TFI International Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to TFI International's first quarter 2023 results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Callers will be limited to one question and a follow-up. Again, that's one question and a follow-up so that we can get to as many callers as possible. Further instructions for entering the queue will be provided at that time. Please be advised that this conference call will contain statements that are forward-looking in nature and subject to a number of risks and uncertainties that could cause actual results to differ materially. Also, I would like to remind everyone that this conference call is being recorded on Wednesday, April 26, 2023. I'll now turn the call over to Alain Bedard, Chairman, President, and Chief Executive Officer of GFI International. Please go ahead, sir.

Well, thank you for the introduction, operator, and welcome everyone to this morning's call. Yesterday, after the market closed, we released our first quarter 2023 results. Many times over the years, including last year, you've heard me mention that profitability and cash flow are most important to us as they allow us to be nimble, especially during uncertain times when we can't capitalize on market turbulence. This means the ability to steadily invest in the business, opportunistically pursue acquisition and return excess capital to shareholders whenever possible. During the first quarter, we generated a 69% increase in net cash from operating activity to $232 million, and our free cash flow more than doubled up 113% to nearly $200 million. While our strong cash flow performance benefited from working capital fluctuation, it also comes despite reduced freight volumes, despite the unfavorable FX impact, and despite our sales last August of CFI. Our operating income during the first quarter was $166 million, with an operating margin of 10.7 versus the year earlier period of 220 million with an operating margin that was 90 basis point higher at 11.6. In addition, our adjusted net income of 117 million was down from 158 million the prior year, and our adjusted diluted EPS was $1.33, was down from $1.68. Importantly, the year-over-year change in these items reflects not only the reduced rate volumes and the sale of CFI, but also the fact that our earnings are fully burdened by several items for which we did not adjust. These include severance package related to early retirement offers, costs associated with transitioning IT system from UPS, the mark to market on DSU, and provide an unfavorable variance to our reported earnings this quarter, and again, foreign exchange fluctuation. We did not adjust for any of these items, the first two of which, the severance costs and the IT system transition, will help to streamline operation and enhance our efficiency going forward. The move of the financial system in particular will result in better control and insight into acquired assets T-force rate operation and allow us to exit our TSA with UPS. With that, let's have a look at how each of our four business segments performed during this quarter, some of which produced significant increases in return on invested capital, even as we navigated uncertain economic times, starting with our P&C, our package, which represents 8% of our segment revenue before fuel surcharge, The number of packages across the segment was down 5% year-over-year, and our revenue before fuel surcharge was down 10%. However, our operating income of $27 million was up 5% over the prior year, with our margin expending $340 basis point, and our return on invested capital was a strong 31.5%, which was up considerably from $26.4 a year earlier. Our next segment to discuss is LTL, which is 46% of segment revenue before fuel surcharge. Our shipments were down 20% in the U.S. and 9% in Canada, which, along with foreign exchange impact, contributed to a 17% decline in our revenue before fuel surcharge. Reported operating income of $58 million was down 39%, fully burdened by the costs I referred earlier, that we do not exclude namely severance cost and IT system transition again. Within LTL, Canadian revenue before fuel surcharge was down 12%, but we achieved a significantly improved operating ratio of 75.5, which was 360 basis point better than the prior year period. Similarly, our return invested capital for our Canadian LTL was 23.2%, up significantly from 18.4 a year earlier. As for the US LTL, revenue before fuel surcharge was up 18% on the ongoing volume headwinds. We continue to streamline operation following the acquisition of T-Force Freight. However, our adjusted operating ratio of 95.7 was up from 90.7 a year earlier on the reduced volume as well as the non-recurring costs. The transition to the new financial system is now complete. which should benefit us going forward, and we continue to see additional opportunity to take costs out of the business. Return on invested capital for US LTL was 17.4 as compared to the prior year's quarter of 22%. Next, let's discuss truckload, which is 27% of our segment revenue before fuel surcharge. Reflecting our sales of CFI last year, truckloads saw revenue before fuel surcharge fall 20%, partially on the impact of foreign exchange. Our operating income held almost flat, down just 1%, again, despite the CFI sales over the course of the past year, reflecting a 320 basis point margin improvement. Digging deeper, specialized operation held revenue virtually flat despite foreign exchange benefiting from our diversity and exposure to niche market. We also saw an improved OR of 84.5, 250 basis point better than a year earlier. Our specialized truckload return on invested capital came in at 14.1% and we view this business as having additional self-help opportunities ahead. Canadian-based conventional truckload was also solid, with revenue before fuel surcharge up slightly, again, even stronger on a constant currency basis. Our adjusted operating ratio for conventional truckload improved a significant 440 basis point to 81.2, and our return on invested capital was 21.3, much stronger than the prior year's quarter of 11.7. as we continue to focus on network density, cost control, and improving the operation of recently acquired businesses. We believe these overall solid results for truckload, which again, were even stronger on a constant currency basis, underscore our point last quarter, that our business is now more resilient during volatile market conditions, with lower U.S. drive-in exposure following the sales of CFI. Our last segment to review is logistics, which represent 20% of segment revenue before fuel surcharge. Our revenue before fuel surcharge of $355 million was down 18% on volume weakness, as well as a difficult year-over-year comparison and foreign exchange impact. Within logistics, brokerage volume were weak, while same-day package delivery volumes were relatively stable, thanks primarily to the successful efforts of our sales team in bringing on new customers. Our operating income fared better, off 9% to $32 million, reflecting successful containment of expenses. As a result, our operating margin actually improved 90 basis points to 8.9, and our return invested capital was 19.3, almost flat, with a quarter of 22, despite the lower volume this quarter. The FI International's balance sheet continues to benefit from our strong free cash flow, which was nearly $200 million during the quarter, as I mentioned. Our funded debt to adjust the EBITDA ratio came in just below 1 at $0.98 as of March. As a reminder, our debt is almost entirely at a fixed rate, which is a weighted average cost of less than 3.5%. This strong capital position is what allows us to strategically invest in the business, even during times of uncertainty, while also returning capital to our shoulders whenever possible. Year-to-date, we have completed five token acquisitions, including one subsequent to the first quarter. During the quarter, we also announced that our Board of Directors approved a $0.35 quarterly dividend, which is 30% higher than the year earlier level. I'll wrap it up with our updated outlook. We are updating our guidance provided in February to a range of $7 to $7.25 for the 2023 earnings per share, U.S. dollars. We also anticipate free cash flow of $700 to $800 million which is based on net capex of between 200 to 225 million. I also note that these range now reflects 300 million of capital deployed towards either M&A and share buyback. And now, operator, if you could please open the lines. We're ready to move to the Q&A portion of the call.

Ladies and gentlemen, to ask a question, you need to press star 1 on your telephone keypad To withdraw your question, please press star two. Callers will be limited to one question and a follow-up in order to get to as many callers as possible. Again, that's star one to ask a question. Our first question comes from Scott Group with Wolf Research. Please go ahead.