TFI International Inc. Q3 FY2023 Earnings Call

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to TFI International's Third Quarter 2023 Results Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. 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 Tuesday, October 24th, 2023. I will now turn the call over to Alain Bedard, Chairman, President and Chief Executive Officer of TFI International. Please go ahead, sir.

All right. Thank you, operator, and thank you, everyone, for joining us this morning. Yesterday, after market close, we've released our third quarter 2023 results. With weaker demand conditions persisting throughout the quarter, we're proud of our solid execution which reflects continued adherence to our operating principles. As I mentioned before, our talented team understands the importance of profitability and cash flow, reacting quickly to market shifts and focusing even more intensely on the fundamentals when trade volume weakens. We view this underlying focus on profitability and cash flow as strategically important to the TFI International growth story, allowing us to consistently invest in the business, pursue M&A always in a disciplined manner and return excess capital to our shareholders whenever possible, which, as you know, is one of our guiding principles. Taking a look at our third quarter results, we generated operating income of just over $200 million reflecting an operating margin of 12.3%. This compares to the prior year's $318 million with a 17.1% margin. Adjusted net income of $136 million compares to $181 million the prior year and adjusted EPS of $1.57 was down from $2.01. Regarding net cash from operating activities, we generated $279 million during the second quarter. And in terms of free cash flow, which we view as strategically important, we produced nearly $200 million. Given the softer market condition, these solid results, along with strong returns on invested capital across all of our business segments, reflect well on the hardworking people of TFI and the importance we place on protecting margins, especially when the freight demand weakens. It's also important to point out that when comparing to the prior year, our results reflect not only our sales of CFI last August, but the associated $76 million gain on sales along with cost incurred to transition our IT system from UPS which will provide long-term efficiency advantages. In addition, we continue to face modestly unfavorable movement in foreign exchange, I'll emphasize the results are reporting are fully burdened, not adjusted for any of these items that affect the year-over-year comparison. So let's review how each of our business segment performed. P&C, which represents 7% of our segment revenue before fuel surcharge saw a 7% decline in revenue before fuel surcharge with the number of packages also down 7%. Operating income of $25 million compares to $34 million the prior year with a margin of 23% relative to 28% the previous year. Our return on invested capital was down from 31% a year earlier and came in at a still solid 27.6%. Overall, our P&C business is operating well given the weaker demand environment and with less contribution from fuel surcharge benefiting from our unique market exposure and ability to control costs. Moving onto LTL, which is 44% of segment revenue before fuel surcharge. Our revenue before fuel surcharge was down 12% on a 4% decline in shipments. Operating income of just over $100 million was virtually flat year-over-year. Within LTL, Canadian revenue before fuel surcharge increased 5% on a 5.3% increase in shipments. In addition, the quality and profitability of our business is apparent given difficult market conditions with our operating ratio of solid 77.2% compared to 72.8% the prior year. Similarly, our return on invested capital for Canadian LTL was 19.6% relative to 23.1% a year earlier. Within the US LTL, results clearly reflect our margin resilience, especially given an important 5% wage increase to our labor force during the quarter. Revenue per shipment before fuel surcharge remained flat year-over-year while our number of shipments were down 7.5%. Our revenue before fuel surcharge of $581 million was down from $687 million a year earlier and we were able to keep our operating ratio flat at 90.8% year-over-year and improve it sequentially. Return on invested capital for US LTL was 15.2% compared to the prior year at 25.2%. Now let's turn to truckload, which is 24% of segment revenue before fuel surcharge. Amidst a very weak market condition with lower demand and weaker rates, we believe that we were able to outperform the broader market benefiting from our specialized Canadian exposure. Our truckload revenue before fuel surcharge was down 21%, reflecting not only the weaker demand, but also the sale of CFI in August '22 and to a lesser extent, unfavorable foreign exchange. Truckload operating income was $50 million relative to $97 million last year, and our operating ratio came in at 87.5% versus 81.1% a year earlier. So taking a closer look within truckload, although our specialized operation continued to benefit from self-help opportunities along with our diversity and exposure to better-performing niche markets, we were still impacted during the quarter by volume and pricing pressure. This is reflected in our new disclosure of weekly revenue per truck, which declined year-over-year. As a result of this as well as a slight FX related squeeze, revenue before fuel surcharge declined 8% year-over-year to $325 million. Our operating ratio was 87.8% relative to 79.9%, and our return on invested capital was 10.1%, down from 12.7%. So taking a look at our Canadian-based conventional truckload business, we generated revenue before fuel surcharge of $79 million, almost entirely flat year-over-year and actually up on a consistent currency basis. However, our adjusted operating ratio was 87.8% relative to 75.5%, and our return on invested capital, which was 20.6% a year earlier came in at 13.8%. This reflects a decline in both revenue per mile as well as number of miles partially offset by our ongoing focus on network density and cost control. Wrapping up the business segment discussion, logistics represents 25% of segment revenue before fuel surcharge. Our solid results this quarter reflect our operational strength and ability to control costs. We generated $416 million of revenue before fuel surcharge, which was down only 2% year-over-year, benefiting from our recent acquisition of JHT while also facing modest FX headwinds. However, on this relatively flat revenue, we were able to drive a greater than 40% increase in operating income to $41 million on a much stronger operating ratio of 9.8%, up a full 300 basis points. Our logistics return on invested capital was 15.5%, down from 21.1% the prior year. Overall, solid performance of our logistics segment benefited from better cost control, the strength of our same-day package delivery operation, the JHT acquisition, and our team's ability to successfully navigate changing market conditions. Turning to our strong balance sheet and liquidity, which is always a focus at TFI International, we were able to further enhance our financial position both during and subsequent to the quarter. First, we generated free cash flow of nearly $200 million, as I mentioned, and we ended September with a funded debt-to-EBITDA ratio of only 1.39. Second, subsequent to the quarter, we were able to further strengthen our balance sheet with a private placement of $500 million, a fixed-rate interest-only debt, bringing our overall weighted average interest rate to 4.5%, entirely fixed, with an overall weighted average duration of nine and a half years. As I mentioned many times, this financial strength is core to TFI International's strategy, giving us the flexibility to make smart investments regardless of the cycle, while pursuing strategic M&A and returning excess capital to our shareholders whenever possible. Speaking of M&A, during the quarter, we completed four additional tuck-in acquisitions bringing our year-to-date total to eleven. I'm also pleased to announce that our Board of Directors has raised the quarterly dividend by 14% and that the share repurchase program, our NCIB has been renewed for an additional year. I'll now conclude with our updated full-year outlook before opening up to Q&A. Today, we are reaffirming our 2023 EPS guidance provided in July of a range of $6 to $6.50. We're also maintaining our full-year free cash flow outlook at $700 million to $800 million, including CapEx of $200 million to $225 million. In addition, we have already exceeded a combined total of $500 million this year of capital deployed in M&A and share repurchase given our very strong financial position. And with that operator, if you could please open up the line so we can move to the Q&A portion of the call?

Thank you. The first question comes from Ravi Shanker of Morgan Stanley. Please go ahead.

Thanks. Good morning, Alain. Would love to get your thoughts on where you think we are in the cycle right now. Obviously a very interesting time kind of bouncing on the bottom, but maybe some signs of life. When do you think that upcycle comes in? Is that late '23, early '24? How powerful is it going to be? Just your overall thoughts would be very helpful.

Yeah. You know, Ravi, what we're starting to see in Q4 is improvement versus our Q3 numbers in terms of activity. But you know, small. We anticipate that '24 is probably still going to be a transition year. There's a lot of things that are happening in terms of the politics, there's an election in the US. There're issues in Europe with war and things like that. So I think that, I mean, that's what we're doing now. We're just going through our budget. And I think that I'm convinced that '24 will be a better year than '23 for us, but it's hard to have a good feel about how good this is going to be. Are we going back to normal '24 or is it still going to be more towards kind of a transition to better days, if you want to call it like that.

Got it. That's helpful. And for my follow-up, kind of just given some of these structural changes in the LTL market in the US and some of the, I mean, just with the benefit of three months of hindsight and settling down kind of how do you think the whole post-Yellow situation has played out so far versus your expectations? What do you think happens in the near term and the medium term? Do you think it can kind of set you up pretty well for '24?

You know, the fact that there have been some major changes in our industry. And I think that the US LTL industry is very well disciplined. So we went through some tough times in '23. The fact that a significant player that was probably a very low margin player has gone from the market. I think this bodes well for the LTL industry. But notwithstanding that, Ravi, our focus at TFI with TForce Freight is really on costs. I mean, yes, you know, our market share could increase, our volume will increase slowly, but our major focus is we need to be leaner and meaner over there and that's what we're doing. So we're providing the team over there with better information, financial information. During the course of Q4 and into '24, we will be providing what we have in Canada with all our LTL operations and package, financial information by terminal so that the manager could start doing a better job of managing costs. Because right now the excuse is, well, I don't know. I don't have the information, so I can't do anything about it, right? So the excuse will be gone now. The training and the education about all this financial information at the terminal level will be top priority for our EVP, Bob McGonigal; and Keith, the President of TForce Freight. So just to make a long story short about that. Our focus for us is really we have to be more efficient. We have to do better. We have to do more with less.

Very helpful. Thanks a lot.

Pleasure.

The next question comes from Tom Wadewitz of UBS. Please go ahead.

Yeah. Good morning, Alain. Wanted to see if you could talk a little bit more about how Yellow's business coming over affected performance in the quarter. I think we were anticipating maybe a sequential lift in price, but I don't know if there's like a significant mix effect within that. And then also just when you have a disruptive step up in activity that can cause some inefficiency. So I wanted to see if you could provide a bit more perspective on how that affected your results in Q3?

That's a great question, Tom. If you examine our average weight per shipment, it's increased by about 7%. This improvement is partially due to the changes in our shipments, and the exit of Yellow certainly contributed to this increase. However, in terms of pricing, we have seen that our pricing and revenue per shipment, excluding fuel, have remained relatively flat year-over-year. It's important to note that previously we were managing around 23,000 shipments. We increased that to about 26,000, but we've now adjusted back down to approximately 24,500 to 25,000 shipments. Throughout this quarter, we faced increased costs since we had to rehire staff to handle the volume uptick, which added to our expenses. Subsequently, we moved back closer to the 24,500 to 25,000 shipments figure, prompting us to readjust our labor force once again. One of the challenges we face at TForce Freight is the lack of financial information at the thermal level, which results in slower response times to fluctuations in volume. We're working on addressing this by providing more accurate financial information on a daily and weekly basis. Overall, our operating ratio for Q3 in US LTL has remained flat year-over-year. It's also worth mentioning that our GFP operation has seen a significant decline in revenue, but we are making efforts to improve that, and our sales team is actively working on it for 2024.

So I guess as a follow-up question, do you have any thoughts on how we should model 400 OR and also when we're modeling 2024 US LTL OR?

You know what, Tom, excuse me. I think that '24 US LTL OR should be less than 90. I'm just losing my voice, too bad. Yeah. So we should be in the neighborhood of 88 to 90.

Okay. Great.

Okay.

Thanks for the time, Alain.

Pleasure, Tom.

The next question comes from Ken Hoexter of Bank of America. Please go ahead.

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

Good morning.

So just maybe to follow up on that for a second, lots of puts and takes in US LTL this quarter. There was the $5 million ongoing charge. Maybe you can talk a little bit about when you start transitioning from the UPS network, and then you start eliminating those contractual charges, the ground freight pricing. Is that something that continues to fade away? I just want to be able to step back and understand kind of how we should think about the US LTL and then your near-term target of moving sub-90 and your long-term target of getting to, you know, as much as 80%.

Yeah. So the transition from UPS at the latest, I mean, we've done, like, Q1 of 2024. So what we've done so far is financial, so we moved Oracle to our own Oracle financial system. We did HR as well. We did HR in the summer. We also did the fleet in September. So we moved from UPS fleet management to our own system. So the only thing really of importance that's left is the housing of our edge system. So that's the only thing really left with those guys. So to me, all these transition costs, all these excess costs should be things of the past, probably into '24. But for sure, you won't see anything like that into after Q1 of 2024. Now, in terms of our GFP, last year, we were just flying with that, doing really well. This year, starting Q1, I mean, our revenues started to drop. I mean, we had some customer issues that we have to fix which we have been fixing and working on. And now we're starting to see revenue of GFP slowly picking up again. Our volume at GFP is down, like I said, big time, like 40% and this is not normal. So we had some issues with certain customers, but we're working with them and we're going to fix that. And it's coming. Now in terms of the LTL, like I was saying, I've been seeing the plan. I'm going to be with the guys tomorrow, and talking about their plan for '24. But I can't see us coming up with a plan with an OR of 90 plus. Okay. I think that the market is still going to be soft, but we can't blame the markets for that because us, we have a lot of work to do in our cost. So even if the market stays soft like it is now, I think that TForce Freight team will definitely improve. So this is why, to me, when we have a target for '24 to be in this 87, 88 range, I think it's reasonable. But this is me talking before meeting those guys tomorrow. I hope that's their plan because to me, that is a reasonable plan. We'll see. But the fact that this market probably will stay soft, even with the disappearance of a major player, that's the best that we can read so far. If I'm wrong and the market improves, so now even better, but the focus and I'm repeating that at TForce Freight, we have to be more efficient. We have to reduce our costs. We're going to be providing them financial information now by terminal, which they never had, which we have in Canada. So think about it, Ken. Look at our OR in Canada. I mean, in a very difficult market in Canada, we're able to come out in Q3 with less volume with a sub-80 OR. Why? Because our guys are very disciplined. They manage the cost notwithstanding the market condition. They do a better job than our US team. Our US team, they don't have the financial information detail. We'll have that by terminal, and we'll start to see some improvement '24 and on.

Great. Alain, I'll ask a follow-up, but I'll keep going.

Very good, Ken.

The next question comes from James Monigan of Wells Fargo. Please go ahead.

Hey, good morning. Actually, just wanted to sort of follow-up on the broader LTL. Good morning. Follow-up on the broader LTL discussion kind of to get a better understanding of the volume and pricing trends you're seeing. It seems like there was a surge of break to pull back. Just kind of want to get some context around that as well.

Okay. So I mean, the forecast we have for Q4 and into the new year, I mean, our forecast is based on about 25,000 to 26,000 shipments a day. That is where we are seeing ourselves going into '24. So that to me is what should be normal for the company of our size for the next years to come. And Tom, what was your next question?

Essentially, the trends you're seeing in October and then you mentioned that there was a spike up in volume, and the spike down, just what was driving that during the quarter?

Yeah. Well, it's just adjustment from shippers. So you know, when Yellow closed their doors, for sure, customers called you, and then there's an action and reaction and there's been an adjustment. So this is why we went from 23 to close to 26 and back down to 24, 25 as we speak now. So but there, again, the story of TForce Freight, it's not about volume for now. It's about cost. So what we're saying to our sales team, guys, okay, try to get better freight. 26,000 shipments is normal for us in '24. That's our goal. Okay, fine. Get better shipment because we keep improving that. And the ops guys have to work on the cost. So that's how we're going to bring, okay, we're not focusing on getting more money from the customer. If we can do that, fine. If the market allows us to do it, fine. But our focus is not that our focus is really bring the cost down, okay. Be more efficient, do more with less.

Got it. Then on Canadian LTL, you're doing much better than sort of the long-term guidance you had given at the Investor Day. And it seems like we're at 12 in terms of it. So like how should we think about essentially, is that number conservative, or is that actually sort of how you still think about the business? And if not, what do you actually do think the long-term margin can be in Canadian LTL? Thanks.

I believe that in Canadian LTL for Q3, despite the volume pressures in the market, we managed to achieve a sub-80 operating ratio. Additionally, we made an acquisition in the Canadian LTL market with the Kindersley Group, which currently has a 2% bottom-line margin. It will take about a year to improve their performance closer to a 15% margin. Our focus has historically been more on the bottom line rather than the top line, and Kindersley is expected to contribute to our volume growth. Consequently, our Canadian volume for Q3 compared to last year has increased due to Kindersley. However, their profit margin is still quite low at around 2%, which will take some time to improve. The Canadian LTL market poses more challenges relative to the U.S. market in terms of conditions and revenue quality. A significant portion of our Canadian revenue, approximately 40%, is derived from intermodal freight using rail, which enables us to maintain a sub-80 operating ratio comparable to the U.S. environment. It's important to stress that our Canadian team has the necessary information to make informed decisions daily, unlike the U.S. team, which currently only has access to labor cost data per shipment as of October last year.

Thank you.

Welcome.

The next question is from Jordan Alliger of Goldman Sachs. Please go ahead.

Hi. Good morning. You guys made some pretty good cost improvement.

Good morning, Jordan.

Good morning. Looking at things like cost per shipment, which was down quite a bit year-over-year and flat sequentially despite the labor increase. I'm just curious if you could provide a little more color on where you think you've made some of that progress. And how do we think about costs per shipment from here? Thanks.

Yeah. Yeah, so you know, those guys today, with the increase in salary to our union labor force, we are a little bit ahead of our target. So our target should be, you know, in a neighborhood where we're right now about 5% or 6% more than that, but the target for '24 drops again. So the guys will have to do a better job. So how can you do a better job? It is you have to act and react, okay, in a much faster way. We're also providing our team with a line-all software of the 21st century, right. So this is going to be up and it's in the trial phases right now. Based on what the guys are saying, this is going to be fully implemented into '24. So there, again, with better information and better tools for our line-all guys, they'll be in a position to shape costs. So I can't really tell you what our labor cost per shipment is. But what I can tell you is that, even with paying our employees more, our labor cost shipping today is less than a year ago.

Got it. And then just as a follow-up, I know we've talked about yield and mix and what have you. I don't recall you touching on sort of like core pricing, ex the effects of fuel and mix. And just as contracts have come up, what you're seeing, especially since the Yellow bankruptcy? Thank you.

Well, I think that for Q1 and Q2 of '23, we were starting to see a little bit of pressure on rates in the US LTL market. Now with the fact that this thing happened, okay, with Yellow, the pricing pressure has alleviated. I'm not saying that GRI and all this is going to be great in '23, '24, but at least the pricing pressure because of too much capacity in the market starts to alleviate in Q3. And I think it's going to be a thing on the past for Q4 and into '24.

Thank you.

The next question comes from Kevin Chiang of CIBC. Please go ahead.

Hi, Alain. Thanks for taking my question. Looking at the US LTL division, it seems that the operating ratio you expect for next year, around 87 or 88, is impacted by the higher wage rate in the first year of your new deal, which I understand is set at 5% and will decrease thereafter. As you move past that wage increase, it seems plausible that you could reach an operating ratio of 85, perhaps more realistically in 2025. Is that an accurate way to consider the trend of the operating ratio as wage growth slows down, while you continue to see yield growth and presumably reductions in unit costs?

Yeah. Well, absolutely, Kevin. Because you know, it's a huge hit. When you have to give 5% more to your employee right there, okay, and employee cost is a big component of our costs, right? So you're absolutely right. I mean, that 5% is really a big hit for year one. But then when you get to our new contract with year two, three and four, I mean, we're not talking about 5%, right. So I think it's about 2%, something like that. Because overall the contract is just under three over five years, right. So that's a huge headwind for us now because all these costs, we have to manage them. We've got to try to pass on more to customers in terms of pricing, which we haven't done because if you look at our average revenue per shipment, I mean, we're flat year-over-year. So really, this increased cost per hour, we have to swallow it within our operation. So again, it's by being more efficient that we're able to come up with an OR that's about stable year-over-year with 5% more money to our employees. So time is on our side for sure, because down the road, we will not raise the salaries as much as '23 and we're still going to be working on, you know, reducing the miles, reducing the hours, having a better planning, talking about my line-all operation, that's going to help big time. I mean, its new tools with AI that's really going to help our line-all division be in a better position to forecast because every day it's a different story, right. So I'm convinced that '24 will see major improvement versus '23 in our US LTL operation. So this is why I'm convinced that we could get to the 87, 88 OR, and then we're on track to be closer to 85 in '25. Our goal has always been to be closer to 80, but we have to go step by step.

That's helpful. As my last question, you've mentioned normalized earnings for your company, indicating a range of 8 to 10. While you see 2024 as a transition year, will you be able to achieve the lower end of that range, or do you think the market will remain quite challenging?

Our truckload is really killing us. If you look at Star in the US, the best truckload company in the US. They had a very difficult Q3 and we were the same. Really, for us in '24 is how is our truckload, okay, specialty truckload going to come back. To me, if our truckload is coming back slowly to a more normal environment, I think that '24, we should be in a position to get closer to 8 than 6.50. So truckload is a big story for us this year. LTL and US LTL volumes in Canada, if we could start to see a little bit of growth there and M&A too, I mean, for sure JHT will help us big time to get closer to 8. And we have other things in the pipeline that could be also interesting for '24. So I mean let's talk about '23. Get to 6.50 in '23 and then, guys, we got to get closer to 8 in '24. And we did 8 in '22. So I mean that's a nice target to be at an 8 in '24.

I agree. That's it for me, Alain. Thank you for taking my questions.

Thank you.

The next question comes from Brian Ossenbeck with JPMorgan. Please go ahead.

Hey. Good morning, Alain. Thanks for taking the question.

Good morning, Brian.

Hey, just wanted to follow up on the M&A and maybe get your thoughts on capital deployment and the rationale and timing behind the private placement. What are some of the best opportunities to deploy capital you see right now? There are some bigger deals that are getting a little more interesting as the freight recession lingers. And then if you can offer some comments on the last time you said you had enough doors in US LTL, so maybe Yellow's auction doesn't interest you, but comments on that would be helpful?

Yeah. Yeah, you know what, Brian, I mean, the reason we did that $500 million placement is because it's not because we don't know what to do. We're just getting ready to do something right. So if you look at what we've done this year, I mean, we've done about $100 million of investments in terms of M&A. I think that we're going to do more than that in '24. So this is why we got set up with this private placement just in order to get a little bit more dry powder for us to be in a position to do the good things that we want to do in '24. In terms of our pipeline, our pipeline is really strong in terms of M&A. Hello?

In terms of a quick follow-up, any thoughts on the Yellow bankruptcy auction? It seems like you have enough doors in the US now, but wanted to see if there's any particular assets that looked of interest to you. And then maybe just as a quick follow-up, can you just give us a sense of how density is tracking in TForce Freight? It's always a big part of the story here, some comments on stops per truck or miles between stops now that you have a big step up in volume in the third quarter. Thank you.

Yeah. Yeah, you know what, Brian, we've said it many times. Our focus in the US has always been logistics and LTL. And to a certain degree, specialty truckload if there's something that makes a lot of sense for us to do. In terms of improvement at TForce Freight, our miles per stop between each and every stop has improved. This is helping us reduce costs, but we're still a far cry from what we do in Canada. So, as an example, in Canada, we do about 5 miles between each and every stop. In the US, we used to be doing double-digit miles over 10. So now, with less volume than two years ago when we bought the company, our average mile per stop is not 5 in the US, but it's not 10 anymore. So it's single-digit now. So slowly, we're doing more in terms of having drivers picking up freight and driving less. And when they drive less, they cost less money because they don't use fuel. There's less risk of accidents because they're not driving; they're picking up freight. So we are on the right track, but we're still far from the efficiency that we have in Canada. But this is work that needs to be done between our sales team and our ops team so that the sales team understands what we're looking for. So TForce Freight used to be a sales-oriented company when it was owned by UPS. Since it's been owned by TFI, it's not a sales-oriented company; it's an operations-oriented company. So the operation talks to sales about what they want, what they need to improve density. It's not the other way around where sales, this is the customer, this is the shipment, and now you have to take care of that. No. This company is moving into an ops-driven environment, and it's the operation that works with sales and says, hey, this is what we want, this is the area, this is the kind of freight we need because I'm not a jack of all trades anymore.

Got it, Alain. Appreciate it. Thank you.

Very good, Brian.

The next question comes from Scott Group of Wolfe Research. Please go ahead.

Hey, thanks. Good morning, Alain. Just want to follow up on the M&A discussion. So it sounds like more M&A next year. Should we be thinking about a sort of a larger, more transformational deal? Is this just more of the tuck-in deals? And how do you balance M&A with the potential for a big buyback just like the stock is now, basically back to pre-Yellow levels? So how do you balance on that?

Well, you know, buyback, we really love buyback. So I'll give you an example. We just renewed our NCIB. And we have an order to buy 1 million shares depending on the price. So this is the focus depending on the price, we're there; we've renewed our NCIB, and we're going to be. If there's a major transaction and I think if you look at history, normally you have something of size in '24. We did a lot of nice tuck-ins in '24. We're probably very close to being done for I mean '23. We're probably close to being done in '23. We got this $500 million placement just to get ready to be in a position in a better position in terms of M&A. Our leverage is 1.39 right now. We should be closer to 1.2 at the end of the year. So we have a lot of dry powder on our line of credit with our bankers. Now we have cash. We got $300 million to $400 million of cash at the end of the year. So we're well positioned to do something of size in '24. Now, it's always the same story with TFI. There's always more than one file that we're working on. I think the possibility of doing something of size in '24, I would put that at 65% to 75%.

Okay. At times, you've sold or spun assets. Is that something you're currently considering? Are there any assets that could be monetized?

No, not in '23 or '24, Scott. Maybe that's something that may happen in '25, depending on what happens in '24. We'll see.

And then just lastly, you made a comment earlier that you're not sure if it's the right environment for big LTL GRIs or something like that. And I know the GRI you announced earlier this month was a bit lower than last year's GRI. We just had Saia announced their GRI this morning, and it's actually a point bigger than last year. So maybe just I want to understand why you think it's not an environment more supportive for LTL GRI and pricing.

Scott, you can't compare OD, Saia with TForce Freight. So our reputation is not the same, you know. So we have to gain reputation. We have to improve our service. We have to improve our costs, but we'll also have to improve our service because for years and years, we're hiding the truth. This is why us in Canada, we could do these kinds of things. We could be the leader. But Scott, I'm sorry, but in the US, we have to be followers today. We have to follow OD and Saia and can we be in the same league as those guys? No. I mean, we were not as good as them. We'll be, but we're not today. So this is why when we talk to our teams, we say, guys, let's be cautious on that. And Saia and OD are the big guys. We do really well. Fine. Us, we still have lots of work to do in terms of service, in terms of costs. Maybe next year we'll be in the same league. Maybe it's going to take us another year or two, but we're not there. So we cannot be as aggressive on pricing as these guys are. We have to be very aggressive on our costs.

Makes sense. Thank you, Alain, for the thoughts.

Pleasure, Scott.

The next question comes from Konark Gupta of Scotia Capital. Please go ahead.

Thanks, Operator. And good morning, Alain. Hope you're doing well.

Good morning, Konark.

Good morning. I just wanted to circle back on TForce Freight's yield in the third quarter. It seemed to have come down sequentially. And I'm just curious, you know, the Yellow bankruptcy situation definitely created a more balance between demand and supply. The LTL market is already pretty consolidated and concentrated. So I'm just curious like what would have contributed to that yield decline in Q3 versus, you know, the first six months of this year?

Well, I think that if you look at the revenue per shipment, I mean, it's flat. The yield is lower because the shipments are heavier. So there's a little bit of a trade-off. So really, Konark, us, what we look at is, hey, what's the revenue per shipment? And our goal is always to increase the weight because we are being paid by the weight. Now, when you increase the weight, you have to reduce a little bit the rate. So it's a balancing act. And like I said with Scott earlier on, I mean, we're not perfect. I mean, it still needs some improvement, our pricing team, you know it's we lack a lot of discipline in the past that we're trying to correct, but that takes time with customers. We want our customers to have a great experience when they deal with TForce Freight. And we had a lot of issues in the past with the service; our equipment was so bad. I think that for the first time in the MD&A, we're showing the age of our trucks at TForce Freight. We're down to about 4.6 average age versus when we bought the company, we were closer to 8. That's issues with service, for sure, I mean with old trucks. So slowly, we're going to get to a better quality of revenue. But we have to improve our service. We have to improve our customers' experience with us. And this is why, you know, it's a balancing act. This is like when you're trying to buy, let's say a car. Okay. So you can't sell a car that is not a Bentley at Bentley's price.

Right. It makes sense, Alain. Thanks for that color. If you can follow-up on the operating ratio. So I heard you saying 87% to 90% almost right next year, so that's a decent improvement, clearly. But I think previously you kind of alluded to, you know, probably as low as 85%. I'm just wondering like is it market forces or is it market driven that you are not expecting 85% next year? Or is it something else in that equation that has changed?

It's currently a challenging time for volumes. While the departure of Yellow has been beneficial, the market in the US is still experiencing overcapacity, albeit to a lesser extent. Therefore, aiming for an operating ratio of 90 in 2024 might be too ambitious; a target closer to 87 or 88 seems more realistic. We are making gradual improvements, but our goal is to achieve shipment volumes in the range of 25 to 26 per day. Any enhancements in volume or pricing, perhaps through a General Rate Increase, will be modest. Significant improvements need to come from operational efficiencies, particularly regarding line costs and P&D expenses, if we want to reach targets of 88, 85, and eventually closer to 80. We also have to navigate the current environment. For instance, in Q3, one of our competitors reported a non-union operating ratio of 85. Given that we are unionized and facing challenges due to the previous lack of investment in TForce Freight, we are under continual improvement and transformation. While our GFP Logistics operation is currently down significantly, I expect it to recuperate in 2024. I am proud of the progress made at TForce Freight since acquiring it two years ago when it was operating at a loss; now it's nearing a potential 10-point margin in a softer market compared to last year.

Thanks for taking my questions here. There's been a lot of talk on US LTL, understandably, given how much you've improved and driven value from that business. But can you go back to the truckload segment a little more in detail, how comfortable are you that this kind of $100 million adjusted EBITDA level is close to the bottom? Should we see some negative seasonality into the fourth quarter? And are we at a floor there where we feel pretty good about where we're bottoming? And it's really just a question of how long it takes us to get better and how quickly that can happen? Thank you.

Great question. I believe that if we aren't at the lowest point, we're very close to it. The performance in specialized truckload has been disappointing, evidenced by our operating ratio of 87 or 88. However, it gives us some comfort to see that in the Van sector in the US, most competitors reported a 95 operating ratio in Q3. So far, it's been quite disappointing. When I spoke with Steve, our leader, the consensus is that we won't see significant improvements in Q4, and it may take until 2024 before we start seeing any improvement in specialized truckload. I plan to meet with the truckload team next week to discuss our plans for 2024. My current feeling is that 2023 has been challenging for truckload, and we are likely at the lowest point. It seems we'll remain at this level for at least the next six to twelve months. Perhaps I am mistaken and things will improve sooner, but we prefer to be cautious. Fuel is a concern, particularly the fuel surcharge, which becomes an issue in a soft market. Shippers can take advantage of this by pushing us on fuel surcharges and rates. Currently, it’s not so much about the rates, but rather the reduced activity in our truckload operations. Our revenue per truck per week has declined, and so have our miles due to the decrease in activity. While our rates are not as problematic, the pressure on fuel surcharges from shippers impacts us more than the base rate. Thus, we are seeing two main issues: decreased activity and lower revenue per truck coupled with the squeeze on fuel surcharges.

Okay. Thank you.

The next question comes from Elliot Alper of TD Cowen. Please go ahead.

Great. Thank you. This is Elliot on for Jason Seidl. Maybe over on the logistics side and the JHT acquisition. I guess how's the integration going so far? How does their margin profile maybe compare to your core logistics margin? Maybe how we should think about that in Q4? I know they're a pretty niche player in the auto space. Curious if they're being affected by the auto strikes as well.

Yeah, very good question. So, no, they're not affected by the auto strikes at all. Okay, number one. Number two is their profile of margin is similar to ours. They're not in the business of 2%, 3%, bottom line because we're not big fans of that. You know, we're not big fans of 2%, 3%. So they're close to ours. And then you know I think that JHT will do better than the average TFI Logistics earnings in '24, '25. We see probably in '24 a little bit of a dip in volume at JHT versus '23, but we see a major improvement for '24, according to the forecasts that I've seen so far. In terms of the integration, I mean, this is so new to us. We're just learning with the team there. I mean, JHT is a fantastic company. It's a great acquisition for TFI Group of Companies. As a matter of fact, after this call, I'm going to be with the management team of JHT to talk about their plan for '24. And you know I think that even with less volume I think that JHT will do as well in '24 as they did in '23. So very happy with this transaction and this is the kind of deal that's going to help us create value for our shareholders long-term.

Got it. And then maybe separately on logistics. You know, as a whole, I mean, you had some organic operating income growth, I believe, in the quarter. I think you called out some strength in the same-day package business. Any other color there on this would be helpful. Thanks.

Yeah. You know what, our logistics arm, our last mile operation in the US is doing really well. I mean, our volume is about stable year-over-year in a more difficult market. We're down a bit in Canada because one of our customers we just cut him off because of issues with credit. So this is why in Canada, our volumes are down a bit year-over-year in Q3. But we have a new business coming on stream for Q4. So probably Q4, we're going to be flat year-over-year in terms of volume, again in a softer market in '20 versus '22. So we're doing well on the medical side of things. The e-commerce for sure, I mean e-commerce is not as good today as it was two years ago. So it's a little bit of a fight. But we have a fantastic team over there that's doing a great job. So volume is about stable, but profit is up. If you look at year-over-year, I mean, JHT is helping, US logistics is also helping. Our volume is down at WW quite considerably because of market conditions, but the bottom line is down just a few points. So all-in-all our logistics is performing really well and I think that we're going to do even better in '24.

Great. Appreciate it.

Welcome.

The next question comes from Cameron Doerksen of National Bank Financial. Please go ahead.

Yeah, thanks. Good morning.

Good morning.

So maybe just a quick couple of questions on the packaging courier business. Just wondering if you can talk a little bit about the outlook as we head into the peak volume period for that business. I mean, what does it look like this year year-over-year? And then maybe secondly, just on the margin, some pressure year-over-year. I mean, how much of that is I guess maybe a little bit lower volume environment, but how much is also perhaps the benefit from or the lack of benefit from fuel surcharge revenue?

Right. Absolutely, Cameron. I mean our volume is down 7%, right. So if you look at our piece count and all that, if I remember correctly, I mean, we're down about 7%. On revenue, we're down $8 million. And basically, we're down $8 million on operating income, Q3 year-over-year. Some of that is attributable to less volume, okay. Our cost is about stable, but the volume is just killing us. And because we're so dense, because we're so good, when fuel is expensive, we make a little bit of money on fuel. When fuel is not expensive like it is now, that profit is gone. So that is a little bit of a headwind for our Canadian LTL package. When fuel is low, we don't make money on fuel. When fuel is high, we do well on fuel because of our density which is very different than our US LTL operation because we never make money on fuel in the US LTL world like today. Now that's going to also help us because our MPG because of the new equipment is doing way better. There's about 17%, 18% saving on our new trucks versus the old trucks that we used to run. So over time, when fuel is going to go back a little bit higher, that should help us in the US as well. But that's the story. The way we see Q4, Cameron, into the volume for our P&C, volume will not improve year-over-year. The market is too soft. And us, we're focused on bottom line like we've said many times. This is why, guys, let's protect the margin and let's not fight with customers that don't want to pay the fair price.

Okay. That's helpful. And maybe just a quick follow-up just on I guess how we should think about CapEx for FY 2024. Obviously, you haven't set your budget yet, but just kind of framework, is there anything, I guess, directionally you can tell us about CapEx as we look into next year?

I would say about the same as this year, Cameron. So far what I could think of. So for sure, we did a lot of CapEx in TForce Freight. That was well warranted. And we will continue to make sure that the average age of our fleet keeps going down closer to 4 versus 4.7 it is right now. Our trailer fleet needs some improvement too. So it's underway. So I would say overall for TFI, CapEx should be in the same league as what we've seen in '23.

Okay. That's great. Appreciate the time. Thanks.

Thank you, Cameron.

The next question comes from Bruce Chan of Stifel. Please go ahead.

Hi, good morning. This is Andrew Cox on for Bruce.

Okay. Good morning.

Oh, sorry, making sure you got me. Hey, I just wanted to get any color on hiring and retention, acknowledging that the facility managers are still lacking the necessary IT systems to react as rapidly as you'd like. I just kind of want to know if there's been any impact of tens of thousands of teams that are becoming available on the market has been easier to add post-Yellow? And do you feel you need to add and need to manage the target of 26,000 shipments per day next year? Thanks.

No. We don't need to add any management, that's for sure. And your question is really a good question and we can't really answer that. So those managers have not been trained in managing costs. So that's what we're going to do in '24. Once we provide them the financial information, we're going to train them. Now, if you ask me what's going to be the success ratio of those managers that have never done that, it's hard to say. So we know one thing for sure is that it's not going to be a 100%. So we will have guys that are going to make it and probably we have guys that are not going to be able to make it and pass the test of being able to manage costs. It's a transition year for these guys over the course of '24. And to tell you what the success ratio is going to be, I don't know. One thing we know is that they've never done it before, so we'll see how good these guys could be. Now listen, if you look at TForce Freight two years ago and TForce Freight today in terms of the executive, Paul, the President, has retired. The pricing guy, David Myers, has gone away. Eileen, the sales leader, has been replaced. So the fleet managers is new. So at the top level, we have a lot of new blood here.

Thank you for that insight, Alain. Could you provide some information on the volume churn? There were fluctuations during the quarter, and I would like to know if you believe those were due to normal seasonal patterns or if it's more about Yellow freight finding a new home. Other executives have mentioned that Yellow freight has been shifting between carriers based on their service levels. I'm looking for clarification on whether this is related to seasonality or the relocation of Yellow freight. Thank you.

I think that we've said it. Day one, the shippers, they go wherever they can. Then they start reacting. That is probably, I don't think that is seasonality so much as just shippers trying to find a home where they feel that it's a better deal for them. Well, thank you, everyone, for being on this morning call. We appreciate your interest in TFI International. And as always, if you have any follow-up questions, please don't hesitate to reach out. Please enjoy your day and we'll speak soon. Thank you again.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.