dedicated operation program. and fine-tune our leadership structure accordingly. Our dedicated operations are significant, with more than 1,200 trucks that have been operating inside of our U.S. truckload segment. By carving out dedicated from CFI, these operations can now be run by Eric Anson and Steve Brookshaw, who oversees our specialized truckload division operation, while Greg will continue his oversight of our over-the-road operation. Lastly, Let's review the second quarter performance for our logistics segment. Now, 19% of segment revenue before fuel surcharge. Logistics revenue before fuel surcharge grew another 12% the past year to $454 million, while our operating income of $42 million compares to $48 million the prior year. That prior year figure, as I mentioned earlier, benefited from a recognition of a bargain price purchase gain, which was $12 million. Our operating margin was 9.3% and our return investor capital for logistics is 21.1 compared to 22.4 the prior year. Shifting gear now, CFI International balance sheet and liquidity have continued to strengthen. Even as we make the necessary investment to profitably grow our business into the future, and even as we return capital to shareholders through share repurchase, and through our quarterly dividend, which itself has climbed 17% the past year. As I referred earlier, we produced free cash flow of $310 million during the quarter. We also repurchased approximately 2.6 million shares of our common stock. And this week, our board of directors approved an increase to our NCIB program to the maximum of approximately 8.8 million shares, about 1.8 million higher than the previous authorization. Also, during the quarter, we completed three small acquisitions plus two additional small acquisitions subsequent to quarter end. We finished June with a debt to adjusted EBITDA ratio of only 132, despite the completed buyback and acquisition. As of June 30th, 76% of our debt was fixed rate, excluding equipment financing, and we had a weighted average interest rate of 3.45%. and a weighted average maturity of 7.9 years. Again, maintaining a strong balance sheet is core to our overall strategy of being able to strategically grow the business when the opportunity arises while returning excess capital to shareholders whenever possible. Wrapping up, I'll update everyone on our full-year outlook, which assumes that these that these volatile, broader macro conditions continue countered by our own strong execution on what TFI International can control. And this is what I find most encouraging, that continued streamlining is within our grasp. Specifically, we plan to continue optimizing T-force rate while staying focused on the fundamentals across our entire network. As I said last quarter, this includes an emphasis on improving density, providing superior service, optimizing our pricing, increasing driver retention, and a concept that we call freight that fits. We only take on the right freight for our valuable network. With this in mind, for the full year of 22, we are again raising our load. We now expect earnings per share to be $8. That's up from $6.50 to $6.75 previously. We forecast free cash flow to be 900 million, up for 700 million previously. So with that, operator, we're ready for the Q&A. If you could please open the line.

Thank you, sir. 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. As a reminder, 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 comes from the line of Ravi Shankar, from Morgan Stanley. Please go ahead.