TFI International Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to TFI International's fourth 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 one 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 call is being recorded on Friday, February 9, 2024. I will now turn the call over to Elaine Bedard, Chairman, President, and Chief Executive Officer of TFI International. Please go ahead, sir.

Well, thank you operator and thank you everyone for joining us today. Our results released yesterday after the close reflect strong performance by our talented team, beating our expectation and once again we're entering a new year in the strongest position in our company's history. DISCOM, despite weaker market demand throughout much of the year, and is a testament to our adherence to longstanding operating principle, regardless of cyclical freight demand. In particular, I've referred many times to our overarching focus on profitability and cash flow, which is apparent in the four core results that I'll walk us through. It's this profitability and cash flow that permits us to execute on overarching principles of our growth strategy, which involve investing in the business, pursuing attractive M&A opportunities, and consistently returning capital to shareholders, and doing all of this even when the market is weak. This approach to the business is apparent in our four core results and indeed our performance throughout 2023. In fact, we were able to allocate roughly $2 billion of capital to announce acquisition and share repurchase during the year. Let's turn to fourth quarter results, which include operating income of just under $200 million compared to $217 million in the year-ago quarter. Our operating margin of 11.8% compares to 13.4% a year earlier, and I should mention that these results include a $23 million reduction in the contribution from asset held for sale. Our adjusted DENICOM $147 million was down only slightly from $152 million in the fourth quarter of 2022, and adjusted EPS came in at $1.71, down a penny. Given our intense focus on generating LT cash flow, we're most pleased with our net cash from operating activity, which was $303 million, up sharply from a year ago $248 million and bringing our full year total to just over a billion, again, up over the prior year despite market conditions. Equally important from a strategic standpoint, our free cash flow of $244 million was up significantly over $188 million in the prior year fourth quarter. For the full year 2023, we produced more than $9 per share of free cash flow, which is remarkable given our company's size, which is again a reflection of the hard work of our team throughout the year. Now let's dig in deeper into our four business segments, starting with P&C, which represents 7% of our segment revenue before fuel surcharge. The number of packages was down 4% with pricing a little softer as well. resulting in a 5% decline in revenue before fuels were charged. Similarly, our operating income of $35 million was down just slightly from $38 million the prior year, and our margin fell by 70 basis points to 28%. Return on invested capital for PNC was 28.1%. We believe this solid performance by our PNC business, in spite of the weaker demand environment, reflects unique market exposure, and as always, our close attention to cost controls. Next, let's discuss LTL, now 41% of segment revenue before fuel surcharge. Our top line revenue before fuel surcharge was down 3%, while our operating income of $71 million compares to $88 million a year earlier. This includes $7 million net loss on asset health for sale. Digging deeper within LTL, Canadian revenue before fuel surcharge grew 12% year-over-year, and a 12% increase in shipment benefiting from the STG acquisition in 2023. Return on invested capital for Canadian LTL was 20.1, relative to 24% a year earlier. Regarding our ongoing turnaround at US LTL, The name of the game for us, in addition to all the costs and efficiencies we have discussed over time, is quality of revenue through improved service. This is evidenced by our last quarter claim ratio of 0.5% for US LTL, 0.5% of revenue, okay, for US LTL, down from 1.5% a year earlier, and our second to non-Canadian LTL claims ratio of just 0.1% of revenue. Our revenue before fuel surcharge of $563 million was down from $601 million in the fourth quarter of 2022, and while volumes were down 5%, we were able to increase revenue per shipment as weight increased by 10%. Our operating ratio of 91% compares to 90.4% in a year ago, period, and our return invested capital for USLTL was 15.1% compared to the prior year at 23.8%. Next, let's discuss truckload, which is 24% of segment revenue before fuel surcharge. Benefiting from acquisition, our volume was slightly higher than a year ago, while rates were weaker. Truckload revenue before fuel surcharge are just under $400 million, was virtually flat with the year-ago period, down just a percent, while operating income of $51 million was down relative to $72 million last year, and our operating and our operating ratio of 87.3 compared to 86.1. Taking a look within truckload, our specialized exposure remains a plus. We were able to capitalize on self-help opportunities and increase revenue per truck. Benefiting from this, revenue before fuel surcharge almost entirely flat at $224 million. Our specialized truckload operating ratio was 87, Relative to $87.4 in the prior year period, and our return invested capital was $10.3 compared to $13.4. Turning to our Canadian-based conventional truckload business, revenue before fuel surcharge also held almost entirely flat at $78 million. Miles driven were up slightly, while rates were up about 7%. Our adjusted operating ratio of 89 compares to relative to 81.1 a year ago and our return invested capital was 12.6 down from 21.3. Let's finish up our business segment review with logistics, which was 28% of segmented revenue before fuel surcharge and turned in remarkably strong performance during the quarter. Revenue before fuel surcharge climbed 24% year-over-year, while operating income jumped 60% to $55 million. These strong results benefited from our very successful GHG acquisition, along with strong execution by our team, including effective cost control in response to market condition. Our operating ratio was 88.4, while return on investment capital was 18.8 versus 21.9 a year earlier. Let's shift gears and discuss our strong balance sheet and liquidity, which we view as a strategic asset. During the fourth quarter, we drove free cash flow of $244 million, as I mentioned, and also completed the private placement of $500 million of fixed-rate interest-only debt, as I referred to in our last call. As a result, we ended the year with a funded debt-to-bid ratio of 1.49%, and a weighted average interest rate of 4.4 that's entirely fixed with an overall weighted average duration of 8.3 years. Looking ahead, it's this strong financial foundation that will allow us to continue to make timely and intelligent investments regardless of the cycle and especially during time of market weaknesses. An excellent example of our recently announced acquisition of Dasky expect to close during the upcoming second quarter and one of the 12 announced M&A transactions during 2023. We very much like this highly complimentary acquisition as it scaled our truckload segment into a leading North American provider while bolstering our capability in the specialized market. Our other major focus this year is the ongoing turnaround of our LTL operation. And longer term, we see the potential opportunity to allow investors to own a separate specialized truckload business in addition to a very attractive LTL, PNC, and logistics business. Another advantage afforded us by our strong financial position is the ability to return excess capital to our shoulders whenever possible. They were pleased that during the fourth quarter, our board of director raised the quarterly dividend by another 14%. So with that, operator, we're ready for Q&A. If you could please open the line. Thank you.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your hamster before pressing the start key. As a reminder, participants will be limited to one question and one follow-up. One moment, please, while we poll for questions. Thank you. Our first question is from Scott Group with Wolf Research. Please proceed with your question.