TFI International Inc. Q3 FY2024 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by. Welcome to TFI International's Third 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. 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 would like to remind everyone that this conference call is being recorded on Tuesday, October 22, 2024. I will now turn the conference call over to Alain Bedard, Chairman, President and Chief Executive Officer of TFI International. Please go ahead, sir.

Well, thank you, operator, and thank you, everyone, for joining today's call. Yesterday, after market closed, we reported quarterly results that reflect industry-wide challenging conditions. We generated strong free cash flow, which has always been one of our primary areas of focus, with a year-over-year increase of 37% to more than $270 million. This continued strong cash flow, as I've said many times, allows us to opportunistically consider strategic M&A, intelligently invest in the business, and return excess capital to shareholders. We do this while maintaining a conservative balance sheet and indeed during the quarter we were able to significantly pay down debt as I'll discuss later on. Let's begin with a review of our consolidated results, which as always reflect the skill and hard work of our team members, especially during cyclical challenges for the industry. During these times, we collectively redouble our focus on the important details of the business, striving for added efficiencies through quality of freight, optimizing weight and revenue per shipment and other important operating fundamentals that have served us well over time. For the third quarter of 2024, our overall revenue before fuel surcharge was up 17% year-over-year to $1.9 billion benefiting from the April acquisition of Daseke. Operating income of $203 million was up slightly from $201 million in the prior year quarter and this equates to an operating margin of 10.7% versus 12.3% a year earlier. Note that last year's operating income included higher net gains on sales of assets held for sale of $15 million. We generated adjusted net income of $137 million, up slightly from $136 million a year earlier along with adjusted EPS of $1.60 up slightly relative to a $1.57. In addition, as referenced, we have strong cash flow with $351 million of cash from operating activity, well above the $279 million in the year-ago quarter and free cash flow of $273 million also well above $198 million of the previous year. Big picture on the quarter, our logistics segment performed really well and our truckload operations held their own as did our Canadian LTL and P&C operations. Going forward, the hardworking men and women of TFI International will continue to focus on improving operating performance while working to get the most out of our recent acquisition. This will be our focus regardless of broader market conditions as we see long-term opportunities ahead. So with that, let's discuss LTL, which was 40% of segmented revenue before fuel surcharge during the quarter. Relative to a year ago, revenue before fuel surcharge was up 7% and operating income was down 24%, although this was largely due to higher gains last year on assets held for sale. In addition, in the year-ago quarter, we had benefited from an early spike in freight from Yellow, which also weighed on the year-over-year quarterly performance. For U.S. LTL, our revenue before fuel surcharge was $531 million relative to $581 million the prior year, and operating income was $48 million down from $68 million. This performance reflected a 2% drop in tonnage, a 3% increase in revenue per shipment excluding fuel and a 35% decline in GFP revenue. Our operating ratio for U.S. LTL was 92.2% compared to 90.8% a year earlier and our return on invested capital was 15.4%. Turning to our Canadian LTL, our revenue before fuel surcharge of $138 million was down 2%, while our operating income rose slightly to $33 million. Our number of shipments was up 3%, although our weight per shipment decreased 7%, and revenue per shipment decreased 5%. Our Canadian LTL OR came in at 76.3%, an improvement relative to 77.2% a year ago, while our return on invested capital was 17.6%. Wrapping up our LTL discussion, P&C operation also saw a slight decline in revenue before fuel surcharge to $109 million from $112 million, with operating income up slightly as well at $24 million versus $25 million. Our P&C OR was 78.2%, which was up 80 basis points, while our return on invested capital was 22.2%. Moving on to truckload, this business segment was 38% of segmented revenue before fuel surcharge at $723 million as compared to $402 million year earlier, reflecting the April acquisition of Daseke. Truckload operating income of $72 million was up from $50 million and our OR was 90.3% compared to 87.7% in Q3 of last year. Taking a look within truckload, specialized operation generated revenue before fuel surcharge of $648 million, up from $325 million, and our operating income of $64 million was up from $40 million a year earlier. In terms of performance metric for specialized truckload, our revenue before fuel surcharge per truck per week was up 5% over the prior year at $4,453, and brokerage revenue more than doubled to $94 million. Our operating ratio was 90.4% compared to 87.8% the prior year and our return on invested capital was 7.9%. Overall, we see room for operational improvement within specialized truckload following the Daseke acquisition. Switching to Canadian based conventional truckload, we produced revenue before fuel surcharge of $77 million down slightly from $79 million a year earlier with the brokerage portion increasing 20% to $30 million. Our operating income of $8 million compares to $10 million as mileage and revenue per mile were under pressure. Our OR for Canadian truckload was 89.9% and our return on invested capital was 7.7%. Lastly, in our review by business segment, logistics was 22% of segmented revenue before fuel surcharge and continues to perform. While revenue before fuel surcharge was up just 2%, operating income was up 19%. Our third quarter logistics operating margin was 11.4%, which was up from 9.8% the prior year and return on invested capital was 17.4%. With that review by segment, I'll next provide an update on our balance sheet. As I referenced earlier, we had a very strong free cash flow of $273 million during the quarter, well above the $198 million a year ago. We used our strong liquidity to pay down $130 million of debt during the quarter and ended September with an improved funded debt-to-EBITDA ratio of 2.07 versus 2.15 as of the end of June. Our solid financial footing is an important aspect of our approach to the business, allowing us to strategically invest regardless of the economic cycle with Daseke as a good example while returning significant capital to shareholders whenever possible, which has long been one of our guiding principles. In terms of capital allocation during the quarter, in addition to debt reduction, we completed two small bolt-in acquisitions, and last month, our board declared a quarterly dividend of $0.40 per share paid on October 15. I'm also pleased to announce that just yesterday our Board of Directors both raised our quarterly dividend by 13% and authorized a renewal of our share repurchase program, the NCIB, for an additional year subject to the approval of the Toronto Stock Exchange. I'll wrap up with an update on our full year outlook that reflects the continuing challenging market conditions. Year-to-date in 2024, our performance has been largely consistent with the prior year and we expect this trend to continue throughout the year end. As a result, we also expect our full year performance to be largely similar to 2023. And now operator, if you could please open the line, I'll be happy to take questions, please.

Thank you, sir. Our first question comes from the line of Ravi Shanker from Morgan Stanley. Go ahead please.

So obviously interesting times in the industry. Just on U.S. LTL, are you able to distinguish how much of the earnings pressure there is purely cyclical and will snap back with more reordering stuff versus maybe some evolving industry dynamics in a post Yellow world with new capacity coming in and players jockeying for share et cetera?

That's a difficult question, Ravi. So, our focus is really to improve our cost basis. So the market condition we know has been challenging for the last probably like 18 months. So we don't control market conditions. Our focus is really to improve our cost base and also improve our service. If you look at the last report from Mastio, our service according to this survey is the worst of the top 7 carriers in the U.S. So it's really a focus of ours. For sure, what we're proposing to our customer is, our proposal is good in the sense that, there's a match between the service that we provide, which has to improve, and the rate also is still a good proposal for our customer because our rate on average is much lower than our peers. So this is why our focus was not notwithstanding the market condition. We have to improve our service, which as a matter of fact, we've started to move more freight away from rail onto the road, but also we have to improve our missed pick up. If you look at our claim ratio, we were going in the right direction but then whoops comes Q3, we dropped the ball, right? So our claims ratio is at 0.8% of revenue. Our Canadian LTL, our claim ratio is 0.2%, which is like best-in-class. We used to be at 0.4%, 0.5%. Now we're at 0.8%. So guys, let's not drop the ball. Let's focus on service. Let's not miss any pick up. Let's be on time with our deliveries, et cetera. Now if you look at this purchase that we did three years ago, okay, and you asked me the question, hey, Alain, do you think that you made a mistake with this purchase? Not at all. I mean, the only mistake is that we probably underestimated the time it will take us to turn this thing around the culture. Now we're improving the management skill of our guys by training, by providing them financial information that we could continue to improve our cost basis, following metrics of service.

And maybe for my follow-up, I just want to clarify, did you say that 2024 is now looking like 2023 level of EPS? If we can just kind of clarify the 2024 guide that would be great.

Yes, Ravi, that's what we're saying. I mean, if you look at where we are, I mean, we're basically flat year-over-year, okay as of Q3. So we believe that, we thought that we would do a better job in 2024 than 2023. But with market conditions, with what we're looking at when we look at Q4, the first forecast that we're looking at, I mean we believe that ‘24 sadly will be a repetition of 2023.

Our next question comes from the line of Walter Spracklin from RBC. Go ahead, please.

Regarding the guidance for next year, consensus has decreased slightly but is still at 8.50%, which is almost 40% higher than your updated projections for 2024. I'm curious about your comfort level with this figure. I understand that much of this depends on the economic landscape. Considering your current outlook and where consensus stands, how do you feel about the 8.50% consensus estimate for next year?

Very good question, Walter. It's too early for us to really talk about ‘25. I mean, we're going through our budget season right now. But what I could say though is that we've been under some kind of a freight recession for close to two years now, right? Normally, the cycle is between, I don't know, 18 months to 24 months. We don't see some major improvements so far in ‘25. We believe that at some point, it will happen, right? So, if we have a normal environment in 2025, not 2022, but just a normal trade environment, okay, I think that getting close to $8 a share EPS like we did in ‘22 is normal because in ’22 that was a great year, but we didn't have Daseke. We didn't have JHT. There's a few assets that we didn't have at the time. So to say that around $8 in 2025 in the normal environment, I think it's attainable, which is about the same as what we've done in 2022 in a great environment, but now we have assets that we didn't have at the time, right? The other thing also to consider, Walter is that we will be reducing our debt like there's no tomorrow, right? So our debt in Q3, we've reduced it by $130 million. In Q4, we will reduce that again by at least another $250 million to $300 million to get close to our target of reducing our debt since the acquisition of Daseke for about $500 million. And then if we don't do anything major until the end of '25, I mean, our debt will be reduced another $500 million during, let's say, Q1, Q2, by end of Q3, and ‘25. So our interest costs, will reduce dramatically because if you look at Q3, our cost of financing is like double what it was last year, right? And that will continue to come down as we pay down debt, which is our focus. And also hopefully, the interest rate will start to drop a little bit and that should help us reduce again. So we said Daseke 2025 in our mind will contribute at least $0.50 a share. Okay. And if we have a normal environment, our U.S. LTL should perform better. Our specialty truck load overall should perform better. Canadian LTL and P&C will perform a little bit better. I mean, we're running 77, 78 OR right now. It's just the top line that we're missing, right, on the lower activity.

Our next question comes from the line of Scott Group from Wolfe Research. Go ahead, please.

Just a follow-up on Walter's question about M&A. What are the sizes of deals you're looking at as you think about ’25? And then I feel like it's been a while since you've given us any update on the potential to separate the business and the spin. Maybe just any thoughts or color there as well?

Yes. Very good question. Listen, in terms of M&A size, if we look at TFI at the end of 2025, okay, in a normal environment, okay, without issuing any paper, right? When we talk to our board, we could look into a $4 billion to $5 billion deal in the U.S., right, on a target. And if the deal is more than that, then we have to resort to paper, which we don't like to do. But, it depends on the target, depends on the transaction. In terms of, not mixing a return on invested capital between 15 and 25 versus a return on invested capital of 8 to 15, the truckload and the rest, for sure the discussion we're having with the board is that right now TFI's market cap is too small to do some kind of a split. Okay. So let's say our market cap is 12. You do a split, 6-6. Six is too small, right? So that's why the discussion that I'm having with our board is, Alain, you got to do this next transaction. And then let's say that you do a $4 billion or $5 billion deal, the market cap changed from $12 billion to $15 billion or $18 billion, whatever it is, you got to get closer to $20 billion to start thinking about splitting into two. But it makes sense, okay, not to have returned invested capital of 8 to 15 mixed up with return invested capital of 15 to 25. So it's just a matter of time. We have to get to a certain size, Scott. And once we get to that size, I mean, I think that this is where we're going to go. We're getting ready. We're getting ready. I mean, Steve Brookshaw that runs our truckload operation. I mean, he knows where we're going. So, as much as we can, right now, we are splitting the real estate, okay? We're splitting the assets. So because that takes time. So we're getting ready. Is this something that's going to happen in ‘25? I don't think so. Is this something potential the end of ‘26 into ‘27? First, we have to do this deal that makes sense for our shareholders probably late '25 into '26 maybe. And then, okay, then we'll be ready to go to the next step.

Our next question comes from the line of Konark Gupta from Scotia Capital. Go ahead please.

I just wanted to verify on the P4, Salain. If we look back in the first few years of the acquisition, you started to reprice the book, which happened decently well. Then you started to optimize the cost. Obviously, and I think you're still kind of looking at the costs here. I'm just trying to figure out, like, with the Mastio survey and obviously, the service focus and the cost focus you have. What's really required here to move the operating ratio in the U.S. LTL business to 85% or so? I mean, do you need the volumes only or do you need the volume service cost and all those things come together? And how far should we kind of play that roadmap in the next couple of years?

Absolutely. If we would get from 22 to 25,000 shipments a day, for sure, that would help our cost basis. But the problem that we have within TForce rate today is that our business is too fixed. It's not variable enough, okay? So this is why we have to work with our team, our terminal managers to really adjust on a daily basis our costs versus the volume that we have, okay? That's number 1. And for sure down the road, if we can hit the 23,000, 24,000, 25,000 shipments, for sure that's going to help us. But you know, this is where it's the chicken and the egg. So if you talk to our sales guy, they say, well, you know, it's tough for us to get more business because the service is maybe not up to par to some of our peers, right? So when we talk to our operation guys we got to fix the service. We have to improve the service. Now you say, yes well, if we improve the service, maybe there's a cost to that. No, you have to improve the service and reduce the cost at the same time. So this is quite a challenge and this is where the talent of your management team comes to play. If you look at our management team in Canada, I mean this is a team that's been educated, trained, focused for years. If you look at the results, okay, in Canada, we're doing very well. Even with the Kindersley acquisition, our Canadian operation is still running at sub 80 OR in a difficult environment. Why? Because we have a very, very educated talent team to manage our business. And this is the key for us in the U.S., where the terminal management team lack this training, lack this education. Now they have the tool. Now they have the financial information. So now they have to act according to it so that our costs are less, fixed and more variable according to the volume. That's number 1. Number 2, in order to bring our cost down, we need our sales team to understand the mission of trying to get more freight per stop. I mean, I've been preaching that for three years now. And so far, it seems like I am preaching to a desert, right? So we haven't done anything good on that. The only thing good we've done with the sales team so far is we moved the average weight per shipment from 1,075 to 1,200. So we have a little bit more dollars per shipment, okay, that's good. 1,200 is not the operational top where we should be, but at least it's a move in the right direction. By having more freight per stop, at the same time, okay, you split the cost of that stop over two shipments or three shipments instead of one or two shipments. That helps you with your cost basis and you become more competitive. So this is a mission that we've been saying and repeating, but it seems to be difficult to accomplish. So this is why we're continuing to educate these guys to go. Our GFP is down like there's no tomorrow. We've lost all the revenue from the reseller because most of these resellers were cheating our partner. So now we have to rebuild that business with our own account. We cannot deal with the resellers that are cheating, okay? Because our partner does not accept that anymore, right? So let's have the sales team focus on growing our GFP and also growing the number of shipments per stop. That will help our cost basis. So it's not just the market that is maybe not the strongest today. Us, we have a lot of work to do ourselves. The market is difficult in Canada. It's probably even more difficult in Canada than in the U.S. And if you look at what we do over there, I mean we do pretty good. Why? Because we've got the real strong management team. This is what we're trying to build in the U.S. right now.

And if I can follow up on Daseke. You talked about $0.50 accretion next year. I just wanted to clarify, this $0.50 accretion next year is incremental to whatever cost improvements you have achieved at the closing of the acquisition. And do you expect another upside to that $0.50 from the debt you are paying or that's included in $0.50?

No, $0.50 is based solely on Daseke's operations and does not factor in our interest costs. I have seen the 2025 plan, and I would be very disappointed if the Daseke team does not achieve the $0.50 based on operations, as we are currently making significant improvements within the Daseke finance team. We are transitioning our financial systems from the Dallas headquarters to Toronto and moving to Infinium. By the summer of 2025, operations will be aligned with the Contrans model, which will yield substantial savings. The two Canadian companies previously managed by Daseke will, by the end of 2024, be overseen by our Canadian team, which has a better understanding of the local market than our Dallas team. We have many positive initiatives in progress with Steve Brookshaw and his team. Certainly, if you compare Daseke’s operation to our legacy business, we reported a disappointing 90% operating ratio in Q3, which is influenced by Daseke’s operating ratio still hovering around 95% to 97%, depending on the division. Meanwhile, our legacy business is performing at around an 80% to 84% operating ratio in a challenging market. We need to bring Daseke's operating metrics closer to ours, which we aim to achieve throughout the remainder of 2024 and into 2025. Additionally, looking at revenue per mile from Q3 compared to Q2 in the U.S. flatbed market, rates have declined again, indicating a weaker market in Q3 than in Q2. However, the recent storms in the U.S. might provide a rebuilding opportunity in Q1 of 2025, but we'll have to monitor that. On the cost front, we have considerable work ahead with the Daseke operation.

Our next question comes from the line of Jordan Alliger from Goldman Sachs.

This is Paul Stoddard on for Jordan Alliger. I guess the question that we have is where can we expect U.S. LTL to go for the remainder of 2024? And how can we expect this for the fourth quarter, just given the previous guidance around 90 for the year?

Yes, I believe we will likely see an improvement in Q4 compared to Q3, and it may be closer to what we experienced in Q2. However, we do not anticipate exceeding a 90 OR in Q4 of 2024.

And I guess to follow-up on that, when we think about the cost takeout in the U.S. LTL business, I know that service has been a big focus but there's also been a lot of different initiatives such as getting financial management systems to the terminal managers trying to take out, improve the different systems, investing in the different assets. So I guess, are there other things aside from service that you can be doing to take out that cost?

We're planning to implement the Mastio file and billing system in early 2025 because one significant issue we've faced with our customers is the inability to bill them accurately. This problem has persisted for a long time, and after evaluating various systems, we've finally chosen one that's successfully used by one of our peers. This change should enhance customer satisfaction as we'll be able to handle billing correctly. Furthermore, it should also help us reduce bad debt and revenue adjustments, addressing the negative experiences we've provided due to billing issues. It's hard to believe that in 2024, we still encountered billing challenges, but we're committed to resolving that. Additionally, another key improvement for 2025 is our fleet maintenance. We've reduced the number of shops from 100 to about 15, which has put us in a much better position to manage warranty claims. The previous number of shops was chaotic, so we anticipate significant improvements from the capital expenditures we've made in the last few years, especially considering that our fleet is now about four years old compared to seven years old when we acquired the company. With better management and new software implemented in 2024, we should see enhancements in fuel efficiency and maintenance. I'm confident in our fleet management team, and I expect noteworthy progress. While these are many small changes, we need to continue investing in our team and talent to ensure we can deliver for our customers and shareholders.

Our next question comes from the line of Ken Hoexter from Bank of America. Go ahead, please.

This is Adam Roszkowski on for Ken Hoexter. I just want to drill in first on the U.S. LTL pricing. So I think you previously noted that contract renewals had decelerated to the low-single-digits. Is that about still the case in 3Q?

Yes.

And also just sequentially from a, I mean, you spoke about the kind of 4Q OR impact sequentially. And last year, there was even into October, some impact from a cyber-outage. How are you thinking, I guess, just tonnage shipments at these depressed levels? Is it fair to still see a reasonable seasonal step down into 4Q?

I believe Q4 will be better than Q3, likely aligning with a ratio of two for U.S. LTL. However, we faced a challenging start in October due to the storms that impacted the East Coast. That's behind us now, but early October saw lower volumes. The issues in the Carolinas, Georgia, and Florida contributed to this drop. Despite these challenges, I stand by my earlier statement that our U.S. LTL operating ratio will improve in Q4 compared to Q3, probably nearing two. However, we don't expect to break 90 in 2024 as we had hoped.

And then I guess, is there a baseline way that you're thinking about potential OR improvement in U.S. LTL next year? Maybe you spoke about some of the focus on service, some of those cost, maybe lower hanging fruit impacts. Is it reasonable $200 million, $150 million? Or what's the kind of steady run rate once you can get some of these issues under control?

Yes, I haven't seen our team's plan for 2025, but I would be very disappointed if we don't achieve a 90 operating ratio by then. Considering everything I mentioned regarding fleet costs and labor costs per shipment, our team is working hard to enhance our service. However, we are lacking support from our sales team, who don’t seem to grasp the situation, despite our efforts to educate them on securing more freight per sub. Increasing this would significantly help reduce our cost per shipment. Currently, we average two shipments per stop; we need to move to three. If we accomplish this, it would directly lower our costs. Unfortunately, the focus hasn’t been there, and it's clear this mission hasn’t been fully understood. We have been advocating for it for a long time, but thus far, we've been unsuccessful. This is crucial for our success in 2025. Sometimes, the sales team cites service issues as an excuse. However, we cannot let these excuses continue, which is why we plan to resolve the issues surrounding our billing and customer master file in 2025 to eliminate another reason for not growing the business.

Our next question comes from the line of Kevin Chiang from CIBC. Go ahead, please.

On the P&C front, revenue per shipment has increased for the past three consecutive quarters. The average weight per shipment has also shown positive trends recently. Can you provide any insights or comments on what you're observing in P&C, especially considering that the overall environment seems quite challenging? It appears you are experiencing some improvements in your operations.

Yes. So what happened, Kevin, in our P&C. In the summer of '23, the management team at P&C made some mistakes, right? Because the market was very weak and we were trying to alter line, and we lost a lot of business. But that is the summer of '23. So the effect of that shows up in Q1 of '24, right? So if you look at our Q1 of '24, a major disappointment. With new leadership there, with Chris taking over and Michael over, that we moved up in terms of taking care of our P&C with Chris, I mean we've corrected the situation. From Q2 and in Q3, you see the trend, but the market in Canada is still very, very, very competitive, right? The demand is still not there. So what the guys have been able to do is keep improving the yield to a certain degree, but work very hard on the cost side, right? So that's where we are and we will see some improvement in '25. We are opening up a new center in Edmonton in early '25. That should help us reduce our costs with better technologies, et cetera, et cetera. We're going to be looking at Vancouver probably '26, '27, doing the same thing in Vancouver to improve our technology there. The guys are working on the costs. We're having some discussions with some partners of ours to move some freight from, let's say, one of our peers to another of our peers with better service and better rates. The guys are really working hard to move freight in a very lean and mean way in terms of cost. Our service is great. Our coverage is adequate. There were some mistakes that were made in '23, in the summer of '23, that puts us back a little bit in Q1 and in Q2 but the team is rebuilding the business base and adjusting in a very difficult environment.

I have a follow-up question regarding your earlier comment about the U.S. LTL or TForce Freight sales initiative aimed at increasing shipments from two to three. It seems that this conversion has proven to be more challenging than expected. Do you believe it is necessary to modify the compensation structure to encourage the sales team to enhance density and reduce costs per shipment? Or are there alternative methods to motivate them to adopt this sales model for better cost efficiency?

Yes, that's a very good question, Kevin. And we've been working at the compensation of not just the sales team, but the terminal managers and all that. So it's an evolution from the UPS days to where we are today. I have not seen their plan yet, but for sure, the compensation package of our terminal managers, of our salespeople probably will have to be reviewed and updated in '25 so that people understand clear what the mission is. So if you go back to what you just said about the sales team, they must understand that we need more freight per stop. For them to understand, they understand money, right? So you're right. If the compensation is based on getting more freight per stop, hopefully, they will start to understand that this is mission-critical, and this is what you have to do, guys. Not open up new accounts, let's try to get more business with the existing accounts that we already deal with. They know us. They know our strength, they know our weakness. They accept that because they do business with us. So let's try to grow with existing customers and not try to chase customers all over the place. That is one way that's going to help the operation to reduce our cost. But there again, we have to look at our terminal managers incentive program so that they understand that we must not miss pick up because if you miss the pick up, you don't get the revenue. The pick up is the generation of the revenue. If you miss the pick up, you don't get the revenue. So you need the revenue, don't miss pick up, right? It’s an evolution because where we started three years ago and where we are going to be in 2025, our incentive program, our bonuses will be way more aligned to what we want these guys to perform on versus '24 or '23 because this is an evolution.

Our next question comes from the line of Jason Seidl from TD Cowen.

I wanted to talk a little bit about the service on the U.S. LTL side. You said, obviously, you're disappointed in a little bit of a step down. I was wondering what you guys are doing to make corrections to that? And your commentary on sort of low single-digit price increases, does that assume that you get improvement in the service? Or would improvement in your service provide potential upside to that number?

I believe that enhancing our service will eventually lead to better pricing and rates. To improve our service, we are shifting as much freight as possible from rail to road, as relying on third-party rail services can be risky. My top competitors avoid giving significant freight to rail to maintain high service levels for their customers. We have started this transition in 2024, but we still allocate over 30% of our freight to rail, which is too high. Our aim is to reduce this closer to 20%, similar to some of our peers. This process will take time. Additionally, we need to cultivate a culture where missed pickups are unacceptable. We've been monitoring this issue for about eight months, and we still miss around 400 pickups daily. We need to shift the mindset that it’s normal to miss pickups due to being overwhelmed by customer demand. It's essential to manage our service image and not neglect any customer. In Canada, we don't experience missed pickups, even in a union environment, and this situation needs to change. Feedback from reports indicates that we have issues with reliability in pickups, which is within our control to improve.

I appreciate the explanation. I wanted to also key on, you called out truckload continuing to steal some LTL freight? I guess two things. One, did you see a sequential increase in that? And two, when would you expect that to improve? Is this like a back half of the '25 event?

The minute the truckload guys get busier. I mean, when is this going to happen? I don't know. Hopefully, in '25, but we know those guys are not busy. We haven't seen any peers so far, except one. And those guys are not really big into the day-to-day truckload world, but we know the market is really weak. For sure, this will disappear once these guys become busy. When is this going to happen? Maybe late '25. Early '25, I don't think so. Summer '25, we'll have to see. But don't forget that interest rates have come down a bit, and they will come down more. This should improve the customer disposable income for customers because inflation is less today than it was six months ago. That helps us.

Our next question comes from the line of Daniel Imbro from Stephens. Go ahead, please.

I wanted to maybe continue on the U.S. LTL pricing discussion. You mentioned that obviously one of the headwinds was service stepping back, but also that some of the competitors had added capacity. Can you maybe rank order which of those sequentially worsened through the quarter when you look at maybe the step down from the first half, mid-single to low-singles? And then just curious, as you're talking to customers and you're making these improvements to service, do you think your pricing will have to step further down to get customers to try and come back to TForce again? Or how are those customer conversations going as you navigate the cost for service changes?

Yes. I think that you need the service. This is step 1 to try to convince the customer, right? You can attract the customer with rates. But if the service is poor, I mean, the guy is going to run and he's going to go somewhere else because service is very important. Price is very important, number one. But service is also key. When you're trying to get more freight, the guy will say, yes, how is your service? Well, my service is great. Okay, I'll give you a chance. Then if you don't provide the right service, then he's going to walk. You're going to have lots of churn. By improving service, you reduce the churn. By reducing the churn, you improve your volume, right? This has been key to us. In terms of our peers the fact that some of our peers invested heavily in real estate, we haven't seen anything so far. But I'm just saying that the market is really soft. Some people are trying to chase rate and grow the volume. Our focus for us is not to chase freight, we have to fix our service first and reduce our costs and then reduce the churn so that we start growing organically.

Our next question comes from the line of Benoit Poirier from Desjardins Capital Markets. Go ahead, please.

There were some great comments about the shift from heavier freight that was previously moving toward LTL and has now moved to TL. Also, you mentioned that we need to see a recovery of TL eventually. What are the firstthings the freight industry needs to see in order to achieve a more normal freight environment?

No, I don't think so. Bankruptcy, I mean we saw that in Canada with Pride. A lot of people thought that Pride in Canada would disappear, but they have not disappeared, right? Because the banks kick the can down the road. The freight will start moving once the consumer spends more. This is very simple. The North American economy is based on consumer. So the consumer right now is disposable income is not where it was a few years ago. With lower interest rates, lower inflation, improve salaries, that is going on right now. Down the road, he will spend more and hopefully spend less on trips and flying all over the place like you did in '23, '24 and spends more at home. That will help freight. Freight will help us.

And for the follow-up question, you mentioned some color about the M&A size close to $4 billion, $5 billion towards the end of 2025, early 2026. I was wondering if you could share more details about segments that you would tap? Is it more related to LTL? Or could you do something in specialized TL? Are there any comfort level in terms of leverage and milestone you would like to achieve before pulling the trigger on something more sizable?

Yes. Our preferred M&A target is in the U.S., number one. And number two, it's always been, like I said, LTL, we have to do more. I mean we're a small player in LTL in the U.S. We're the dominant player in Canada. So we will probably never be the dominant player in the U.S., but we have to be more of like maybe a #3 or #4, not #6 or #7, that 22,000 shipments a day we're too small. So for sure, LTL, down the road. And logistics, we love logistics because the return on invested capital is huge normally. Although, we don't like Logistics, making 2 points. We're not in that league. We're not in that business. If we could find an LTL that's asset-light down the road that would be fantastic because if you look at our LTL in Canada because of our intermodal, the Vitran, the Clarke and all these guys I mean we run a very asset-light model into our Canadian LTL sector. If we could find a nice business in the U.S. that could be asset-light, as an example, that would be interesting for us because then you don't have the worry. Yes, but I think you run a union shop and then you buy a non-union shop, and the union will try to unionize the non-union shop. That's always the concern. But if it's asset-light that concern does not exist. We run union shops and non-union shops in Canada, and the union does not unionize the non-union shop. But in the U.S., it's a concern or if you buy a non-union shop and the union will try to unionize it. We run Hercules right now. It's small. It's only $100 million in revenue. We just bought it a few months ago, and it's still non-union. But asset-light non-union probably would be a good target of ours down the road, we'll see. In terms of comfort level for the leverage, Alain, any thoughts there? Leverage in the U.S. needs to remain below 3. This is why I mentioned $3 billion to $5 billion—we could achieve that without issuing new debt. If we exceed that amount, we would have to consider issuing debt, which isn't our preference. We have the capacity to go up to a leverage ratio of 3. The reason for this is our ability to reduce debt quickly. For instance, with the Daseke acquisition we completed in April, we took on an additional $500 million of debt, but we expect to reduce that by $500 million by the end of the year.

Our next question comes from the line of Bruce Chan from Stifel. Go ahead, please.

This is Andrew Cox standing in for Bruce. You mentioned anticipating some impact in the first quarter from the hurricane relief efforts, particularly due to the Daseke exposure. We were curious if you expect any effects in the fourth quarter as well or if this is primarily a first-quarter event for you.

Yes, very good question. So far, what we know is that right now, it's a cleanup phase that these guys are going through right now. It's more like the waste guys that are taking are busy with the situation there. The cleanup phase, is that going to be week? Is that going to be a month? So once the cleanup phase is done, then they start reinvesting, rebuilding, et cetera. This is why maybe we'll see some benefit in Q4, but who knows? We don't know. But one thing is for sure, if it's not Q4, it's going to be Q1.

And then just as a follow-up, I wanted to get your thoughts on the impact of a potential FedEx Freight spend given your experience with the big brown machine in UPS. Do you think the spend would be a bigger hurdle, smaller hurdle or comparable from an unbundling standpoint? And over the course of time, do you expect this spend to be a net positive or a net negative for the group?

Well, I think it's going to be a net positive, but it's not easy to do. Don't forget to do the spin-off of a division like UPS has done with us. It's not a very easy process. We've done it us; we know how to do it. But it's not easy to do. I could tell you that. I think it's good for the FedEx shareholders, depends on the valuation of the freight division, but I think it's a good move. I think it makes a lot of sense. I think it's also going to be good for the LTL industry.

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

Just a couple of clarifications on some numbers, just some confusion. I know you've kind of hit this a couple of times, but just when you answered Ravi at the beginning, you said flat earnings year-over-year, and then you kind of clarified a couple of things throughout the call. Were you talking about a normalized $6.34 or Bloomberg has you at $6.18 year-over-year? Just trying to get clarity on the fourth-quarter target. I know you said it was more like the second quarter which was, I think, $1.71. So just trying to clarify that for some investors.

Right now, what we're saying, Ken, is that probably it's going to be more of the same. That's for the year. I don't remember what we did last year. I think it was something like $6.18, $6.20. I think that's where we're going to end up the year.

Okay. Because that would be a significantly weaker, I guess to clarify that, that would be a weaker fourth quarter than I think I guess, the normalized $6.34 that's floating out there as well. Okay. So you're comparing against the $6.18. And would you be able to state then to clarify what your first three quarters has been just because there's a lot of normalization going on?

You know what, Ken, I don't have this number. I'll have to get back to you on that or David will have to get back to you on that. But overall, if you take what we have, I think at the end of Q3, just hold on for a second that we're at $4 55. So yes, so $4.55 plus $1.60 something like that. Yes, which is basically what we've done in Q3. But I think that we'll do a little bit better in Q4 than in Q3, like I was just saying about our specialty truckload, a little bit less on logistics, a little bit better on LTL and P&C. To be conservative, what we're saying is that, okay, let's say that '23 and '24 are the same, like $6.18, $6.20.

And then when you talked about the kind of 91-ish OR for the fourth quarter, I guess you're looking at improvement sequentially for the U.S. LTL. Can you talk about what gets you there? What gives you the confidence? I mean it sounded like you were concerned. And should we be concerned with where pricing is at? It sounds like the renewals are low-single-digits. So I'm trying to match the kind of pricing concern, service concerns with how you show improvement?

No. The problem that we have that we have to improve versus Q3 is our cost. I mean, we had way too much cost in our claim. If you look at our claim in Q3 at 0.8% of revenue. This is completely unacceptable. I think that we're going to do a better job in Q4. That's number one. Number two, again, our fleet costs are improving in Q3. But for sure, they will keep improving on Q4. So labor cost per shipment. We took a little bit of a setback in the first two weeks of October. But September, our labor cost per shipment was the best so far in the year. We did really, really well in September, but then with the first two weeks of October, it's a little bit a step back. I'm looking at the third week of October so far, and we're back on track to where we should be. I think that we'll do a better job on the LTL OE in Q4 versus Q3. Same volume, same pricing.

So it's really focusing on those costs and then improving performance here, yes?

Yes.

There are no further questions at this time. I'd now like to turn the call back over to Mr. Bedard for any final closing remarks.

Thank you. So well, thank you very much, operator, and thanks, everyone for being on this morning's call and for your interest in TFI International. As always, if you have any follow-ups, please don't hesitate to reach out. Enjoy the day, and we look forward to speaking again on our next quarterly call. So thank you. All the best.

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.