TFI International Inc. (TFII) Q1 2023 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to TFI International's First Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Callers will be limited to one question and a follow-up. Again, that's one question and a follow-up, so that we can get to as many callers as possible. Further instruction for entering the queue will be provided at that time. Please be advised that this conference call will contain statements that are forward-looking in nature and subject to a number of risks and uncertainties that could cause actual results to differ materially. Also, I would like to remind everyone that this conference call is being recorded on Wednesday, April 26, 2023. I will now turn the call over to Alain Bedard, Chairman, President and Chief Executive Officer of TFI International. Please go ahead, sir.

Well, thank you for the introduction, operator, and welcome everyone to this morning’s call. Yesterday after the market close we release our first quarter 2023 results. Many times over the years, including last year, you've heard me mention that profitability and cash flow are most important to us as they allow us to be nimble especially during uncertain times when we can capitalize on market turbulence. This means that the ability to steadily invest in the business opportunistically pursue acquisition and return excess capital to shareholders whenever possible. During the first quarter, we generated a 69% increase in net cash from operating activity to $232 million and our free cash flow more than double up 113% to nearly $200 million. While our strong cash flow performance benefited from working capital fluctuation, it also comes despite reduce freight volumes despite the unfavorable FX impact and despite our sales last August of CFI. Our operating income during the first quarter was $166 million with an operating margin of 10.7% versus the year earlier period of $220 million with an operating margin that was 90 basis points higher at 11.6%.In addition, our adjusted net income of $117 million was down from $158 million the prior year and our adjusted diluted EPS was $1.33 was down from $1.68. Important the year-over-year change in these items reflects not only the reduced rate volumes and the sale of CFI, but also the fact that our earnings are fully burdened by several items for which we did not adjust. These include severance package related to early retirement offers, costs associated with transitioning IT system from UPS, the mark-to-market on DSU and provide an unfavorable variance to our reported earnings this quarter and again foreign exchange fluctuation. We did not adjust for any of these items, the first two of which the severance cost and the IT system transition will help to streamline operation and enhance our efficiency going forward. The move of the financial system in particular will result in better control and insight into acquired TForce Freight operation and allow us to exit our TSA with UPS. With that, let's have a look at how each of our four business segments performed during this quarter, some of which produced significant increases in return on invested capital even as we navigated uncertain economic times, starting with our P&C, our package, which represent 8% of our segment revenue before fuel surcharge, the number of package across the segment was down 5% year-over-year and our revenue before fuel surcharge was down 10%. However, our operating income of $27 million was up 5% over the prior year with our margin expanding 240 basis points, and our return on invested capital was a strong 31.5% which was up considerably from 26.4% a year earlier. Our next segment to discuss is LTL, which is 46% of segment revenue before fuel surcharge. Our shipments were down 20% in the U.S. and 9% in Canada, which along with foreign exchange, impact contributed to a 17% decline in our revenue before fuel surcharge. Reported operating income of $58 million was down 39% fully burdened by the costs I've referenced earlier, that we do not exclude namely severance costs and IT system transition again. Within LTL, Canadian revenue before fuel surcharge was down 12% but we achieved a significantly improved operating ratio of 75.5% which was 360 basis points better than the prior year period. Similarly, our return on invested capital for our Canadian LTL was 23.2% up significantly from 18.4% a year earlier. As for the U.S. LTL, revenue before fuel surcharge was up 18% on the ongoing volume headwinds. We continue to streamline operation following the acquisition of TForce Freight. However, our adjusted operating ratio of 95.7% was up from 90.7% a year earlier on the reduced volume as well as the non-recurring costs. The transition to the new financial system is now complete, which should benefit us going forward and we continue to see additional opportunity to take cost out of the business. Return on invested capital for U.S. LTL was 17.4% as compared to the prior year's quarter of 22%. Next, let's discuss Truckload, which is 27% of our segment revenue before fuel surcharge. Reflecting our sales of CFI last year, truckload saw revenue before fuel surcharge fall 20% partially on the impact of foreign exchange. Our operating income held almost flat, down just 1% again despite the CFI sales over the course of the past year, reflecting a 320 basis point margin improvement. Digging deeper, Specialized operation held revenue virtually flat despite foreign exchange benefiting from our diversity and exposure to niche market. We also saw an improved OR of 84.5%, 250 basis point better than a year earlier. Our Specialized Truckload return on invested capital came in at 14.1% and we view this business as having additional self-help opportunities ahead. Canadian based conventional truckload was also solid with revenue before fuel surcharge up slightly, again even stronger on a constant currency basis. Our adjusted operating ratio for conventional truckload improved a significant 440 basis point to 81.2% and our return on invested capital was 21.3% much stronger than the prior year's quarter of 11.7%, as we continue to focus on network density, cost control and improving the operation of recently acquired businesses. We believe these overall solid results for Truckload, which again were even stronger on a constant currency basis underscore our point last quarter that our business is now more resilient during volatile market condition with lower U.S. dry van exposure following the sales of CFI. Our last segment to review is Logistics, which represent 20% of segment revenue before fuel surcharge. Our revenue before fuel surcharge of $355 million was down 18% on volume weakness as well as a difficult year-over-year comparison and foreign exchange impact. Within Logistics, brokerage volume were weak while same day package delivery volumes were relatively stable, thanks primarily to the successful efforts of our sales team in bringing on new customers. Our operating income fair better of 9% to $32 million reflecting successful containment of expenses. As a result, our operating margin actually improved 90 basis point to 8.9% and our return on invested capital was 19.3% almost flat with the quarter of ‘22 despite the lower volume this quarter. TFI International's balance continues to benefit from our strong free cash flow, which was nearly $200 million during the quarter as I mentioned. Our funded debt to adjusted EBITDA ratio came in just below [$1 at $0.98] (ph) as of March. As a reminder, our debt is almost entirely at a fixed rate, which is a weighted average cost of less than 3.5%. This strong capital position is what allows us to strategically invest in the business even during times of uncertainty, while also returning capital to our shareholders whenever possible. Year-to-date, we have completed five tuck-in acquisitions including one subsequent to the first quarter. During the quarter, we also announced that our Board of Directors approved a $0.35 quarterly dividend, which is 30% higher than the year earlier level. I'll wrap it up with our updated outlook. We are updating our guidance provided in February to a range of $7 to $7.25 for the 2023 earnings per share, U.S. Dollars. We also anticipate free cash flow of $700 million to $800 million which is based on net CapEx of between $200 million to $225 million. I also note that these ranges now reflects $300 million of capital deployed towards either M&A and share buyback. And now operator, if you could please open the lines, we're ready to move to the Q&A portion of the call.

[Operator Instructions]. Our first question comes from Scott Group with Wolfe Research. Please go ahead.

Hi, thanks, and Good morning. Alain, can you just talk about what's changing in the guidance assumptions, and then the severance in IT cost? What are the actual annual savings that come out of that? How does that change your view around with the LTL margins?

Okay. Well, let's start with the guidance. So, what we see, Scott, is after Q1 and just above a few months ago, we were thinking that first two quarters of ‘23 would be soft and we believe at the time that Q3 and Q4 would be better. But when we talk to our customer now more and more, inventory are still high. The consumer approach to -- they want to travel more because we've been locked down for two, three years. The story was, well spend money on your house, spend money on buying a TV, whatever, because you can't travel. Now this has changed. So people want to travel. So, disposable income is also affected by inflation, so food costs more. So what's left, we see consumer now in this year and probably into next year spending more of these dollars into travel and vacation and all that versus consuming a TV or whatever improvement to the house etcetera etcetera. So with that in mind, we've talked to our EVPs and everybody we've reviewed our plan and that's how we come up with a reduction on our guidance. So we think that the new guidance is really reasonable, but who knows, at $7 EPS per share, its way below our target of $8 to $9 that we would like to be. But we have to be realistic about the market. Now, in terms of the IT transition from UPS, so it costs us a fortune in terms of consultant, but the work is done now. So, all of this cost that if you look at all this transition and IT in the quarter, you're talking about $8 million which is about a $0.07 impact on EPS, just coming from that. And that will allow us with this financial system to use the TFI systems to better manage cost. So, until just a few months ago, as an example, all payables were managed by UPS. So, these were payments that were approved by our operation but we had no visibility on it, except maybe at the terminal level. But now we're starting to dig in with our head office team and our analytical team and for sure we're seeing some opportunity to do better in terms of expenses. In terms of the severance package, in that amount is about close to $9 million to $10 million in there you got two segments. You got staff, that this is a severance that is long-term because these people will never come back because of new technology, new tools, etcetera. So, these guys amount to have severance of about $3 million - $3.5 million, if I remember correctly. The [RAS] (ph) is a package that we offer to our drivers, to our dock workers. And what we're saying to them is that, guys we are offering you a certain amount to retire because as we speak, because the volume is down like 20% like I said, we have about 800 people - 900 people on layoffs. So, when you replace folks that have been with the company for a very long time with younger folks, normally the cost is not the same, like vacation is not the same. So, I mean there's a value -- financial value to that, but there is also you bring newer people, for the ones that are being laid off, younger people I would say not newer but younger, back to the work force. And as you know, we are in discussion with the union that represents our employee right now, right? So, I mean it's just a matter of not having too many people on layoff. And what we're saying to our friends, that represents our employees that we are 23,000 shipments a day right now. It used to be at 30,000; 32,000 we're down to 23,000. And it will take us some time to bring the 23,000 shipments a day to 24,000 to 25,000 etcetera. So, these are -- these people on layoff will be there for quite a long time. So, with early retirement and retirement, we'll be able to draw from that pool of layoff people over-time because we're not -- we're going to add shipments if it makes money, if it makes sense for us. So, basically Scott, this is the approach that was taken. Now the payback of these costs, I would say it's less than a year.

Okay. Helpful, a lot there. Just second question just on the M&A environment, just give us an update. I know you've done five tuck-ins, how we feeling about a big deal, so you lower the ArcBest stake just slightly, how should we think about that, where you want to take the M&A?

Well, I think you're buying bad news, you're selling good news, Scott. And there's lots of bad news right now in transportation. One of my peers just came up this morning with shipments down 10% which is the star of the U.S. LTL. So, a lot of bad news and we love this environment for M&A. So you'll see us do some more tuck-ins. And I said in my discussion, we're going to be spending at least $300 million on M&A and on buyback, but these are small transaction. We believe that every three years TFI do something of size. So, for sure we've been working on a few opportunities. Now could that materialize in 2023, maybe at the end of 2023 into 2024 for sure, we have the capacity, we have the knowhow. So something may happen on something of size before the end of the year or into next year, Scott. But one thing is for sure is that the small nice tuck-ins, I mean, we'll be announcing one in Canada very soon, a fantastic deal and probably another one again in Canada later in the year that we're working on right now. And on the U.S. side, I mean, we have a few opportunities that we're looking at right now, and stay tuned.

Thanks, Alain. Appreciate the time.

Very good, Scott. Thank you.

Our next question comes from Ravi Shanker with Morgan Stanley. Please go ahead.

Thanks, good morning. And then just a couple of follow-ups on that, just on the guide itself. Your 1Q result adjusted for the special items came in roughly in-line with our expectations, which means the full year guidance cut is coming out of the rest of the year. Is this largely a function of 2Q being a lot worse than you thought? Or are you just taking the full back half including the second half inflection down as well. Just trying to figure out what the rest of the year looks like.

Yes, yes. What I'm seeing right now, Ravi, when we talked to our customers, we thought that Q2 would be soft and we thought that Q3 and Q4 would be better. Right now, the discussion we're having is that no, no, no, this is not going to happen. Q2 is going to be soft, Q3 and Q4 is going to be probably the same. So, this is why we've reduced. Now, don't forget last time we gave guidance, this was without any M&A. So, now the $7 to $7.25 include some small tuck-ins that we're doing now. So, it's a little bit of a change. But basically the biggest issue is future is Q2 and Q3 and Q4 is going to be tougher than we thought.

Understood. And maybe as a follow-up on the M&A discussion as well. Obviously, on the last call, you put out some feelers on ArcBest with the stake that you purchased. How has that progressed? Have you had any conversations with them on cooperation or partnerships and kind of how might this play out? Thank you.

You know what, Ravi, right now, I mean, there's no update on that. I think that we are very busy trying to manage the storm right now. And I think we did pretty well in Q1. So, really our focus right now is to manage again the storm into Q2. Now we had some discussion with the company there, that we own about 4%, but I guess these guys are busy. Don't forget that we have also to renew the union contract us and them. So, this why we said we're too busy with the storm and too busy trying to get a contract in place with the teamsters. So for now, I would say there's nothing going on, and we'll see down the road.

Alright. Thank you, Alain.

Pleasure, Ravi.

Our next question comes from Cameron Doerksen with National Bank Financial. Please go ahead.

Yes, thanks. Good morning.

Good morning Cameron.

So, I had -- maybe a question on the Truckload business obviously, it was still a bit of a tough market, but you actually improved your operating ratio in both the segments there. Just wondering if you can sort of give us some color around what you've done to be able to do that. And you also mentioned just in your prepared remarks about some additional self-help in the Specialized Truckload segment.

Right.

So, maybe you can talk a bit about what you mean there and what additional upside there might be.

Very good question, Cameron. So, one of the things that is helping us this year and will continue to help us is Transport America that was part of CFI. We sold CFI in the summer of ‘22, and now TA is part of Mr. Brookshaw, one of our EVP’s responsibilities, and this is really a great turnaround that's helping us in our specialty truckload. That was I would say last year was like a mini-dog and now it will become like a mini-star within our specialized transportation business. So, this is when we talk about self-help in 2023, TA is a great example of that. Also our flatbed division in the U.S. has been combined into one. It used to be three flatbed division in the U.S. coastal, overall and South shore. So, those three now are combined into one, under the leadership of Kristen, one of our Canadian EVP, oversees now this flatbed operation in as of 2023. So, that is another self-help. If you compare what we do in Canada, a flatbed operation and what we've been doing so far on our flatbed, it's like day and night. So we believe that with the management team that we have now in the U.S. overseen by Kristen, that's another major improvement in our flatbed organization in our specialty truckload. If you look on the Canadian truckload side, I mean we've bought SGT about a year and a half ago, and that company was just a mess, when we bought it. Now, the team there in Quebec has turned this SGT around. We also bought in Quebec, Boutin which was also not very profitable within by -- then pay a lot of money for that. Now we see a good future. We also bought Saint-Michel in Quebec, that we see that is going to improve big time over the course of ‘23. Now, all this, Cameron, is with an environment that is more difficult this year than it was last year. So, we have more price pressure with customers for sure. But at the same time, we got a lot of work to do on our costs, our TMS, as an example at Saint-Michel was not up to par. The same story is true of what we were doing at TA. So we just moved these guys in to the financial system of contracts, which is Infinium from CFI. So, I mean there's a lot of a good stuff that we're doing. Now, the market is difficult. I mean, our guys did a fantastic job. Our Truckload guys did a fantastic job in Q1. I mean, I would say that they were pulling water out of rocks. So, this is why Q1 in my mind is a great quarter. Now, the only small rug that we have in our shoe is TForce Freight, for sure, I mean, think about that. You're down 20% in volume and that's difficult. But the guys did. okay. I would say that we did great, but we did okay. Don't forget, we had some major in energy spent into this transition from UPS financial to TFI financial. So, sometimes when you're focusing on one thing, you may drop a few issues here and there on the cost side, but let me tell you that we're going to take the bull by the horn for the rest of the year at TForce Freight and we're going to do a much better job on cost.

Okay. That's very helpful. Just on the TL margins, are you fairly -- it sounds like you're fairly confident that those are sustainable through the rest of the year, especially given the fact seasonally Q2 and Q3 would be better quarters?

Yes, but you know what, Cameron, we may see a little bit of a drop because this market is really becoming -- I would say that right now April is softer than we thought it would be. So, I’d say that the team is doing a fantastic job. Now, are they going to do as good in Q2, Q3, Q4, as they did in Q1? Normally, I would say yes. But, because of market conditions, this is why we're conservative in our guidance at $7, $7.25.

Okay, understood. Thanks very much.

Thank you. Thank you, Cameron.

Our next question comes from Paul Stoddard with Goldman Sachs. Please, Paul, go ahead.

Hi, this is Paul on for Jordan Alliger. I guess getting back to the tonnage decline in U.S. LTL, I guess the question is, when you're hearing from customers that things are a little bit more difficult, I guess how much of this is macro versus actions that you are taking on your end?

About 50-50. If you look at what we've seen so far in my peers, basically, the number one LTL peers that we have in the U.S. came out with a drop of about 10% on shipments. If you look at our Canadian operation, we're down 9% on volume. So, we know the market in Canada and in the U.S. LTL our U.S. LTL, we're down 20%. So, I would say guys that half of that is the market and the other half is all the clean-up that we've been doing since we bought the company.

Got it. Great. Thank you. And I guess for a follow-up, you mentioned a little bit about the cost actions that you're going to be taking in U.S. LTL. Could we maybe give more update. I know we had some of the IT costs that happened this quarter, but maybe more of an update as we move through the year with some of the plans that you mentioned your Analyst Day back in November?

Yes, absolutely. So, if you remember on our Investor Day in November, Paul, was talking about [Lionel] (ph) this new tools will be fully implemented by the end of May. And if you remember what, Paul, was saying at the time, is that this is about 100 basis point. So, I mean this is should help us improve our cost. On the P&D side, labor costs on the dock and P&D and fuel, I mean for sure, we have now KPIs dollar-wise that will help improve what our terminal managers are doing. As an example for fuel, I mean we could do way better on fuel than what we're doing today. Fuel economy, price at what price that we're buying fuel, where are we buying the fuel, so this is all things that now we're starting to implement with our team there that’s never been done really. So, I mean we believe that our volume probably will stay around 23,000 shipments to 24,000 shipments between now and the end of the year. Now that being said, so we shouldn't have too much up and down in terms of volume. So, that steady volume will help us attack our costs, improve our productivity. And at the same time, don't forget that we're in discussion with the people that represents our employees and we want to finalize that as soon as possible. I think that what we've been clear with them is that the volume that's gone, it's not coming back next week, it’s not coming back next month and we have to be more efficient, but don't forget, it's us. The management has to reorganize the work, so that the employee is more efficient. It's got nothing to do with the salary of the employees, got to do what do you do with this employee, a driver drives a truck and when he drives a truck, he spends money. So me, I'd like my drivers not to spend more times driving and spend more time picking up freight. So, by reorganizing the work, they drive less and they have more stop and that's more beneficial to the company and that doesn't change anything for the cost of employee.

Great. Thank you.

Welcome.

Our next question comes from Walter Spracklin with RBC Capital Markets. Please go ahead.

Thanks very much. Good morning, Alain.

Good morning, Walter.

Just wanted to zeroing on your -- first on your personal business, did very well when you compare it to UPS, for example. And just curious to see is there a different -- are you seeing a different environment in Canada in parcel versus what UPS reported just any color on what might be different there that's helping P&C do better than their peers?

Well, you know, Walter, they're down 5%, 4% - 5% U.S. domestic, we're down about 5% or so. So, in terms of activity, in terms of volume, I think that everybody is going to be down in the package business, probably like 4% - 5% like us in UPS. Now, the difference between us and them, I can't say what's different, Walter, what I can say is that TFI runs a very lean and mean operation. I remember two years ago when I asked McGonigal, I said Bob, as kind of training because don't forget the TFI culture is we like our EVP to train into different segment because one day the actual CEO will retire maybe in five years, something like that. So we want -- and the next year will come from one of our EVP from the family. So, when I said Bob, Bob, you go there as a training. And he said, well, I know nothing about P&C he says, well, so what? I mean, you know about network. You've been running some of our LTL division and you'll learn, it's an experience thing. So, after two years, it's been there in a market that's been quite difficult after the lockdown and this and that. We're still improving the numbers. So I mean, it's a cost approach. It's the return on invested capital approach. It's just that -- and don't forget, we're finding, besides UPS and FedEx, we're also finding Purolator, which is a different league than us. You understand what I'm saying, Walter, it's not -- the owner is not the same.

Understood. The railroads that we're reporting noted a particular lag benefit in their fuel surcharge program were declining fuel prices, they were still --

Yes.

They were charging higher fuel surcharges, but paying less at the pump. How does that working in your business? Are you -- did you see any lag benefit here or is it a different nature.

No.

I know the railroads probably have a little bit more pricing power that they can drive through a more -- a stronger fuel surcharge.

Yes.

Is there any impact to change in fuel prices here for you positive or negative from that?

Yes. You see, we're not a monopoly, Walter, right? So, fuel is always a problem. So when it comes up and you call customer and you say, I got to adjust my fuel surcharge. He says, wait, wait, wait, wait, 30 days, wait 15 days, etcetera, etcetera. When fuel comes down like now, he says, don't wait, adjust the price now. Now with rail, it's probably a different discussion because there's not that many rail company in Canada or in the U.S. So for sure we don't have the same benefit of this discussion that you're talking about rails. Now you're right, though, that when you run a very high density network like we do us in Canada with our P&C and our LTL, okay? Not so much in the U.S. because in the U.S. I mean the density of our LTL operation is the shift. We're working on it. But that being said, so fuel comes down as we speak, it's like neutral for us in the U.S. because we don't have a huge benefit with our density. But it's a negative, it's a little bit of a negative in Canada because of our huge density versus the fuel surcharge that we collect from customer because of our huge density, we get a little bit of a benefit that may disappear over time if fuel stays at, I don't know, $70 a barrel.

Okay. Appreciate the color. Thanks Alain.

You're welcome, Walter.

Our next question comes from Jack Atkins with Stephens, Inc. Please go ahead.

Great. Good morning, Alain. Thanks for taking my questions.

Pleasure, Jack.

So, if I could go back to something you said in your prepared comments around, I think you said you'd like to have earned $8 to $9 this year. What was that comment really referring to? Is that if we were sort of in a more normalized operating environment, you feel like the assets in place could make that. Just could you provide a little bit of clarity around your commentary there?

Yes, because you know what, Jack, last year we did $8, right, about $8. So we're not feeling good about that. As we thought that in a normal environment in 2023, we would have done at least $8 and going towards more $9 than $8. But now our situation is reversed because we're coming out with a guidance that is $7. So we're far from $8 and we're very far from $9. Okay? So the guys will be working really, really hard in in 2023, everybody in TFI's family to get to try to be this consensus that we just updated today. Because this company, okay, in a normal environment, for sure will be an $8 to $9 maybe even better down the road, okay, to $10. But our forecast for 2023 is $7.

Okay. No, that makes sense. So, I just wanted some clarification on that. And then as it relates to like the $300 million of M&A and buyback by end of the year. If I go back to the fourth quarter call, the idea was you're going to do $300 million to $400 million of M&A by the end of June. So what's changing there? Are you may be saving your dry powder for something bigger by the end of the year? Just if you could maybe clarify that changes as well.

Yes. So, that's a very good question, Jack. So, two deals that we were doing in the U.S., one seller decided to not to sell. It was a father and son thing there where the son want to sell, the father didn't want to sell, which is not normal. Normally, the father wants to sell and the kids they don't want this, but that was a story in the U.S. So, we had to pull out of that transaction. And we also pulled out of another transaction because the trend of the business was not consistent with the agreed price so we pull out of two deals. But at the same time, like I said, we have a major transaction on the Canadian market now. That should close probably in Q3 and into Q4. It's a fantastic deal that we are going to be doing in Canada. So, we got two major deals for the Canadian scale, that one is imminent, the announcement will be imminent and the other one is probably going to be later. Now in there also, Jack, we said buybacks because buybacks always in our mind, and so far, if you look at our Q1, we did zero, we did about 50,000 shares. So, we didn't do much because like I also said on the call is that we believe that there's a possibility of something of size between let's say Q3, Q4 and Q1 2024 it's always the same thing, Jack. We work on not just one transaction because one could fail like I just explained, two deals that we're working on are failed. But we have a good feeling about something of size. So like you said, dry powder is important to us. So we'll do those two major transactions that are really fantastic for us in Canada. We're doing some small M&As here and there. So this is why we said, hey, guys, we spent US$80 million in Q1 on M&A and we believe that over and above that we have at least another $200 million to $300 million of deals going down the road.

Okay. Thank you, Alain. Really appreciate it.

Pleasure, Jack.

Our next question comes from Konark Gupta with Scotiabank. Please go ahead.

Thanks and good morning, Alain. How are you?

Hey, I'm good. How about you?

Good. Thanks, Alain. I just wanted to confirm before I ask my question, Alain. The guidance you said $7 to $7.25 does that adjust for any of the non-recurring items that you laid out?

No. These non-recurring items are part of that $7, because we did $1.33 I think in Q1, if I remember correctly. And so the difference between $1.33 and what is $7 is what we're going to have in Q2, Q3 and Q4.

Makes sense. Thank you. So my first question is on the U.S. LTL. If I'm looking at the operating ratio without these non-recurring items. Right? So sounds like its 92%, you were at 90% in the previous quarter in Q4. Right? Now I think last quarter you said, you have visibility into sub 90% operating ratio by the end of this year. What's that visibility looking like right now in this volume environment?

In the plan, when we talk about that plan of $7 EPS, we think that we're going to run around that 92% mark, okay, excluding like you just said, I mean, we said 95%, but this includes those non-recurring items. Now if you look at the year of TForce Freight, we believe that we're going to run the year at 92%. So we should do a little bit better from 95% over the course of those next three quarters at TForce Freight.

Okay. Thanks. And I suspect that's driven by those financial systems and the remaining sort of transitioning items, right?

Yes. I mean, we're – see my labor cost per shipment today, if I look at April, if I look at March, the trend is down. So these are tools that we implemented with the TFI financial system that we monitor the labor cost per shipment on P&E, on dock, and that's by terminal as well. So we're tightening the screw, working with our team there, giving them some incentive to get to a more reasonable number. Because don't forget, we will do about 6 million shipments in 2023 at TForce Freight, [grow some] (ph), 6 million shipments. So if you could shed just $5 per shipment, labor costs, which is normal, which is normal what we should have been able to do, well 6 million times $5 is $30 million which is about close to a 150 basis point just on your P&D and that labor, which is the normal goal. The other aspect also that we're looking is admin cost per shipment, which is something that was never looked at. So we went as high as close to $50 including benefits for admin. I mean this is not sustainable. So now we're down to about $42 per shipment. The goal is to get to about $30 per shipment. I mean in Canada, we do even better than that. Now in Canada, we've been working at it for more than 20 years. So by these new system that we are implementing. So we did the financial up and running February 1, 2023, we're doing the HR on Oracle as we speak, May and June. So again we're going to be able to walk away from Workday UPS into TFI Oracle HR. So there again, we're going to be saving on TSA and we're going to have a tool system, a KPI that is standard to TFI. And then the next move which is about the fall is we're going to run away from the fleet management system that we use at UPS, it's called AIS and we're going to be moving to our own, okay, system in the fall. So these are all the things guys that we believe that will help us in that soft patch of volume to be able to manage around a 1990, 1991, 1992 or in 2023?

Sounds perfect. Thanks Alain. Last one for me. I noticed in the disclosures you guys sold or kind of maybe sold some of the ArcBest shares in Q1 from Q4. Is that more kind of reflective of, you know, just to kind of strategy to own equity in your competitors from time to time? Or is it more of a discussion of what's happening with ArcBest time unions?

I mean, don't forget that at ArcBest, they have a buyback program. So it's just that we didn't want to be too close to the 5% where you have to do this and do that. So that's why we sold a small 50,000 shares of the company. That's got nothing to do what our intention to try to have a good working relationship with the company over there.

Perfect. Thanks so much, Alain. Have a good one.

Thank you.

Our next question comes from James Monigan with Wells Fargo. Please go ahead.

Hey guys. Good morning.

Good morning, James.

Just wanted to ask about U.S. LTL and I guess, the severance cost you incurred. You mentioned the employees that were laid off and sort of underutilized, outside of those severance cost, was there a drag from those – in the quarter, from those employees essentially sort of being underutilized across it before they took packages?

No, not really. I mean, if you look at what we've done in Q3 and in Q4 in terms of utilizing those employees, we probably should have done a better job in Q3 and in Q4 because our volume was also dropping with market as of Q3 and in Q4. And we were a little bit late in the game and no, that's I would say probably by the end of October, November, this is when we start to lay off workers. We should have started doing that much sooner. Okay, fine. But there again, we have all kinds of excuse, the visibility that we have, etcetera, which we improve now, because of the financial tools, financial system at TFI, I know Scott Group doesn't like when I say tools, but it is what it is. So I mean, now we have better visibility and our management team is taking action more on a day to day basis versus what are we going to do eight months or eight weeks after the fact. So now the fact that we've offered package to retire, that is more financial, is we're replacing those guys very expensive in terms of benefits and in terms of salary versus younger folks. And also we have 800 to 900 people in layoff. We don't like that. We would like to bring those guys back as soon as possible. And the volume -- growth in volume will help us, but we don't see a lot of potential there for 2023. So, normally we have about 200 to 300 people that retire every year over there, 200, 300, 400. So the fact that those older folks are retiring helps us on the cost per shipment because the salaries, the benefits are not the same on let's say a 30 year old employee and a 60 year old employee, right? So this is part of things that was never done before. Was never done before, which is -- we do that in Canada if need be and we've done that many times, but never been done there. And we're going to keep pushing because we want to reduce the average age also of our workers, because if you look at the average age of our workers today, this is fairly old. So we need these younger folks to come in and have the older folks retire. And yes, that is also what we're going through now. Now volume growth down the road will help us. Absolutely.

Yeah. And I guess I also wanted to ask, it seems like you're also making progress with truck deliveries, but I guess more broadly, it seems like you're like this quarter had some sort of inefficiency costs within it. You're quite aggressive about managing those. You're seeing like TSAs come out across year, but you're not necessarily sort of building in step down in sort of the OR from the sort of elevated rate even ex those costs, right, that you called out in the press release. So Just trying to understand why you're not seeing sort of more significant margin improvement across the rest of the year even if volumes are sort of relatively stable? Like, or is there a yield or mix headwind we should be considering? Or like, is it 800 or 900 employees create a larger drag? Just trying to understand sort of what the moderate cadence of improvement in OR?

Yes. Well, there's many things going on, James. I mean, as an example, we used to 120 shops, mechanic shops with 300 mechanics. So our leadership in the maintenance right now, their focus is – a lot of their focus is shutting down those shops. So we went from over 100 shops, which doesn't make any sense. Now we're down to 40 shops. So you have to make arrangement, close the shop, get rid of the spare parts that was in those shops, layoff or just retire those employees, those mechanics, the management that was related to those. So, if I look at my maintenance costs, compare to what it should be. I mean, I'm not there. I'm not there now. The excuse that we hear though, yeah, but I mean we're stuck in closing shops, my fuel economy is not as good as it should be. So, these are all the things that in a normal environment of a company, okay, that's got 4000 trucks. You don't have 120 shops to maintain that fleet. We don't. It's just that we have to do a lot of correction. We did the same thing on fuel. So fuel, we shut down about 85 to 90 fueling station that were running. So we moved that to [Comdata] (ph) with fuel card. Now the system, that controls those cards, if you look at our Canadian operation, our truckload operation, I mean, is fool proof. Now the system that we have over there at TForce Freight is not fool proof. So we're working on that to improve that. So this is why when you look at that in a soft market environment, we're saying that you know what guys we came up $95 in Q1 or, okay, if you adjust for the one-time costs, we're $92 we may also have some kind of one-time cost in Q2 and Q3 because we're moving to HR Oracle, not as much as financial, but we may have some. And we're saying, let's be conservative and let's say that, is $92 reasonable in 2023? We don't like to be a $92 OR company. But I think it's reasonable for now. Let's see what we come up with in Q2 and in Q3. And I'm still convinced and we'll get there that if we can run a $75 OR in Canada with a unionized environment there as well. In a market that is day and night the quality of the revenue in U.S. versus Canada. If we can run that in Canada, in a union environment $75, with the experience and the tools we have in Canada that we are also importing to the U.S. I mean for sure we'll get to at least an $80 OR. But it will take us some time, absolutely. And for sure, we are getting more and more involved into the TForce Freight operation.

So just real quickly, the best way to sort of characterize it is there is these OpEx headwinds or investments from lowering some of the structural cost and they're masking like real underlying improvement?

Yes, absolutely. Yes, 2023 guys is a huge transition year for us from UPS. So don't forget, at the same time that we're paying UPS, we're spending money, we're spending energy and time. Don't forget, we did this transition and it was a huge financial one. It was a huge success. We did the payroll a year ago for 10,000 employees just like that, Jan 1, 2022. It was a huge success. We had a little bit of fine tuning to do, but I mean think about we have no issues with system and this and that and losing this, losing that. No way. No.

Thank you for the clarity and context.

Pleasure James.

Our next question comes from Kevin Chiang with CIBC. Please go ahead.

Thanks and good morning, Alain.

Hi Kevin.

Maybe just focusing on Canadian LTL. I mean, if I just look at it, had great results and yield and volumes were down, but your operating ratio was in the mid-70s. Maybe just if you could provide some granularity on some of the buckets you're able to pull on given the more challenging top line environment? And then I guess when I think of the cadence of that OR through the year, typically first quarter is your highest OR. Would that be your expectation in your guidance for 2023 that you kind of start at $75.5 and or you can kind of grind that lower as we get through the year here in Canadian LTL?

No, not in 2023. I don't think so. I think that 2023 is a special year. You're absolutely right. Normally, Q1 is not as good as Q2, Q3 and Q4. Q2 is always our best. But because what we're seeing on the market right now, Kevin, we were soft in Q1, but the guys have done a fantastic job. Like I said also earlier fuel was a little bit of a tailwind for us, but that tailwind is disappearing. So we're going to lose that into Q3 and Q4 if oil stays at about the price it is now, if you look at the price that we're paying now is about the same today as it was last year. But last year, it's really peaked heavy into Q2 and in Q3, right, which is not going to happen this year. So we're going to lose a little bit of that tailwind in Canada, not in the U.S. but in Canada. So this is why to me if we can come up with $75 OR in Q2, Q3 and Q4, I mean it would be like wow because of that situation. So I think that $75 will maybe be $78 down the road because of that tailwind that may disappear, well, probably disappear. Now the big difference that we have, Kevin, between our U.S. and the Canadian operation as an example, so think about that in the U.S. with huge density, we have to drive between each and every pickup we do about 11 miles. Think about that 11 miles between customer one to customer two. In Canada, where the density is the ship compared to the U.S. because if you sue Toronto, Montreal and Vancouver, I mean, what are you talking about? And our average miles okay, are 50% less. So what does that tell you? That tells you that in the U.S., we like to drive trucks and we don't like pick up rate.

No, that's a great anecdotal data point there. Maybe just on U.S. LTL, if I think back to some of the levers you had called out some of the self-help levers to get the OR lower. You had talked about the IT program. Obviously, you made those investments there. If you talked about labor efficiency, it sounds like some of the severance stuff addresses that. I think the last one was improving the fleet efficiency. Can you just give us an update on where that sits? And then I think if I added all that together before, that was about 8 points of OR improvement on an annualized basis. It feels like you're making great progress as I think of those three levers here.

Yes, but not good enough guys, not good enough, because we still drive too many miles for P&D operation, too many miles. So, for sure the guys are looking at that. So we do too many pickups with small trailers. As an example, if you look at what my peers are doing in the U.S., what we're doing in Canada, a driver likes to drive and he also likes to drive with a short trailer. It's easier. But us we don't like a 28 feet trailer because what kind of freight can you put in 28? So what we normally do, we have our P&D guys drive 40, 48, 53s. So we can load more freight in and they can pick up more freight. So this is a global change of culture. We run in Canada six wheelers and eight wheelers. But we mostly run 8 wheelers, so tandem trucks. Toll for sure the trucks is longer. So again, you have to be a better driver to drive a longer truck. So they were only used to drive six wheelers. So we're saying, no. So we are changing that also because if you run, for instance, we run Nashville to Memphis with LTL. And let's say we run five a night and we come back with three empties. Why are we doing that? Well, because we don't have attendant truck. So we can't load a truckload on the way back. Well, this is just normal operation, but you don't have the proper equipment because the guy runs at 28 or 228, he runs a six wheelers, so he can drive with LTL because it's not that heavy, but then if you have to load a truckload let’s say Pepsi or Coke as an example, I mean you need attendant truck. So this is all going through right now with us getting involved in the operation and changing things, UPS freight was like -- was run like a package company hauling LTL. So we're changing that now. So TForce Freight has to become a real LTL company with the right equipment, and that is the transition that we're doing as we speak.

Alain, thank you for taking my questions and best of luck as you get through 2023 here.

Thank you, Kevin.

Our next question comes from Benoit Poirier with Desjardins Capital Market. Please go ahead.

Good morning, Alain.

Good morning, Benoit.

Yes. Looking at LTL, the segment benefited somewhat from strong market condition during the pandemic and the lack of supply. As we return to more normalized condition, do you see some of the LTL business flowing back to a Truckload?

I don't see that, Benoit, I mean, for sure the Truckload guys are not busy. If you think about the U.S. it's just a disaster. If you look at one of my peers in the Truckload that came out, their U.S. Truckload operation has been killed with volume. So there may be some of that, but for us, we don't see some – first of all, we never saw LTL, because we're so busy going to Truckload us, because what we unload as freight that we didn't want for sure the Truckload guys would never want that. It was just terrible freight. So, now the guys are less busy. Is there some shipment that would go from us. Let's say an LTL operation to them. I don't see that, Benoit. I mean, when we talk to our customer, they're more about -- because if you look at my quality revenue Q1 this year versus last year, my revenue per shipment is about the same. We've dropped a little bit, ex-fuel I'm talking now. A little bit, the weight also has dropped a little bit. So there's not been any significant change in the quality of our freight year-over-year. We've lost volume, yes, because of market condition and also because some of the freight that did not fit. But to Truckload guys, I don't see that. It's the same thing that we have in Canada between rail and road. The service is not the same.

Okay. That's great. And with respect to your 92% OR for USDA for 2023. Does it imply that OR needs to reach 90% at one point in the coming quarters given the start at 95% and just wondering if the 80%, 85% target over two or three years is the way somewhat given the software market environment?

You know what, Benoit, I would say that the target of 80% to 85% OR is still two, three years down the road. So for sure 2023 is going to be a soft year and we will end up with better into Q2 and in Q3 and in Q4, not because of market condition, because I don't think market condition will improve. But I think that we will do a better job at our cost. We are working really hard with better tools, better information, better training. I will just give you an example of what we've done so far. We used to run our LTL with three divisions, East, Central and West. We said forget about that. There's only two division now. So we run East and West. We used to run with 21 our deal, which is regional guys that – so we went from 21 to I think 16. So, we're doing a lot of things that to be leaner and meaner. And like I said with Kevin, we're also changing TForce Freight to be more of a real LTL carrier than just being like a half pregnant LTL carrier, little bit of package influenced into the equipment as an example. So because we run so many single axle that we can't come back with Truckload when there's no LTL on the way back. So, there's a lot of things going on plus that we're moving away from Workday at UPS into HR Oracle. We're moving from their AIS system to fleet -- for the fleet management that's going to help us have better visibility with our own system. So, a lot of good things that are on the go on the cost side. We want TForce Freight to be much leaner, much leaner. We have about 2000 doors that we don't need right now at TForce Freight, 2000 to 3000 doors too many. So, this is why we're having discussion with our peers. We just made a deal with one of our peers in Raleigh. So in Q1, when you see a gain of $5 million on our real estate in Q1 in LTL is we sold to one of our peers, our Terminal in Raleigh and we bought those. So, we're keeping all of this real estate on going. We're just in the midst of doing another deal with one of our peers in one of our terminal in Georgia. So, I mean this company will be much leaner than it is today and it's leaner today, a little bit leaner today than it was years ago. And yes, we're investing in technology, we're investing in our people, the same time. No, we'll get there guys. If we can run a 75 OR in Canada in that unionized environment with intermodal there as well, I mean, there's no reason why we can't do an ADOR. And I think like you said in one of your note, I mean, just think about the free cash flow generation at TFI. That opens up a ton of opportunity for us down the road.

Yes. No, that's great color, Alain. And last one for me, obviously, financial position is great. With respect to the large transformative deal that you've been referring to, what drives the timing later this year or early year. Do we need to see the expectation going forward to come down or is it more a matter of you have enough work on your plate with TForce Freight. So you want to be more advanced or get more visibility before doing something more transformative?

Yes. For sure. I mean, we can do anything in Q2. I mean, don't forget, like I said, someone asked me the question about Specialized Truckload. I mean Steve Brookshaw and his team have done a fantastic job at TA. So TA used to be a concern of ours. TA is not a concern of ours now. TA will do very, very well. So now the market is a concern, that's not going to change because we can't -- we don't control the market. So we're going to have to adapt and adjust and we'll do that. Now the concern that I've got is our TForce Freight. We need to renew this contract, we need to become leaner. And this is why -- this is an on-going process But we're not going to do anything of size for sure before Q3 and Q4 of 2023. But we don't want to miss the poll because we like to buy us on bad news. Bad news is always good for TFI. If you look back, I remember in 2008, 2009, this was really, really bad. And we bought TFIS from Mike Andlauer. Andlauer retail, it was called ATS at the time. So we bought that from Mike and it turned out to be a fantastic transaction for us at the time and even today. So it creates a ton of good opportunities in bad times. And I think that 2023 is going to be a tough year for the industry. And maybe into 2024, who knows. So, I mean we got a lot of opportunities. I mean we are not just talking about one transaction of size, because if you shoot only one and you lose that well you just lost. So, you have to look at one, two or three different possibilities and then you try to do the one that makes more sense for your shoulders. But there is so many things that we are working on right now. And like I said, the earlier stay tuned guys.

Perfect. That’s great color. Thank you very much, Alain.

My pleasure.

There are no further questions at this time. So, we conclude our question and answer session. I would like to turn the floor back over to Mr. Bedard for closing remarks. Please go ahead sir.

Okay, so alright. Thank you operator and thank you everyone for being with us this morning. So, please enjoy the rest of your day and if you have any follow-up questions don’t hesitate to reach out. As always we appreciate your interest in TFI International. Thank you again and see you soon for the Q2 results. Have a great day. Take care.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.