TFI International Inc. (TFII) Q1 2021 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to TFI International's First Quarter 2021 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 in order to ask many callers as possible. Further instructions for entering the queue will be provided at that time. 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 risks and uncertainties that could cause actual results to differ materially from those anticipated. Also as a reminder, TFI changed its presentation currency at year-end and all dollar amounts are in U.S. Dollars. Lastly, I would like to remind everyone that this conference call is being recorded on Wednesday, April 28th, 2021. I will now turn the conference over to Alain Bedard, Chairman, President and Chief Executive Officer of TFI International. Please go ahead, sir.

Well, thank you very much for the introduction operator, and I'm pleased to welcome everyone to this morning's call. Yesterday after the market closed, we released our first quarter 2021 results. So TFI International had an exceptionally strong quarter to begin the New Year, a quarter that marked the one-year anniversary of our listing on the New York Stock Exchange. During the height of the pandemic, we made the right moves to preserve our long-term growth opportunities and we're beginning to see the benefits. We maintained our relentless focus on the fundamentals of the business and on getting the details right. We look for opportunities to enhance efficiencies, as we do in good times and bad. And as always, we look to increase returns on invested capital, optimize our free cash flow, and grow our earnings per share. This in turn place us in a position of strength with a strong financial profile that allows us to strategically expand our business with the ultimate goal of creating long-term shareholder value and returning excess capital to shareholders whenever possible. The identification of strategic accretive acquisition opportunities is another important part of our strategy. In a highly disciplined manner, we've continued to selectively seek acquisition candidates that are both accretive and strategic to extend TFI International's long and successful track record growth through M&A. As you know, in January, we announced an agreement to acquire UPS Freight in one of the most strategic transaction in our company's history. The acquisition immediately propels TFI International to become one of the five largest North American LTL carrier. It will strengthen our service offering, accelerate our strategic expansion across the U.S. and fortify our ongoing relationship with UPS. This transaction is on track to close this quarter. Now let's turn to our first quarter results. That includes strong year-over-year growth in both revenue and operating income, despite very solid results a year-ago. Our total revenue for the quarter -- for the first quarter of $1.1 billion was up a very robust 24% compared to the prior-year's first quarter, again despite most, much of the prior-year's quarter being before the pandemic. Just as important to us given our focus on profitability and despite significant one-times item, I'll discuss our operating income grew 17% to $102 million and our adjusted EPS on a diluted basis expanded 26% to $0.77. Our net cash from operating activities was $155 million, up 13% over the prior-year. As you know, we consider the strong cash flow to be strategically important allowing us to invest in our business and seek out attractive expansion opportunities. Regarding those one-time items, the first relates to the mark-to-market of our cash held directors shares unit or DSUs due to the rise in our share price during the first quarter. This had a $0.07 impact on our adjusted diluted EPS which was really impacted by $0.01 per share of transaction expense related to the acquisition of UPS Freight. In total, that's $0.08 of combined one-time cost. Let's now take a more granular look at the operating results for each of our four segments all of which contributed to our strong overall performance. Starting with our Package and Courier, P&C represents 13% of total segment revenue and saw a 26% increase in revenue before fuel surcharge versus the prior-year. Operating income of $18.3 million expanded an even greater 58% with an operating margin of 13.9% up 280 basis point. This strong growth was driven by improved yields on both B2C and B2B activity, which have continued to rebound this year. We're pleased with our more balanced mix of B2C and B2B following the pandemic and see additional growth opportunities ahead. Our LTL segment [also] [ph] 13% of total segment revenue generated revenue before fuel surcharge of $132 million essentially flat compared to the prior-year quarter. While demand is still feeling the effect of the pandemic, most important to us, our LTL operating margin expanded more than 700 basis point to 16.8% from the less than 10% a year earlier, driving a nearly 17% increase in operating income to $22.1 million. This strong growth in operating income benefited from strategic consolidation in our over road operation, as well as a $2.7 million contribution from the Canadian wage subsidy. Next is our Truckload segment, which represents 41% of total segment revenue. Revenue before fuel surcharge was up 7% year-over-year, while operating income was up 8% to $15 million reflecting a slightly higher operating margin of 11.8%. Our growth in this segment was driven mainly by business acquisition as well as strong spot pricing and tight capacity in U.S. markets offset by severe winter weather. Within Truckload, our U.S. operations saw a 1% decline in revenue before fuel surcharge, while, our Canadian operation grew 6%, and our specialized business grew 13%. We also had a $2.7 million overall benefits from the Canadian wage subsidy. Rounding out our business segments, Logistics represent 33% of total segment revenue, our revenue before fuel surcharge jumped nearly 90% driven by e-commerce strength in Canada as well as acquisition over the past year. Our operating income was up 52% to $29.1 million reflecting a margin of 7.7%. Now turning to our balance sheet. It remains a significant source of strength for TFI International that allows us to execute our growth plan by making disciplined investments both in organic growth and attractive M&A opportunities. Our strong free cash flow of $143 million allows us to end the quarter with more than $1.3 billion of liquidity benefiting from January's private placement of $500 million in senior notes, which also substantially extend maturities to between eight and 15 years at a fixed rate. Lastly, I wish to provide our outlook for the year. A range which include a range of $3.80 to $4 of earnings per share and $475 million to $525 million of free cash flow. In addition, despite the anticipated closing of the UPS Freight acquisition, we expect our leverage to remain below two times next quarter and for the rest of 2021. Please note that this leveraged calculation refers to the funded debt-to-EBITDA ratio as calculated in accordance with our debt covenants, and as set forth in our quarterly MD&A. In summary, the past 12 months have been like no others. But at TFI International, we stuck to our game plan throughout. We focus on the fundamentals of the business to maximize profitability and cash flow. And we carefully considered capital allocation to further enhance value. The economic outlook remains fluid. But you can rest assure that we will stick to our approach no matter what the future holds. Today, we're in the best position in our company's history and the pending acquisition of UPS Freight will make us even stronger. Together, we look to create additional shareholder value by constantly driving efficiencies and focusing on profitable growth. Ultimately, our goal is to create and unlock shareholder value, returning excess capital to our shareholders whenever possible. And with that, operator, if you could please open up the lines for Q&A.

[Operator Instructions] And your first question is from the line of Scott Group with Wolfe Research.

Can you just walk us through some of the revenue and margin expectations for each of the segments within the guidance and just clarify if you're including UPS Freight in that guidance or not?

Yes. Yes. Well absolutely. So for sure UPS Freight is included in the guidance. Okay, let's say for about seven months. But if you remember, I mean the profitability of UPS Freight is very limited. Okay. And so yes, it's in there. Okay, that's for sure. Now in terms of the rest of our business, I mean what we see so far, if you look at our P&C revenue is up, okay was up about 20% in Q4, about the same thing in Q1. And we anticipate the year to be probably in the same kind of fashion. So our P&C, we see a lot of organic growth in there. And as you could always take a look, when you look at the results, it shows also on the operating earnings. LTL excluding the acquisition of UPS Freight, we believe that the revenue is going to be flat, okay, but the profitability will stay on the same kind of neighborhood profitability that you see now because we're more about making money than chasing volume. That's a religion at TFI. Then if you look at the USTL, we think that Q1 was a little bit of a disappointment, in a sense that February was tough for us. But when we look at the rest of the year, we see that the situation should keep improving, same story for Canadian Truckload and our Specialty Truckload. On the logistics side, I mean the acquisition of DLS last year was a major plus for us. We're still working to [unhook][ph] ourselves from the previous owner through the TSC that we have with them, probably it should be done by the summer. And then, we believe that the overhead should reflect a more better efficient cost basis, I could say. Now, all in all, this is why we feel pretty good about the $3.80 to $4 of EPS in the rest of for the total 2021 year. Again, this is based on what we know today about the UPS Freight contribution, which is minimal. Okay. It also reflects about a $325 million of CapEx which is way more than we normally would do because there again, we're investing more dollars into the UPS Fleet and would be normally done, right. So it's still a conservative, I think forecast that we have for the year on terms of EPS and free cash flow. But also, the important thing is our leverage will stay under two, even with the acquisition of UPS. And when we say under two is probably like more like 1.75 to 2, being -- 2 being maximum, we're not going to get there to 2, right. So we feel really good about 2021, what we can do about that. But there again, I mean, we still have to close this transaction with UPS, which we anticipate is going to be really soon. And then Paul, and his team over there at UPS Freight, I mean they're fully aware of the plan, what we want to do, how are we going to approach this. And I've said it many times, our first approach at UPS Freight is to work on the cost, and to bring new trucks in, will help us on our maintenance costs, will help us on safety, because these equipment have the safety features of trucks that are built in 2022, the forward-facing camera, also the driver experience in driving a new truck versus an older one. I mean, it's day and night. So all these, we believe that our first step working with the team there to reduce costs and be more efficient. And then slowly for sure, we'll address the situation of rates that maybe not reflect market rates today.

Okay. So I just wanted to, that was my second question was about UPS Freight. Now, as you've done more work since three months ago, ahead of closing the deal, has anything changed in terms of your near and long-term margin expectations, maybe have you had conversations with customers about revenue retention, things like that. Just any thoughts there? Thank you.

No, no change, really. I mean it's just a confirmation. What we've been able to do over the last few months is just to confirm the plan that we have and we feel very strongly that this is a great plan, and we have the support of the management team there. They understand, okay, where we want to go. And this is why, when we say that within a year, we believe that UPS could be a 97 OR. Okay, we still very firmly believe that and within three years we don't see any reason why this company with the potential, the customer base, the relationship that we have also with UPS, there's no way I mean -- we still feel very, very strongly that we could be a 90 OR within three years.

Your next question is from the line of Konark Gupta with Scotia Bank.

So I think maybe first on the CapEx clarification. You said $325 million I guess, is that a gross number or is it net of any [indiscernible]?

Yes, it's net of disposal, Konark. Yes.

Okay, thank you.

Canadian dollar is about 400, U.S. is about 325 something like that.

Great, okay, thanks for that. And so my first question is on the UPS position. So UPS reported obviously this week, and I think they were saying the Freight segment had a pretty good quarter. I think they had record profitability there for that. Just wondering your thoughts in the sense that how's the UPS Freight doing right now, where you saw them when you were acquiring them? And how does that kind of potentially push up your goals or aspirations with the margins?

Very good question, Konark. But as we're very conservative so I'm not going to say something different from the UPS management team. I mean, they still own the company. So when they said that they had their best quarter, I mean, they know what they're talking about. So for sure, the trend okay is improving over there, for sure the market condition is also improving. So if you ask me the question, is the company today better, okay, in Q1 of 2021 than it was, let's say in Q1 of 2020? For sure. Okay, so we are buying a company right now that the trend is improving every day. Yes, but we're still coming out with something very conservative, right. This is the culture that TFI has always been under promise, but over delivery, right? So we're not going to say, we are going to come up with 4.50 whatever, no 3.80 to 4 and then, we may revisit that after Q2, okay or after Q3 after we have a little bit better control of the situation at UPS Freight because don’t forget, this is also based on a plan when we look at UPS Freight that we're not in control today. I mean, we're looking at the trend. We're looking at the plan. We think right now, probably all the guys are doing a fantastic job, we will just work with the team to improve that.

Yes, that makes sense. That's good color, Alain. And then, secondly, if I can ask you on the pricing, you mentioned about the strong spot pricing in the Truckload market especially I think in the U.S. --

Yes.

Which is no surprise to anyone here?

No.

I'm wondering what your thoughts are on the pricing going forward and like what are you seeing with obviously fuel kind of rebounding? And I think the demand function remains pretty strong at this point. But curious to hear your thoughts into how pricing trends overtime here and for the next few quarters in the U.S. in the Truckload as well as any other segments, I think you mentioned about P&C where yield was pretty strong, and B2C and B2B both? What are you seeing in the pricing on the pricing side in P&C as well?

Well, on the P&C, I mean our Q1; we saw a price increase of about 7%. Okay, volume increased about 15% but price 7%. Now, like I said to our friends at UPS, those guys did a better job than us because their price was about 10% the price increase 10%, 12% depending if it's domestic or international. So, I mean, the leadership of UPS is helping everybody in the industry, okay to adjust price to a level which makes way more sense. Okay, so pricing environment P&C really good. Pricing environment in our USTL for sure, I mean, there's every morning if you talk to our EVP responsible for USTL, he says I've got more freight than I can handle right, it's been going on like that for at least the last four months. So for sure this put pressures on rates. I was just listening, in the U.S., they anticipate maybe fuel costs will go higher because they are short drivers. Okay, for filling the service station with fuel. So it's a global North American situation whereby we're short, not afraid. We're short of drivers, right. So the rates are being pushed up. Okay and at the same time as also we have, and in the industry, we also adjusting salary to our drivers, right. So, it's just a normal phase but for sure, I mean if you look at the freight environment right now in the USTL, there's more freight okay available that we could haul ourselves, right. So every morning we're overbooked by 10%, 15%, 20% of what we can handle. And customers are, can you help us and we're trying, we're doing the best we can. But it's hard I mean the schools, okay because of COVID, I mean, it was like a big issue to have a school, right trying to educate those people to be drivers. It's a sum of all this thing that happened over the last say 12 months that create pressure, and now the U.S. economy is doing really well. I mean, we anticipate that the GDP will grow maybe 7% or 8%, okay, the numbers I'm looking at, so for sure, we got huge demand. The same story is true also in Canada for our Truckload division. I mean, Q1 was okay. But wait till you see Q2, I mean. Yes, sure. We have lockdowns right now in Canada, I mean, Ontario, big time, big lockdown there at Quebec, not as bad, but very close. Now we have issues in the Maritimes and some little bit also in BC, but vaccination rollout is taking on more speed. So we believe that Q2 is still going to be maybe a transitional quarter, but then three and four, our Canadian activity is going to be roaring really, really strong. So the pricing environment really good. I mean, we look at our logistics is same story. And this is why, when we come out with the guidance on EPS or free cash flow as usual, I mean, we will try to beat the guidance, right.

Your next question is from the line of Allison Landry of Credit Suisse. Allison, your line is open.

Thanks, good morning, sorry, just on another call this morning? Alain, so I mean, obviously we're talking about the UPS Freight acquisition, sort of about to close shortly here. But presumably, you're still evaluating small tuck-ins. Just could you give us a sense of the pipeline and whether the opportunities that have changed over the last few months? And then just sort of what types of businesses or end markets you're looking at?

Yes, this is very good question, Allison. So our pipeline is always full in terms of M&A. But these are small transactions. I mean, right now, we're looking at about three or four transaction in Canada, we're looking at maybe two or three smaller ones in the U.S. as well. So our pipeline is always full. But there again, nothing, nothing of the size of UPS for us in 2021, and probably not in 2022. So we're these are nice tuck-ins that we do small and highly profitable for our shareholders. And we're going to keep on doing that absolutely. Now for sure, our big focus is going to be on working with the UPS management team, approaching the cost, like I said, many times, we have to reduce the cost there to be a lean and main carrier at UPS Freight. And that will be a big priority of ours. But okay, small tuck-ins, M&A, it's in our blood. I mean, we do that all the time.

Okay. And just a follow-up in terms of the free cash flow guide, is there -- could you maybe just help us think through sort of the cadence over the next few quarters? Are you expecting to be sort of relatively stable? Or sort of any sort of difference in the second half versus the first half?

No. The only difference that we have between let's say, the first three months and the next nine months of 2021 is the fact that Q1 2021 was affected by a lot of taxes that were paid by the company, okay for a reason that we were allowed to delay some payment because of COVID. But we've remitted all those taxes that were -- have to be remitted in Q1. So this is why our free cash flow has been a little bit affected by that. But we don't anticipate anything similar in the next nine months. The only major thing for us in the next nine months, okay, will be CapEx. Okay for sure, like I said on the call, we're going to be investing this year about $325 million to $350 million net CapEx USD depending on the timing, because of the chip situation, the shortage, I mean we're not sure if everything's going to come in on time. But no, that's a ballpark figure.

Your next question is from the line of Kevin Chiang with CIBC.

Hi, Alain, thanks for taking my question here. If I could ask maybe the longer-term outlook for free cash flow. So I think a guidance of $500 million if I look at -- if I looked at consensus revenue for this year, about $6 billion, and that's about 8% free cash flow margin, but you've highlighted elevated CapEx with UPS, you obviously have a target to improve the profitability in a number of your operations. When you're kind of through a lot of this heavy lifting could you give us a sense of where your free cash flow margins could level out here is this was like a low double-digit free cash flow margin business, mid double-digit free cash flow margin business, looking out the next three, four years?

Well, absolutely. Kevin. I mean $500 million. I mean, it's been handicapped a little bit this year, okay, on the exceptional CapEx that we have to do in 2021 with this acquisition, we'll also have to do a little bit also in 2022 of catch-up CapEx for this UPS Freight acquisition. But I would say that normally, normally in a normal environment, okay, with all the improvement that we see coming at UPS Freight down the road, okay, absolutely. I mean, this should be a double-digit free cash flow company, right. Our capital intensity, okay, you'll see that change big time, because of the mix, that's going to change. Also, we believe that at UPS Freight, we could do more with less. Okay. We believe that in terms of the assets, in terms of the real estate, in terms of all kinds of stuff, I mean, we could do more with less. The business is quite stable right now at UPS Freight in terms of the volume. So things are going well, like the management team said on the UPS call. But I think we believe that we could do more with less. So over time, I believe that we're going to be absolutely a double-digit free cash flow as a percent of revenue. Now, also the important thing, Kevin, I'm sure that you guys will take a look at the return on invested capital. Okay, which is a first we're looking at trailing 12 months. Okay, we're publishing that now. And if you look at that, I mean every, every division we have are all running double-digit, except our USTL operation, right. So, I mean, if you look at our P&C are getting I mean P&C, wow, this is fantastic. I mean, our P&C is just above the 20% -- 20% our LTL is above 15%. Our logistics is 18.6%, our specialty truckload is close to 11%, right. So the combined is about 12%, 12.4% something like that. Return on invested capital aftertax. And don't forget, this is also based on all assets, not just the hard assets. It includes all the intangible assets as well, right. So, I mean, this is good. This is a fantastic company when you look at -- and adding UPS Freight to the mix. Okay, for sure return on invested capital at UPS Freight is going to be low. Okay, year one. But I'm telling you, I mean, there's too much asset, there's too much real estate. And we're going to work on it –

Okay, that's helpful color.

By the revenue, right.

Okay, sure. That's helpful color, and I appreciate the ROIC disclosure this quarter, maybe just to my second question, one of your Canadian competitors is consolidating parts of the Canadian LTL market. I know in the past, you've talked about this market being irrational. So just wondering, if you're seeing anything at a high-level in terms of any change in industry behavior that suggests maybe a little bit more rational behavior in this marketplace, just given what's happened with one of your competitors out there?

Well, we believe that finally it's, I'm happy to see that the other company is doing something. We can't buy them all right. So it's a good thing for the industry. But we're really happy with that. I mean, we have a great relationship with the other company. We work together. I mean, we have a very high respect for the other Group. And it's fine. I mean, we can't buy them all, right. So it's good that somebody else is showing up and doing something about, they can even in LTL day and night versus the U.S. LTL. Why is that? Well, first of all, because we don't have a lot of industrial LTL in Canada. So that's a big problem. It's mostly retail. And number two is there's way too many small companies that are above making 1% or 2%. So we're happy because the other company that's buying those two companies right now, their focus has never been to make two points. Right, so for sure, they will have a job to do over there. And I'm happy to see that the two companies will be part of this Group now. And the focus is going to be to improve profitability. Absolutely, that's all good for the industry.

Your next question is from the line of Fadi Chamoun with BMO Capital Markets.

Thank you. Good morning, Alain.

Good morning, Fadi.

So question on I mean the ROIC you just talked about being pretty strong pretty much across all division except the USTL. I'm just wondering where does the segment kind of sit in terms of the capital allocation priority? It's a very competitive segment obviously, your position is typically top player in most of the other segments, of the other than U.S. and Canada obviously and parcel [ph] and so on. Is this something you want to put more capital in, you want to grow that business U.S. conventional, TL is this something potentially candidate for a divestiture? Just wondering, where does that sit in the capital allocation priorities for you?

You know what Fadi, I mean, this is a tricky question because, everybody understand that if you generate less than 10% in your part of TFI for sure, you're not going to be the first in line to get capital, right. Our logistics and our P&C absolutely they come first, our LTL as well. And this is why we're buying UPS Freight. Now, what we have in the U.S. right now, okay is to keep and are we going to grow it through M&A, probably not, because our focus right now has always been to grow our special TTL and if you look at our special TTL return on invested capital, I mean, we're just above the 10 mark. I mean, we're 11%, 11.5% something like that, I mean and this is fine, because I think we could do better and we'll do better over time. Now in terms of the regular event, if you look at the best company in the U.S., okay, the best of the best. And you look at the return on invested capital is less than 7%, elsewhere it's 5.5%, it’s not great. Okay, but we're not that far away from the best of the best. So our goal is slowly get closer to the best of the best and I believe strongly that we have the A team okay under Greg Orr and also the acquisition of UPS Freight gives us another small truckload division. That's not doing too good. Okay, they probably run in 98 OR okay, and now we have a plan of working TCA, this UPS Truckload division with our TFI management team and we're going to do a combination, okay, by the end of 2021, that should help us get closer to a 6 or 6.5 and be the best of the best. Now, don't forget that our introduction to the Truckload market. Okay. Five years ago, six years ago to the USTL market, there was a goal behind that is to give us some size in the U.S. so that we could one day listed in the U.S. Now with the UPS Freight acquisition, I mean, most of our revenue, okay will be U.S. domestic. I mean, as a matter of fact, in Q1, we have more U.S. domestic revenue than Canadian, right? So we'll be probably like 75:25, 75 U.S. and then we'll see over time. I mean, we're not in the business of selling companies. Okay, but we've done that before. We've done that with our waste division. So, but it's not in the cards for now. What we're trying to do working with Greg and his team over there is to get closer to the best of the best in terms of the return on invested capital.

Okay, that's great. My follow-up just on the P&C network side, I mean, you're seeing very significant organic growth, which are signaling will continue. I mean, I don't recall having seen that kind of growth in this network in a long time, obviously, for you and I'm wondering is this like, how is the sortation network handling this type of growth, is this predominantly coming kind of from the supply side of things? And how are you handling kind of this -- this kind of environment we're in right now? And if there's going to be any need for capacity or expansion there?

Yes, very good question, Fadi. I mean for sure, I mean Toronto hub, okay is very, very, very busy. It's never been that busy. Okay. And we're working on the plan right now to see what the next step is going to be. So we're getting close to capacity over there. So this is why we're looking at what can we do more? Okay, in Calgary, what can we do more in Vancouver? What can we do more in Montreal? So, Calgary revenue sorting center, we just opened that up a year-ago. So there we're doing fine. But in Toronto for sure, we will have to do something there. The JC center, we're really busy. But I mean we could do more. And for sure, this is why we're growing about 14%, 15% in terms of volume right now. We were skeptical at first that changing the mix from B2B to B2C with the pandemic there that would erode our margin. But if you look at our Q4, it was great. If you look at our Q1 this year, again we feel good. We have some division capacity like ICS, like TFIS, we could also do more within our Loomis operation. So, I mean, we could still see a 20% or 15% growth in our e-commerce in 2021 and into 2022. But then we will get closer to capacity crunch, right. So this is why we're working now to see how we're going to resolve that.

Tim James, TD Securities.

Good morning, Alain.

Good morning.

Why don't you talk about how your progress is with the DLS acquisition, the integration of that, and kind of how the -- just maybe update us on the opportunity set, which I think was -- is quite compelling and how that's shaping up relative to your expectations, when you acquired it?

Yes, what DLS we're really happy about what's going on now. In terms of the transition agreement okay, we believe like I said earlier on the call that by the summer, I mean we're going to be a standalone with running our financial and Oracle instead of their SAP. But in terms of revenue growth, I mean, we're quite surprised to see how this team is doing. I mean, I was looking the last month that we close in March; I mean our revenue growth was pretty impressive, right. So I mean, to me, it's really a fantastic acquisition, because it gives us market intelligence on the U.S. domestic LTL market, so that we can understand, okay, what the rates are, what the value is, et cetera, et cetera. So, but over and above that, I mean we have a fantastic team there based on an agent model. And we feel that we're running about a $600 million and $650 million business right now. And is it possible that we could do a billion dollar within the next two or three years absolutely. The way we're growing right now, I feel pretty good about that. Now for sure the margin is slim. We're running it 4, 4.25 margin right now, but the guys are working, we're going to be working on reducing our overhead costs as soon as we can unhook from Donnelly. And then work also on the margin with some of our customers and working with the Transportation Company and a providing great solution. For example, DLS or what we call now WW -- DLS WW they were never involved in the Transborder LTL. They were just focusing on domestic shipments. For us the Transborder LTL into Mexico or into Canada is very important to us. So now those guys have put a plan, and they're working on it now to see how they can grow that, right, because to us, this is one of the greatest market of the LTL is the Transborder between U.S. and Canada and Mexico. So feel good about this acquisition, it's really strategic to us. And now with the UPS Freight acquisition, now it gives us assets on the ground, okay, and working with the team there, then we could feel that we could grow this UPS Freight. As soon as we have a very solid foundation, which will take us maybe a year, 18 months to be really, really solid in control there of all of our costs. I feel good that we could grow this company, we have the team there. And we have the assets; we have the real estate to grow probably 40% or 50%. That's not the goal. Really, the first goal is to be lean and mean and very cost efficient. But I'm just saying that we have the assets to do it, if the market can bear it. But I feel really good about the future over there.

Thank you. And just one follow-up here on the return on capital in the business, which as you pointed out is very strong, really across most parts of the business. So how you think about, in the future, adding more capital versus increasing returns. I mean, are there any areas of the business now where you really don't I mean it sounds odd to say it this way, but you don't want higher returns on capital or your preference is actually just to put more capital to work or is your thought that it's still better off to kind of squeeze the assets get more or push your returns on capital higher?

Yes, that's a very good question. If you look at our P&C, I think that a 20% return on capital -- invested capital, net of tax, okay. It's difficult to do better than that. I mean, if you look at as an example, okay, if you look at the return on invested capital, the best LTL Company in the U.S., the best, the one that trades at 35, 40 times earnings. Okay. I mean, they're going to be in that 20% neighborhood, right. So to me, if you ask me, could you do better than 20% on your P&C. I would say, it's going to be difficult. I mean, we're working on it, but it's not going to be easy. Now, on the LTL side, I believe that what we're doing in Canada, I mean, it's got to be at least that in the U.S. over a period of two to three years, right. So because you got the best of the best is at 20%, you got another one at 15%. So we’re above 15% ourselves in Canada, which is not as good of a market as the one in the U.S. So we believe that LTL we could do better because of this UPS Freight acquisition. In terms of the Truckload, the idea is really to try again to do more with less. So how do we do that? Well, we could do more with the owner/operator model; we could do more with our brokerage operation. And this is the focus of our, this is why when we bought CFI; they had no brokerage operation whatsoever, right? It was Menlo, so Menlo stayed with HBO. So as we end up with no asset-light operation there. So we've built CFI Logistics, okay, and it's doing well and is growing. So that's going to help, again get a better return on invested capital, because it's all organic. So it's always a balance, okay, and me working with a team. It's always where should we invest our capital. And this is why a lot of times we say, okay, well guys, M&A is going to be our first priority. Buying back the stock, if we feel that the stock is under pressure, and we see an opportunity, yes, we'll do that. Right to improve again, our return we will invest on assets as well. So it's a balance, guys.

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

I wanted to touch back on P&C and see your more margins over time as some of your B2B business does start coming back historically that was good margin business because you guys have a lot more packages often than the conservative market?

Yes, yes, yes. Well, absolutely Jason. So for sure our B2B is still affected. Okay, because Ontario, okay and Quebec are under some major lockdown right now. We've started to see some improvement at ICS which is mostly B2B. But then it fell through again, just lately about two, three weeks ago. We believe that probably by the end of Q2, things should be back to normal. So we have two division within our P&C that are not running on all cylinders right now. It's ICS and TFIS, because they're mostly dependent on B2B. So you're absolutely right down the road let's see in Q3, we're more closer to normal situation in Canada, Ontario, Quebec, which is the largest provinces, there's a population. So yes, our margin would probably help us in Q3 and in Q4, with the right mix also a balance between B2C and B2B at our Loomis CanPar operation. Yes, don't forget, we did about what 19% in Q4, in terms of OE at our P&C operation, we did about 19% P&C. So, can we do better than that? Let's see if things are back to normal in Q4 of 2021 probably, the same story with LTL.

Okay, thanks for the color. I will just focus a little on the logistics operations, can you give us an update about some of your different initiatives?

What's that Jason, are you talking about UPS Freight?

Logistics?

Oh, logistics, okay, yes. Logistics, well in logistics, you've got the two sectors, our last mile operation in Canada is doing really, really well, our U.S. operation, in terms of top-line, I mean, we're basically flat. And we're just starting to see some growth opportunities, we're working on a few projects, but our bottom line is definitely improving there. We're getting closer to a double-digit EBIT there, okay which is got to be our goal within, let's say, the next 12 to 18 months. So our operation is really humming, our guys are working on all the costs and being more efficient. And our sales team is also working on adding more business to our network. In terms of our DLS or WW Company, I mean, those guys are organically, they're growing quite well. And the margin is still, we look at 4% us and we say why are we at 4%. But then we look at some of the other players in the industry. And one of the best guy is also at 4%. So, but we say, what guys, we have to work on the overheads. I mean, for sure, we have to do more with less there as well. So over time, our logistics sector, you'll see because of this acquisition, a lot of growth, but at the same time also overall, our EBIT there is running between seven and eight. Over time, we believe that we could get closer to 10, okay, with some organic growth as well. So let's say we're seven to eight right now over time within 12 to 24 months, can we get closer to 10? We believe so.

Your next question is from the line of Cameron Doerksen with National Financial, National Bank Financial. I apologize.

So just a clarification on the expected CapEx, the net CapEx for 2021. Correct me if I'm wrong, but I think it's what you're indicating at $325 million is higher than what was the case a quarter of ago. And I'm just wondering if that implies that there's some pull-forward of spending from 2022 into 2021 because I think that maybe a lot of the sort of the UPS CapEx was originally going to be planned for 2022. So just if you could kind of clarify what that means for I guess CapEx over the next 18 months as opposed to just 2021?

Yes, yes, so you see, Cameron, what we were able to do with the supplier is to get 1,150 trucks into 2021. So we put a lot of pressure on those guys, the supplier to make sure that we get all these trucks into 2021. So you're right at first, okay, we were saying that within 12 months, okay we should get the 1,150 trucks. But now we put pressure on these guys. So it's going to be instead of being 12 months over 12 months is going to be over the next seven months. Let's say we take over in May, sometime in May. So we only have seven months. We believe according to the builder, if they're starting building for us in July right. So because the order is already out, I mean, everything is out, we know how much it's going to cost us et cetera, et cetera. So it's ongoing. We believe that we should get all those 1,150 trucks before the end of 2021. So this is why you're right. It's a little bit of a change versus going over 12 months now; it's going to be over seven months. Yes.

Okay. So what does that imply? I guess, for 2022, should we expect? I guess maybe the question is what's the kind of more normalized run rate CapEx in 2022, if you're making this huge investment in 2021?

I think Cameron it's going to be more of the same in 2022 because we cannot do the catch-up CapEx only in one year. So I think in your model, you should expect that 2022 is going to be the same as 2021. Okay, because we want to bring the age of the fleet closer to four to five and 7.5 to 8 right now, right. So 2021 and 2022 are probably exceptional years of catch-up. And normal should be more like, normally like 2023.

Okay, got it, that makes sense. And just if I could just squeeze in a question about I guess driver issues. I mean, I think it's well known what's going on. But I'm just -- I'm wondering if you can maybe comment on what your expectation is for the ability to kind of keep and hire drivers in the U.S. LTL, obviously, that's going to become more important for you. I'm just wondering is it less challenging or more challenging in LTL in the U.S. to find drivers?

LTL I mean, U.S. and Canada, I mean, the turnover is not absolutely not the same. I mean, we have no issues whatsoever in Canada with our LTL or package and courier guys finding drivers and replacing the ones that are retiring. In the U.S., I mean we look at the statistics for LTL. I mean, it's not an issue. It's not an issue. I mean, it's truckload, it's a big issue but not LTL.

Okay, that was as I thought. I appreciate the time. Thanks very much.

Thank you, Cameron.

Your next question is from the line of Benoit Poirier with Desjardins Capital.

Yes, just to come back on the previous question, obviously, very strong fundamentals. But the question on the driver shortage what can you say about the wage inflation and the ability to pass-through those wage inflation on pricing and potentially a direction on the margin, whether it's impacting your margin?

Yes. So I mean right now, the pass-through is easy, because there's more freight than drivers. So we’re adjusting salaries to the drivers over the course of 2021. And the spot rate is just through the roof. And the contract price has been renewed with 7%, 8%, 9%, 10%, 12% right now, so it's not an issue. So if you look at, we just bought six months ago, MCT okay, which is a reefer division. And we had about 200 drivers, and we're doing really, really, really well with this division right now. I mean, this division operated in sub-85 OR in Q1 of 2021. And we believe that those 900, 800 to 900 drivers in the truckload division of UPS that Greg Orr and his team will take over soon. Okay. And those guys are running a 98 OR right now. I mean we believe, we firmly believe that this is going to be a huge asset because we're adding okay, those 800, 900 drivers, okay in a market, that is a win. It's a fairly great market for the truckers. So we believe that we could use this -- these drivers in a better way that they're being used today. If I can say that, right. Because the freight is abandon and those guys are hauling freight, probably at rates that don't reflect the market. So on the truckload world, we believe that we can turn this truckload division around much faster then we can turnaround, okay the LTL division because truckload is more of a reaction faster than the LTL. LTL, our focus is currently more on cost and yes, pricing too, but the big focus is mostly on the cost side. But the truckload is on cost but also market, pricing very fast there.

Okay, that's great color, Alain. With respect to your leverage ratio 1.75 to 2, if you take into -- does it take into account the cash and given it's pretty healthy, any color about the capital and low for to tuck-in M&A for the remainder of 2021 and maybe the opportunity to pursue share buyback?

Right now when I say our leverage is going to be between 1.75 to 2, there's minimal M&A in there except the UPS thing there. And right now, there's no share buyback. Okay, so we did some in Q1. Okay, we may do some in Q2, Q3 and Q4, depending on the valuation of the stock. For sure, we have a target in mind. We know, I mean I've been involved with this company for more than 25 years. So we know where we're going. So if we see weakness in the stock, absolutely. I mean, we will be active on the buyback. I mean, we bought back what I think, 642,000 shares in Q1, which is minimal. Okay, but can we buy another million shares in between now and the rest of the year? Absolutely, I mean, our leverage is going to -- in our plan is going to be much closer to 1.75 and 2 anyway.

Your next question is from the line of Walter Spracklin with RBC.

Good morning, Walter.

So I just like to come back to P&C. And I think your strategy is a good one in the sense that you've got capacity, you're going to grow into that capacity at a fairly, fairly healthy clip in the near-term. You mentioned in an answer to a prior question that you start to get up to your capacity limits, perhaps next year, obviously, you'll have higher EBITDA once there. My question is more longer-term I know Alain you've indicated longer-term, some challenges with regards to growth after we're through this systemic growth period driven by the lack of acquisition opportunity, how has your thinking changed around that that division, longer-term? Do you double down and invest heavily in adding capacity after you hit it next year or do you look at other alternatives for that division?

You know what Walter, that's a very good strategic question. And if you go back in time, the reason we sold our waste division it was because we could not grow it anymore, right because our valuation was so low and buying assets. It was dilutive to us. So finally we didn't want to do that. But we have to do it. So we sold our waste management company at the time. And okay, so you look at our P&C, we're really doing really, really well. But then, as you just said, I mean, we'll come to a point in 2023 where, okay, and we're already looking at the possibility, what do we do in Toronto, right. So this is, Toronto is the big hub for us. And this is why we're looking at the question right now. And for sure, we have capacity in other markets. Well, we're getting tight in Toronto. So then we'll come to a point is there some M&A possible? Is there something that you could do on M&A? Is there some -- is there partnership that you could do with somebody else, right. So if you take, for example, some of our competition at major hubs, okay, is there any way that we could do a deal with them and help them and help us at the same time. So don't forget that this discussion that we're having with our friends in Atlanta, I think it's -- it could be way more than just this transaction that we should be closing on soon. I think that because we have a relationship with those guys can we expand more of this relationship in Canada working with them? Is there anything that we could do? Time will tell. But we're looking at every opportunities of what we can do, okay. And I'm not a big fan of investing $100 million to $200 million and with low returns, right? We could do it, we could invest $200 million, no question, but I need the returns. And we're not very patient. So if the guy tells me well, the return is going to take 15 years, we're going to try to find other issues, other opportunities, right.

Absolutely. That makes a lot of sense, Alain. And just administrative here your -- the effective tax rate, I know you mentioned there were some movement in your tax rates there quickly but going forward, what effective tax rate should we build in and is most of that cash taxes or should we look at a cash tax rate that's somewhat lower than your effective?

Yes. I would say, I'm not a big specialist, Walter on cash, tax or tax. But I would say that what you see right now around the 25% mark, we don't know what's going to happen with the tax rate in the U.S. There's some discussion there with Biden that they may change that. So right now, I think that if you work with a 25%, I think it's reasonable. That may change. We don't even know what Mr. Trudeau could do in Canada. I mean, because they have huge deficit there. So maybe there's going to be some changes there. But I don't anticipate anything major for 2021. We'll have to see for 2022.

And your last question will come from the line of Sanjay Ramaswamy of Bank of America.

Great, thanks for squeezing me in. Just with regards to U.S. Truckload, I mean, Alain, you mentioned that obviously, 1Q was a bit of a disappointment. So revenue per total mile were up around 8%. And some of your peers have been talking to double-digit ranges in the mid-teens, look just asking you, is it just more of a function of, the more contracts you guys have and less of a spot market exposure, maybe some color there would be helpful.

Yes. So I think what happened in Q1 is that in one of our division TCA, I mean there was some issues with some dedicated word that we've lost, and we weren't able to replace quite fast enough, right. But if you look at going forward, if we look at April into Q2, and in Q3 and Q4, we believe that this was just a one-time event for us in Q1. And also the fact that we're getting about 900 drivers through the UPS acquisition in our truckload division and also the demand is really there. So in the consolidation that we're going to go through in 2021, we believe that this will also have an effect of reducing our overhead, the overhead that we get from the UPS Truckload division on top of the CFI, overhead, and on top of the TCA, if you sum that up for sure, there's going to be some saving there to bring us back to more of a sub-90 OR or around 90 than being a 92, 93, 94 guy.

Yes, that's really helpful. And just one follow-up in terms of the employee count that you guys have, it was down around that 1,600 year-on-year; I think about 350 sequentially noting that was mainly in the LTL businesses. I mean, how do we think about that kind of moving through 2021 ex kind of the UPS Freight acquisition and the employees coming on there? Is there room to -- are we going to see that employee count continually come down despite the volume environment, or how we think of that?

Well, it's too early to say what we can do over there. But one thing is for sure is we believe that we have to do more with less. That's what we've been doing all the time. It's a religion and TFI, every day you ask yourself how can you do more with less and less means less asset, means less people, better technology, better tools. Okay, because we're competing, okay in Canada with some very fierce competition both in the P&C, LTL and Truckload, we look at the LTL market in the U.S., and there's some very, very good transportation company over there. So we have to compete with these guys. And right now, I mean although like UPS management said on the call yesterday that the division did better in Q1, we're still a far cry from where we should be. I mean, the trend is good. Okay, fine. But probably, once we take over the company, we're going to have to accelerate. Okay, the change and the improvement that's been taking place right now.

And that does conclude our Q&A session. I'll turn the call back over to Alain Bedard for any closing remarks.

Okay, well, thank you, operator. And I want to thank everyone for joining us on this morning's call. So on behalf of the team at TFI International, we appreciate your support and we're working hard on your behalf each and every day. I look forward to updating you on our progress next quarter and hope that you remain safe in the months ahead. As always, please don't hesitate to reach out with additional questions. Thank you again and I hope that you enjoy the rest of your day. Thanks, bye.

Thank you. This does conclude today's conference call. You may now disconnect.