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 6, 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 capped 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 points. 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 $0.09. Perhaps more important, the $188 million in free cash flow that were produced was up sharply from $121 million the prior year, 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 P&C, 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 on invested capital was up 32.5%. Next is our LTL, which is 44% of segmented 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 deliveraging caused by low revenue. Again, deeper on the LTL, Canadian revenue before fuel surcharge was up 15%, and yet we achieved 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 on investment capital for Canadian LTL was 24%. Turning 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 given 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 on invested capital for USLTL was 23.8. Let's move on to truck low, which is 25% of our segment revenue before fuel surcharge. Reflecting our sales of the CFI business I mentioned earlier, our focus quarter 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 conditions following the sale of CFI assets last year, which ended our exposure to the U.S. 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 on 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 truck load, we are able to capitalize on TFI diversity and the relative strength of the Canadian market, which add 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 equates to an operating margin of 9.1%, up a healthy 100 basis point, and our return on invested capital was 21.9%. Turning to our balance sheet, TFI International ended the year with a funded debt to adjusted EBITDA ratio of just under 1, 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 approved a U.S. 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 2023. We also anticipate free cash flow of more than $800 million, which is based on net capex 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 1 on your telephone keypad. To withdraw your question, please press star, then 2. Callers would be limited to one question and a follow-up in order to get to as many callers as possible. Again, that's star, then 1 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.