TFI International Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Consolidated Results: Generated strong free cash flow up 37% to over $270M, paid down $130M debt during the quarter, adjusted net income $137M, adjusted EPS $1.60.
• Segment Focus: Focus on improving operating performance across LTL, truckload, and logistics segments; integrating acquisitions like Daseke.
• Capital Allocation: Paid down debt, completed small bolt-in acquisitions, raised quarterly dividend by 13%, and renewed share repurchase program.

Segment Performance

• LTL:
  • U.S. LTL: Revenue before fuel surcharge $531M (down from $581M prior year), operating income $48M (down from $68M), tonnage down 2%, revenue per shipment ex-fuel up 3%, GFP revenue down 35%, OR 92.2% (vs 90.8% prior year), ROIC 15.4%.
  • Canadian LTL: Revenue before fuel surcharge $138M (down 2%), operating income $33M (up slightly), shipments up 3%, weight per shipment down 7%, revenue per shipment down 5%, OR 76.3% (vs 77.2% prior year), ROIC 17.6%.
  • P&C: Revenue before fuel surcharge $109M (down from $112M), operating income $24M (up slightly), OR 78.2% (up 80bps), ROIC 22.2%.
• Truckload:
  • Total truckload revenue before fuel surcharge $723M (up from $402M prior year), operating income $72M (up from $50M), OR 90.3% (vs 87.7% prior year). Specialized truckload: Revenue before fuel surcharge $648M (up from $325M), operating income $64M (up from $40M), revenue per truck per week $4,453 (up 5%), brokerage revenue more than doubled to $94M, OR 90.4% (vs 87.8% prior year), ROIC 7.9%. Canadian conventional truckload: Revenue before fuel surcharge $77M (down slightly), operating income $8M (down from $10M), OR 89.9%, ROIC 7.7%.
• Logistics: 22% of segmented revenue before fuel surcharge, revenue up 2%, operating income up 19%, margin 11.4% (vs 9.8% prior year), ROIC 17.4%.

Guidance

• Full year 2024 expected to be largely similar to 2023 due to challenging market conditions.
• 2025 outlook: Daseke expected to contribute at least $0.50 per share, continuing debt reduction, focus on tuck-in acquisitions and potential larger deals in the U.S. logistics and LTL sectors.

Risks

• Market cyclicality impacting revenue and margins.
• Service issues affecting customer perception and retention.
• Competition from other carriers adding capacity and affecting pricing.
• Interest rate fluctuations impacting debt costs and capital allocation.

Question and Answer

Q: So obviously interesting times in the industry. Just on U.S. LTL, are you able to distinguish how much of the earnings pressure there is purely cyclical and will snap back with more reordering stuff versus maybe some evolving industry dynamics in a post Yellow world with new capacity coming in and players jockeying for share et cetera?

A: That's a difficult question, Ravi. So, our focus is really to improve our cost basis. So the market condition we know has been challenging for the last probably like 18 months. So we don't control market conditions. Our focus is really to improve our cost base and also improve our service...

Q: Just on that guidance, looking out to next year now, if I look at consensus, it's up at it's come down a bit, but it's still at 8.50%, which is almost 40% above your new guide for 2024. I'm just curious if you're comfortable with that...

A: Very good question, Walter. It's too early for us to really talk about ‘25. I mean, we're going through our budget season right now. But what I could say though is that we've been under some kind of a freight recession for close to two years now...

Q: I wanted to maybe continue on the U.S. LTL pricing discussion. You mentioned that obviously one of the headwinds was service stepping back, but also that some of the competitors had added capacity. Can you maybe rank order which of those sequentially worsened through the quarter when you look at maybe the step down from the first half, mid-single to low-singles? And then just curious, as you're talking to customers and you're making these improvements to service, do you think your pricing will have to step further down to get customers to try and come back to TForce again? Or how are those customer conversations going as you navigate the cost for service changes?

A: Yes. So I think that you need the service. This is step 1 to try to convince the customer, right? So you can attract the customer with rates. But if the service is poor, I mean the guy is going to run and he's going to go somewhere else because yes, service is very important. Price is very important, number one. But service is also key, right? So when you're trying to get more freight, the guy will say, yes, how is your service? Well, my service is great. Okay, I'll give you a chance. And then if you don't provide the right service, then he's going to walk and you're going to have lots of churn. So that's one thing that a TForce rate we have, right? We have too much churn. So customers try us, and we fail a bit, okay, the guy goes away. So by improving service, you reduce the churn. By reducing the churn, you improve your volume, right? So this has been key to us. In terms of our peers the fact that some of our peers invested heavily in real estate. I mean, we haven't seen anything so far. But I'm just saying that the market is really soft. So people are -- some people are trying to chase rate and grow the volume. Our focus for us is not to chase freight, it's we have to fix our service first and reduce our costs and then reduce the churn so that we start growing organically because if you get 3,000 shipments more a day, but you lose 3,000 because of the churn, well, you're back to zero. So you got to fix the service so that you can reduce the churn of customer.