TFI International Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to TFI International's third quarter 2023 results conference call. At this time, all participants are in listen only mode. Following the presentation. Pardon me. 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 cause actual results to differ materially. Also, I would like to remind everyone that this conference call is being recorded on Tuesday, October 24, 2023. I'll now turn the call over to Alan Bidnord, Chairman, President, and Chief Executive Officer of GFI International. Please go ahead, sir.

All right. Thank you, operator, and thank you, everyone, for joining us this morning. Yesterday, after market close, we released our third quarter 2023 results. With weaker demand conditions persisting throughout the quarter, we're proud of our solid execution which reflects continued adherence to our operating principles. As I mentioned before, our talented team understands the importance of profitability and cash flow, reacting quickly to market shifts and focusing even more intensely on the fundamentals when trade volume weakens. We view this underlying focus on profitability and cash flow as strategically important to the TFI international growth story, allowing us to consistently invest in the business and pursue M&A always in a disciplined manner, and return excess capital to our shoulders whenever possible, which, as you know, is one of our guiding principles. Taking a look at our third quarter results, we generate operating income of just over $200 billion, reflecting an operating margin of 12.3%. This compares to the prior year's $318 million with a 17.1% margin. Adjusted net income of $136 million compares to $181 million per year, and adjusted EPS of $1.57 was down from 201. Regarding net cash from operating activities, we generated $279 million during the second quarter, and in terms of free cash flow, which we view as strategically important, we produced nearly $200 million. Given the softer market condition, these solid results along with strong returns on invested capital across all of our business segments, reflect well on the hardworking people of TFI and the importance we place on protecting margins, especially when the freight demand weakens. It's also important to point out that when comparing to the prior year, our results reflect not only our sales of TFI last August, but the associated $76 million gain on sales along with costs incurred to transition our IP system from UPS, which will provide long-term efficiency advantages. In addition, we continue to face modestly unfavorable move in foreign exchange. I'll emphasize the results of our reporting are fully burdened, not adjusted for any of these items that affect the year-over-year comparison. All right, so let's review how each of our business segments perform. PNC, which represents 7% of our segment revenue before fuel surcharge, saw a 7% decline in revenue before fuel surcharge, with the number of packages also down 7%. Operating income of $25 million compares to $34 million the prior year, with a margin of 23 relative to 28% the previous year. Our return on invested capital, while down from 31% a year earlier, came in at still solid 27.6%. Overall, our P&C business is operating well given the weaker demand environment and with less contribution from fuel surcharge, benefiting from our unique market exposure and ability to control cost. Moving on to LTL, which is 44% of segment revenue before fuel surcharge. Our revenue before fuel surcharge was down 12%. on a 4% decline on shipments. Operating income of just over $100 million was virtually flat year-over-year. Within LTL, Canadian revenue before fuel surcharge increased 5% on a 5.3% increase in shipments. In addition, the quality and profitability of our business has been given difficult market conditions with our operating ratio of a solid 77.2% compared to 72.8% the prior year. Similarly, our return invested capital for Canadian LTL was 19.6, relative to 23.1 a year earlier. Within the U.S. LTL, results clearly reflect our margin resilience, especially given an important 5% wage increase to our labor force during the quarter. Revenue per shipment before fuel surcharge remained flat year-over-year, while our number of shipments were down 7.5%. Our revenue before fuel surcharge of $581 million was down from $687 a year earlier, and we were able to keep our operating ratio flat at 90.8 year-over-year and improve it sequentially. Return on invested capital for USLTL was 15.2 compared to the prior year at 25.2. Now let's turn to truckload, which is 24% of segment revenue before fuel surcharge. Amidst a very weak market condition with lower demand and weaker rates, we believe that we were able to outperform the broader market, benefiting from our specialized Canadian exposure. Our truckload revenue before fuel surcharge was down 21%, reflecting not only the weaker demand, but also the sale of CFI in August 22, and to a lesser extent, unfavorable foreign exchange. Truckload operating income was $50 million relative to $97 million last year, and our operating ratio came in at 87.5 versus 81.1 a year earlier. So, taking a closer look within truckload, although our specialized operations continue to benefit from self-help opportunities, along with our diversity and exposure to better performing niche markets, we were still impacted during the quarter by volume and pricing pressures. This is reflected in our new disclosure of weekly revenue per truck, which declined year-over-year. As a result of this, as well as a slight FX in width, revenue before fuel surcharge declined 8% year-over-year to $325 million. Our operating ratio was 87.8 relative to 79.9, and our return on invested capital was 10.1, down from 12.7. Taking a look at our Canadian-based conventional truckload business, we generated revenue before fuel surcharge of $79 million, almost entirely flat year-over-year, and actually up on a consistent currency basis. However, our adjusted operating ratio was 87.8 relative to 75.5, and our return on invested capital, which was 20.6 a year earlier, came in at 13.8%. This reflects a decline in both revenue per mile as well as number of miles partially upset by our ongoing focus on network density and cost control. Wrapping up the business segment discussion, logistics represents 25% of segment revenue before fuel surcharge. Our solid results of this quarter reflect our operational strength and ability to control costs. We generated $416 million of revenue before fuel surcharge, which was down only 2% year-over-year, benefiting from our recent acquisition of GHD, while also facing modest FX ed wins. However, on this relatively flat revenue, we were able to drive a greater than 40% increase in operating income to $41 million on a much stronger operating ratio of 9.8, up a full 300 basis points. Our logistics return to capital was 15.5, down from 21.1 the prior year. Overall, solid performance of our logistics segment benefited from better cost control, the strength of our same-day package delivery operation, the GHT acquisition, and our team's ability to successfully navigate changing market conditions. Turning to our strong balance sheet and liquidity, which is always a focus at TFI International, we were able to further enhance our financial position both during and subsequent to the quarter. First, we generated a free cash flow of nearly $200 million, as I mentioned, and we ended up September with a funded debt to EBITDA ratio of only 1.39. Second, Subsequent to the quarter, we were able to further strengthen our balance sheet with a private placement of $500 million of fixed-rate interest-only debt, bringing our overall weighted average interest rate to 4.5% entirely fixed, with an overall weighted average duration of 9.5 years. As I've mentioned many times, this financial strength is core to TFI International Strategy's giving us the flexibility to make smart investments regardless of the cycle, while pursuing strategic M&A and returning excess capital to our shareholders whenever possible. Speaking of M&A, during the quarter, we completed four additional token acquisitions, bringing our year-to-date total to 11. I'm also pleased to announce that our board director has raised the quarterly dividend by 14%, and that the share repurchase program, RNCIB, has been renewed for an additional year. I'll now conclude with our updated full-year outlook before opening up to Q&A. Today, we are reaffirming our 2023 EPS guidance provided in July of a range of $6 to $6.50. We're also maintaining our full-year free cash flow outlook at $700 million to $800 million, including capex of $200 million to $225 million. In addition, we have already exceeded the combined total of $500 million this year of capital deployed in M&A and share repurchase, given our very strong financial position. And with that, operator, if you could please open up the line so we can move to the Q&A portion of the call.

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