TFI International Inc. Q4 FY2024 earnings call

• TFI produced strong free cash flow of over $200 million in Q4, with full year total over $750 million for the third consecutive year. Total revenue before fuel surcharge was $1.8 billion, up 9% but operating income was down. Adjusted net income and EPS were down. Cash from operating activity was $262 million and free cash flow was $208 million, both down from prior year. • Reviewed three business segments: LTL, Truckload, and Logistics, detailing their financial performance. • On the balance sheet, reduced debt by $156 million, ended the year with a funded debt-to-EBITDA ratio of 2.1. Declared a 13% increase in quarterly dividend and repurchased $42.4 million worth of shares. Plan to redomicile from Canada to the US.

For the fourth quarter, TFI International's three business segments were reviewed. LTL was 40% of segmented revenue before fuel surcharge. LTL revenue before fuel surcharge was $737 million, up 10%, with operating income of $70 million (up 34% but with an $8 million impact from higher accident-related costs); adjusted LTL operating ratio was 90.3% compared to 86.1% the prior year, and return on invested capital was 16.3%. Truckload was 38% of segmented revenue before fuel surcharge, with revenue of $693 million (up from prior year), operating income of $60 million (up from $51 million), an operating ratio (OR) of 91.5% relative to 87.3% the prior year, and return on invested capital of 8.4%. Logistics was 22% of segmented revenue before fuel surcharge, with revenue of $410 million (down from prior year), operating income of $43 million (down from $55 million), a logistics operating margin of 10.5 relative to 11.6 last year, and return on invested capital of 17.1.

• No formal 2025 guidance provided. • Mentioned Q1 is still in a deep freight recession, and 2025 is likely to be difficult. Tried to plan in October '24 but didn't anticipate current volume issues in truckload and LTL.

• High accident-related expenses, which were about $9 million higher than prior year. • Foreign exchange fluctuations impact EPS, with every $0.01 fluctuation of Canadian dollar per U.S. dollar affecting annual EPS by about $0.02. • Challenges at TForce Freight with high costs, low volume, and need for cost reductions. • Daseke acquisition with excess equipment leading to high depreciation expenses. • Uncertainty in market conditions, tariffs, and macroeconomic factors affecting volumes.

Q: When you think of where we are in the cycle now and where ultimately go to $8 of normalized EPS, how much of the path is idiosyncratic actions vs cycle recovery?

A: Very good question, Ravi. And you know what, I think that we still have a lot of work to do on cost. If you look at our TForce Freight, you know, our costs are still too high. We're getting also killed because our volume keeps dropping. Our shipment count is down 6% year-over-year. Although our weight per shipment is about the same, it's still a very difficult environment. So we still have a lot of work to do at TForce Freight on the fleet side to reduce our costs. We're on the right track there. Our average age of fleet of trucks at TForce Freight is 4.2 years, which is getting close to normal versus the average age that we have in Canada, which is a little bit higher. But then if I look at my maintenance cost per mile in U.S. versus Canada, I mean, there's still a big discrepancy between the two. So we still have a lot of work to do on cost at the TForce Freight. The same is true also of our Daseke acquisition. If you look at the trend since we bought Daseke in April, I mean, Q2 was okay. And then we had issues with revenue per miles that keep dropping because the freight recession is still with us. And even in Q1 of '25, we're still seeing a very high [ph] pressure on rates, although it's quite stabilized, but the number of miles are down and our costs also are too high. Daseke, we were trying to have a lot of equipment and these equipment are specialized equipment. They're used not very often. And let's say, wind equipment, wind is out of wind, right? So it's not very popular right now. So we have to reduce our asset base at Daseke to reduce our cost, to reduce our depreciation expenses, to reduce our interest costs as well. So we still have a lot of work to do to get to - to me, on the cost side, with no market improvement, we have to be closer to a 7 to 7.25 EPS in a normalized cost environment. If you look at our logistics, I mean, we're down $12 million quarter-over-quarter - year-over-year in Q4. This is just volume. I mean, the truck manufacturers volumes are down about 20%. This will continue probably Q1, Q2, Q3 of '25. When we talk to our customer, they see a pickup by the end of '25. So that is also not helping us in the early days of '25. But this is just volume, and it will come back. So to make a long story short of a big question is that we still have a lot of work to do on the U.S. operation to become lean and mean. If I compare that with our Canadian operation, I mean, we still have a lot of work to do in the U.S.

Q: Just to come back to U.S. LTL margins and deterioration in the quarter. Would you say that's - I know you talked about cost as well, but is it primarily revenue? And then can you maybe go into a little bit more color on some of the specific steps TFI is going to take to work on U.S. LTL margins in 2025 regardless of the volume environment?

A: Yeah. Yeah, yeah. You see the problem that we have, Jordan, is this, is that right now, okay, we're losing the small and medium-sized, okay customers, which have the best margin, right? And some of that has been replaced, okay, by, let's say, 3PL and corporate account, which doesn't bring the same margin. And this was really accelerated in Q4. So that's part of the issues that we have is sales, okay? We have to be way more aggressive on the small- and medium-sized account. So this is problem number one for us, if you look at TForce Freight today, okay, is revenue. Problem number two is cost. So we've been working steadily on costs since we bought this company, and we've invested a ton of capital to improve our asset, to improve our training, et cetera, et cetera. But at the same time, okay, our volume, okay, keeps coming down, right? So it's like you're chasing your tail, like a dog chasing his tail, okay? So this got to stop. So we are at a floor of around 20,000 shipments. The mission that we give to our sales force is to try to grow organically, but also to try to improve the density. So what I mean by density, and I'm like a guy that's always repeating the same thing, if you look at our Canadian operation, our density is second to none. I mean it's just fantastic. That's why we're doing so well. In the U.S., our density is the ship. I mean, it's really bad. So we have to improve the density. So there's two ways to improve density, right? Approach number one is to try to do it organically, and that's what we've been trying to do for 3 years since we bought the company, 3, 4 years. Option number two, okay, is down the road, okay, you got to do what we've done in Canada, you got to do some M&A, okay? So if you can't get the density from organically your sales team, then you have to focus down the road, okay, in trying to find a target, something that fits you, okay, that could help you improve your density at one point, right? So this is why we've been saying that one solution down the road, okay, for TForce Freight on sales and revenue is it will have to go through M&A at one point. But in the meantime, let's say, during the course of '25 and '26, our focus has to be trying to grow it organically, okay, with the people we have and the sales, the revenue, and try to squeeze, okay, the cost of our, let's say, fleet operation. What we've done so far that's good at TForce Freight is our line haul, okay? So now we're using a software that's really good, which is called Optum, which is used by some of my peers. And now we are implementing Optum in Canada for P&D, okay? And we're also starting to look at implementing that P&D tools. It could be Optum or another one in the U.S., again, to improve the management of our costs on P&D side. So it's like a two avenue for us. We got to keep working on the cost and do more with less, okay? But at the same time, the mission to our team - sales team is to grow organically and to improve our density. And over time, down the road, let's say, within 12 months, 24 months, whatever, when we're ready, when we can find the right fit, okay, is to add M&A like we do in Canada all the time.