TFI International Inc. (TFII) Q4 2020 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to TFI International's Fourth Quarter 2020 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. [Operator Instructions] Before we turn the call over to management, please be advised that this conference call will contain several statements that are forward looking in nature and are subject to a number of risk and uncertainties that could cause actual results to differ materially from those anticipated. Also please note that TFI has changed its presentation currency. And all dollar amounts are in US Dollars. Lastly, I would like to remind everyone that this conference call is being recorded on Monday, February 8, 2021. I will now like to turn the call over to Alain Bedard, Chairman, President and Chief Executive Officer of TFI International. Please go ahead.

Well, thank you very much operator and I want to welcome everyone to this afternoon call. I mean, today was a special day I guess is our press release is now out just since about 5 O'clock so I don't know if it's because we change from Canadian Dollars to US Dollars. I mean, there was a glitch I'm sorry about that. But the press release is finally out so my script was saying well today after market closed but really it was at 5 O'clock we released our fourth quarter and full year 2020 results. Now, TFI International had another very strong quarter, which got a very successful year, a year that include our listing on the New York Stock Exchange one year ago this month. Most importantly, we generated robust operating and financial results, despite the ongoing pandemic, and our focus on health and safety of our employees and customers. Looking back at 2020, we never strayed from our operating philosophy, which includes a relentless focus on the fundamentals of the business, and on getting the details right. Seeking opportunities to enhance efficiencies is a non stop focus of ours. That became even more important last year. As always, we look to increase return on invested capital, optimize our free cash flow and grow our earnings per share. This in turn, placed us in a position of strength, with a strong financial profile that allows us to strategically expand our business. Our ultimate aim is to create long-term shareholder value, returning excess capital to shareholders whenever possible. The identification of strategic accretive acquisition opportunities to expand and enhance our platform has long been part of our strategy. During the fourth quarter, we completed five acquisition bringing our total to 13 well timed and highly strategic acquisition for the full year. Subsequent to year end, we have already completed another acquisition. As we have also announced an agreement to acquire UPS rate expected to close during the second quarter. In a highly disciplined manner, we continue to selectively seek acquisition candidates that are both an accretive and strategic to extend TFI International, long and successful track record of growth through M&A. Let's now talk -- let's now walk through fourth quarter results starting with our high level performance. As you may have seen in our earnings release today, we have elected to change our presentation currency from Canadian to US dollars due to our growing market presence in the US and to facilitate a comparison of the company's financial position to that of its peers. For comparative purposes, our historical financial statements have been restated. Our total revenue for the quarter is $1.1 billion was up 13% compared to the prior year's fourth quarter, marking a return to a year-over-year growth. Even more important given our focus on profitability, our operating income increased 26% to $117 million. And our adjusted EPS on a diluted basis expanded 36% to $0.98, up from $0.72 a year earlier. Our net cash from continuing operation activities was a robust $165 million, up 24% over the prior year. As I mentioned, the strong cash flow is strategically important allowing us to invest in our business and seek strategic expansion opportunities. Digging in further on these strong results, let's review each of our four business segments starting with our P&C. P&C represents 15% of total segment revenue and saw 21% increase in revenue before a fuel surcharge versus the prior year December quarter. Our operating income was $29.4 million was up 30% and the operating margin was at 19.1% up 130 basis point. Our growth over the prior year was due to a pickup in both B2C and B2B activity, which has come back well following the pandemic related slowdown earlier in the year. As I mentioned last quarter, following the pandemic or P&C segments has a more balanced mix of B2C and B2B, and we believe that we are well positioned to capitalize on future growth opportunity in both markets. Our LTL segment represents 14% of total segment revenue and generated revenue before a fuel surcharge of $141 million compared to $151 million the prior year quarter. While the pandemic related decline in demand persisted, we saw improvements during the quarter. More importantly to us, our LTL operating income grew 27% to $24.5 million and our operating margin expanded 450 basis points to 17.3%. This strong growth in operating income receive a small boost from the Canadian wage subsidy of $2.1 million but was mainly driven by our success driving operating efficiencies at the same time that year-over-year revenue decline have continued to moderate to only 7% in the fourth quarter. Moving on to Truckload; this segment represents 42% of total segment revenue. Revenue before fuel surcharge returned to year-over-year growth in the fourth quarter of 6%. And our truckload operating income also returned to growth of 15% to $54 million. Our operating margin also expanded up 100 basis point 12.2%. Within truckload both our US and Canada operation grew revenue before fuel surcharge 3% over the previous year period, while our specialized business grew 9% and similar to LTL, we benefited from a small Canadian waste subsidy of $4.1 million in our Truckload segment. Completing our business segment discussion, Logistics represent 29% of total segment revenue. Our revenue before fuel surcharge jumped 62% driven by ecommerce, same day package delivery demand and our acquisition of DLS Worldwide in November. Our operating income nearly doubled to $26.5 million or 14.2 a year earlier driven by strong top line growth, combined with 110 basis points of operating margin expansion. TFI International balance sheet is a significant source of strength that allows us to be opportunistic as we execute our business plan. We ended the year with more than an $800 million of liquidity, which benefited from our strong cash from operating during the fourth quarter, and we reduce our long-term debt by 35% over the course of 2020. Subsequent to year end, we further strengthened our financial profile, with January's private placement of $500 million in senior notes, substantially extending maturity to 8 to 15 years at fixed rates. In conclusion, Our REIT rate that the TFI International, we focus on the fundamentals of the business to maximize profitability and cash flow. And we seek to optimize our capital allocation to further enhance value. This is our approach regardless of consensus, constantly changing macro condition. And you saw us adhere to this philosophy during 2020, which was certainly an unprecedented year. Looking ahead, I believe in TFI International is in its strongest position ever to create additional shareholder value, as you can rest assured that our entire team is focused on driving efficiencies to produce not just growth, but profitable growth. As I said, at the outset of today's call, our ultimate objective is to create and unlock shareholder value, returning excess capital to our shareholders whenever possible. And with that, operator, if you could please open the lines, we can begin the Q&A session.

[Operator Instructions] Your first question comes from the line of Ravi Shanker with Morgan Stanley.

Thanks. Good afternoon. Alain, can you give us some color on what customer industry feedback has been post your announcement of the UPS LTL acquisition?

You mean the customer feedback that UPS Freight got from this acquisition? Is that the question?

All of the above, kind of have you heard from UPS customers kind of, do you have a sense of how they're reacting to your purchase of the business? And also kind of any of your existing customers or other people who don't do business with kind of now that this deal has really put you on the map in the US?

Yes, I think that the customer reception is, wow, this is a fantastic transaction because as UPS rate for UPS was very, very minimal in terms of their portfolio, in terms of the percentage of their business. It was not a real focus of our -- of those, I mean, which will be a real focus of ours though. And based on all the experience we have in Canada, and if you look at the profitability that we're able to come up in the Canadian LTL market is very, very, very competitive. And we're able to do really well there. And I think that the UPS Freight acquisition is really going to be a source such a strategic acquisition for us at TFI. It's fantastic. So the, I mean, we have reaction from the employees. At the company, we had reaction from customers, we have a reaction from suppliers, we have reaction from people that sells trucks, because as you may have heard, I mean, we're planning on investing on a lot on CapEx there for the -- at least for the next two or three years in order to do a little bit of a catch up. So the reaction so far has been really, really positive. And in Canada, right now, to a UPS freight Service Canada with a local cartridge company. And for sure, over time, I mean, this is going to be part of our strategy to really move that business away from the strategic partner that they used to have in Canada, into our own network. So it's going to be really positive for the cost of our division in the US and positive also for the profitability of our Canadian Division that's going to take over that business over the next, I don't know, year or two years, whatever the transition is going to be.

Great. And as a follow up question, you guys were very targeted and tactical with inroads in the B2C ecommerce business kind of going after really dense profitable lanes that you said were more profitable and even you expected. Do you expect those opportunities to persist into 2021? Once the world starts normalizing, again? Or do you feel like that was a unique thing driven by the pandemic?

No, I don't think that will ever go back to the pre-COVID market condition. I think that what you're seeing is a very successful strategy that was put in place by Mr. Kohut, our EVP that runs the show for us in our P&C and his team, very successful in really focusing. And if you look at our EBIT margin in Q4, we've grown the top line we've grown the bottom line, and the margin as well. So we at first, if you go back maybe 18-24 months, we were always afraid of growing too much on the B2C because there was a perception that because it's free, you can make money on it, then we were -- we had customers, that was pushing us into doing things that didn't make any sense. Us we said, no, no, no, we're not in business to practice delivery. We're in business to make money on behalf of our shareholders. And finally, we were able, thanks a little bit to this pandemic thing there to say, well what, B2C, if we do it properly, if we do it where it makes sense where the density is high. Yes, we could still come in with great margin and the confirmation in his in our Q4 numbers, and wait till you see I've seen so far January, and the trend is still the same. The organic growth is still about the same as we saw. Now, I don't think that when B2B reopened fully, let's see in six months, nine months or a year, maybe there'll be a little bit of a small effect on B2C. But by the time that this happens, I mean, B2C is growing all the time, the pandemic was just a major catalysts for this business to explode. And we're not going back to the pre-COVID at all, no way. And if you look at our logistics is the same story, our resolve there are just going through the roof, we're on fire over there. We're in fire in Canada, big time. The US, I mean, we still have a lot of work to do on the US side. But the team is really, really focused on improving. We saw major improvement too also on our US operation, but not to the degree, we're not growing organically in the USA to date same as we are growing in Canada, but that I mean, we'll get there.

Your next question comes from the line of Allison Landry with Credit Suisse.

Thanks. Good afternoon. So it doesn't look like there was any specific guidance. And obviously there's quite a few acquisitions that you're -- that you guys are digesting but maybe if you can just give us a sense for how you're thinking about organic top line growth in 2021. Obviously, there's a lot of margin improvement opportunities, both organic and inorganically, but just hoping you can give us some sort of broad guideposts for how to think about the earnings part of a business over the next 12 months and also free cash flow generation.

Yes, that's a very good question. And there again, guys, I'm really sorry about this press release that came out so late that I know you guys are good. You're a fast reader, but you really have to read fast about what's going on. But your question about organic growth, if you look at our P&C's result, okay, in Q4, and you look at the organic growth that we had there, it's really very comforting to look at that we're up, what about $20 million in the quarter, okay, which is huge. I mean, it's like more than 10%- 20%. We see the P&C growing the same kind of rate into 2021 so far. LTL, the Canadian LTL, we're down 7% in the quarter year-over-year, probably, what we see for 2021 is that this will probably remain like negative five or negative five to 10 on the top line, not on the bottom line, though. And because we have lockdowns in Canada, still big time in Ontario and Quebec, so our LTL is really affected by that kind of environment. Plus, there's also a depreciation of the market in the sense that a lot of our customers are shutting down their doors because of the ecommerce growth. So they are -- there's a rationalization of the number of stores so that affects our business on the LTL side, so LTL on the Canadian side, we see a negative organic growth there for 2021. Now, if you look at our Canadian Truckload, our Specialty Truckload and our US Truckload, we see a little bit of growth there, a few points. Not much, I mean, the focus for us is really get the business more efficient. What we're talking about is we have a project in the US with TFI and TCA. And maybe down the road once we acquire UPS Freight, the truckload division of UPS Freight, the intention is really to have one business unit in the US to reduce our overhead, reduce our costs and run a much better operation that will be able to be no closer to a 85 OR versus a 92 OR like we are today. Logistic, that's also a big story for us. I mean, yes, if you exclude the acquisition of DLS, which is TFWW with NTFI, here so that, I mean, we're growing, we're growing in Canada, like 20 to 25. Right now in the US not so much. I mean, we're about flat two plus one plus two, by the end of the year, I think that will be closer to a plus five plus six. But more importantly, look at the improvement on the margin. I mean, even if you exclude DLS, which has a much lower margin, I mean, DLS runs about 3%, 4% net profit, it's really low. But we just bought the company a few months ago. So globally we don't give any guidance for 2021 because there are so many things that can happen. I just looked at the consensus on Bloomberg. I think that this, the consensus that we have for 2021 on the EPS diluted, I think it's attainable. But guidance for us is not, nothing before we get into Q1 and nothing before we're sure that everything that's going to go at UPS Freight or TForce Freight. So there are too many moving parts right now.

Okay, that was actually really helpful. And just following up on UPS Freight. Any sense I mean, obviously just announced a transaction. But is there any sort of possible real estate or terminal sales or divestitures or anything like that you foresee with UPS Freight? And I know that you have an agreement or some kind of a commercial arrangement with [Masaya]? Is there any sort of competitive implications there? Maybe he could speak to those two questions. That would be great. Thank you.

Yes, that's a very good question. I was in -- the relationship with Masaya very strong and very solid. As a matter of fact, we have a call with the team there just to make sure that they understand that the transaction with UPS Freight is got nothing to do with the relationship between Masaya and one of our business units, which is TSTCF. And we're going to keep on working on this relationship and grow that. The UPS Freight acquisition, that's a different story. I mean, it's got nothing to do with a relationship we have with Masaya. Now in terms of real estate, my first comment on real estate, I don't think that we will have any real estate to sell. But what I think is going to happen over time is that we will have more revenue generating from the real estate portfolio. So let me explain what I mean by that. 25 years ago when I took over this LTL Company in Canada, I mean, a terminal was the only source of revenue was the LTL operation. But if you look at the way we run our business today, let's say in Toronto, okay, one terminal I could have maybe 30% of this terminal being occupied by a TFI business and the rest is third party, a different trucker. We rent space on the dock. We rent space in the yard. I think that when I look at the real estate portfolio of UPS what I can see now okay, but it's still very early is not that we're going to be selling anything as a matter of fact; we're probably going to be building okay terminals there and to eliminate the leases that we have. But what I think is going to be a nice feature down the road is that will bring other revenues into our real estate portfolio by leasing space in our yard by leasing space on our dock where it makes sense and where it fits.

Your next question comes from the line of David Ross with Stifel.

Yes, good afternoon, Alain. Wanted to talk about the dedicated opportunity at UPS Freight, the dedicated truckload piece that's being peeled off there and once you merge it with TFI and TCA, how big is your total US dedicated business going to be post deal?

Okay, so another very good question, David. So if you look at TCA today, there are about 500 trucks running dedicated today. And if you look at UPS, I mean, they run close to 1,000. So if you do the sum, it's about 1,500 trucks tomorrow. Okay, let's say in the summer of 2021 that will run into our dedicated unit.

And I guess when you think about ups Freight on the LTL side of things that T Force freight side, what's the one thing you need to get right over the next couple of years to make everything else easier?

Yes, oh boy, there are many things that we have to get right, okay. So our first priority is and I think I've said it is CapEx because we want to have a fleet that represents the company in the sense that safety wise, fuel economy wise, maintenance wise, it's about the same plan that we did when we bought TFI, that TFI at the time was running what we call a rainbow fleet, we have the similar kind of story over there. So safety, driver satisfaction, et cetera, et cetera. That's really key number one for us okay on the CapEx side. The other thing also that's going to help us is on the claim, okay, we are going to be really focused in reducing our claims because the cargo claim as an example what is about 1% of revenue today. 1% of revenue in our book is way too high. I mean, so we're going to work with the team there to get this closer to half a point. For sure, we will have to address some customer's issue, okay, because the rating of the business and maybe some freight doesn't fit the network. When we bought TFI, the truckload division of SPO we were stuck with tons of freight that did not fit TFI. It took us a year to get rid of that freight that we were losing money on. When we look at UPS Freight, we have something similar. There's some freight there that the company does not make any money on it. Now, it's normal because it was part of a global commingling bundling, whatever word you want to use. Okay for the good of the company. Okay UPS. If you look at the results of UPS, they are fantastic. Okay, but UPS Freight not so much. So now UPS Freight being a stand alone, they have to stand on their own two feet and there's some freight maybe that don't fit the network. So we will have to address that as soon as possible as soon as we get in there, okay, and talk to the customer understand if it fits or not, and then take action. So if you ask me, is it possible, like you just said, when we announced the deal that you could run a 96 OR within 12 months, I'm convinced. And I'm also convinced that when I look at the good LTL company in the US, and there's many, like OD and Masaya and others, that those guys were all run sub 90 OR. But there's no reason for us why in two to three years, we are not in the same position of sub 90 OR. Now, I know there's always a story. Yes, but there's a union, [Baba Viva], us union, we work with the union. We respect the contract, but we manage the business.

Your next question comes from the line of Scott Group with Wolfe Research.

Is this any better?

That's good. Now I can hear you. Okay, go ahead, please.

Okay, sorry about that, I apologize. I was saying -- I'll just start over. David, if you're on and if you've got some history of the financials in US currency that'd be helpful for everybody. And then Alain my question for you on how is DLS performing? I know, you mentioned sort of low single digit margins. Where do you think those can go this year?

Yes, well, this year, here's my thinking. I mean, we're happy with what we're seeing so far. Okay, in terms of revenue in terms of revenue growth, in terms of gross margin it matches what we thought it would be. Okay. And in terms of free cash flow, it's fine. Now are we where we think that we should be? I don't think so. So but it's still too early in the game to really be able to say, well, are we going to be running in 96 OR all the time over there? Or are we able to run a 90 or 92 OR? I think that a 90 to 94 OR is doable in this business. But it's still too early in the game to get more specific on that. I mean, we just bought the business in November, right? So we have two, three months behind us. It fits the plan, it fits where the plan that these guys provide us with. Am I happy with this? For now yes. Can we do better? Absolutely. I'm convinced. Now [Indiscernible] is working with Tom and the crew there for sure. It's a big cultural change for them. I'll just give you a small example is that they never manage the cash there. So our focus is we have to manage the cash. So we have one supplier that we were paying those guys at seven days, a transportation company and we say why are we paying those guys at seven days? Well, it's because it looks better. Well, no. So we change that to 30 days, because normally in our book, our logistics company, our working capital, negative, so you don't need a working capital to manage this business. But in the case of DLS, or TFWW now, we need the working capital to operate the business. So I mean, one step at a time by the summer, okay. We will be moved out of ASAP adonely into our Oracle system. Okay. And then you will start to see because we're seeing that transition agreement. We're paying for their service as we speak. So for sure I mean there's going to be some saving over there down the road. It's still too early to say. But top line is there, gross margin is there, the overhead? I'm convinced that there's something that we could do about that.

Okay, thanks. And then just last one, since announcing Ups Freight, you've also announced another smaller tuck-in acquisition. Should we expect that you'll continue to do a bunch of those tuck-ins this year? Or with UPS Freight do you think there's less of the small activity?

No the small ones. I mean, we do them all the time, all the time. I mean, the big ones are once every three years, two, three, four years, we do a large one. But the small ones, we do them all the time. I mean we've got so many opportunities; our pipeline is full of what we could do. Now for sure, it's got to fit, it's got to the price has to be reasonable. And the resource has to be there. So this one that we just announced this year is under Mr. Brookshaw; our special TTL operation. So absolutely, if we could buy a company in Canada right now, that would be in the same business as our P&C group. Absolutely, we would do this deal. If we could find an LTL company in Canada that fits, absolutely, we'll do the deal. Now, are we going to do any LTL deals in the US after this deal? No. I mean, we're going to be really busy in the US. Okay, getting this company to the level of profitability. That is normal.

Your next question comes from the line of Walter Spracklin with RBC Capital Markets.

Thanks very much, operator. Good afternoon, Alain. So keeping on with acquisitions, I know you were talking last year about your focus on a potential something in the truckload space. I'm curious with UPS Freight is that off the table now or both because of balance sheet and resources that you're devoting to the integration? Or is it -- do you consider yourself able to do still a larger deal in a separate segment if the stars align?

Yes, if it's the right deal, Walter will do it. I mean, in our truckload division absolutely can be either in the US or in Canada, if it's the right fit. If it fits, absolutely, we'll look at it because don't forget, really this UPS Freight thing there is going to take a lot of my time, a lot of the time of our LTL group working with those guys. Yes. Okay. But our truckload guys, our logistics, guys. I mean, if there's a deal that fits; if there's something that's reasonable, that there's a nice payback, absolutely, we won't pass on it. But nothing major though. Nothing, I mean, there's not going to be a $300 million investment into a company right now. It's impossible. But something small that the investment is going to be 20, 30, 40, 50, 60, yes.

Got it. Okay. And understanding you're not giving guidance on any of the major items. I was wondering if some of the other areas like your CapEx spend anticipated. I know you gave us some indication when -- with UPS Freight and what would be required there. But on a kind of global US dollar side your tax rate. I don't know if you have any DNA forecasts out there, any of those kinds of more accounting related or along those lines that you might be able to give us some insight on for this year, if possible.

Yes Walter, what we would prefer to do right now is to get, while Q4 is behind us now Q1. Okay, once we get Q1 out, I mean, we'll have a much better feel about where we're going. CapEx, okay, if you exclude, okay, the UPS Freight acquisition, I mean, our CapEx is going to be normal again this year, like in Canadian dollars, net of disposal, it's always about $200 million, right? So our dividend stays the same. I mean, it's $0.29 a share right now per quarter. That doesn't change. There are many things that don't change. It's just that we don't know enough about what's going to happen in Q2 and Q3, Q2 because of the amount of subsidy that we got in Q2. Okay, so we want to get closer to Q2 so that we are really going to be in a position to say, okay, forget about the subsidy. And if you look at our Q4 subsidy it's minimal. I think it's about $6 million or $7 million, probably Q1 is going to be close to zero. And Q2 is probably going to be again zero, right? So we just want to see a little bit more not to mislead investors. What I could say that the consensus that is out right now for 2021 in terms of diluted EPS I think it's attainable. The CapEx basically it's about CAD200 million for the existing business. And then over and above that, we're going to do more into -- with the TForce Freight acquisition.

Great. And I've got a 25% effective tax rate. Is that good to keep using that tax rate?

Yes. Well, it's lower than that this quarter. But yes, 25% is reasonable.

Your next question comes from the line of Tom Wadewitz with UBS.

Yes, good afternoon. I asked. I know you've been asked a bit about kind of the, I guess, whether you can do small deals and other deals. How long do you think that takes to digest something this large? Is this something that doesn't look for another large deal for two or three years? Because you need that kind of time? How do you think about, because obviously, it's really big for you? And there's a lot of work to be done.

Yes, absolutely. I mean, if you look at history, there's always three years between a big deal for TFI, right? So 2011 was a big deal for us. Big year deal, 2014 was big, 2016 into 2017 TFI was the one and now it's 2021 is UPS. There's nothing major that can happen in 2021-22. Impossible, we will be laser focus on TForce Freight and UPS Freight, whatever you want to call it right now. That's going to be our mission is to bring this company to the level of profitability that is normal. Right now at 99 OR it's not normal. So that's going to be our focus. The small deals, yes, we could do the small tuck-ins in truckload and LTL in Canada, in P&C in Canada, no sweat, small. But when I say small is the aggregate could be like CAD200 million invested or let's say US$150 million on the small deals.

Yes. Okay, that makes sense. What about synergies across the system? I think we haven't really seen historically that truckload and LTL companies together. I guess case in point would be kind of Con-way bought TFI and then ended up separating them. And I'm just wondering how you think about potential synergies across your different businesses in the US in the network. And also whether there's a mix of union on the LTL side and non union on truckload side, whether that's a barrier to sharing some of the terminals or whatever, kind of resources, assets you might want to share?

Yes. Well, in terms of the synergies you are absolutely right, I mean, except for the buying power, okay. So when you discuss with the truck manufacturer, when you discuss with a fuel provider, they don't care if it's LTL, or truckloads, so the sum of the two, normally, we should get a better deal. So that could be an area of synergies. Okay, the spare parts for the maintenance and all that, in terms of the customer in terms of -- we don't see a lot, we don't see that. The bundling, we're not big fan of bundling because if you tell me that I'm going to lose money with this account, because Paul makes money on it. I don't -- we don't do that I would say. Peter has to make money, Paul is to make money. So very simple. And Peter runs his show, and Paul is the same. So but in terms of purchasing power, yes. There are some synergies there that are attainable and doable, like the tires and all that. In terms of under the same roof, okay, having a union or non union carrier. Okay. I mean, we don't have a problem in Canada. We do that all the time. We've done that since the last 25 years. Now maybe in the US, it will be a different story. I don't know. Okay. But what I can tell you though are that, in my mind, the terminals that we're buying are owned by a real estate company will be owned by a real estate company, which is going to be a subsidiary of TFI. That's the plan. That's what we're working on now. So the operating unionized company is a tenant of the real estate company like anybody else. And we'll see. What we want to talk to, you guys to understand is our philosophy is that a terminal is not a union terminal because it's a real estate asset that will be leased to a union carrier that's owned by TFI, or a non union carrier that's owned by TFI, or a non union carrier that's owned by somebody else.

So but it remains to be seen whether that there's receptiveness from the union to that approach. Is that fair? Or you think you have visibility to that?

Well, I mean, it's just a real estate transaction. I mean, the important thing is that the operating company is a tenant like everybody else.

Your next question comes from the line of Konark Gupta with Scotia Capital.

Thanks and good evening, Alain and David. All right. So, first of all, glad to see the numbers are in US dollar, you sure scared me for a minute and some AI bots there. So may be first one on not to beat the dead horse here. But some of the UPS acquisition, I understand that you are buying the small kind of piece from UPS here, but obviously, clearly they were bundled. And the freight business you acquired deals with UPS the parent company as well as other external customers. So like when you talk about focusing on improving their profitability, one of the key tenets to that is you have to kind of update or improve the pricing in some businesses or you have to let go that business perhaps, but my question is, how, like what would be the take or the reaction from UPS parent or the external customers, when you go to them and ask for putting the right price or the fair price there, and they might think maybe they go to somebody else, and like what sort of the risks and pitfalls and going to those customers and telling them all of a sudden that we will not be able to provide the same pricing that UPS did for many years?

Well, if you look at one experience that just took place, the last few years is the large competition to UPS is another group, that is also the number one LTL provider, okay, the largest LTL carrier, okay, in the US is competing with UPS in the parcel business, right. And they used to do a lot of bundling, they used to do a lot of give me a good price on my package and give you a deal on the LTL. So the reaction of this company has been FedEx, I'm talking about, what guys we are so overwhelmed with volume. Why would we be using LTL as a loss leader? Right? So I think that if you would ask the question to the UPS team there, I think that they are overwhelmed with volume and a lot of customers are calling us and them and FedEx and everywhere for capacity. Right, so I think that it's the same problem also with the LTL there's a capacity issue there as well. So as our approach with customer is going to be very simple is that guys, this rate does not fit. So I mean, either it fits or it doesn't fit. And it could be because the lane, the lane does not fit or it could be because the commodity does not fit because there are too many claims or it could be the region does not fit because we don't cover it ourselves and we lose money with the agent. There are many reasons but then we sit down with the customer and have a discussion. And we can provide to a customer another solution. Because let's say it doesn't fit our operating company. Maybe it fits our logistics company. Well, so this will take time guys. It's not going to happen overnight. It's the same kind of discussion we just had on the real estate side, this will take time. It's not going to happen overnight that we're going to have tenants in our real estate portfolio outside tenants. But if you look at 25 years ago, Cabano, Kingsway, there was none. Today, we generate a ton of money in our real estate division, renting space to third party, right. So it's the same story with the customer, we got to go step by step and have a chance to discuss and but we have lots of tailwind right now in the industry, on the package side. And on the LTL side, in the US I'm talking about.

Right. So it's kind of fair to expect that perhaps the first three to six months post closing, there'll be a lot of discussion with the existing customers on the terms and conditions segments.

Yes, but don't forget, guys, our focus number one is going to be the equipment, we want to reduce the maintenance, we want to improve the safety, we want to also improve the drivers experience, instead of driving in 2004, the guy drives a 2021 it's not the same experience, there's more safety on the truck. We want to do all of this step one, and also at the same time, slowly address the situation because we want to be lean and mean in terms of costs. One big area that we can do without making a mistake, because what customer you can make a mistake, right? So it takes time. But on the CapEx side, replacing old equipment with new equipment, reducing your maintenance costs, improving your safety, improving the drivers experience by replacing 2004 with 2021, you can't make a mistake by doing that.

Right, and thanks for that, Alain. My last one is on the investments. So thanks for providing color on CapEx and tuck-ins. Just want to parse out the CapEx numbers, what would be if you have a $200 million net CapEx, let's say from existing operations, what is sort of a disposal number implied there or gross CapEx whichever you want to kind of call out and free cash flow was obviously very, very strong in 2020 in terms of US dollars, but just wondering if with the CapEx guidance you provided plus the investments you have to make at UPS, should we expect free cash flow to improve this year from last year?

Yes. So this year was exceptional in a sense that we did not invest the CapEx that we should normally have done because we put a lot of CapEx on Hold in Q2. So we will have a little bit of this recoup to a certain degree. So gross CapEx normally, pre acquisition of UPS Freight in Canadian dollar is going to be about CAD250 to CAD260 minus the disposal, which is net about CAD200, right? So I'm going to have to get used to the USD numbers because that's the way we're going to be reporting. But that is the CapEx because USD is something also new for us. And that's not going to change. Now over and above that the normal CapEx for TForce Freight globally or UPS Freight in my mind, sustainable CapEx to sustain the existing business in US dollar. Okay, net of disposal is about US$90 million. Okay. So we're going to do more than that. Us going from acquisition, it will take us maybe three, four months before we get the stuff so let's say by Q3 and Q4, we'll probably do like US$60 million, okay, because we won't get all this stuff because you got some delays, et cetera, et cetera and then into 2022 instead of being $90 million CapEx normal for 2022. We're going to talk between $150 million to $165 million in 2022, the full year. So you got some catch up mix in there.

US$150 million to US$165 million, right.

US, yes.

Your next question comes from the line of Jason Seidl with Cowen.

Thank you, operator. Good afternoon, Alain. I wanted to talk a little bit about getting added to US indices, which I think is the next important step for you guys. What's left and what's the timeline that investors can look at?

Very good question, Jason. I mean, we're thinking about it. But in order to be that we have to be a US Corporation, we are still a Canadian company today. So we are in discussion right now with legal and tax, David and myself and our group to see if it's doable, if it's possible. Some Canadian companies have done it. It's not simple to do. So we'll see. I mean, but we are thinking about it, for sure, it would be a great benefit to our shareholder base to be part of the index. But so far, we don't have a timeline. Jason on that, we know, we're looking at it. But we have nothing to really come up with; we're going to do that within a year or two years or whatever. Not yet.

Okay. Fair enough, Alain. Follow up question. You touched a little bit on CapEx; I was wondering if within that number, what is your assumption for truck count growth or decline, if you will, in the US?

Right now, Jason, the numbers I'm talking about is there's no loss of business or there's no revenue loss, because of this discussing with customers of freight that don't fit because we know, in principle, what we know so far, guys, is that this process of discussing with customer has already started at UPS Freight. It's not something that is going to be new; they already have started this process probably like six, seven months ago. And what they've seen so far, okay, what the guys are telling us is that they haven't lost any piece of business. Right, but it's the pace, all fast these guys are going about it. And it's also, if you have a chat with an account that you lose 15%, and you ask the guy for 2%. And the market is really 5% more than the price that you're charging, and you're asking only for two for sure, you're not going to lose the business because the guy understand that he still has a fantastic deal with you. Now this is why us not knowing really the US market, the LTL market. This is why we bought this DLS Company because those guys are it's a brokerage operation. So they buy and sell all the time, right. So with Tom, we have also an idea now of what the lane, what's the market of that lane, okay. And we'll -- that's where we're going to have some good discussions with our guys at UPS Freight or TForce Freight now, a down the road, and we'll address the customer one by one. But it's a long process; you don't want to rock the boat, you want to go slowly about it. And this is why our main focus is going to be us working on efficiency and costs and improving safety and things like that, that we're sure we cannot make a mistake. And at the same time, we're learning about the customer in the business so that when we start discussing and having a good plan with customers, we have more knowledge than on may 1st because May 1, we don't know anything about the business we have to learn.

So okay, that's great color, Alain. So it's going to be basically a flat track account between CFI and the transport corp, real quickly also, you mentioned obviously the money that you want to put into a new fleet and better technology within the cabs, at UPS Freight, is there anything on the dock side that you guys are looking into that you think that could be added if down the line in terms of improving productivity?

What we've seen, Jason, so far on the dock is they just did the rollout of a new technology that these guys have. And we're really impressed with the tools that these guys have to monitor productivity on the dock. I mean, between you and me, they are better tools than what we have us in Canada. Now, tools is one thing, it's like a mechanic, you could have the tool but you need the mechanic to repair the car. So what we're seeing is that they have a fantastic toolbox. Now how are they using it? I mean, it will take us some time to really evaluate that.

Your next question comes from the line of Ken Hoexter from Bank of America.

Hey, great, Alain and David if you up there. Good afternoon. Some major moves over the year so congrats on all the acquisitions over the last few months. But Alain you mentioned earlier in the call blending some assets in the US talking about TFI, TCI and other things that's a little bit different than the way you've tackled by keeping things individually. Is that any kind of structural change? Or is that blending moving to blend the TL would you look to do that any other segments where you're looking at keeping brand name separate?

Yes, that's a good point, Ken. And why are we doing that? Okay. And it's because we look at dedicated with the flash acquisition, say flash UPS Freight acquisition. I mean it makes sense now to have a dedicated business because right now we have TCA, which is 50% dedicated, and the other 50 is not, we look at TFI. TFI is got no base dedicated business. And then we just bought MCT, about a few months ago, which is a temperature control thing there. And we're going to use MCT. So there was no value to MCT. So now we said, okay, we're going to use TFI temperature control, and it's going to fall under the TFI umbrella. And then we're buying Freight. So what are we going to do with that the UPS Freight, truckload division? Are we going to keep the name? No, we can't. So what are we going to do? Oh, we're going to fold that into TCA. And then, okay, TCA will become a dedicated carrier, and then whatever is not dedicated, will fall under TFI. And after having all kinds of discussion with our people, okay, we came to the conclusion that probably maybe it makes sense to keep two or three DBA doing business as like TC or doing business as TFI temperature control. But really, down the road, okay, we're going to be one business unit in our USCL operation with different sectors, logistics being one, the dedicated truckload being another one, that temperature control and just the other TFI van regular business.

And just a follow on, would you look to do that any other area with one brand name like in Canada on LTL? Or is this just a special case with US deal?

Well, it's something that we're always thinking about. So if you look at what we've done in Canada in the summer of 2020, we combine TST and CF and it's been a fantastic results. Okay. And that's one of the reasons if you look at our margin on the LTL. I mean with less revenue, I mean, our margin in dollars and in percentage is just doing very, very well. So it's something that we always look at, I mean, in some time if a brand is worth something, okay, we'll be careful. But in the case of our truckload operation, we know TFI is a diamond in terms of brand; MCT, there was no value, it was confirmed, TCA, we're not sure. So this is why Greg and the team there are discussing that. But in terms of the business unit, for us, it's going to be one. Maybe we'll use two DBA, TFI and TCA. I mean, the guys are still talking about that. But for sure the truckload division of UPS Freight is not going to be called UPS Freight, truckload division or whatever once we buy the company is going to fall under Greg into TFI.

Perfect. Let me just switch subjects for my follow up real quick. You said focus on maintenance, safety, driver experience. But I think earlier in the call, you mentioned that your, I guess damage was up to 1%. Did I hear that right versus kind of peers at 0.1% I guess OD or half a percent? Yes, cargo claims. What needs -- it was that you're answering what needs to be done? Why is that so high relative? Is that's not relative to the equipment or safety right. So what's --

No, no. The cargo claims got nothing to do with equipment. It's got something to do with the freight, the waste baggage, et cetera, et cetera. And this is an ongoing thing. I mean, for sure. I'll give you an example. We started our ecommerce business with the largest retailer in Canada. And we've dealt with Amazon for a long, long time. And never any issues with Amazon because the way they package the product is fantastic. But this retailer, the largest retailer in the world, one of the largest one, they're not used to ecommerce. I'm talking two three years ago. So we had lots of issues, okay, with the way the product was packaged for delivery to a consumer. So we sat with them, we talked with them and finally I look at what we do with them today. It's fantastic. So what I'm saying is that in our LTL, one of the reasons that you have claims, there's a few, if you touch the product 25 times, every time you touch the product, you may break it. So you got to make sure that you don't touch it too much. So the average line hauls, the number of hubs that you have. So if you ship from, let's say, LA to New York, and you have 25 hubs in between you touch the product 25 times load on load, you have more chance to break it that if you run direct. The commodity that you haul also has got something to do. So what I'm saying is that cargo claim, it's an area that we see that there could be improvement, but that's nothing compared to workers complain, okay, and accidents. So accidents in our mind, in our experience, the more safety you have in the equipment, that helps the driver, so the driver does not make a mistake, because this guy doesn't want to be involved in an accident. But he makes a mistake, he's a human being. Okay, so we can make mistake. But if you've got equipment, up to today's technology that tells you, hey, don't change lane, there's another car there, and you're going to hit the car. That helps reduce the number of claim, reduce the BI the same thing, collision avoidance, that guy the driver has got some distraction. And he rear ends a car. Well, with today's technology on the truck is going to help you. Right. So what I'm saying, Ken is that there's many things that we could do to reduce the costs of the operation today, in terms of the freight that fits, in terms of rate or in terms of cargo claim. And then also the accident and the workers comp. That's something that it's our control, then something that is our control, but also needs the customer to help us is the rate. But this is why for us really is our focus is going to be what can we do us to be better? Okay. And at the same time, yes, slowly, we'll have a discussion with customer to make sure that we're all in freight that fits at rates that makes sense.

Your next question comes from the line of Tim James with TD Securities.

Thanks. Good evening, Alain. I'm just wondering if you're seeing any kind of residual efficiency challenges related to kind of disruption like hangover from the pandemic dock terminals, what have you. And I'm just trying to understand if as we get to a more normalized environment if that maybe is an opportunity on the cost side, if there's still some challenges there today that may subside going forward.

Oh, absolutely, absolutely. I mean, the lockdown is a big problem for us. I mean we have huge lockdown in Quebec, huge lockdown in Ontario. I mean, this is this is not helping us, right? So yes, it helps us in the sense that our P&C guys their ecommerce is just booming, true. But we're losing on the B2B side. So if this pandemic can go away by the end of 2021, I mean, our 2022 year in my mind, okay, should be even better in the sense that all these you have sick people someone, it didn't get sick at the workplace, but he got sick because his partner got sick at her workplace. So it's just a global issue. You got guys that are no show because they said I don't want to go because I'm afraid that I'm going to catch the virus. I'm talking truckload drivers in Canada that doesn't want to cross the border into the US because they listen to the news and they say, oh, there's a lot of COVID thing in the US. So it's disruptive for sure. I was just reading talking to our steel all in department. Now we're short of chips for the manufacturing of cars and trucks. So it will affect the steel and the aluminum shipment. So it's all related to the global supply chain and over and above. It's been just made worse with this pandemic.

Okay, thank you. That's helpful. In my follow up question, you've given some gray color on where you're thinking in terms of tucking opportunities going forward. I'm just wondering, specifically, has the pandemic changed at all the opportunities that you see, like if we were to kind of back up to 12 months ago? Has your view on what maybe makes sense? And what doesn't make sense? Has that changed at all? Or is it more or less the same?

No, I wouldn't say that. To me, it's more of the same. I think the only thing that I could say that pre-COVID and now is we had the perception with our P&C that B2C would dilute our margin. And when we got stuck in a lockdown in March and April, we had no other option than to look at the B2C and we looked at it. And we looked at it in a smart way. And our perception pre-COVID, that it would be diluted to the margin was wrong, because we do it the right way. And if you just look at our Q4 numbers, it's just a confirmation of that. Although we came out late with our press release, I'm sorry again about that, guys. I mean, there was a little bit of a glitch. I don't know what happened, but we're going to make sure that it never happens again.

Your next question comes from the line of Brian Ossenbeck with J.P. Morgan.

Hey, good evening, Alain. Thanks for taking the questions. So I know we talked a little bit about synergies, and how you might be able to use the footprint at UPS Freight today in the last call. But I was wondering if you could do something along the lines of like an LTL consolidation business where you go into large retailers help them meet the OTIF standards, is that something you think that the footprint is well suited for when it comes to leveraging the hard assets and also having maybe enough space and some of these docks or maybe even expanding the warehousing footprint to be able to be more of an aggregator of sorts for that particular end market?

What you're saying just made a lot of sense. But I cannot answer that right now. Okay because I don't have a clear picture of what we can do. One thing that we look at us is what we call door pressure is how many bills a day would go through a door. Okay. And when we compare the door pressure of UPS Freight they versus what we do in Canada, I mean, it's day and night. So that tells us that there's over the real estate is big, and there's some things that we could do. But it's still too early. I mean, what we're doing now, guys, is just the phase one and phase two where it needs to be done in terms of the environment. So I haven't toured any real estate so far, I haven't seen anything, but for sure, it's going to be a priority, because real estate is expensive. And you want to make sure that you get every dollar out of that major investment that you do in terms of land in terms of building.

Okay, got it. But nothing structurally that would prevent you from doing that, if it were to make sense?

I don't think so. I mean, to me, this is why, to us this transaction is so important that we have the real estate separate from the operating company, because this is just a smart way of doing it. I mean, and then real Estate's got nothing to do with the operator. You just attended like everybody else, and then you build for a third party or whatever you could do. One thing I said on the call, Brian, is that the way I look at it is that we are a tenant in about 50 terminals. And for sure if it makes sense we want to get out of those leases and have our own terminal in the US where it makes sense. For sure if there's capacity, we'll try to fit somebody else in there. If there's too much land if there's -- if the building is too big for sure all of this will be addressed over time. Because the focus at TFI is how we can do more with less, not the opposite, do less with more.

Understood. Maybe a quick follow up, you can just touch on what's going on in the US logistics segment. I think you still got some self help initiatives going on there, the consolidation of that fragmented industries, will it going to take some time. But we believe you mentioned that there wasn't too much growth there this quarter where there was a lot in Canada. So if you can bring us up to speed on recent initiatives and what you see kind of on the table for the year ahead.

Yes. So the way we run our Canadian operation is fantastic. And we have grown right now of 30%, 35%. And what we've done about a year ago is we said we're so successful in Canada. So I've asked Kohut, the guy that runs our Canadian operation to get involved into supporting our US operation. Since that time, okay, what have we done? So right now, the guy, the sales leader responsible for sales is a North American sales leader now. So it's not just about US or Canada is both, the guy is response for both. What we have just announced Feb 1 is that the guy that used to run Canada for us, okay he is going to be moving to the US, and we'll run the East Coast, because for us, US is split into East and West. So then Leslie, will be now responsible for running the East Coast operation. And what we're trying to do is, and we've been successful so far, because if you look at the EBIT margin of our US division a year ago, versus what it is today, it's 100% improvement. Okay, you say, wow, 100% this is fantastic. No, it's not. Because we still have a long way before we get to the Canadian margin. All right, so we run right now the US operation only with a single -- high single digit EBIT number, man, we could do way better than that, but one step at a time. But also, most importantly, that organically our US division is not growing. Today, we're about flat year-over-year. It's not normal. I mean, there's so much if we can grow 30% 35% in Canada, why are we flat in the US? Well, it's just because that this was not the focus of ours. And this is what Kohut and Dean and the team there is going and we see the potential, absolutely, we're going to start growing the top line. But we want to make sure that we also provide the right service to the customer. Because if you have a business unit that's been used at zero growth or minus five negative growth, they're not big fan of getting new customer in because they get lazy. Now we have to change this kind of culture of okay, we're going to do today the same thing as we did yesterday, no more. But it's, again, a one step process step by step. And you'll see us by the end of 2021, the plan is that we're going to start growing organically by about 5%, 5% is not much, but it's a step in the right direction. And then in 2022 there's going to be more catch up versus our Canadian operation. But at least now based on what I could see, we're going to break this single digit EBIT number in 2021 and get into a double digit EBIT number in our logistics and last mile in the US. So a lot of good stuff on the go. Just look at our Q4 number year-over-year improvement, right.

Right. Yes, it was quite strong. All right. Thank you, Alain. Appreciate it.

Hey, Brian, the only thing is you guys got the numbers so late that you couldn't have the chance to read that, right.

Your next question comes from the line up Benoit Poirier with Desjardins Capital Markets.

Yes, good afternoon, Alain and congratulations for the results. So thanks for the great call about the opportunity to improve margins for US last mile. When we look now at truck CL obviously you break down into three different segments and what is nice is to see a specialized surpassing the margins in Canada so things on a good path here close to 85% although when we look at us CL 92% OR in 2020 what is the unfortunately to be to improve this OR especially in the US and recoup the gap versus specialized or Canada down the road? Alain, could you maybe give us some more color about this opportunity.

Well, Benoit, if you look at 92 OR right now, I mean for sure it's the sum of two business units. ATC and TFI. And the problem we have is that TFI is really running a sub 90 OR company, closer to an 85, 86, 87 during the course of 2020. So the problem we have is with our other business unit and this is why like I said on the call with the fact that flash is coming in not flash but TForce because the codename was flash, this is why it confused me a little bit. But UPS Freight truckload division coming in, it opens up the opportunity for us to create, okay, a real dedicated truckload business. Okay, upsize. And I said it early on a call. So that means our dedicated truckload business is going to be about 1,500 trucks, 1,400 -1,500 trucks, under the leadership of Greg Orr. And we will also run a temperature control, okay, separate segment. And I think that during the course of 2021, this is when we're going to do all this transformation. And I believe that by the end of 2021, we will be running closer to a 90 OR okay, globally, we're in 92, we should be running closer to 90 OR. Now one thing is for sure is the business that we're buying through the UPS, those guys are running today at 96 OR, or 96, 97 OR. So they're worse than our business today at 92, right? So we have also a lot of work to do with those guys. And the existing business that we have at TCA. So this is why I think that a good way of approaching 2021 is to bring global ADOR to 90 OR because don't forget, I mean, it takes time to correct the situation. And then we'll address that. But I agree with you if you look at all the divisions of TFI, P&C, logistics, LTL, specialty truckload, the only one that you could say, Alain, you guys are star. You are a star of a company and P&C with the resolve the LTL bah, bah. The only areas that you could maybe say, well, we're not going to give you a AAA, we're going to give you maybe a B. Okay, is our USCL up but the team is there. And the guys are going to be working really hard to move from B to closer to an A or an A plus kind of an operation, I'm convinced.

There are no further questions at this time. I will turn the call back over to Mr. Bedard.

Okay, well, thank you very much operator for helping with the today's call. On behalf of the dedicated men and women of TFI International, I want to thank everyone for joining us today and for your interest in TFI. We continue to work hard every day for our shareholders and I look forward to updating you on our progress throughout the year. Please stay safe, and don't hesitate to reach out with any follow up questions. Have a great evening and thank you again. Bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.