TFI International Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to TFI International Second 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 Tuesday, August 1, 2023. I will now turn the call over to Alan Burdard. Chairman, President, and Chief Executive Officer of TFI International. Please go ahead, sir.

Well, thank you very much, operator, and thank you, everyone, for joining us this morning. Yesterday, after market close, we released our second quarter 2023 results. During these tough times for the freight market with lower volumes industry-wide, it was critical that we abide by long-term operating principles, and we did just that. We again demonstrated the quality of our operation and our team's ability to quickly react to changing market conditions by focusing intensely on the fundamentals of the business at all times. Speaking of our team, I'm pleased to announce that just yesterday, our T-Force Freight unionized employees ratified a new agreement with an 81% vote in favor, which we view as favorable outcome for everyone involved. Throughout our organization, we recognize the importance of profitability and cash flow. This is what allowed us to produce solid results during a difficult quarter with solid operating ratio across all four of our business segments. In turn, This focus on profitability and cash flow, as I've mentioned many times, allows us to steadily invest in the business, take a disciplined and strategic approach to M&A, and as always, return excess capital to shareholders whenever possible. We produced just over $200 million in net cash from operating activities during the second quarter, with free cash flow of $138 million, despite the industry-wide weaker freight environment and other factors I'll outline in a moment. Our operating income during the second quarter was 192 million, reflecting an operating margin of 12.4. This compares to the prior year's quarter of 391 million with a margin of 19.7. Our adjusted net income of 139 million compares to 241 million, and our adjusted EPS is $1.59 compared to 261. We view these as solid results under the circumstances supported by our team's ability to protect margin by quickly reacting to changing market conditions, changing market dynamics. Our success in this regard is best reflected by the strong returns on invested capital across our organization. When comparing to prior year, I point out that our results reflect not only our sales of CFI last August, but last year's sizable gain on the sales of real estate in both LTL and truckload segments. In addition, similar to last quarter, foreign exchange fluctuations hamper the year-over-year comparison. And similar to last quarter, we incurred costs associated with the transitioning of our IT system from UPS to help enhance efficiency going forward while providing better controls and insight and allowing us to exit our TSA with UPS. TFI reported results are fully burdened as we are not adjusting this year nor did we in the second quarter of 2022 for any of these items that worked against our year-over-year comparison. Let's turn to the performance of each of our business segments, starting with our P&C, which represents 7% of our segment revenue before fuel surcharge. We saw an 8% decline in both the numbers of package and revenue before fuel surcharge. Our operating income came in at 27 million relative to 37 million the prior year with a margin of 23 relative to 29%. However, our return on invested capital actually improved to 28.8% from 27.6 a year earlier. Next up is our LTL, which is 43% of segmented revenue before fuel surcharge. Shipments were down 18% and our revenue before fuel surcharge was down 23%, also reflecting the unfavorable FX impact. Operating income of $81 million compares to $187 million in the year-ago period, and again, we do not adjust for the IT system transition, nor our sales of real estate at a gain in a year-to-go period. Digging deeper within LTL, Canadian revenue before fuel surcharge was down 14%, but our operating ratio remains strong at 73.7 compared to 69.1 the prior year. At the same time, our return on invested capital for Canadian LTL actually improved to 21.1, up 70 basis points versus a year earlier. Turning to U.S. LTL. Revenue before fuel surcharge of $550 million compares to $725 million the prior year due to volume pressure. However, reflecting our continued progress with our turnaround plan to streamline the operation of T-force freight, our adjusted operating ratio of 91.5 reflects relative stability versus 88% reported a year earlier, and importantly, our work is not done enhancing the efficiency of acquired operations. Return on invested capital for USLTL was 16% compared to the prior year's quarter at 24.5%. All right, let's move on to truck low, which represents 26% of our segment revenue before fuel surcharge. Revenue before fuel surcharge was down 26%, reflecting not only weaker volumes but our sales of CFI last year and unfavorable foreign exchange translations. Operating income was $66 million relative to $127 million last year, reflecting the same factor plus our sales of real estate in the prior year period, and our margin of $16.1 was down from $22.9. Within truck load, revenue before fuel surcharge for our specialized operations, which benefit from our diversity and exposure to niche markets, performed relatively well. at $335 million versus $353 million the year prior, despite FX. Our operating ratio also held under the condition at 83.9 versus 77.1 the year prior, and our return on invested capital actually improved to 12.7, up 150 basis points over the past year. This is yet another business where TFI has what we refer to as self-help opportunity, regardless of the macro environment. Next is the Canadian-based conventional truck low, which produced revenue before fuel surcharge of $77 million, down from $88 million, a comparison that would have been stronger on a constant currency basis. Our 84.3 adjusted operating ratio, which compares to 73.4 a year earlier, is impressive under the circumstances, benefiting from our continued focus on network density and cost control. Our return on investment capital once again showed improvement despite industry headwinds coming in at 17%, up 30 basis points. Finally, let's discuss our logistics segment, which represents 23% of segment revenue before fuel surcharge. We've reduced $362 million of revenue before fuel surcharge, reflecting both volume declines and foreign exchange when compared to the year ago, $454 million. Logistics... Operating income of $33 million compares to $42 million a year earlier, and our operating margin actually held nearly flat at just above 9%, reflecting our team's success in reacting to market condition, as well as the relative strength of our same-day package delivery operation. Rounding up our logistics discussion, our return on invested capital was 17.9 versus 1.1 a year ago. Shifting gears. Strong free cash flow across our business, totaling $138 million, I mentioned, continues to benefit TFI International balance sheet. We ended June, okay, with a funded debt to EBITDA ratio of 11.11, at 1.11. And as a reminder, our debt is almost entirely at fixed rate at a weighted average cost of just under 3.5. This financial strength is an important pillar of our strategy, allowing for smart investment in the business, regardless of the cycle, while continuing to return capital to our shoulder whenever possible. During 2023, we have now completed seven small tuck-ins acquisition, including one completed subsequent to the second quarter. Our ability to take a disciplined approach to M&A stems directly from our strong balance sheet and the patient allows. We also announced on June 15 that our Board of Directors approved another $0.35 quarterly dividend, which is 30% higher than the year-ago quarter. Turning to our updated full-year outlook, we are updating our guidance provided in April to a range of $6 to $6.50 for 2023 EPS. We maintain our free cash flow at $700 to $800 million, which is based on net capex of between $200 to $225 million. In terms of capital allocation, given the strength of our current M&A pipeline, we expect that for the full year, we will now allocate a total of approximately $500 million to a combination of acquisition and share repurchases. With that, operator, we're now ready to move into Q&A. If you could please open the lines.

Excuse me, ladies and gentlemen. To ask a question, you will need to press star 1 on your telephone keypad. To redraw your question, please press star 2. Colors will be limited to one question and one follow-up in order to get to as many colors as possible. Again, press star 1 to ask questions. Please stand by while we compile the Q&A holster. Our first question comes from Havishankar with Morgan Stanley.