TFI International Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to TFI International's fourth quarter 2022 results conference call. At this time, all participants are in 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 the 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. Also, I would like to remind everyone that this conference call is being recorded on Monday, February 6th, 2023. I will now turn the call over to Elaine Badar, Chairman, President, and Chief Executive Officer of TFI International. Please go ahead, sir.

Well, thank you, operator, for the introduction and thank you everyone for joining us this afternoon. Today, after the market closed, we released our fourth quarter 2022 results which cap a successful year for TFI International. Despite obvious macro-related top line headwinds, we generated increased operating income versus the year ago quarter. We expanded our overall operating margin by more than 200 basis point, and we produced free cash flow of $188 million, which is 56% higher than the year ago quarter. For the full year, we produced adjusted diluted earnings per share of just over $8, an increase of 53% over the prior year. We also generated full year free cash flow of $881 million, up 26%, despite our calculation fully reflecting higher working capital on the order of $147 million associated with higher fuel costs. We view our robust free cash flow as especially important during times of uncertainty, affording us the flexibility to capitalize on market turbulence through strategic investment. Our adjusted net income expanded to 152 million, up from 149 million, while our adjusted diluted EPS climbed a full 10% to $1.72 despite a foreign exchange headwind of nine cents. Perhaps more important, the $188 million in free cash flow that were produced was up sharply from 121 the prior year, and we also produced a total of $1.7 million further enhancing our flexibility to strategically deploy capital into acquisition and return the excess to shareholders when possible, which is, as I mentioned, are two of the overreaching principle. Let's now review the performance of our four businesses segment, all of which generated strong return on invested capital and three of which were able to grow operating income and expand margins despite economic conditions. Beginning with PNC, this business represents 8% of our segment revenue before fuel surcharge. During the quarter, we saw a continuation of the more sluggish volume from the third quarter. As a result, revenue before fuel surcharge was down 14% year over year and volume 6%. Our operating income of 38 million was up slightly over the prior year. Similarly, our return invested capital was up was a 32.5%. Next is our LTL, which is 44% of segment of revenue before fuel surcharge. $721 million of revenue before fuel surcharge was down 12% and volume down 19%. Operating income was 88 million, down 15%. But with the margin off by only 40 basis point, despite the deliver, deliveraging caused by low revenue. Again, deeper on the LTL, Canadian revenue before fuel surcharge was off 15%. And yet we achieve a notable improvement in adjusted operating ratio, which came in at 75.3. This was 300 basis point improvement over the prior year, reflecting what we believe is the best in class performance. In addition, return invested capital for Canadian LTL was 24%. Then to the US LTL, revenue before fuel surcharge was off 12% despite meaningful volume headwinds. As we continue to refine this business following the acquisition of T-Force freight, our adjusted operating ratio was 90.4 relative to 89.4 a year earlier, which is an okay result, giving seasonality weaker volumes and the overhead costs related to our transition services agreement. However, I'm pleased to report that as of last week, the finance module of the transition agreement is behind us with the financial system migration completed successfully as of last week. More broadly, the stability and margin in the face of volume pressure across the industry reflects our pricing focus and the real progress we're making on the cost side where we see some opportunity ahead. Return invested capital for US LTL was 23.8. Let's move on to Truotlo, which is 25% of our segment revenue before fuel surcharge. Reflecting our sales of the CFI business, I mentioned earlier our focus core revenue before fuel surcharge was 403 million as compared to 506 million a year earlier. Most impressively, despite the sale of our truckload operating income managed to grow 16% to 72 million. We now view our truckload segment as more resilient during volatile market condition following the sale of CFI assets last year, which ended our exposure to the US dry van market. Within truckload, our specialized operation held revenue before fuel surcharge nearly flat at 325 million, benefiting from our diversity and exposure to high-end battery market and favorable niche, including the industrial end market. More important to us, our adjusted operating ratio managed to improve to an 87.4 while our specialized truckload return invested capital came in at 13.4. Specialized truckload is an area where the self-help, nature of our opportunity is readily apparent. As for our Canadian-based conventional truckload, we are able to capitalize on TFI diversity and the relative strength of the Canadian market, which had pockets of strength this quarter with growth of 7% in revenue before fuel surcharge to 79 million. We also remain focused on network density and cost control where we were able to produce an adjusted operating ratio of 81.1, although this was helped by a gain on sales of real estate of 15 million. So our return invested capital was 21.3. Wrapping up our review of business segment, logistics represent 23% of segment revenue before fuel surcharge. Revenue before fuel surcharge at 376 million was up 12% year over year, which was slightly impacted by foreign exchange as much as our revenue this quarter. However, our operating income climbed 4% to 34 million as we successfully contained operating expenses. That equate to an operating margin of .1% of the healthy 100 basis point and our return invested capital was 21.9. Turning to our balance sheet, TFI International ended the year with a funded debt to adjust the adjusted EBITDA ratio of just under one, and our debt is almost entirely at fixed rate as a weighted average cost of less than 3.5. Our strong capital position benefited from the 56% increase in free cash flow that I mentioned at the outset of the call and permits us to strategically invest in the business while also returning capital to our shoulders whenever possible, as I also mentioned. During the fourth quarter, we strategically allocated capital towards three tuck-ins acquisition and have completed one in January. Further, our pipeline of further tuck-ins is large with the majority of the anticipated closing expected to take place in the first half of the year. We also announced that our board of directors approve a US 35 cents quarterly dividend. That's an increase of 30% over the previous quarterly dividend, reflecting the ongoing success of our business and our continued favorable prospect for generating cash. Also, during the quarter, we repurchased approximately 900,000 shares for about 83 million. I'll conclude with our outlook for the new year. We currently expect $7.50 to $7.60 of earnings per share in 23. We also anticipate free cash flow of more than 800 million, which is based on net cap x of between 250 to 275 million. With that, operator, we're ready to move to the Q&A. If you could please open the lines.

Ladies and gentlemen, to ask a question, you will need to press star, then one, on your telephone keypad. To withdraw your question, please press star, then two. Callers would be limited to one question and a follow-up in order to get to as many callers as possible. Again, press star, then one to ask a question. Please stand by while we complete the Q&A roster. The first question comes from Scott Group from Wolf Research. Please go ahead.

Hey, thanks, good afternoon.

So,

Elaine, I just wanna follow up on the guidance. I think you said $7.50 to $7.60, so a pretty tight range, but maybe if you can just walk us through the different businesses and thoughts on revenue and margins for the businesses within the guidance, that'd be great.

Yeah, yeah, that's a very good question. So what we're seeing so far is that on the LTL side, we see still some pressure, Q1, Q2, 23, softer volume, both on the US and Canadian side. The Canadian side, we're mostly affected in our intermodal division because we're competing with one of our fierce competition there, dealing, you know, using CP. Us, we're mostly CN, and this guy is very aggressive. So that's really the big pressure on volume for us on the Canadian LTL side. On the US LTL, we believe that we're gonna go through a soft patch, Q1, Q2. Now, the benefit of that, that gives us a chance to be more focused on our costs, reducing our costs with the renewal of our fleet, reducing the number of miles, et cetera, et cetera. So the LTL, okay, we believe that if you look at the year, we should do probably a little bit less in Q1, Q2, but a little bit better in Q3 and Q4. Also, the TSA that we have with UPS is slowly going away, replacing with our own costs. So that should also be a tailwind for T4 straight going forward, you know, into 23. So US, Canadian LTL, about stable, right? PNC, you know, we're doing a fantastic job over there in Canada, but we need some growth. I mean, we've been down, okay, for the last, I would say 18 months, okay, since the B2C, okay, as drop, okay, with the e-commerce. I mean, we're having a tough time competing with the competition that's owned by the Canadian government there in Canada. So really our goal there is to keep some organic growth because like you said, we're down about 6% in volume. Now, that being said, we're making some major investment in Edmonton during 23 to be up and running into a new sorting facility. We just finished Winnipeg. So we got a lot of good things on the go there to keep our costs down and do even a better job on the cost control. Truckload side, we believe that this is gonna be some major improvement. The fact that now TA, our dedicated business is now much better run than it's ever been run. I mean, I was just looking at the month of January and, you know, we're heading in the right direction. So I believe that our truckload, and even if you look at our Q4, you see some improvement, slight improvement year over year. And there I continue to think that we're gonna do way better than last year. Logistics, I mean, the market fell out for us on the logistics side, but we protect our margin. So our margin is about 9%. So when you do all this sum up, okay, like always, Scott, we're very conservative. We could have said, you know, guys, maybe we'll beat $8, but we're not gonna say that. I mean, we have only one month down, right? So this is why we're coming out with something that I think is conservative and reasonable. And, you know, if things get better after Q1, for sure we'll update you guys on the guidance.

Okay, and then just on the guidance, can you just clarify, is there anything in there for buybacks or M&A in the guide? And how you're thinking about the M&A environment right now? No,

no, there's nothing there in terms of M&A or buyback. So we believe that we will close about $300 million of M&A deals between now and the end of June, okay? So our guys have been very active, okay, in all sectors, I would say. And, you know, I've always said, you buy on bad news, you sell on good news. And right now for the last, I would say eight, nine months about trade recession and all this, it's been bad news. And you got a lot of guys that are tired, right? So it creates an opportunity for us. Our leverage is less than one, like I said on the text there. So we're very well positioned. So for us, you know, nice tuck in, three to 400 million US, for sure that's gonna get done in 23. But this is not part of that guidance.

Okay, thank you, I'll pass it along.

The next question comes from Ken Hoekster from Bank of America. Please go ahead.

Great, hey Elaine. And David, can we maybe just follow on that outlook a little bit more? What it seemed like at US LTL tonnage decelerated or declined at an accelerating pace? Maybe talk about your thoughts on the volume side and what to expect at LTL and throw in margin thoughts too.

Yes, yes, so you know what Ken, I mean, when we bought this company UPS rate, a third of the volume didn't make any sense for us. It didn't fit at all. So we got rid of a lot of that, but we're not done, right? Now, if you look year over year, we're down about 19, 20% in volume. Now, some of that is market. If you look at some of my peers, good peers, I mean, those guys are down five, six, 8%, right? Us we're down 19%. So the reason being is that we had a lot of freight that did not fit the operation. So during the course of 23, the plan is that we're gonna grow up organically slowly, by about 5%, versus where we're at today. So let's say today we're doing about 23, 24,000 shipments a day in first month of the year, January. The plan right now sits at about 25 by the end of the year. So, I mean, it's not a very tall order for our sales department, because don't forget, when we bought the company, we were at 32,000 shipments a day, right? So now we're down to 23, 22, 23, 24. So we took a hell of a beating, but we had to. We had to get rid of that freight that didn't fit. And we also lost some business because of the softness of the market, right? But we believe that the first six months are gonna be

maybe

soft, but things will start to get better in Q3 and in Q4. So it's not a big improvement in terms of volume, but it takes time. It takes time and we're really busy working on our costs. You know, we're getting all the trucks that we've ordered that were always late, late, late. Now, I would say since the end of November, I mean, we're just getting flooded with all these new trucks that we have to get in the network, sell the old one, improve the MPG, save money on the maintenance and all that. So this is gonna come, okay, towards 23. But in terms of volume, I mean, our sales team have a lot of work to do there.

Just to clarify, I don't know, did you throw in a cost estimate for that? For what, I don't know, whatever the last piece of the UPS to put that in perspective. And then my follow-up question was on truckload. It sounded like you might've mentioned, you know, freight heading in the right direction. Maybe just expand on that if

there's

just chewing up inventories and we're starting to see a turn, or

maybe

is there any sign of a floor?

Yeah, so to answer your first part of the question, I mean, we had to spend a ton of money for the transition, okay, of the financial system from UPS to us, right? As a matter of fact, I mean, we were paying $600,000 a month, okay, for the financial service of UPS, number one. Number two is we also had to pay for them to provide us the information to be able to transition, a huge expense. So I would say that probably Q3 and into Q4, all these transition costs, you're talking maybe $15 million in there of additional costs to do all this transition. Now, we still have to do the transition of the HR, okay, which is April, May. We still have to transition the fleet, okay, sometimes in the fall of 23. And then we're just gonna be left with the IT late into 23, early into 24. So all these costs will, because we have like double costs right now, because we have to do it ourselves, they're still doing it for us. And so that's why we feel pretty good that even with the 25,000 shipments a day, I mean, we'll be able to position this company pretty well with cost reduction into the new year, 23. Now, in terms of the truck load, my comment is really because now we are exposed in the US in the dedicated truck load, okay. So with all these sales that we've done with CFI and Sexton and all that, the drive-in is gone. So now we're focused only on dedicated truck load and we're doing really, really well. So for sure, revenue has dropped, okay. But now we make money on every account. If you remember, when we bought UPS, the truck load division, we were losing like four or $5 million a quarter with these guys. I'm talking about 18 months ago when we bought the company. And now that's not the case at all. I mean, this company, if you look at what we know so far in 23, it's gonna run better than the 90-OR. We're gonna beat the 90-OR in that US truck load dedicated specialized business that we own now.

Great, very helpful. Thanks, Alain.

Thank you.

The next question comes from Walter Spracklin from RBC Capital Markets. Please go ahead.

Thank you very much, operator. Good evening, Ani, how are you doing? Hey, pretty good. How about you, Walter? Good, good. I just wanna turn back to acquisitions. I noted that you have broken investments out of other assets in your balance sheet and you put a footnote there indicating that you own about 4% of ARK Best. And that seems like more of a strategic rather than passive investment. Just wondering if you could share any color on what your intentions are with regards to that investment.

Well, you know, we really like this company. So when we talk about the investment that we've done, is we believe that now just to talk about it, it was the right thing to do for us to really disclose that. Now, in terms of what do we want to do, we would like to have some discussion, some very positive discussion down the road with these guys, this management team, because we believe being a unionized carrier like they are, I mean, there's some things that we could work together and improve over time. I mean, it's just, once in a while, we can invest in a public company, one of our peers. They're not the only one where we're having some discussion, okay, in terms of what we could do to improve our company and their companies, so we're having discussion with other peers in terms of the real estate, what kind of discussion we can have. You know, as we know, we have a very large portfolio of real estate within T4's trade, that a lot of it is unused. So what kind of discussion can we have with these guys? You know, that is really the intention behind all of that.

Okay, a lot of follow-ups I could do on that one, but let's put that one on hold for now. Just in terms of your outlook now, and you mentioned, see, with your guidance, I got the sense that, really, my question is, what kind of economic scenario are you assuming when you give that guidance? And I get the sense that you're assuming, based on what you said in your divisional response, some weakness in the first half and perhaps some strength in the back-up. So are you, is there a recession in those numbers, and that's what we should frame that disclosure around, or, yeah, just a little bit of color on the outlook.

Yeah, well, you know what, Walter, I mean, I'm listening to all the different players in our industry, and I think that everybody has the same kind of feeling,

which

may be wrong, right? But what we believe is that Q1 and Q2 is gonna be soft, and then things will get better. This is based on what we're hearing from the economy, the economy, blah, blah, blah, et cetera, et cetera. But who knows, right? So this is why we're going ahead with a very conservative kind of forecast, right? Now, if I look at my month of January, I feel pretty good versus our forecast. So, I mean, one month is not a year, okay, but I think that we're on the right track. We're very well positioned. I think we're gonna do better at T4 straight down the road, not so much in volume, okay, early in the year, but in terms of controlling our costs better, doing a better job, getting rid of a lot of these transition costs and excess staff that we had to have to do the transition, but now, once that we do all these transition in 2023, we should see a major reduction in our costs over there. So we feel that it's reasonable, it's fair. It's a little bit less than what we've accomplished in 22. We did $8. We think that now CFI is gone. CFI was contributing about, I don't know, like 40 million of net earnings last year. Okay, so they're gone, but we have a lot of M&E on the go. All these guys slowly should replace the CFI investment that we have there and probably do better than when we used to own CFI in terms of return investor capital and profitability. So we're conservative, Walter. We've always been like that. We'd like to under promise and over deliver, right?

Thanks a lot, Asens. Appreciate the time, L.A.

Pleasure, Walter.

Thank you. The next question comes from Ravi Shankar from Morgan Stanley. Please go ahead.

Thanks, good evening, Alain. Alain, can you just, I mean, you gave us a little bit of detail on the kind of what you were thinking of ARCBEST, but can you confirm that if you had any discussions with them or had any engagement with the board or anything on them?

No, no engagement whatsoever. I mean, it's just, no. What we're trying to do is to have some discussion on the business. Okay, like I said, down the road, we would like to talk because we have a lot of expenses that we could reduce if we would work together with them. And also with the other Unionized Carrier, right? Another of our peers. So it's just, guys, can we make things better for both companies, right? That is really the nominal goal for what we're doing. That's the most I could say right now.

Got it,

Andrushar.

And maybe for my follow-up, you've said a couple of times that you believe your guidance is conservative and clearly you guys have a very strong track record of beating by a long way. At the same time, at the top of the Q&A, you kind of laid out a whole list of items to be concerned about or that can be headwinds. I'm just trying to get a sense of, when you kind of put these two things together, kind of do you feel like you're sitting at the comfortable bar here and kind of what are the moving parts like? Or do you feel like the macro really needs to come your way in the back half of the year to kind of top this guy?

You know, Ravi, we're very early in the game. We have only one month down. So this is why what we look at right now is that competition, volume, I mean, it's not as good as it was in 22. So this is why we're cautious, okay? We believe that things will get better, okay, during the course of the year, but so far, I mean, we see in some market, some of our peers panicking, lowering rate. Like if you look at our PNC, our average revenue per shipment is down because of competition, okay? If you look at our Canadian LTL, we have some pressure from some of our peers. So this is why we're looking at it, I would say things will get better. But right now, I think that we have to be conservative. That's the way we look at it. Very good, thank you.

Welcome.

The next question comes from Jordan Allager from Goldman Sachs. Please go ahead.

Yeah, hi, just wanted to get back to the LTL. Couple things on volumes, the down 19%. How much of that, is there a way to get a sense how much of that is macro versus the ongoing culling? Because I thought you were sort of winding down on that. And then secondly, talk a little bit about the price strategy on LTL. Are you seeing the core price? Are you seeing some of those competitive pressures? Because I think the yields ex-fuel were perhaps not quite as high as some of your peers. So I'm just sort of curious, what's going on with core LTL US pricing, thanks.

Yeah, so in terms of pricing, I mean, for sure, some of my peers are, you know, ex-fuel plus five, plus six, we're plus four, okay. So we're not doing as well as the other guys. But don't forget, we're new to the game. We have a reputation that is not as good as maybe some of my peers. So our sales team have some difficulties sometimes to get more money from the customer. The service also is, when we took on the company, I mean, the service was maybe not AAA. So we're still working on improving our service. So in terms of pricing, I don't see too big of an issue. In terms of volume, okay, I said it earlier, when we bought this company, a third of the volume did not fit at all. I mean, it was, so we would have to go from, let's say 32,000 shipments down to 20,000 shipments. I mean, we can't do that. I mean, so we went down big time, like 19%. Some of it is the softness of the market, like everybody else of my peers, except maybe for one that I've seen so far, everybody's down a few points, six, seven, 8%. We're down more than that. Why? Because we got rid of a lot of that trade that did not fit our network at all, right? Now,

that's

why I'm saying, if you look at our forecast, part of our discussion in terms of guidance, we believe that we're gonna get back on average, okay, in the latter part of the year towards a 25,000 shipments, maybe 26,000 shipments, whereas right now we sit at 23,000 shipments, okay? Now, for sure, this is February, January, February, it's not the best quarter, but we're still very low and we're still like 16% less than last year in February so far, right? So we're still lapping freight that we were hauling last year that did not fit, that we got rid of, well, it's a little bit of the softness in the market, like all of our peers.

Great, thanks for the color.

Pleasure. The next question comes from Konark Gupta from Scotiabank. Please go ahead.

Thanks, Albregur, good afternoon, LA. Good afternoon. Good afternoon, my first question is on the competition you referenced on your prepared remarks with respect to a Canadian LPL player that supports CP rail and you guys are more on the CN side. I'm just trying to understand, if they are supporting CP and you guys are into CN, what exactly is causing the competitive pressures from those guys?

It's very simple, Konark, I mean, this peer, okay, he's got a sweet deal with one railroad, which us, we don't have, right? And now this guy is taking advantage of that to be more aggressive in the market. So us, we're protecting our margin, so we have to let go some volume. Plus also, like in the US, there's also a little bit of a softness in the market, right?

Okay, that makes sense. So just leveraging that kind of deal and production they have. Now, with respect to the trends in the US, you spoke about some of the volume trends in LPL and some of the trends in the truckload. If you compare the Canadian and US marketplace today, clearly the US consumer spending has taken a hit and the rates are still going up. The Bank of Canada is talking about slowing down here in Canada. Is there any major difference you are noticing in the freight trends or the volume trends especially between Canada and US?

Yeah, that's, if we look at our Canadian operation, the big difference is probably the Canadian economy could do whatever it wants, we don't control that. But one thing we control is our cars and we're very efficient, lean and mean, and hands on. In the US, we're not as sharp. I mean, we're new to the game on the US LPL we're beefing up the team, we're investing a lot in information, tools and all that. But this is why we're not as good as some of my peers. So if there's a fluctuation in the market, sometimes in Canada, we're very, very active. In the US, we're still too slow in my mind. So if you look at my Q3 and my Q4, I'm disappointed a little bit in a sense that we were too slow to adjust ourselves in our US LPL versus the drop in volume to adjust our labor force, et cetera, et cetera. Now, the excuse is, well, you know what, Alain, the way we do it is that we do it from top down versus in Canada, our approach us has always been from bottom up. So it's the terminal managers that manage the labor force, not the guy at that office. So it's a change in culture that we're doing over there. And that helps you when the market is getting to a soft patch that you can react way faster. So if I look at one of my peers in the US LPL, the volume was down, let's say 8%, but the EPS was up, you know, 9%. So that's the kind of company that is really sharp and the guy ends on and fast. If you look at what we're doing in Canada, let's say on the Canadian LPL, our revenue is down, okay, but our OR is also down, right? Because we're sharp, we're on the ball, et cetera, et cetera. So this is, you know, when we look at what's going on on the market, the biggest important thing for us is to accelerate the decision making in the US based on changing conditions, right?

Okay, that's it, thanks, Alain. Thanks so much and all the best for this year.

Thank you.

As a reminder, ladies and gentlemen, please limit yourselves to one question and a follow-up. Our next question comes from Brian Ozenback from JP Morgan. Please go ahead.

Hey, good afternoon, Alain, thanks for taking the question.

Pleasure, Brian. Just

to go back to T-Force, Fray, you mentioned all the initiatives that you've laid out in terms of the system migration, but maybe you can talk about the workforce productivity because it sounded like that was being put into place last quarter, maybe didn't come through this quarter as well as you might've hoped. But when you get out, you know, three or four quarters from now, what do you think the run rate OR margin is gonna be as you have visibility to a lot of this self-help, you know, even if the macro doesn't come through as you might hope?

Yeah, well, you know, our goal, Brian, is to get to an ADR, right? And we said it from day one, we believe that this company could get there. Now, listen, 23, the start is difficult, we're investing in equipment and technology and all that, but it's also a big question about the style, the management style, like I was just explaining that how fast can you start moving and make the decision? So we're making a lot of changes with Paul and the team there to be fast, to adjust ourselves, because like I said, we could have done in my mind a better job of controlling our cost, labor costs I'm talking about in Q3 and in Q4, okay? Now, that being said, we've implemented the, you know, new tools, new information so that the guys could start doing, you know, a job much faster, but that will take time and that takes education. So can we do better than the 90 or in, let's say in Q4 of 23? I think so. I think that with all the costs that we're gonna be shedding, okay, will help us get closer to maybe an 87 in 23, maybe an 88, all the admin costs that we have to get rid of because we have way too many costs right now because we're going to a transition agreement and all that. So we were paying on one side with the transition agreement and we're paying on the other side because we had to hire people and train them that, you know, for them to be able to do their job once we run away from UPS. So this is all going on into 23. So that's why, you know, we feel good that by the end of this year, the contribution of T-Force Ray is gonna be better than just a 10 point of OE.

Okay, thank you for all that. And as a follow-up, I know you say you can't give too much information on ARCBEST and what you might do at this point, but if you can just maybe put some general thoughts around that, would that be some sort of joint venture in the US? You know, it's a little hard to figure out what that might be. So any thoughts on your actions or potential there would be helpful.

Yeah, well, Brian, I think I've said enough on that. I don't wanna say more. It's very early in this kind of process right now, right? So I think that I've said, you know, probably even more than I should have said on that. We believe that this is a good company, okay? And if we work together, like we do with a lot of our peers, because we make some deals, Brian, with non-union carriers on the real estate side, okay? We're having some discussion with non-union carrier on different aspects of this. Also, what we're trying to do is what we're doing in Canada. So as an example, in Canada, we work with Mullen, one of my peers. So it's not, oh, no, no, no, you can't work with this guy's company, no. So this is something that we're trying to do on the US side with this company and others. To the benefit of our employees, customer and shareholder, if we can.

Okay, thank you very much, Elaine, appreciate it.

Pleasure.

The next question comes from Jason Seidel from Cohen. Please go ahead.

Thank you, operator. Hey, Elaine, good afternoon. Good afternoon, Jason. I wanted to talk a little bit about what your customers are telling you about inventory levels and when do you think that they're gonna be sort of appropriately right-sized to start seeing some more growth going forward?

Still high, still high. It's still high. I mean, because of all this mess in the supply chain, so what do you do? I mean, you need two, you order four, because you're afraid that you'll get only one. So, I mean, and then, whoops, stuff starts to come in. Everybody's busy, but then everybody's got too much. So that takes time, okay, to go through all this supply that there's too many. Now, depending on who you talk to, it's the end of Q1, it could be the end of Q2, but for sure it's gonna happen in 23.

Okay, that's good color. I wanted to talk a little bit about the P&C side. Could you break down what's going on between B2C and B2B and where you think the trends are gonna run as we move throughout 23?

Yeah, so during COVID, I mean, our B2C went as high as about 40% of our revenue, and we were growing big time, okay, at the time. I'm going back to 2021. 21 was a big growth year for us, and then things started to slow down in 22 early in the year, and now our B2C is really like probably like more 15 to 20%. So that was replaced by B2B, okay, where our profitability has always been a little bit better than B2C because B2C is more difficult to get density, right? Because on average, one stop is one package. So this is what we're going through right now, but we could do, I think, a better job in terms of organic growth. So this is why our focus over the last, I would say, six months, six months of 22 and into 23. Bob and the team there's goal is really to start growing organically again. Now, we're fighting competition there, and some of my peers are not about making money. So that is a little bit the difficulty that Bob and his team have is that we're competing with some of our peers that they don't really care if they make 5%, 10% or 20% because they're owned by the Canadian government.

Understood. Elaine, appreciate the color and time as always. Thank you. Thank you, Jason.

The next question comes from Tom Waterways from UBS. Please go ahead.

Yeah, thanks, Elaine. I wanted to see if you could clarify a little bit your comment on USLTL operating ratio. I think you said like 87, 88, but I didn't know if that was a view on full year 2023, what would be thinking about you also kind of mentioned sub 90 for 4Q. So just wanted to see if you could revisit that and make sure I understand what the comment was.

Yeah. Yes. Very good, Tom. So what I'm saying is that I think that by the end, okay, of 23Q4, okay, hopefully we get to an 87 or an 88 OR at T force rate. Why is that? Because our volume should start to pick up again, okay. Number one. Number two is we're shedding a lot of costs through the TSA. TSA day one was costing us on a yearly basis 72 million, okay. So just the finance portion was about seven or eight million. But over and above that cost is we were stuck with trying to build a team that's going to replace what UPS is doing, right. So it's all these costs are slowly, you know, getting rid of. And now that's why I believe that, you know, if everything that we're doing works according to our plan is that we should end up this year on an 87, not for the year, but for the fourth quarter of 87.

And so should we think about, like seasonality would suggest, you know, normally four Q is not as good as two Q three Q. But, you know, it sounds like you have things that might, you know, kind of overcome the seasonality. Should we think about kind of sequential improvement two Q three Q four Q? Or is that the wrong way to look at it?

Well, I think that the best way to look at it, Tom, is that right now we're a 90 OR in Q4. And we should be an 87 OR in 23.

In Q23.

300 basis point improvement year over year in Q4.

In Q4. Okay. Yeah. Yeah. Okay. That's great. Thank you for that. Going back to the topic of acquisitions, you know, you've got a lot of visibility and conviction on small carrier acquisitions and 300 million tuck-ins you mentioned. And you said, you know, you want to kind of buy when things are bad. Are things bad for big, big targets as well? Like, do you think you are optimistic about, you know, larger acquisition potential or is that tougher to say?

You know what, Tom, the problem with something big is it takes a long, long time. You see, you do something small, let's say 100, 200, 300 million dollars revenue. You could do that fast. And let's say within three months, it's done. When you when you look at something of size, let's say over a billion dollars in revenue, two billion dollars revenue. I mean, this takes a lot of time, a lot of convincing, a lot of discussion. And like I said, the first answer from the target, my experience always no, no, no, we don't do that. Why would you do that? I mean, so, you know, it takes time. It takes a lot of discussion. So this is why I've said on average, we do something of size every three years, three, four years. So last time we did something of size was a year and a half ago with UPS. You know, so maybe we could get something done in late 23, but I think it's going to be more like in 24. So are things going to get better in 24? Probably. Right. So you buy in bad news, you sell in good news. So this is not going to apply in 24, but that takes so long to do something of size. My experience.

Yeah. Okay. Yeah, great. That's very helpful. Thank you, Elaine. Pleasure,

Tom. The next question comes from Kevin Jang from CIBC. Please, please go ahead.

Good evening, Elaine. Thanks for taking my question.

My pleasure, Ken. If I could just

go back to, you talked about maybe your USLTO segment, maybe just reacting slower than what you typically see in Canada. You talked about some of the system transitions. The one that you just completed a week ago, is that enough for them to tighten up that feedback loop or do you need to get to that HR rollover before you start driving better productivity?

No, I think that now, okay, with the financial tools that we have in place and the education and the training and the tools and all that, I mean, we're well positioned now to start doing what we're supposed to do, is manage costs at the terminal level. So in Canada, every terminal that we manage us has a P&L. So we know what's going on. We don't have that at T-force rate today. So the manager is not responsible for all the costs. He doesn't know. He's got no financial information. So now that we are running on TFI, it's financial, now we are in a position to slowly implement that at the terminal level so that our guys could start managing the business the way it should be managed, at the terminal, managing the costs and understanding what's going on and understanding that your labor cost per shipment, your target is, let's say, $40. Not 50, but 40, right? Right now, we're starting to implement those kinds of targets, targets in dollar, right? So we manage dollar us. We don't manage stop per hours or pounds on the dock or things like that. We educate our guys to manage dollars because that's what we bring to the bank.

Right. That makes a ton of sense and it sounds like we'll be harvesting those benefits in the near future here. Maybe just on the longer term US LTLOR target of, let's say, 80 to 85% in the next couple of years here, does that require you to get back to 30,000 shipments a day? I understand the need to kind of find a freight that fits, but do you need to get back to the absolute volume numbers that you inherited when you acquired this business to hit the margin targets? Or 25,000 shipments a day, you can hit the margins you need to hit?

Yeah. No. We have a lot of fixed costs. Okay, Kevin, I agree with you, but we're going to start shedding those fixed costs to bring this company lean and mean. That will take time. It's not going to happen. Now, we could get to an 85 OR within two years at 25,000 shipments. Why? Because we're working at the same time on fixed costs. So we are leasing doors, leasing yards, selling real estate, selling trucks. I'll give you an example. I mean, the fleet that we have right now, remember the first day that they were talking about plans for 23, they were talking about 4,200 trucks. Now we're running about 35, 3,600 trucks. So we're doing more with less slowly. Like I was explaining, the day that we start moving the management of costs at the terminal level, we will see a major, major improvement in terms of costs, because that's the role of this manager. He's got to manage his people, he's got to manage his costs. He's got to manage his equipment. One of the first things that we've done in 22 is all the real estate has been leased right now to the operating company. And in 23, all the truck and trailers in 23 are being leased to the operating company now. So the manager now sees a rent cost for his real estate. He sees a rent cost or he will see a rent cost for his fleet equipment. And we know by experience that this is really a major high opener for a manager that's qualified. If you have a manager that's not good, well, he's not going to be able to do the job and we'll just have to replace this guy over time.

Right. No, that's great. Call it. Thanks for taking my questions and best of luck in 23.

Thank

you. The next question comes from Ari Rosa from Credit Suisse. Please go ahead.

Great. Good afternoon, Ellen. So I wanted to ask you about the... Hey, how you doing? I wanted to ask you about the $800 million free cashflow target. How do you think about the resiliency of that figure? So it's obviously a pretty material step up from a couple of years ago. I think in a softer environment, it's certainly a very good result. I think we would characterize it as. And especially given some of the investments that you're talking about, whether it's kind of the working capital drag that you saw last year or some of these investments that you're making on the IT side, do you think we should think about that $800 million free cashflow figure as a floor for cash generation from the business going forward? And kind of where do you get confidence in that number?

Yeah, I think so, Ari. I think so. Don't forget that in 23, we're still doing major investment, not normal for T-Force freight. Right. Because this fleet was abandoned for years and years and years. By the end of 23, the average age of our fleet in the US LTL is going to be normal. So we're going to be running like a -year-old fleet versus a seven and a half year old fleet like when we bought the company. So this takes that into account. By the end of 23, we should be probably more into a normal kind of environment. So if you remember what I said in the taxes, we're going to do net capex of between 250 to 275. So we feel about that this 800 is still very conservative based on what we know so far.

Got it. So in a more normalized environment, Ellen, how should we think about what that number could look like if you get rid of some of these economic headwinds, you get rid of some of this high-key spending, you get rid of the fleet replacement or excess costs associated with bringing down the fleet age? How should we think about what that number looks like on a more normalized basis?

Between 800 and a billion dollars should be the normal. Now, you've got to be careful about inflation on the cost of capex. So if inflation kills me by about 10%, so on 300, that's 30 million. This is, I would say that between 800 to a billion dollars is the normal range of free cash flow for TFI going forward.

Got it. That's super helpful. And then I wanted to ask, obviously, especially in Canada, it was a little bit of a challenging winter in terms of December in Q4. You mentioned some encouraging trends that you're seeing in January. I was hoping you could both address to what extent weather impacted fourth quarter results, and then also what is it that you're seeing in January that you said you're encouraged by?

Yeah. Well, we had some issues also with the weather in January. We had a major storm in Toronto, a major storm in the US, too. But this is winter. I mean, it happens every year. Now, one of the good things, though, is that it's been a warm winter so far. If you look at January and December to a certain degree, December wasn't so bad, but even January was very warmer than normal. So that helps us a little bit. I feel good when I look at our actual results for the month of January is that a lot of what we anticipated as being dark and very soft is not happening. So I would say that we're probably a little bit ahead of the plan so far, so far so good. So it's normal. We should be out of the plan because every year we have to beat the plan, right?

Got it. No, absolutely. That's very helpful. Thanks for the thoughts there, Alan.

Pleasure.

The next question comes from Cameron Dirkson from National Bag Financial. Please go ahead.

Thanks very much. Good afternoon.

Good afternoon, Cameron.

So I just have really one question. I was hoping maybe you could talk a little bit more about, I guess, the outlook for the logistics segment, just what you're seeing there, and maybe specifically on the last mile operations. How are things going there?

Last mile, Cameron, in Canada are doing really, really well. I mean, our operation is second to none. We are, you know, we went through a soft patch in 22 because we've lost the largest e-tailer in North America, our friend at Amazon, I wouldn't say that. But so we had to recoup all that volume with other customers. So we are starting to see some organic growth in 23 in our Canadian operation. On our US operation, our revenue is about flat. Okay. So we've done a little bit of an M&A on the medical side in the US in Q1 in January, as a matter of fact. So that's going to, with this M&A, we are now organically including this M&A ahead of last year. And we're going in the US to a transition again, okay, that's been going on for years and years where we're, you know, replacing average account by better account, right? So we've not been growing the top line that much, but we've been growing the bottom line every year, year over year. So that will continue. So we feel pretty good. Now, the big hit that we had in our logistics in Q4 is really coming from TFWW, which is our logistics arm in the US. And that was because the LTL really dropped like a rock in, I would say, November and December with these guys. And if you look at one of my peers that came out with their numbers, I mean, it was like a very difficult quarters for them, right? So if you look at another of my peers that came out, I mean, last week, their logistics also is a 2% bottom line operation. So, I mean, as we're coming out with a 9, so there's not that many guys that can run a logistics operation with a 9 or a 910R.

Okay. And have you seen any, I guess, trends on that business change in Q1 so far?

No, no. So Q1, I think that it's going to be an uphill battle on the revenue side. Okay. But we're holding firm on our profitability. And I think that overall, if you look at 23, I think 23 will do better in 23 than we did in 22 overall in terms of dollars of OE for the logistics.

Perfect. Well, I appreciate the call. Thanks very much.

Pleasure, Kevin.

The next question comes from Benoit Parier from Desjardins. Please go ahead.

Hey, good afternoon, Alain. Yeah, just in terms of M&A or strategic investment, we know about the, we are aware about the opportunity to really increase density as part of your US LTL business, but would you be willing to increase significantly the size of your logistic business, Alain?

Well, it depends, right? It depends. So we bought TFWW about two years ago because we saw that there was a lot of positive with this company because they have a lot of market intelligence on the market. So that was a nice acquisition for us. It really was a good fit. So I'm not saying no to something of size, but we're always very careful about what we do in the logistic sector because, you know, we don't want to be stuck with some of the guys like on the tech sector where you buy something, doesn't make any money and you pay a fortune for it.

Okay. And in the LTL business, there's always a question mark around the unionized workforce with the pension stuff. Have you seen a big change on the structural side from a pension deficit standpoint where maybe some interesting takeover targets are maybe more attractive? Have you seen a big change with respect to the way a pension deficit is structured?

Well, you know, a few years ago, the federal government in the US came in and supported the union carriers that had a specific two of my peers that are unionized are part of that. We are not part of that. I mean, us, what we got from UPS in terms of pension is really, we have a standalone pension plan for our employees. So we're not part of that group of company that has some issues with the deficit on the pension plan. Now, I mean,

every

situation has got to be looked at. Us, we like to do a deal friendly. We're not big fan of doing a, you know, an un-styled kind of transaction. So every time we do a deal is always, I've never done a deal style anyway. Because I mean, so these kinds of discussion, like I was saying, with a target of size is really takes a lot of time, a lot of discussion, a lot of convincing, because a lot of people like to buy, not that many people like to sell because when you sell, you know, you lose revenue, you lose some profit, and then you have to find something else to do. So us, like for example, we sold CFI to Heartland, you know, great transaction for the buyer. But now us, okay, fine, we got cash in the bank, but we got to find something. What are we going to do with this capital now? Well, the idea is to do better than the CFI asset when we used to own it, but we have to find it. So we're doing a lot of these small tuck-ins right now, but the big whale, okay, is, you know, it's inside, we're trying, but we didn't catch it yet.

Okay, thank you very much for

the time, L.A. Pleasure be with you.

The next question comes from Tim James from TD Securities. Please go ahead.

Thank you. Thanks for taking my question, L.A. I'm going to turn to PNC for a minute. You've talked about having to face a -for-profit competitor there and the challenges that that brings, and yet that business, I mean, you know, you've done great things with that business. I realize growth maybe has been challenging, but the returns have actually been very good. What does, you know, stepping up or putting your foot on the gas for growth, what does that look like then given this environment and, I guess, given that competitor sort of, how should that look and what's the execution required there?

Yeah, that's a very good question. You know, when I'm talking to Bob and the team there, I mean, our focus is, you know, we're having our team focus on trying to get more business from existing customers because some customers, they split the business between, let's say, us and one of my peers, right? So it could be 50-50, it could be, let's say, us, we have 70 and some of our peers have 30, but sometimes we have 20% and my peers have 80%. So can you guys sit down with this customer and try to get, you know, the 20 up to 50, right? So that's what we're trying to do, not necessarily try to get new customers in the door. Yeah, if we could find a good one, so be it, but what the focus has always been, guys, in order to create more density, you need more freight per stop, right? That's always been TFI's goal, get more freight per stop and don't travel miles just for the pleasure of running a truck. So this is the mission that we have with our team there in Canada is that, guys, we're running a fantastic operation. I mean, 20% OE, who's doing that? I mean, wow, this is great. Well, we just have to do more, right? So let's grow with our existing customer. The ones that are giving us only 20% of their business, can we get 40? Can we get 50? That's going to be really the goal for us. Now, for sure, we have some capacity issues, like, for example, we're building a new hub in Edmonton. I mean, this is going to start this summer. So Edmonton for us, even if we want to grow Edmonton, it's going to be difficult, but we opened up Calgary, new hub in Calgary two years ago. We just opened up Winnipeg last fall. So that helps us, you know, creating or getting rid of a bottleneck, okay, or old terminals with old technology, okay, where you bring more volume in, but you don't have good costs. But now with new terminals, new technology, new conveyors, you can bring more volume in. So this is what the goal is to keep polishing that diamond and try to get the diamond a little bit bigger.

Okay, that's helpful. My follow-up question, looking at the intermodal business, you touched on some of the challenges there related to appear. If I think longer term on intermodal, you know, is the potential for a migration of some of the -the-road volume back towards intermodal, is that a challenge for TFI, you know, as you look at over the next couple of years, or could that be an opportunity for you?

It's really a challenge, because what we put on the rail is it's always a relationship between cost and service. So, I mean, you can't really, when you have a customer that wants really a AAA kind of service, you can't take the risk of the rail. This rail, you know, the service is, it seems okay, but even more so in the winter, there's always an avalanche or things like that, or it's so cold that they have to reduce the speed, they have to reduce the length of the convoy, etc., etc. So, what we're doing, really, is to try to keep what's over the road, okay, highly profitable, because we make way more money with our freight over the road than versus the rail stuff, the intermodal stuff. And then when a customer wants to have a better deal, wants to save money, okay, not so picky about service, then okay, we'll fight, then we'll bring this guy to our rail operation, our intermodal operation. That is really the play, okay, that we have on the Canadian side. So, it's really a two-split kind of an operation. So, you got TST overland that runs road, you got T-Force Raid Canada that runs road, but then you got Vytran and Clark that runs rail.

Okay, thank you very much for the time.

That's great.

Pleasure. This concludes the question and answer session. I would like to turn the conference over to Mr. Badaar for any closing remarks.

Well, thank you very much, operator, and I very much appreciate everyone joining the call today. I hope you have a wonderful evening, and please don't hesitate to reach out if you have additional questions, and we appreciate your interest in TFI International. So, thank you again, and have a great evening. Bye.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.