TFI International Inc. Q1 FY2024 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by. Welcome to TFI International's First Quarter 2024 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 instructions 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 can cause actual results to differ materially. Also, I'd like to remind everyone that this conference call is being recorded on Friday, April 26, 2024. I will now turn the conference call over to Alain Bédard, Chairman, President and Chief Executive Officer of TFI International. Please go ahead, sir.

Well, thank you, operator, and welcome everyone to today's call. Our results, released yesterday after the close, show continued performance to start the new year in the context of a particularly weak freight environment. Our self-help opportunities, along with the continued hard work of our many talented team members, have again helped TFI International deliver solid performance. Especially during weaker freight cycles, we sharpen our focus on the long-held operating principle that has helped TFI expand rapidly over the years through organic growth and very strategic M&A while always maintaining a strong financial foundation through our emphasis on profitability and cash flow. We then use our excess cash to intelligently invest and return excess capital to shareholders when possible. Starting with a high-level overview. During the first quarter of the year, we produced operating income of $152 million versus $166 million a year earlier, with an operating margin of 9.4% relative to 10.7%. Our adjusted net income of $106 million was down from $116 million in the first quarter of 2023, and our adjusted EPS of $1.24 was down from $1.33. We produced just over $200 million in net cash from operating activities versus $232 million last year, and we generated positive free cash flow of $137 million relative to $196 million. Taking a step back, I'd like to point out these results. First, they reflect a solid performance given the economic cycle of the US LTL business, which is picking up steam. The ongoing transformation is rooted in our overarching focus on service quality and revenue per shipment. In particular, we saw tonnage inflect positively in the quarter, leading to a 12% increase in revenue per shipment. A second observation is that we see very tangible opportunity ahead to drive much stronger LTL results. There is much work to do on costs all while being only in the early innings of our service-driven sustainable top-line improvement program. With that overview, let's take a closer look at each of our four business segments. P&C now represents 6% of our segment revenue before fuel surcharge. As you know, this market is experiencing softer volume across the industry and our revenue before fuel surcharge was down 8%, driven primarily by a lower weight per shipment and slightly fewer shipments. Our P&C operating income came in at $18 million or a margin of 18%, down from $27 million or a margin of 24% in the prior-year quarter on lower operating leverage. Our return on invested capital was still a very solid 25.7%. Moving on to LTL, which is 42% of segment revenue before fuel surcharge, we generated revenue before fuel surcharge that was down 1% over the past year, while our operating income, despite lower gain on assets held for sale, actually grew significantly to $67 million, which was up 15%. This reflects a 140 basis point increase in our operating margin. Looking more closely at these strong results, our Canadian LTL revenue before fuel surcharge grew 8% year-over-year on a 9% increase in shipments and our claim ratio remained low at 0.2%. Return on invested capital for Canadian LTL was 19.1%. Turning to US LTL, revenue before fuel surcharge of $552 million was down 3% over the past year, with the decline driven by our asset-light operation GFP. In the core LTL business, we drove tonnage up 7%, weight per shipment up 13%, and revenue per shipment up 12%. In addition, our operating ratio for US LTL improved significantly, up 310 basis points to 92.6%, and our return on invested capital was 15.2%. Truckload is up next, now 24% of segment revenue before fuel surcharge. This market remains weak and we produced revenue before fuel surcharge of $398 million, which was down 4% year-over-year, reflecting a decline in miles with pricing stable and specialized, but under some pressure in the Canadian van division. Looking closer, within Truckload, our specialized segment generated revenue before fuel surcharge of $321 million, which was down 5%, with an operating ratio of 89% versus 85% last year. Return on invested capital for specialized truckload was 9.5% compared to 14.1%. Moving on to the Canadian base conventional truckload, we slightly grew our revenue before fuel surcharge to $78 million, with an adjusted operating ratio of 91% compared to 81% a year earlier, and our return on invested capital was 10.4%, down from 21.3%. Speaking of Truckload, as you know, earlier this month we closed the acquisition of Daseke, a business very complementary to our own, serving many attractive specialized and industrial end markets and providing us even greater scale. You'll begin to see the Daseke contribution in the second quarter, and similar to other acquisitions of ours, we see an immediate opportunity to enhance financial results. Rounding out our business segment review, Logistics is 27% of segment revenue before fuel surcharge and again produced very strong results this quarter, outperforming the industry. Our revenue before fuel surcharge climbed 24% over the prior year, and our operating income grew 27% to $40 million. Our acquisition last summer of JHT continues to benefit our results. For the quarter, our Logistics operating ratio was 91% and return on invested capital held steady versus the prior-year period at just 19%. Moving right along, I'll provide an update on our balance sheet and liquidity. For starters, we generated free cash flow of $137 million during the first quarter. Adding to our liquidity near the end of March, we closed a $500 million term loan at an attractive rate with tranches due March 25 to March 27. We ended the quarter with a funded debt-to-EBITDA ratio of 1.6. This very solid financial foundation is a core part of our strategy, allowing for smart investment cycle in and cycle out. In addition to the fourth quarter acquisition of Daseke during the March quarter, we completed acquisition of Hercules, a well-run LTL carrier that adds to our cross-border capabilities. We also were proud to declare another dividend during the quarter with our Board of Directors again approving $0.40 per share paid on April 15, a level 14% higher than the prior-year quarter. Wrapping up with guidance, today we introduced our 2024 EPS outlook range of $6.75 to $7, and we expect full year free cash flow in the range of $825 million to $900 million, with net CapEx of $275 million to $300 million. We also plan to pay down $500 million to $600 million of debt, targeting a funded debt-to-EBITDA ratio under 1.7 by year-end. All right. With that, operator, if you could please open the line, I'd be happy to take questions.

Thank you. We will now begin the question-and-answer session. Our first questions come from Brian Ossenbeck with JPMorgan. Please proceed with your questions.

Hey, Alain, good morning. Thanks for taking the question. So maybe you can just start with...

Good morning, Brian.

...some of the assumptions under the EPS guidance, because I think last quarter you gave us a little bit of a preview before the Daseke acquisition closed. EPS probably starts with a $7, so that's still within the range, but a little bit lighter than that on the lower end. So just wanted to see what had changed and maybe what you saw with Daseke initially.

Daseke is not related to our current situation. The first quarter has turned out to be much worse than we expected. Our EPS for Q1 is down compared to last year, primarily because the Truckload sector has faced significant challenges. When we look at our U.S. and Canadian peers, the market for Truckload is very tough right now. As a result, instead of projecting an EPS of over $7, we're now adjusting our expectations to around $6.75 to $7. Our P&C division in Canada also performed poorly in Q1, but we believe we can improve that in the coming quarters and return to our usual performance. However, it's important to note that P&C will only account for about 4% of our revenue after the Daseke acquisition, so it won't be a major concern for us in 2024. The real issue lies with the Truckload market. In Canada, we are also dealing with the issue of Driver Inc., where we face competition from companies that do not provide benefits to their drivers, which is impacting us significantly. Our operating ratio is down 10 points year-over-year, and we don't expect much improvement unless the freight environment improves significantly. In the U.S., we are performing relatively well compared to our peers, but we believe the freight recession may continue until at least 2025. With the upcoming election year in the U.S., many of our customers are hesitant and waiting to see the outcome. Therefore, we had to revise our EPS forecast down from over $7 to around $6.75 to $7.

Thanks for that, Alain. Appreciate it. So, the follow-up would be just on TForce Freight. In that backdrop you just outlined with the freight recession continuing, maybe you can talk about some of the momentum that seems to be building there, especially with the weight per shipment moving up? Looks like some nice movement in yields and volume and just things moving looks like in the right direction. So, can that continue even if you do have that sort of backdrop you outlined with the broader US freight market?

We've been educating our sales team to focus on freight that aligns with our model. We've told them not to bring shipments with an average weight of 1,075 pounds like before. Remember, we acquired this company three years ago in May, and it took about two years to convince our team that since our pay is based on weight, carrying lighter shipments doesn't make sense. Changing this mentality has been slow. Additionally, pricing was poor, which made us less competitive with heavy shipments. We needed to shift our culture and improve various aspects. However, there's still work to be done. We still travel too many miles between stops, which hampers our density compared to Canada, and we aren’t picking up enough freight at each stop. Improving these areas is crucial for TForce Freight to achieve an 80% to 85% operating ratio in the future. We acknowledge that the freight environment, even in LTL, is soft. Our current focus is on several factors: weight, density, and reducing costs. We're aware that we're overstaffed and have outdated technology, leading to inefficiencies in servicing customers. We are actively addressing this by planning to improve our freight billing system by the end of the year. Currently, we face significant billing issues and too many staff members. Our new tools, particularly for linehaul, are expected to enhance our services, as missed pickups are improving. We're putting more freight on the road compared to a year ago and relying less on rail. Previously, rail was a significant part of our linehaul, but that’s decreasing, and our own linehaul is gaining speed. I expect that within a year or two, about 60% of our linehaul miles will be managed by our own team to further improve service. There’s still much work ahead, but we know the strategy, and we're beginning to see some improvement in our execution.

All right, Alain. Thanks very much. Appreciate it.

Thank you, Brian.

Thank you. Our next questions come from the line of Jordan Alliger with Goldman Sachs. Please proceed with your questions.

Yeah, hi. Good morning. Just to sort of follow up a little bit...

Good morning, Jordan.

Good morning. I know you mentioned sort of early innings in service improvements, so it's good to get a little bit more color on what you feel you've accomplished and what's next to come to get service. And then, even though it's early innings, are you at the point in service, again, assuming the freight market cooperates, where you could have sustainability in that growth and tonnage after a first quarter that saw an inflection?

We believe that monitoring missed pickups is crucial for improvement. Currently, we miss about 2% of our pickups, which varies by terminal quality. Since freight relies on pickups, missing them directly impacts revenue. In California, for example, we are enhancing our approach to ensure we don't miss pickups, thereby building customer trust. Additionally, our billing system has been a longstanding issue that's affecting customer relationships, and we aim to resolve it in 2024. On the topic of linehaul freight transported by rail, we cannot expect timely deliveries since rail services often lag behind road services. Compared to our U.S. peers, we handle a significantly greater amount of freight using rail, which we plan to improve over time. Our focus for company growth includes increasing the weight per shipment, which remains low relative to U.S. competition. In Canada, we have a higher weight per shipment due to a better understanding of the market, and we will continue enhancing this aspect over the next couple of years. We're currently in the initial stages of development for our TForce Freight LTL business. We still have challenges with costs, excessive miles, and freight density. In Canada, we’ve achieved an operating ratio that, while it has increased, is still commendable given the market conditions. Our goal is to replicate that success in the U.S., striving to achieve more with less.

Got it. And just as a quick follow-up, taking all that together, is it still a thought you could do around an 88 OR this year?

Well, when I talk to my guys, okay, they are convinced that they could do it. I had a little bit of concern when I look at the environment and the market right now. I would never, Jordan, anticipated that '24 was going to be so rough in terms of the freight environment. I mean, I'm telling you, if you would have asked me six months ago, what do you think about early '24, I would never have said that it would be that bad. I mean, look at the truckload guys. Some guys are losing money. I mean, this is probably one of the worst markets we've seen in the last 30 years.

Thank you.

You're welcome.

Thank you. Our next questions come from the line of Ravi Shanker with Morgan Stanley. Please proceed with your questions.

Thanks. Good morning, Alain. Just on that point, on the LTL side, how much of that path to 88 OR is macro, so, depending on the cycle coming back versus idiosyncratic actions, I mean, best practices from the Canadian operation that are putting into the U.S. operation. And so, how quickly can you implement that idiosyncratic action?

When discussing the business, we don't focus on the market, as it's beyond our control. Our belief in reaching an 88 operating ratio is based on current market conditions and not on potential future improvements. We don't plan for changes in the market since we can't influence it. What we can influence are our costs, efficiency, and productivity, which is our main focus. Regarding the market, we should concentrate on managing the types of freight we handle, specifically working on heavier freight rather than lighter freight, as this is an area where we are gradually making progress. We should aim to increase the amount of freight we handle per stop, which is within our control when we engage with customers effectively. The target of 88 for 2024 relies on our ability to better manage costs and improve productivity by increasing weight per shipment. While our revenue remains stable, our shipment count has decreased, which assists us with costs since we are handling fewer shipments for the same revenue. This trend emphasizes that, while we can't control the market, we can manage our expenses and the freight we pick up and deliver.

Got it. Helpful. And maybe as a follow-up, you said earlier that you're not expecting an inflection in the cycle until 2025. So just to understand, is your full year guidance for '24 just based on normal seasonality off of a 1Q number, or are you accounting for any improvement at all this year?

No. The way we see it, Ravi, is that this is going to be not a great year in terms of the freight environment.

Okay. Understood. Thanks, Alain.

You're welcome.

Thank you. Our next questions come from the line of Tom Wadewitz with UBS. Please proceed with your question.

Yeah, good morning, Alain.

Good morning, Tom.

Yeah, let's see, there's a lot going on in transports these days. Wanted to get your sense on acquisitions. You've had very, very good skill at identifying value and taking out costs, and doing acquisitions. Historically, I think with TForce, obviously, the market backdrop is tough, but it seems like it's been maybe harder to fix than you might have anticipated or maybe just takes longer. Alain Bédard: Yeah. And then you've got a pretty tough truckload backdrop and you've got a big truckload carrier you just bought. So, I guess a question is, do you consider slowing the pace of acquisitions maybe the next year or two, and say, hey, we've got a lot to digest and maybe even takes longer to kind of separate the truckload businesses, or just thinking about how that might affect the pacing of what you do on the, I don't know, strategic front?

Very good question, Tom. The UPS Freight acquisition was quite challenging to execute mainly because it was a carve-out, which always presents difficulties due to uncertainty about the costs we would inherit. One thing we didn’t foresee was that 35% of the freight was of poor quality when we acquired the company. So that was an unexpected challenge. It has taken us longer than anticipated; for instance, it took us two years to separate from the UPS financial system. However, we are now completely independent from UPS and are making progress. On the other hand, the situation with Daseke is different. Daseke is not a carve-out but rather a standalone business. Their head office costs were exorbitant, almost equivalent to operating our own head office. We’ve managed to reduce Daseke's head office costs by 75% over the next year or two, bringing them down to minimal levels. The operating units at Daseke consist of about nine business units. Looking at the results for 2023, excluding the head office, these units performed reasonably well given the market conditions. When I assess the 2024 outlook for just these operating businesses, they are on track. While they are down compared to last year and to 2023, the decline isn’t significant. Their performance isn't as strong as TFI’s, but the difference isn't as drastic as the gap we experienced with UPS Freight versus our operations in Canada. As for the future, we need to continue digesting TForce Freight and do the same with Daseke. Therefore, for our M&A strategy in 2024, we’ll focus on smaller integrations in Canada, but nothing substantial apart from the Daseke transaction. As I mentioned previously, we plan to reduce our debt by $500 million to $600 million in 2024 to bring our leverage down to around 1.6 or 1.7. Currently, we are approximately at 1.6 and expect to return to 1.6 by year-end. Consequently, I anticipate no significant M&A activity in 2024.

Okay, that's really helpful. I just had one follow-up on U.S. LTL. How do we view the improvement in operating ratio and its sensitivity to the freight market versus what is within your control? There are several factors that you can control, but it seems that receiving a higher price would benefit from a tighter freight market. It also appears that the improvement has some sensitivity to pricing and the freight market. So, how do you see this year and next year in terms of how much of the improvement in LTL is under your control versus how much is influenced by the freight market?

We do not control the market, and recently we've seen a significant drop in linehaul shipments. While the market situation is beyond our control, we can influence the freight we choose to transport. Moving forward, we plan to make substantial improvements. Instead of handling lighter freight, we aim to focus on heavier shipments, increasing our average from 1,200 pounds to more closely align with our peers at around 1,500 pounds. Additionally, enhancing our density is crucial; we must aim to pick up more freight per stop, regardless of market conditions. Our sales team will be tasked with maximizing shipments from existing customers. Furthermore, we need to refine our zip code coverage to improve efficiency and prevent costly pickups or deliveries far from our terminals. In Canada, we maintain a tightly-knit network and outsource freight outside our coverage area. In the U.S., we recognize the need for adaptation. We may limit service frequency in certain areas to boost efficiency and reduce transportation miles. Ultimately, we want to ensure that our road assets are used effectively to meet customer commitments. When shipments face delays due to rail, we cannot pass the blame to customers, so enhancing our service quality is vital. Improved service leads to better shipments and increased revenue.

Right. Okay. Thanks for the time, Alain.

Thank you, Tom.

Thank you. Our next questions come from the line of Kevin Chiang with CIBC. Please proceed with your questions.

Hi, good morning, Alain. Thanks for taking my question here. Maybe if I could just go back to the...

Good morning, Kevin.

Good morning. Just the guidance. So, if I look at Q1 versus the midpoint of your guide, it's about 18% of your EPS you're calling for in the first quarter here. If I go back and I know there's a lot of moving parts when you go back historically because of your M&A track record. But if I go back the last, let's say, 10 years, that's been about the average, about 18% in Q1. And I guess I'm just trying to get a sense of maybe the conservatism in your guidance or maybe what you're building in for certain KPIs. Just I would have thought you would have seen better momentum as we get through the year, even in a tough freight environment, because Q1 was tough. Just with some of the things you've mentioned already within TForce Freight, it sounds like you're doing some stuff in P&C. So maybe you can just frame that a little bit more in terms of where you're seeing some of that momentum and maybe what some of the headwinds could be to maybe drive maybe a number not above $7 of EPS this year.

Yes, Kevin, you’re absolutely right. Q1 typically accounts for about 18% of our EPS on average, which remains consistent. However, considering the current environment and what we’ve observed from our peers, we have serious concerns about the freight situation. Therefore, after discussions with our team, we decided to adopt a conservative approach to avoid any disappointments in the coming quarters. The performance of the top truckload companies in the US has been alarming, which is why I emphasized the need for prudence and a focus on free cash flow, which should remain strong even in a challenging year. I believe we might exceed $7, but given what I've seen from my peers in Q1, especially in the US and Canada, and considering the driving conditions in Canada, I expect things to worsen rather than improve. So we need to be careful. I sincerely hope we do better than $7, but at this moment, that's the best I can offer. I apologize for the earlier expectations from Q4 when we indicated guidance starting at $7; we're not there now. While Q1 may not have been catastrophic for us due to our diversification, it’s troubling when I compare our situation to that of my peers. We initially thought 2023 would be a tough year, but based on the early results from 2024, it might actually be worse. Of course, one quarter does not represent a full year, but this is why our motto at TFI has always been to under promise and over deliver.

I appreciate that given all the uncertainty that's obviously facing you in the broader transport space. Maybe just my second question on P&C, you talked about the tough Q1 here, but you're taking steps to obviously turn this around, and maybe we'll see something in the next couple of quarters here. I did notice average weight per shipment, I think, it's the lowest I've seen in a long time in the first quarter. Your vehicle count is pretty low. Just maybe any color on what's happening there? And maybe what are some of the steps you can do to kind of turn that around?

The freight we are currently hauling on the P&C side is lighter than usual. We've noticed a decrease in shipments of about 3% to 4%, but the main issue is the weight because we earn based on weight, similar to LTL. It's a shift in perspective. Additionally, Bob McGonigal, who previously managed our P&C, is now focusing on the US LTL side, and we've brought in a new Executive Vice President for our P&C operations who has a fresh plan. The previous leader, Jimmy, did not fully embrace the new approach, which led to his retirement and transition to GLS. Now, Mike Hover, who used to oversee our TForce Freight Canada division, has taken charge and is aligned with the new strategy to be more selective about the freight we accept. We can't haul lightweight shipments since our payment is weight-based, which necessitates a change in our approach. Looking ahead, the actions we implemented in the summer of '23 will begin translating into results in Q1, with more noticeable effects likely in Q2 and Q3. It takes time to adapt pricing and onboard customers, which is why our performance in Q1 for P&C wasn’t strong. Our operating ratio stands at 81 or 82 now, which isn't ideal since we were at 75 before, so we aim to push that below 80 while modifying our freight strategy. We have a plan in place, but we expect to see significant results by Q3 or Q4. The main challenge lies in our truckload operations, especially with the addition of Daseke. While we don't anticipate a significant change in '24, we expect improvements by '25. Our operating ratio in specialty truckload is currently at 89, which is not optimal compared to the previous 84. However, given the current US truckload market, I'm somewhat content with an 89 ratio. I would prefer not to remain at this level. With the Daseke acquisition, I have expressed to Steve Brookshaw that we need to work towards getting them to perform as well as we do within a year. We also hope for market improvements in '25, and with Daseke onboard, our goal is to achieve more efficiency.

That's all very great color. Thanks for taking my questions, Alain. Have a great weekend there.

Likewise. Thank you, Kevin.

Thank you. Our next questions come from the line of Walter Spracklin with RBC Capital Markets. Please proceed with your questions.

Thanks very much, operator. Good morning, Alain.

Good morning, Walter.

Yeah, I guess going back to some of the self-help and corporate activity that you could look at, and one of the things that you've mused about in the past was the spin-off now of the truckload division, I'm just curious, is this something that you want to have Daseke fully integrated before you contemplate that? And if so, is a year the typical timeframe that you would see Daseke integrated and therefore would contemplate something like a spin-off of the truckload division?

We believe that if it makes sense to consider a spin-off in the future, we could look at that possibility toward the end of 2025 or the beginning of 2026. Daseke's various business units are functioning quite well, though there are one or two that need improvement. The head office has been a burden, costing us significantly without delivering results, so we've made some changes there. We've cut the annual salaries at Daseke's head office by over $12 million. While it will take about a year to see substantial improvements, Daseke's operations, excluding the head office, are performing reasonably well. They have room for growth, and in the current U.S. market, they're managing adequately. We will continue working with them to enhance performance, and I can confidently say that if we decide to pursue a spin-off in late 2025 or early 2026, we will be ready.

Got it. Okay. Building in Daseke, since it's a significant revenue item, it does impact our models quite a bit based on the operating ratio we assume. Is there any indication you can provide us, considering we haven't assessed how Daseke fits within your operations and how it compares to your existing business? We understand it may be a bit less profitable, but what kind of operating ratio or margin degradation should we anticipate for the second quarter of 2024 as we incorporate this into our model and account for integration synergies afterward?

Based on Daseke's results for 2023, if we disregard the issues at the head office, the operating ratio is around 90, fluctuating between 92 and 94 depending on the quarter. This is not a major concern compared to situations like UPS Freight, where there were significant losses. The average operating ratio for 2023 is likely around 93 or 94. When we stepped in, the head office was a major factor affecting the operating ratio negatively. We are actively reducing head office costs, and you'll see this reflected in our Q2 results. Daseke isn't a project that requires extensive fixes like UPS Freight did; it has a solid foundational business with capable teams. However, when compared to our own U.S. operations, there is room for improvement, and we have a clear plan to enhance performance.

Okay. Excellent. Thanks very much for the time, Alain.

Pleasure, Walter.

Thank you. Our next questions come from the line of Konark Gupta with Scotia Capital. Please proceed with your questions.

Thanks, operator. Good morning, Alain.

Good morning, Konark.

Good morning. My question is about the US LTL situation. Are you seeing that shipment weights are decreasing in the industry? It's clearly a tough environment, although rates are stable. For your company, you're looking to raise rates, which you've already done over the past few quarters, and that's positive. However, you're also aiming to enhance rates to maintain high quality. I'm trying to understand how challenging it is to increase your shipment weight while also keeping prices steady when the industry is experiencing a drop in weight. Do you need to be more competitive with pricing to attract more weight per shipment, or do you need to adjust other factors?

One of the reasons we weren't significant in heavy shipments is that our pricing was not competitive. About a year ago, we revised our pricing model because we had been reliant on the UPS system, which made it challenging to gather accurate information. As of February 2023, we took control of all financial data, allowing us to collaborate with our team to adjust pricing to become competitive in the heavy shipment market. With our sales team shifted focus toward industrial freight rather than light or retail freight, we've gradually increased the average weight of our shipments to align more closely with our peers, who typically handle weights of 1,400 to 1,500 pounds, compared to our previous average of 1,000 pounds. While our average revenue per shipment has decreased slightly due to matching market rates for heavier shipments, our revenue per shipment remains crucial. The difference in revenue isn't solely based on shipment weight; logistical costs are consistent regardless of whether we're moving a shipment for $300 or $400, as only the weight changes. At TForce Freight, our challenges lie with volume, not weight. Transitioning to heavier shipments does not impact our costs; instead, it boosts our revenue. We're emphasizing the need for our sales team to pursue heavier shipments and ensuring our prices are competitive. We aim for more shipments per stop and closer proximity to our terminal. This strategy has proven effective in Canada, where we outperform other major LTL carriers with better operational ratios due to superior density, rather than just pricing. The market rates are uniform across the board, so understanding the market is essential for all of us.

Right. That makes sense, Alain. Thanks for the color there. And then, if we can follow-up quickly. There's a bit of a competitive landscape change I think maybe in Canada, but perhaps in the US as well. I mean, there was a big Canadian player that is going through restructuring recently. Any thoughts here on what kind of opportunities that present to you? Like, is it more like a market share grab opportunity for you? Or would you be interested in some of the assets, like trucks or drivers or lanes?

No. The person you're referring to is operating under the Driver Inc. model. He is currently under court protection but continues to run his business. It's likely that he will need to downsize and reduce operations. However, we are still confronting him and others, primarily based in Ontario. This situation has severely impacted my operating ratio in Canadian truckload, creating a disaster. We are currently running ten percentage points behind last year. The root cause is these individuals who do not provide employee benefits because they utilize the Driver Inc. model. This situation is not going to help us because he continues to operate, and we may see him downsize a bit. However, people like him can easily restart under a different name. Their model exploits the Canadian system, benefiting customers at our expense.

Yeah, that makes sense. Thanks. I appreciate the time, Alain. Thank you.

Pleasure, Konark.

Thank you. Our next questions come from the line of Cameron Doerksen with National Bank Financial. Please proceed with your questions.

Yeah, thanks. Good morning. Just to follow up on that thought about the Canadian dry van truckload, if we don’t see any changes in the regulation or whatever you want to call it, does it still make sense for you to maintain a Canadian dry van operation? Is that something you might consider not wanting to own anymore?

We are questioning whether it makes sense to maintain $200 million in assets in a business where we are competing against others who do not provide fair benefits to their employees. Despite years of promises from political leaders, they have yet to take action. Our benefits for employees continue to grow, especially with recent initiatives like Mr. Trudeau's introduction of 10 days of sick leave and three days of PTO, which our competitors do not have to cover. So yes, we will likely reduce our asset base because if we can't compete fairly, we might have to reconsider our position. However, we won't compromise our values by becoming a Driver Inc. company in Canada, as that would be unjust to our employees. Consequently, you will see us scaling down. On the other hand, there are opportunities to acquire companies at the asset price, particularly smaller operators who are struggling right now. We may consider small mergers and acquisitions that align with our goals. Yet, in the broader scope, our Canadian truckload operations will diminish due to the unfair competition posed by Driver Inc., which will lead to job losses for well-paying positions at TFI.

Okay. That's helpful. And just staying with truckload, just thinking about the specialized business, which obviously is a much larger piece of the business now with Daseke, what are you seeing, I guess on market conditions there? I mean, it's historically been a little more stable from a market perspective. But any signs of a bottoming? Are you feeling more optimistic later in the year? Just any thoughts around the market conditions?

When we currently speak with customers, there is a consensus that 2024 will be steady but not exceptional, while 2025 and 2026 are expected to be strong years in the US. This is largely due to the major election, which has created a divided environment. As a result, some clients are hesitant and waiting to see the outcome. For instance, with GE Energy, if a candidate opposed to wind energy wins, that sector may decline. Conversely, a candidate who supports green energy could boost that business. This uncertainty has left certain clients undecided about their next moves. Regarding our Daseke acquisition, I believe we are purchasing at a favorable price in a depressed market. Although there may be a slight decline, the likelihood of substantial growth over the next few years is significantly higher. This is the rationale behind the transaction. Additionally, I believe that if we pursue options like a spin-off in 2026, market conditions will likely improve compared to 2023 and 2024, although perhaps not reaching the highs of 2022.

Right. Okay. That makes sense. Thanks for the time.

Thank you, Cameron.

Thank you. Our next questions come from the line of Ben Mohr with Deutsche Bank. Please proceed with your questions.

Hi, Alain. Good morning. Thanks for taking a question.

Good morning, Ben.

Back to US LTL, good morning. The typical LTL industry operating ratio improves from the first quarter to the second quarter by about 300 basis points. It generally remains flat from the second quarter to the third quarter and then typically rises from the third quarter to the fourth quarter by about 200 basis points. I wanted to ask what factors influence this as a baseline. It seems that you'll need to perform significantly better than that to achieve your guidance of 88 for 2024. Are you anticipating perhaps 50 to 100 basis points improvement each quarter based on your initiatives, assuming the freight market remains stable and possibly even improves a bit into the second quarter given the weather in the first quarter?

Yeah. So you're absolutely right, Ben. And this is, like I said earlier, I mean, this is a little bit of a concern when I talk to my guys at the US LTL, and I say guys, are you still confident? And they are. And that's also part of that $6.75 to $7, okay? If the market continues to be difficult, okay, like we're seeing now, okay, can we get to the 88? We're still convinced. Okay. But like you said, it's a tough goal. What I could say so far when I look at April is we are on plan, okay? But our plan keeps improving during the course of the year. So again, I mean, we'll see. But I mean, our guys are still convinced that we can meet this plan.

Appreciate that. And maybe as a follow up again on US LTL, you've guided before on a 2024 exit rate of 24,000 to 25,000 shipments a day and averaging 23,000 to 24,000 for this year. With 1Q at about 22,000, that means 2,000 to 3,000 of additional shipments per day to get to that point. Are these all market share gains because we're assuming zero freight market volume inflection? And if so, are you taking market share from smaller regional players given your service improvement?

The focus is to increase the freight we receive from our existing shippers without adding stops. Currently, we're handling about 22,000 shipments, and our goal is to reach around 24,000 by the end of the year. Our service is improving, which has attracted customers, like a large retailer we previously did minimal business with. They are now willing to give us more freight because they noticed our service has gotten better. This trend shows that shippers also want to diversify their carrier base. We're not trying to boost volume by lowering rates, which would be unwise. Instead, our strategy is to gradually improve our service to gain more freight. Two years ago, the only way to increase our freight was to cut rates due to poor service. That’s not the approach of TFI. We're focused on providing better service, and as a result, customers are willing to offer us more freight now. This strategy will help us reach our target of 24,000 shipments.

Great. Thanks a lot. Appreciate the time and insights.

You're welcome. Thank you.

Thank you. We have reached the end of our question and answer session. I would now like to turn the call back over to Alain Bedard for any closing remarks.

Well, thank you, operator, and thank you, everyone, for being on today's call. So we look forward to keeping you updated as we move through the year. And please don't hesitate to reach out if you have any additional questions. Have a terrific weekend and stay safe. Thank you.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.