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 material. Also, I would like to remind everyone that this conference call is being recorded on Friday, July 29th, 2022. I will now turn the call over to Mr. Alain Bedard, Chairman, President, and Chief Executive Officer of TFI International. Please go ahead,

sir. Thank you, Mr. President and members of the rest of the universal society. Our remarkable performance so far this year reflects our longstanding 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 add-winds, 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 principle 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? Because it facilitates achievement of our ultimate goal which is to create long-term shoulder value. Especially, our strong cash flow and solid balance sheet permits the strategic identification of our creative 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 receipt 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 -by-segment result, on a consulted 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 -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 higher 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 generate impressive returns on invested capital that help 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 the 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 .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 of 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 rate 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-go 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 point over the past year. Equally impressive, 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 investor 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 US truckload operation. Digging deeper within truckloads, starting with our specialized business, which grew quarterly revenue before fuel surcharge of 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 was improved with an adjusted OR of 76.9, an improvement of 570 basis point and a return capital of 13%, an improvement of 180 basis point. 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 invested capital of 16.7 was up 420 basis point. Lastly, within our truckload, our US based conventional business had revenue before fuel surcharge reached 198 million, up 5% over the prior year. Our US OR improved sharply to 82.5 on these significant revenues. That's just over a thousand basis point better than last year, although gain on sale of equipment accounted for 19 million of operating income. In addition, return invested capital for this business reached 8.2 relative to the prior year, 5.5. Much of the improvement here relates to our dedicated business where we have made significant progress under Greg Orr's leadership. We still have more work to do and we've been referencing last year. In that regard, one thing to remove is we are now making it is to a separate out of our dedicated operation and fine tune our leadership structure accordingly. Our dedicated operations are significant with more than 1200 trucks but have been operating inside of our US truckload segment. By carving out dedicated from CFI, these operations can now be run by Eric Ensign and Steve Brookshaw who oversees our specialized truckload division operation, while Greg will continue to 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 last year to 454 million while our operating income of 42 million compared 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 .3% and our return invested 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 shareholder through share repurchase and through our quarterly dividend which itself has climbed 17% the past year. As I referred earlier, we produced a pre-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, 36% of our debt was fixed rate excluding equipment financing and we had a weighted average interest rate of .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 volatile, broader macro conditions continue countered by our own strong execution on what TFI International can control. 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 2022, we are again raising our outlook. 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 1 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.

Thanks. Morning, Alan. As you mentioned in your comments, there's been much press dedicated to what the U.S. macro environment is like. It may or may not be a recession, but maybe investors here are not quite as clear with what's happening in Canada. Can you give us a little bit of a snapshot into what the macro environment and outlook is like in Canada and also what the ELD situation there is like and potential tailwinds from there? Thank

you. Very good question, Ravi. Finally, our friends at the federal government said that this is going on in January 1, 2023. In terms of the general economy in Canada, we feel pretty good with that. Yes, we have two years of COVID like the rest of the world, but oil being at over $100 a barrel really helps some of our provinces in Canada because, don't forget, the Canadian dollar is mostly like a petrodollar. Ontario and Quebec means economy are doing well as well. We have a lot of people that are talking about freight recession or maybe a recession, but so far, even when I look at our month of July, we're still running on all cylinders. Maybe a storm could come, maybe at the end of 22 or into 23, but as I said many times, us at TFI, we know that storm will come one day and we're ready for that and we try. We do very well in the storm and it creates opportunity for us. We have a very strong balance sheet. We generate today a lot of cash. Our forecast for 22, like I said on my script, is about 900 million US. We feel good about that. We feel good about the economy as it stands. For sure, we have those challenges like inflation and all that, but we went through COVID for two years and prior to that, there was another story. In our world, there's always something that we have to live up to, a challenge, and if there's a recession coming, we're ready. Great. Maybe as

a follow-up, what kind of message do you want to send to investors in the street by raising your buyback at this point? Clearly, with your new guide, I think it reflects the valuation of the stock, but maybe if you can talk in terms of like a profit PS or a floor on the stock price, what kind of signal are you sending with that upside?

Yeah, well, you know, Ravi, we believe that even at the stock price today, it's still cheap. Maybe not within the next six months, maybe because there's a recession coming, but long-term. If you look the next five years, we believe that at today's prices, it's the best use of our cash because don't forget, we do large M&A every three years on average and right now, we're not doing in 2022 anything big, anything of size. That may come in 2023 if market conditions are fine, but in the meantime, we just buy back something that we know that what we're buying for sure is TFI. So we'll stay very aggressive on our buyback because we believe that long-term valuation of TFI is still undervalued. We could be an ADOR down the road, like I said, over the next two to three years. We are investing in technology to help our team there. We are also investing in our equipment, which was very under invested for a few years. So we believe that the TFI could be an ADOR within the next few years, like I said. So this is why for us, buying back the stock long-term, it's a great deal for our shoulder.

Great. Thanks, Alain.

Pleasure,

Ray. Thank you. Our next question comes from the line of Ken Hochstel from Bank of America. Please go ahead.

Great. Good morning, Alain. Morning, Ken. To clarify that last point, you mentioned earlier in your opening comments that you thought the US LTL could be similar to Canada. You just said an ADOR, and obviously Canada is now pushing below 70, is ADOR your target or are you throwing it out there longer term?

No, no, no. We're still staying with a target of ADOR, which is quite a challenge because, don't forget, a year ago when we bought the company, the company was not very successful at the time. So now we're from a 90, now we're down to 88. We're making all these investments in technology and equipment and people, and our forecast is really to be an ADOR within the next two years. Now, can we be as good as Canada? I mean, that's a different country, that's a different story. We are a dominant player in Canada. We are not a dominant player in the US today. So, no, what we're saying is that the same recipe that bakes the cake of success in Canada, we're working with our US team to bring in the similar approach, similar philosophy. You guys have to do more with less. We cannot haul freight that does not fit. And if you go back to a year ago when we bought the company, I would say that about a third of the freight that we were hauling at the time did not fit. So it's not a situation that has been corrected in 12 months. It will take more than 12 months to correct. We've made a lot of strides doing that. But no, I mean, the target for T-Force freight, reasonable target for the next two years is an ADOR. It's not a 70-OR. I mean, 70-OR, it's best in class in the US. I mean, there's only one company, one of our peers that's there, and us, we're there, okay, in Canada. But Canada is not the US.

Yeah, thanks. I just wanted to clarify if you were sending a different signal. No, no, no, no. Just to continue on that, you sold a terminal. Is that just the start of your digging through the process in terms of what LTO opportunities within the US, or was that a special case out in California?

Well, that was a special situation because so far, I mean, we got rid of one lease in Chicago. We're going to be selling two small terminals to one of our peers. But that was a major one, okay? So the usage of that terminal was very, very small. So that was a kind of a one-timer. But for sure, like I said earlier, when we bought the company a year ago, these guys were, they were managing about, I would say like 11 to 12,000 doors. And we believe that there's at least 3,000 doors, too many. So we just sold 74 to this purchase from a third party. But there's more to come. So are we going to be selling the terminal, or are we going to be renting space like we do in Canada on our dock to third party? Are we going to be starting to rent space in our yard because we have lots of space available in our yard? For sure. Okay. But year one was really just to try to understand what's going on. Okay. And now our real estate team is working aggressively with our operating team to identify the opportunity for renting space in our yard and on our dock. In terms of selling excess real estate asset, that was more of a one-timer, although we're selling some small terminals here and there. But as a matter of fact, we're also buying one terminal from one of our peers in Sacramento. Okay. So at least we'll be turned over to one of our own terminal in Sacramento. We're also looking at buying another one in Louisiana. So it's just a real estate complete analysis that's been going on. And we didn't talk on the script about the environment. Okay. But very important to say that we've pulled out the fueling tanks and all this equipment in about 40 of our sites so far. We shut down 100 fueling operations within the network and we're cleaning up all this environmental as we speak.

Alain, great to watch and appreciate your thoughts and insights. Thank

you. Pleasure, Ken.

Thank you. Our next question comes from the line of Jordan Halliger from Goldman Sachs. Please go ahead.

Yeah. Hi, morning. I was wondering if you could drill down a little bit deeper on the truckload profitability for the quarter, specialized Canadian TL. I mean, just a really big step up in margin and maybe give a little more details around that. Thank you.

Yeah. Very good question, Jordan. So our Canadian TL, Canadian truckload, I mean, van division at, you know, they've done a fantastic job in the quarter Q2. They took advantage of market condition and they produced a no more in the 75 neighborhood and the same of our specialty truckload because now specialty truckload is big. Okay. We're the largest player by far in Canada, mostly on the Eastern part of Canada, Ontario, Quebec. And we're building also a quite solid specialty truckload, okay, in the U.S. under the leadership of Steve Brookshaw. And we've reported a very improved OR there because don't forget, we made a lot of acquisition in that sector over the last 12 to 18 months, small tuck-ins here and there. And when we buy this company, normally they run a 95 OR on average when we buy those guys. And Steve and his team are slowly bringing those guys closer to, let's say a 90 OR and an 88 OR and an 85 OR. So we had a fantastic quarter in our specialty. On the regular U.S. operation, you know, with the acquisition of UPS a year ago, we got about 750 trucks in our UPS truckload dedicated division that was losing a ton of money. We were losing about $5 million a quarter when we acquired this division. And at the same time, we've also moved all the -the-road operation of Transport America to CFI. So CFI kept all the -the-road operation of the old TA, and TA kept only the dedicated business that was intertwined, okay, with the -the-road operation. So now the old TA operation, which is about 500 trucks, and the combination of the old UPS truckload division, which is about 700 trucks, the total of that dedicated operation is 1200 trucks. A year ago, these guys were losing money, big time, because of UPS mostly. Now Greg's team, working with Eric, they've turned the tide, they've turned the page, they've turned the corner, and now we are in a profitable environment, okay, running an operation that is around a 94 OR. And the reason we did the split is that we want Greg's team to be really focused on -the-road, which is a different world, okay, than dedicated. Dedicated is not the same kind of business in our mind, okay, because we run also some dedicated business in Canada, and for us it's always been part of our specialty truckload. So this is why we've announced on the call this morning that we're making these changes. So Greg keeps the -the-road. Eric is now our leader in the dedicated, working with Steve's team in the U.S.

Thanks, and then just in the context of the earnings outlook, then, I mean, is this kind of within a few points the margin level you'd think for truckload going forward, for the time being at least?

Well, that's the intention there, Jordan. That's the intention, is that by having this team more focused on just -the-road with their CFI Loistica division in Mexico, that, guys, let's focus on being better at -the-road. And in the meantime, Eric is running his operation, working closely with Brookshaw.

Thank you.

Our next question comes from the line of Brian Austin Beck from JPMorgan. Please go ahead.

Hey, good morning. Thanks for taking the question, Lane. So I wanted to ask you a couple questions about labor to start. We've seen AB5 not be heard by the Supreme Court. Just given the nature of TFI's model, and I think you just purchased the courier service in California, maybe give us an update on that as well as what you're expecting with the Teamsters on T-Force rate coming up in the next year.

Yeah. Well, AB5, I mean, we've been preparing for that for the last, I mean, two years. At the time when this came out, we believed that this would stay the course. So that unit-T courier that we bought a few months ago is an employee model, okay? And we're just getting ready to grow with the employee model in California. What we've done with our last mile operation is we don't have an owner operator today that works for us and has only one truck, okay? And that creates an issue with AB5. So, I mean, we've cleaned all of this in the last, I would say, two to three years just to make sure that we would be clear of any issues with AB5 as it is now. Now, in terms of our discussion with the Teamsters, I mean, we feel really good about that. I mean, our intention is always, like I said many times, our asset is our people. And our approach with our people is that we want salaries to be market. And we are. We're there. I mean, the base salary of our employees is market. For sure, market could be different in California, okay, that it could be, let's say, in Louisiana, okay, different market condition, or New York, or Texas. And our approach to us, to our discussion is, guys, let's see what we can do together. I mean, we're not about trying to squeeze salary reduction or whatever you want to call it. Our approach to us is to do more with less. So, how do we do that? Okay, it's very easy to say, but how do we do that? So, our approach to us is, guys, can we reduce the, because right now our driver spend about 55% our P&D drivers spend about 55% of the time driving. Why? Because between each and every stop that we do, overall at T-Force rate, our guys have to drive between, on average, 10 to 12 miles. So, they spend more time driving a truck than picking up freight. Well, that's completely different than what we do us in Canada. So, when we say to our team, guys, we have to do more with less is we have to drive less miles so that our drivers pick up more freight. And how do you do that? Well, let's focus on customer that are close to your terminal. Why would you run 50, 60 miles to deliver a pallet? Try to deliver around your terminal, a radius of 10, 15, 20 miles. Okay. But why would you run all 60 miles in rural areas where there's no density? So, that is one aspect. The other aspect that we're trying to do as we do in our P&C, and if you look at our P&C results, why are we so good? It's because there's been a little bit of a shift between B2C and B2B, and B2B, our density is way better. We've always said that B2B is way better in density. So, we've done less in our P&C in terms of volume, but our profit came up because of that change in mix. So, what we're saying to our guys in the US, LTL, is, guys, when you stop at a customer and on average you pick up 1.1 shipment, well, try to grow that to 1.3, 1.3, 1.4, 1.6 to 2. So, you pick up more freight, you drive less mile, so that's how you do more with less. It's got nothing to do with the salary of the employee. So, us, we want to pay market conditions for salaries, and this is what we'll be talking with our friends at the Teamsters, but our job is to manage those employees better, to get more yield out of an hour of work, right? To have better tools like we're implementing over the course of 22, AI tools to help us with our line-haul operation. And we believe that just the improvement on our line-haul could provide us with a one-point saving on our OR. So, we do more with less, but that's got nothing to do with the rate per mile that we're paying our drivers. It's just that we manage those employees better.

Thank you for all those details, Elaine. And just to follow up on the building shipment density, it looks like in T4's freight, shipments in tons are still down a bit quarter to quarter. That's still part of the one-third of the business that doesn't fit, and maybe you can offer some thoughts on where you are in that journey and when that might start to reflect positive. Thank you.

Yeah, you're absolutely right. I mean, if you look at TFI's history, every time we buy a company, it always shrinks, step one. And T4's rate is not an exception, it's what we do, right? Now, for sure, we have some kind of a pause right now, okay, in terms of because, you know, a third of the shipment, you can't turn a third of your shipment within, let's say, a year. It's impossible. So what we did is we got rid of everything that was really, really bad, okay, but we still have some bad stuff in there. But you know what, between you and me, we still have some bad stuff in Canada, right? So nobody's perfect. But in the U.S., it's going to take us to churn everything that doesn't fit, probably another two years, right? Because we have to do it on a timely manner. We can't run from, let's say, 30,000 shipment down to 20. It's not going to work, right? So this is why we're slowly and aggressively replacing the things that are the worst freight that we've got. You know, it's like hauling mattresses. That doesn't fit T4's freight. Hauling carpet, I mean, we're not in that business. That should not be us, right? So to answer your question, you know, we're probably at the flat, okay, organic growth, or a little bit negative maybe in the next few quarters. But after that, okay, we are investing in our sales team. Our approach is different. And one thing that is also important to note, guys, is that our GFP, which is our diamond within T4's freight, there our revenue is growing by about 20% a year. That's our asset light operation in our LTL.

Thanks, Wayne. Very helpful. Appreciate it.

Pleasure. Thank you. Our next question comes from the line of Tom Wiedwitz from UBS. Please go ahead.

Yeah, good morning. Good morning, Tom. Elaine, I think there's been, you know, maybe greater caution on the truckload business that we've heard from you over, I don't know if it's over the past year or whatever. I think maybe some frustration with some of the challenges. This quarter was, you know, I think you performed well across the board, but truckload was really notable how strong the performance was, you know, on the margin side. And I think you said on an earlier question that you thought it was sustainable at this level. So with that as a backdrop, does it make you more optimistic on that business as an attractive segment? You know, and maybe something you'd want to grow more in the future? And maybe that's more, you know, conventional TL question, because I know you like specialized TL.

Yeah, yeah, you're absolutely right. We prefer, okay, for sure, specialized. But within our -the-road operation, okay, we have one part of our business, which is temperature control, okay, that's doing really, really well. And we're growing that. As a matter of fact, we did a small acquisition of D&D, a small Joplin 100 truck company. So we are investing in temperature control. On the drive-in side, you know, I mean, right now our focus is really to do better with the assets that we have now, right? And that's why we did that split so that Greg's team could be more focused on -the-road and temperature control. And then Eric has got, because Dedicated is really not the same business in our mind than it is with the -the-road stuff. -the-road stuff, I mean, it's not the same story. The employee turnover is not the same. So, you know, the -the-road stuff, 900 miles, average length of all, you end up with something like an 85 or 90 turnover. Dedicated, normally you should be closer to a 50 in the US, I'm talking, 50, maybe 60 turnover. So it's a different story. It's not the same. So that's why we made the slit, working with our dedicated team in Canada under Steve Brookshaw. That made a lot of sense of Eric. So these are changes that we're making to make sure that, you know, we could do a better job.

Where would you see risk and potential, I don't know, pressure on revenue and performance, you know, looking out a quarter or two?

Yeah. I would say that to me, it's mostly our truckload operation. That you may be more concerned that our US LTL or our US logistics or last mile in our logistics, you know, when... We

do a better job than... I don't know. Okay. I'm

going

to

say it for you.

Hey, good to see you. What's up? I'm Jack. I'm a... I'm a... I'm a... I'm a... I'm

self... I'm self... ...control, etc. But was there anything non-recurring in nature, like, not necessarily, you know, Q2 for those two or three segments for 30% margin, or was that purely kind of an operational performance and you continue to expect those segments to deliver those kind of margins going forward?

Yeah. Yeah. Well, on the truckload, the Canadian truckload is really the market condition that we really took advantage of. You know, the market has been tight, the activity has been good. Okay. So really, it's just market condition, right, that we took advantage. Because if you go back to, let's say, two, three quarters ago, I mean, we were not able, okay, to provide these kinds of results because the market was not helping us on that. So really, for Canadian truckload, Canadian LTL, it's a little bit of a different story because we keep on building, you know, more freight, more dens to reduce our costs. So I could say that because so high and when your density is also above average, okay, compared to your peers, which is not the case for us in the U.S., like I said earlier, our density in U.S. compared to our peers is probably not as good. But I would say that our density in Canada is way better, okay, than I would say compared to our peers, normal. And when fuel is high and you've got efficient equipment, which is not the case, I mean, in the U.S., we have old trucks. So we get the double whammy of not being efficient. So we have old trucks and not good density. So fuel is high. In the U.S. LTL, it kills us. On the Canadian side, we have a young fleet, okay, and we have high density. So to answer your question, maybe on the package and the LTL in Canada, because fuel is high, it's a little bit of a tailwind for us that let's say fuel goes back to normal, okay, so it could be a little bit of a detriment to our profitability because we make a little bit. This is because we are so efficient. But that also helps us on the U.S. side. If fuel comes down, okay, it should be a good benefit for us because it will take us two years to bring our fleet to a normal age. See, we reduce the average age by one year, okay, from 8.3 when we bought the company, average age of trucks in the U.S. LTL, now we're down to about seven and a quarter. Seven and a quarter is way too old, right? So we're going to bring that down. So that is the only thing I would say that is something that is unusual, okay, that if fuel goes back to normal,

yeah.

Right, that makes sense. Thanks, Dr. Colarelli. And then moving on to the pricing environment, I think some of your U.S. peers have recently alluded to the fact that the rates have started to kind of soften. I'm not talking about spot, I'm talking about contract. I know you have minimal exposure to spot, but even on the contract side, they are anticipating some sort of softness in the second half sequentially. They will still be up versus last year and maybe a year ago. But what are you seeing from your perspective in your kind of rate discussions with your customers? I know your book kind of turns around pretty quickly every year. So any thoughts here?

You know what, because of all the effort that we had to do on our dedicated, because when we got this business from UPS, it was really, really losing money big time, okay. And Greg's team's focus has been on correcting that. So a lot of energy from the sales department and everybody was there to correct the situation. But I believe that our average revenue per hour over the road today is under market because the guys were too focused on dedicated, maybe not enough, okay, on over the road. So our contracted rate today, okay, we're still not seeing that pressure that some of our peers may have because probably their quality of revenue is better than ours because us, our team had to focus more on the dedicated to track a situation that was completely not acceptable. We were losing money, right, didn't make any sense. We had deals with customers that had no sense. But you know what, when you have to adjust rate, it's hard to, you have to chase the customer. So it takes time and a lot of discussion, et cetera, et cetera. So a little bit of out of focus because of that is dedicated. I would say that maybe our rates at over the road compared to our peers are not where they should have been, okay. So we're still overbooked every morning. As of today, we still are overbooked by 5 to 8 to 10%. We used to be overbooked by 15. Now we're overbooked only by 5, okay, to 10. But still, I don't see in the next, let's say two quarters to, for the rest of the year, I don't see any pressure on the truckload, the US truckload rates for us.

That's very good. Thanks, Ola. I appreciate the time.

Thank you.

Thank you. Ladies and gentlemen, as a reminder, please limit yourself to one question and a follow-up. Our next question comes from the line of Kevin Chang with CIDC. Please go ahead.

Hi. Good morning, Elaine. Congrats on a set of good results here. Thank you, Kevin. Maybe just, I'll keep it to one question. If I could just look at your LTL division, if I look at your revenue for shipment excluding fuel for both the US and Canada, sequentially there were a couple of percentage. And one of your peers north of the border was pointing to a stronger pricing environment in the Canadian LTL market. And I think part of that might be, so maybe a little bit of a catch up on pricing. It'd be interesting to hear what you think the trends in LTL yield or pricing or revenue for shipment, whatever metric you want to call out looks like through the balance of the year and maybe even into 2020, 2023.

Well, you see, Kevin, if you compare us and the US LTL with our peers, the big, big issue is our average weight. So our average weight is not even 1100 pounds per shipment. And most of our peers are at least above 1300. So the cost of only a pallet that's 1100 pounds versus delivering a pallet or picking up a pallet that's 1600 pounds, I mean, the costs are basically the same. But the problem is the revenue is not the same. Why? Because most of the pricing is based on per hundred weight. So this is part of our strategy of improving the quality of revenue is to haul like we do in Canada, our LTL operation in Canada. I mean, we're heavy in industrial LTL. There's not much industrial LTL in Canada, but that's where we're focusing. And that's why if you look at our average weight for shipping in Canada is day and night versus what it is in the US. Right? Canada is exceptional. Our average weight is wow. Our OR is, you know, we've never done a 69 OR. Right? But on the other side, we've got a lot of things to fix. Like I said, when we bought the company, at least a third of the shipment didn't make any sense. So we've corrected some of that, but we still have to correct way more. Okay. And this is also part of the issues of the weight per shipment. So we've improved over a year a little bit, the weight per shipment, just a little bit, not much, not enough. Right? So that's also part of our focus on our kind of three, four leg chairs. Like I said earlier, one leg is to pick up more freight per stop. Another leg is to, you know, pick up more freight around your turbos so you're not stupid and having milk run of 300 miles or 200 miles that the guy keeps driving for about 65% or 70% of his time spending money and not picking up any freight. And then also is the weight per shipment. So you've got to be focused on the freight that fits. You don't want freight that is so light that weighs 200 pounds because you're paid by the pound, by the 100 pounds. Right? So to me, I mean, in the U.S., we still have lots of opportunities, lots of things from the fleet side. We believe that, you know, if we bring our fleet to where it should be, okay, in terms of age, we're going to save on MPG, we're going to save on energy, we're going to save on maintenance, we're going to save on the size of the fleet, et cetera, et cetera. And that's about between two to three points of OR, okay, that, you know, we're not getting because compared to my peers, I run a very old fleet. Right? So all in all, we're really happy with what's going on in our LPL. For sure. I mean, Canada is, well, U.S. is, well, guys are doing a much better job today than a year ago.

That's super. And we mentioned the clarification question. When you think of that ADOR target in the next couple of years in the U.S., I guess that assumes that the fleet gets replaced, so you get the two to three points there, plus the average weight gets to 1,300. Are those kind of the two KPI that are the major drivers of the ADOR or is there anything else you would call out?

Yeah. So what we're saying, Kevin, in general, okay, is if you look at today's operation, so where are we going to take the, let's say the 90 OR to those eight to 10 points, okay, fleet, okay, is two to three points. That is the big thing. Getting more freight per stop, the productivity of our operation is another two to three points. The line haul, okay, that, you know, we're bringing some new tools to help our guys. We believe that this is between one to two points. Okay. Line haul is our biggest expense at about 38%. You know, it's a huge change, okay. So the guys are working, it's a complex network that we have in the US, contrary to Canada. Canada is a very easy complex because your line haul runs Toronto, Montreal, a little bit to the west, no big deal. But in the US it's complicated because we got 20 hubs. So the tools that they have right now are not tools of the 21st century. So that's what we're doing. Okay, we should be up and running 100% by the end of this year. And there on the line haul, we believe between one to two points of OR will reduce, right. So all in all, we have a path, okay, to the 80 OR, but that takes time, right.

Perfect. I'll leave it there. Have a great weekend, Elaine. Thank you very much.

Thank you. Likewise.

Thank you. Our next question comes from the line of Walters Franklin with RBC Capital Markets. Please go ahead.

Thanks very much. Good morning, LA. Good morning, Walter. So I want to come back to the question on segmenting. You mentioned some leadership changes. You've carved out USTL. You're hosting an investor day. Just curious as to whether all of this suggests that you're looking at businesses either more on a standalone basis. Would you consider some to be non-core, but not strategic for you that you could spin out that or, you know, just curious whether all of these, you know, changes are leading to, you know, something that you might be saying, maybe you won't say it here, but am I pulling together things accurately here or is that just something you're doing in the normal course of how you're managing your business and nothing to read into?

No, it's normal course, Walter. I'll give you an example, which I did talk about on the script. So what we've done is our Western Canadian operation. That was the responsibility of Steve Brookshaw. Okay, we said, Steve, you know what? This got to go. It's got to go to Chris Strakers, which has its own operation out West. So we did that change about two months ago. And that change was done. Why? So we removed about $100 million revenue from Steve's management. Okay. And we gave it to Chris because we saw an opportunity in dedicated. I mean, Greg and his team have done a fantastic job to turn this thing around. Okay. But doing that, okay, like I said earlier, we lost focus on the over the road thing. More importantly on the quality of revenue, the revenue per mile. I'm convinced that we've missed, okay, because they were too focused on trying to correct a situation, okay, at dedicated. So this is why, you know, our approach was to say, okay, Greg, let's have you and your team focus on over the road only so that we could catch, okay, everything that we didn't do because we were too focused on something that we had to correct. And Steve, okay, is growing more and more into our specialty truck load. And there we also made a split between the flatbed operation that we have in the US and the tank operation in the US. So Cameron that used to run Volt, okay, until about two months ago, Cameron Ulcer, now runs only the tank operation. And someone else, I forgot his name, runs our US flatbed operation, which is of size. I mean, we're doing about $100 million of flatbed in the US today. And now bringing dedicated Eric with about 1200 trucks into the same folder, the same team. The other thing also is the TMS, okay, we run mostly TMW, okay. And TMW is the software in our dedicated that we got from UPS. It's also the same kind of system that we have at the old TA, okay. So it's two different roles. And our specialty in the US, they all run TMW. So, you know, it's a standardization thing that we're doing there,

Walter. That makes sense. Some more of an optimization standardization rather than a broad market. Got it. Okay. Acquisitions you mentioned perhaps in 23. I know recently when we were chatting, you mentioned that you're always working on larger transactions. They take time. Yes. And there were a few that you were kind of working on. My question is, do you think those are advancing or the market conditions right now slowing that process down or pausing it or are they continuing to proceed such that, you know, in 2023, we could very well see another larger deal from TFI?

Walter, I think it's possible. I think it's possible. But you can't say anything until it's done, right? But for sure, like I said many, many times, you cannot buy something of size and do that overnight. That's not our style. We always believe that you make your money on the buying, never on the selling. So you've got to be a smart buyer and take opportunity where they lay. So 22, it's impossible for us. What we're doing, as we said, okay, we're buying TFI. We bought 2.6 million shares in Q2. You know, we've increased from seven to eight something, okay, according to our board approval. So we'll be probably very active with our NCIB in 22. Now, going into 23, and you know what our forecast is that, you know, if we exercise all the share buyback that we could do until the end of October, because that is the NCIB, that's the expiry date of our actual NCIB buying back. We believe that our leverage is going to be at about one, right? So it's going to be incredible. So that's our focus. Now, 23, for sure, if it fits, if it makes sense, if market condition, and maybe, you know, like everybody is saying, maybe there's a recession coming. But if a recession is coming, I like that on the Yemeni side because it adjusted the value, okay, through a recession, right? Everybody's valuation comes down. If you look at since April, most trucking companies' valuation have come down 10%, 15%, 20% because the perception is that we're going into a recession, right? So that's why I think 23 is the right timing for us. I think that, you know, our target that we have are still very interesting. And let's see what 22 ends up being. And I think we'll be ready for something of size in 23.

Yeah, I guess when you got good free cash flow, it gives you lots of options, buyback stock and still be able to do acquisition with a clean balance sheet. That's great. Congrats on a great quarter. Appreciate the time.

Yeah. Thank you, Walter.

Thank you. Our next question comes from the line of Jason Seidel from Covin. Please go ahead.

Good morning. Morning, Jason. I wanted to ask a couple questions here on some operational issues. So if you look at your P&C business, I mean, obviously there's been a switch away from the consumer more to B2B. How should we think about the margins in that business trending forward with this shift going on?

I think that most of the shift, Jason, what you're seeing in Q2, I think that it's probably going to be similar in the next three to four, Q3 to four, Q4 in 22. I think that the switch, OK, so if I take one of our division, for instance, ICS, OK, we're really badly affected by B2B, all the closing, et cetera, et cetera. They're back to normal now, right? So those guys are back to normal. TFIS, OK, were badly affected by B2B. Those guys are back to normal. Now, our Canpower Lumis operation, mostly Lumis, OK, there we've been down on volume because they were a big B2C player when this covid thing hit us. They were the choice, the tool that we use. And this is why our Lumis operation has shed some volume and B2C will probably continue to shed a little bit of volume into the peak season of 22. Why? Because the consumers, OK, we see that all around. A lot of these guys are going back to the mall, right? So it helps our TFIS, it helps our ICS guys to the detriment mostly of our Lumis guys.

OK, that's great color. I wanted to also follow up with Canadian LTL. I mean, absolutely an amazing OR. I've been on one of your docs years ago when it was under another brand name with the rail tracks running through it, and I think they were operating in the 90s. So to be operating in the 60s is an amazing accomplishment. How should we think about that going forward? Is this sort of plateauing and then we should think about potential growth on this? Or do you think there's even more to go there on the OR?

No, I think that when you run on the Canadian market, Jason, a 70 OR, I mean, it's like you cannot say impossible, but it's like very, very difficult to do better than that. I mean, our guys are working every day, very professional to do better. But when you are at a 69, 70 OR in Canada, because if you compare the quality of revenue of a Canadian shipment, same weight, same length of all. OK, you compare that with the US even better to the one of our peer in the US that is running a 69 OR. Compare the quality of revenue of a US 69 OR with the quality of us. We do a 69 OR. You will say, wow, this is incredible because the Canadian market is such a poor market in terms of quality of revenue. So our team are doing a fantastic job. If we would be able to replicate what we do in the US, OK, I mean in Canada, in the US with the same quality of revenue that we have in the US, even with shipment that don't fit, we would probably be running a 55 OR. OK, so if you do the math, because in our MDNA, OK, we are showing all these different numbers and you would see that. Wow. OK, so to answer you and make a long story short, it's difficult to do better than that. Right. But we're going to try.

Well, it was extremely impressive nonetheless, and I look forward to you guys posting gains in the US division. Impressive quarter. Thank you for the time. Thank you, Jason.

Thank you. Our next question comes from the line of Benoit Parier with Desjardins Capital Market. Please go ahead.

Hey, good morning, and congrats for the very impressive quarter.

Thank

you. Yeah, obviously very strong performance from Canadian LTL and Canadian TL with very impressive OR. But we are aware about the supply chain issues in Montreal and Toronto, the lack of -os-ing and dry-age capacity capacity. And obviously, TFI has many tools in their toolbox to help out customers. So could you provide some color about how the supply chain issues benefit TFI and whether the strong performance for both segments is sustainable going forward as the supply chain is going back to more normal levels at one point?

You know what? You're right, Benoit. Maybe, but our guys really took advantage of the market for sure because we have a good pulse. We know what the market can sustain and we took advantage of it. Now, if supply chains issue within a year or 18 months or maybe because of recession, supply chain gets better or worse, I don't really know. But one thing is for sure is that we always take advantage of market condition. The only areas where we've missed the boat a little bit, like I said earlier, is our US TL over the road because the guy we're really focused on correcting a situation and are dedicated that need a lot of attention. But the rest of our operations really are on pulse with market condition. Now, if market condition change, for sure that could affect us down the road. But you know what? That also helps us on the eminy side. So if you look at 20 years of TFI's history, good times, bad times, we adjust ourselves and we perform well.

Yeah, okay. That's great, Kaller. And for my follow up, Alain, with respect to the $8 EPS target for the year, could you talk a little bit about the expectation for gain on the rolling stock in the second half? And looking at the capex also seems a bit weaker in the quarter. So if you could mention some color about the capex forecast and your ability to get new trucks these days, that would be awesome.

Yeah, yeah, well, for sure. Q2 on the capex side has been slow, okay, for our US LTL. I mean, the suppliers keep pushing back. Now, we believe that three and four will be important capex for our US LTL. We're trying to catch up. I mean, so far, we've replaced about 650 trucks in the US, which is way too low. We believe that by the end of 22, we'll be in a position to have been able to replace about 1400 of those trucks. So capex on Q3 and Q4 will be more important. Now, in terms of gain, okay, on equipment, we don't believe that the huge gain that we had in Q2, because we also took advantage of the market. See, we were selling trailers in the US for $24,000 at 2008-2009, okay, in Q2. As of today, the same trailer is being sold for $15,000. So it's still a lot of dollars for an old trailer, but it's not $25,000 like it was like two months ago, right? So we don't believe that in three and four, the gain on selling pre-owned used equipment is going to be in the same nature. Q2 was exceptional in that regard. But we believe very, very confident about our $8 per share and our free cash of $900.

Okay, thanks for the call there very much. I'll ask some questions again.

Thank you. Thank you.

Our next question comes from the line of Bascom majors with Susquehanna. Please go ahead.

Can you talk about how you compare quantitatively the return you expect on buying your stock versus the return you think you can earn from M&A and what that comparison looks like today where your stock price is trading this morning? And just to clarify, does the EPS guidance assume that you get through that full expanded 8.8 million share buyback or does it not? No,

no, no, no. When we talk about the $8 per share, it assumes the share count as we have it today after the 2.6 million shares that we bought back in Q2. So if we buy back another, let's say, two to three million shares, okay, that could be a different story on the EPS.

Okay, thank you. In the return comparison, how does your hypothesis? The return comparison

is always difficult to do, okay, but what we believe is if you look at it today, maybe it's close to breakeven, always depending on what is the cost of purchasing the stock back. But we know long term, okay, it's going to be a huge advantage for our shoulders. When I'm talking long term is I'm talking three to five years.

Thank you for the time.

Pleasure. Thank you. Our next question comes from the line of Ari Rosa with Credit Suisse. Please go ahead.

Great, thank you. Good morning, Alan. Really impressive results here. So, you know, you laid out the path to get to an ADOR on the US LTL side. Obviously, what you guys have done since acquiring that business has been extremely impressive. Maybe I could just get you to speculate or discuss what would be the obstacles to getting to that ADOR? You know, two to three years down the road, if you guys aren't there, what would be kind of the reasons that that might not happen? And specifically on the kind of competitive landscape in US LTL, we've seen a number of the big players looking to expand. And obviously a lot of people are going over after that heavier weighted shipment, heavier weighted shipments and that sort of thing. Does that present any kind of competitive risk to achieving that ADOR? And if not that, is there something else that that might be an obstacle to getting there?

You know what? I don't think so. I think that, you know, we have a lot of opportunity to correct a situation that, you know, has been there for too long. Like, you know, when you run an old fleet like we do now, OK, that's got nothing to do with the market. That's got something to do with the decision of the owner of the company to invest or not to invest. And when you don't invest, OK, well, that's the result that you're getting is your maintenance cost per mile instead of being five cents a mile on equipment on your truck is going to run to 40 cents a mile because you're running a 2008 or 2009 truck. So on the two to three points of OR, OK, that relates to the fleet, this is us. I mean, this is us investing in the future of the company. Right. On trying to do more with less on the P&D side and on the line all side, again, this is us. I mean, we have to provide our team there the tools to be able to be efficient like our peers. The tools that we're implementing in our line, all most of our peers are using that tool. So for sure, they're more efficient than us because it's not about market condition. It's about just providing our team the tools to be successful. Right. And that's what we're doing. We're implementing those tools on the P&D side and on the, you know, the freight that fits. Again, that's a decision that was made to go after everything that moves. Right. Our approach is more. No, no, no, no, no. We're not jack of all trades, master of none. We're not hauling mattresses. We're not hauling surfboard to California. That's not us. So, guys, let's focus on what makes sense. Okay. Let's try to pick up more freight closer to our terminal. Let's try to pick up more freight per stop, per customer. That's what we do in Canada. So it's got nothing to do with the market. This is all us doing a better job, okay, with better tools. Right. Now, if market condition change, let's say that, you know, if I look at one of my peers, my best peer, okay, the next fuel is revenue per shipment was up 9% year over year. That's great. That's fantastic. But that's not us. I mean, us, you know, we are up big time because we got rid of a lot of freight that did not fit. That's how we're able to get a better revenue per shipment. We did not raise our rate on average by 9% year over year with existing customer. No way. We're not in that position today. Right. So a lot of improvement from a 90 or to an 80 or it's just us. It's us doing a better job, providing our team with better equipment, providing them with AI tools because we run a complex network. That's just us.

Got it. Got it. Looking forward to seeing that play out. I'll keep my questions to one. Thanks for the time. Okay.

Thank you.

Thank you. Our next question comes from the line of Cameron Doxen with National Bank Financial. Please go ahead.

Thanks very much. Good morning.

Good morning, Cameron.

So I just wanted to actually follow up on the comment you just made about, you know, some of the peers and maybe their ability to price a little higher. And I guess one of the things that some of them have pointed out is, you know, having very good service metrics is one of the, I think it's the levers for having improved pricing. Can you talk about, I guess, the T-Force freight service metrics, how that has evolved since you've owned the company and what more maybe needs to be done that maybe down the road you will have maybe a little more pricing power?

Yeah, that's a very good question, Cameron. And for sure, if you compare me with the best peers in the US, our service is not up to that level. Okay? And you're right. You're absolutely right. You've got to correct your service to be able to or adjust your service to, let's say, what the peers are. Now, one of the reasons, okay, that our service is not up to par compared to our guys, which we have to improve and we keep improving it, is the equipment, right, and the tools we have. Right? So that's something that will be corrected over time. And so claims, it's also a nightmare for customers. So we used to have one or one and a quarter percent of our revenue to pay for claims. So when you have claims, customers are not happy because you have claims because either you break the guy's stuff or you lose it. Right? So now our claims per dollar revenue is down to about point five. So we are solving this issue. Billing, okay, billing with T-Force rate from day one. And it's been an ongoing thing for years. Okay? I mean, billing failures, we have way too many. Right? So this is what we've done is we've brought in all the billing, okay, fast, as fast as we could from the TSA, the deal we have with UPS, into our own family. The customer master file, the same thing. So if you compare me with my peers on mistakes on billing, well, for sure, I'm worse than most of my peers. So this is something that we are correcting. And you're absolutely right, Cameron. We have to fix all these things. Okay? And in order to be able to get the same kind of quality of revenue as my peers. Right? So these are all things, like I said earlier, that it's us. Okay? But we are investing, okay? And we're bringing all this into our own house. Okay? So that we are in control. So same approach, same philosophy as we have in Canada.

That's great. That's extremely helpful. I'll keep it to one question. Thanks very much.

Pleasure, Cameron.

Thank you. Ladies and Chairman, we have reached the end of the question and answer session. I would now like to turn the conference over to Mr. Aylin Bidart for closing remarks.

Well, thank you, operator, and thank you, everyone, for being with us this morning. Again, we look forward to seeing many of you at our upcoming Investor Day on November 10th. As always, we appreciate your interest in TFI International and will keep you posted on our ongoing quest to create and unlock shareholder value. Please feel free to contact us with any remaining questions, and I hope everyone has a terrific weekend. Thank you again.

Thank you, sir. The conference of TFI International has come to an end. Thank you for your participation. You may now disconnect your lines.