TFI International Inc. Q2 FY2025 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by. Welcome to TFI International Second Quarter 2025 Earnings Call. 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. I would also like to remind everyone that this conference call is being recorded on July 28, 2025. Joining us on today's call are Alain Bedard, Chairman, President and Chief Executive Officer; and David Saperstein, Chief Financial Officer. I'll now turn the call over to Alain Bedard. Please go ahead, sir.

Well, thank you very much, operator, for the introduction, and thank you, everyone, for joining today's call. Within the past hour, we reported our quarterly results that demonstrate solid margin performance across all of our business segments. This reflects the hard work of the talented team members across our organization even as economic uncertainty continues to weigh on industry-wide freight volumes. As you've heard me say, strong free cash flow is always a top priority at TFI International, and I'm pleased to report that we had yet another strong quarter in that regard, producing $182 million of free cash flow. As you know, we use excess cash flow to return capital to shareholders whenever possible. Thus, we repurchased a significant number of our shares, both during the second quarter and into the third, while maintaining a strong balance sheet, which has long been a pillar of our strength. In fact, we further strengthened our balance sheet during the quarter through a private placement bond offering that I'll discuss in a moment. So let's begin with a quick review of our consolidated results. During the second quarter, we had a total revenue before fuel surcharge of $1.8 billion compared to $2 billion a year earlier. As I mentioned, we had strong margin performance across the board, and we generated $170 million of operating income, representing a 9.5% margin, up just a percentage point compared to 2.5% in the prior year period. We also produced adjusted net income of $112 million relative to $146 million last year, and our adjusted EPS of $1.34 compares to $1.71. In terms of net cash from operating activity, we generated $247 million, which was virtually flat with the prior year period. And free cash flow, as you heard me say, was $182 million, and that was significantly above the second quarter of 2024 results of $151 million. That's up 20% due in part to favorable working capital dynamics as well as moderately lower CapEx relative to last year. We owe these solid results to the dedication of the men and women of TFI International who really focused on execution during the quarter, taking the opportunity to strive for quality of revenue and improved efficiencies, including at acquired operations, while maintaining a keen focus on cost control. Let's turn to the next second quarter results for each of our three business segments, starting with LTL. This quarter was 39% of segmented revenue before fuel surcharge and down 11% year-over-year to $704 million. Operating income of $74 million compares to $110 million in the year earlier period. The LTL operating ratio of 89.5% compares to 86.2% in the second quarter of 2024. However, this represents a 360 basis point sequential improvement relative to the first quarter of 2025. Our LTL return on invested capital was 12.9%. Next up is Truckload, which was also 39% of segmented revenue before fuel surcharge, which came at $712 million compared to $738 million a year earlier. Operating income was $71 million versus $81 million in the prior year period, and our Truckload OR of 90.1% is relative to 89% in the second quarter of 2024. Tariff-related uncertainty continues to weigh on industrial end market demand. However, this quarter's OR also delivered a 250 basis point sequential improvement relative to the first quarter of 2025. Wrapping up on Truckload, our return on invested capital was 6.4%. Our last business segment to review is Logistics, which at $393 million was 22% of this quarter's segmented revenue before fuel surcharge and down from $442 million in the prior year. Logistics operating income was $38 million compared to $51 million, representing a 9.6% operating margin as compared to 11.4% in the prior year second quarter, and our return on invested capital was 15.7%. In terms of the balance sheet, we benefited from the $192 million of second quarter free cash flow and ended June with a funded debt-to-EBITDA ratio of 2.4x. As I mentioned, we also eagerly repurchased shares during the quarter, $85 million worth, and also paid out another $39 million through dividends for a total of $124 million of excess capital returned to shareholders, fulfilling one of our long-standing important commitments. Subsequent to the quarter end, we have repurchased in excess of another 475,000 shares. I'll wrap up with our outlook for the third quarter of 2025. We currently forecast an EPS in the range of $1.10 to $1.25, and this assumes no significant change, either positive or negative, in the operating environment. In terms of net CapEx, we continue to expect approximately $200 million for the full year. All right. So with that, operator, if you could please open the line. Both David and I would be happy to take questions.

Your first question comes from the line of Ravi Shanker from Morgan Stanley.

Great to see the turnaround in margins here. I assume that this was all idiosyncratic to the actions you've taken and not really helping the cycle. Can you remind us what is the margin ceiling you can achieve with further internal actions before the cycle starts to help you out on the LTL side?

Yes, Ravi, that's been a significant topic of discussion at TFI. We are quite cost-sensitive, and what our team achieved in Q2 was impressive, especially considering the challenging market conditions. We've introduced several tools, one of which is Optym, implemented for our linehaul operations. We're currently in the process of integrating Optym for the pick-up and delivery segment as well. We're proud of the progress in our linehaul, where four years ago, over 30% of our miles were on the rail, and now it's closer to 20%, and we're aiming to reduce that further thanks to Optym. We believe that improving our pick-up and delivery operations will help us significantly in reducing costs. This week, we are starting the implementation in two smaller terminals, which is part of a broader plan for over 100 terminals with Optym. Additionally, we have a lot of work ahead in managing claims. While we've improved our claims ratio to 0.7% of revenue from 0.9%, we still have room for improvement. Our best results have been at 0.4%, and our Canadian operations have achieved 0.2%, which is also the benchmark for the best peers in the U.S. This is a significant cost burden for us. Similarly, we are addressing safety issues, having recently hired Marc Fox to enhance our safety culture, given his successful track record at Matrec. We need to make substantial improvements in claims and safety, which will greatly benefit us. Furthermore, we're exploring new AI technology to decrease the labor intensity of our operations, particularly regarding collection and appointment freight. We are committed to reducing costs and becoming more efficient.

Maybe as a follow-up question, if you can give us a little more color on just how customers are talking to you about the tariff environment, kind of especially Canada, U.S.? Are there any structural changes in supply chains and kind of any impact on you guys long term, if you can tell at this point?

We are definitely experiencing a decline in our Canadian LTL business, although we're still performing well overall. The drop is largely due to reduced trade between the U.S. and Canada in the LTL sector, which is our most profitable area. Typically, we see two loads going north for every one going south, but that ratio has shifted to about one load north. Therefore, we're losing out. Once the tariff issues with Canada and Mexico are resolved, we expect things to improve. The current instability is a concern, but we anticipate a resolution before August 1, although it could take longer, certainly by 2025. Additionally, we are feeling the impact of instability in our industrial truckload operations in the U.S. Many customers are hesitant and are waiting to see how things unfold. Our miles in the specialty truckload have decreased by about 10%, which is unusual. The market is quite quiet at the moment. We hope the new legislation will encourage investment, which is why we invested in Daseke a year ago, anticipating a rebound in the U.S. industrial sector. Unfortunately, we may have acted a year too soon.

Your next question comes from the line of Scott Group from Wolfe Research.

Maybe if you can just give us a little bit more color on the Q3 guidance, $1.10 to $1.25, maybe some of the margin assumptions there. It's probably a little bit of a steeper decline Q2 to Q3 than we typically see. So just any thoughts there.

Scott, this is really based on just the historical seasonality of the business. If you look last year, Q2 to Q3, we dropped $0.11 of EPS and margins contracted pretty much across the board, across the divisions and the segments. And so that's all that we're forecasting there is just normal seasonal sequential declines. And the extent to which we're able to continue to drive these idiosyncratic opportunities that we have over the course of this quarter, we will, of course, come to offset some of that.

Okay. And then maybe just a little bit more specifics on how you think about the progression of U.S. LTL margin in Q3, if you have any early thoughts on where you think this should be going in Q4.

You know what, Scott, I think that our guys at TForce Freight will do a great job again in Q3. I would say that, again, I mean, our volume is still too soft. So the guys, what they've done so far is they've improved the mix of our freight, okay, year-over-year. And when you talk to our team here, they think that what we're focused on is a 94% OR like we've done in Q2, 94%, 95% OR. I think that, that is the goal that is attainable today with the kind of volume we have, right?

So you're saying 94%, 95% in the back half of the year is sort of what you would expect?

Yes.

Your next question comes from the line of Walter Spracklin from RBC Capital Markets.

Regarding the guidance for the latter half of the year, I understand you might not be providing explicit guidance for the fourth quarter. Can you share any insights into what we might expect for the entire year? Additionally, you've mentioned your observations about the current macroeconomic environment, indicating that there hasn't been much improvement. Are there any indications that suggest a potential improvement in the first half of 2026, or are you leaning towards a more favorable outlook in the second half of 2026? I'm interested in your perspective on the overall macro situation based on the signals you're receiving.

In terms of industrial freight in the U.S., we believe the new budget proposed by the Trump administration could rejuvenate investment in the industrial sector, as well as in housing and schools. This gives us hope that we will finally emerge from the freight recession that has plagued us for nearly three years. While we haven't observed concrete improvements yet, feedback from our customers has been more positive. Recently, during a meeting with our specialty truckload fleet, U.S. representatives expressed optimism about communicating with their customers, indicating that things might start to pick up. Although we lack solid evidence at this moment, the indicators suggest a turnaround could be on the horizon, possibly in late '25 or early '26, keeping in mind that such projects often require time to materialize. Meanwhile, on the Canadian side, there is considerable uncertainty. Once we see how things unfold in the U.S., we anticipate that Canada will better understand the necessary steps to take moving forward.

Yes. And I think what underpins that is really being able to see the effects of the cash tax savings, right, and thinking about how that flows through the economy. I mean just us, our cash tax savings in the U.S. this year are going to be $20 million and next year is going to be another $20 million. And think about that throughout the economy, and this is really going to go towards companies that are doing CapEx, right? And these are the companies that are our customers. And now that we own Daseke, right, 72% of our specialized operation in the U.S. is flatbed. We have $1.3 billion of U.S. flatbed exposure revenue. That's this year based on today's depressed dollars. So when you think about rates coming down and you think about all of this cash tax savings coursing through the economy, that's what gives us a little bit of confidence in there really being a catalyst for a turn, in particular, for our business units, which is our specialized Truckload and our LTL.

You're sounding more confident than I've heard you in a while. So that's great. My follow-up question is on M&A. Can you talk to us a little bit about how you're looking at tuck-ins, what your budget would be over the balance of the year and into next for just tuck-in M&A? And then what your thoughts are toward a larger deal, I know you pointed to 2026, is that still in the cards?

Yes. So for '25, Walter, it's pretty simple. The M&A activity is buying back TFI, right? That's what we're doing. That's what we'll continue to do in '25 because we cannot find another opportunity that cheap. It's impossible. With so much free cash flow, there's no company that we can buy today at a reasonable price that is better than buying back TFI. So that's what we're doing. Now in terms of larger transactions, I think that probably you could see us getting involved in something of size in '26. Don't forget, the last deal we did was late '23 into '24, so that was like two years ago. Mr. Brookshaw and his team, slowly, we're digesting Daseke, okay? It's more and more every day under our control. We're transforming the good Daseke truckers, okay? The role that Steve has is to change these guys from good truckers to good business truckers, right? So a good business trucker is there to make money. A good trucker is there only to service the customer and hopefully makes money. That's the difference between the two.

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

Yes, I was wondering if you could give a little more color on the U.S. LTL side and some of the other things you've been working on such as the sales force rejiggering penetration efforts on the small to midsized businesses, some of that other initiative stuff that maybe lifted margin better than expected in the second quarter.

That's a great question, Jordan. Since we acquired UPS Freight, now known as TForce Freight, it has been a significant challenge for us. We've struggled to achieve strong sales performance, despite our efforts. However, for the first time since the acquisition in Q2, we are seeing progress with a motivated sales team focused on small and medium-sized accounts that is delivering results. The number of shipments, which had dramatically decreased six to nine months ago, is now rebounding, and the team is very enthusiastic. We're optimistic that with Chris' leadership, we are revitalizing our sales team. Additionally, we have historically faced issues with billing customers, and David can elaborate on how our new software, Prism, is addressing that.

Yes. For sure, especially now that we've corrected the problems, we can explain exactly what they were. Prism is a new billing software, which is helping us with our billing and our billing accuracy. We've also changed our processes so that we no longer deliver until you have an account with us or we have your credit card. And this caused DSO to go down at TForce. Or in the U.S. LTL, which is primarily TForce, DSO went down from 43 days a year ago to 35 days. It's very rare to see such a dramatic reduction. And why is that? Well, it's because of the software and it's because of a better process, which is a basic one, which is don't deliver the freight until you have an account and then you get paid quickly. So this also helps the customer service. This also helps the customer experience because there's no running around afterwards trying to figure out the billing.

That also helps the motivation of the sales guy because now they don't get calls from customers, and your billing department, they don't know what they're doing or this or that. I mean it's smoother. It's getting easier to do business with TForce Freight today than in the prior times, and we'll keep improving that.

Exactly. And you see it in also the quality of the revenue. So you'll notice that our length of haul is down a little bit. The SMB mix has improved, right? The big problem that we had over the last several quarters was a three-point reduction in the SMB mix as a percentage of our total revenue. And we've now reclaimed two of those three lost points, okay? So we're two-thirds of the way back to where we were, let's say, about a year ago. And that's important. That's contributing to the results. And then the last thing is the GFP. We've now put up our third sequential quarter of GFP stability. We're up a little bit. But stability for three quarters now is something that we have not seen in a while. And those two go hand-in-hand, the local, the SMB and the GFP sales.

Your next question comes from the line of Tom Wadewitz from UBS.

I wanted to ask you a little bit more on U.S. LTL. I know you guys have been kind of peeling back the onion for a number of years, getting the billing right, I'm sure it sounds like a big positive. What else do you think is left? I guess I was surprised when you said around 20% of linehaul miles outsourced rail. I thought you were like up in the mid-30s. But I don't know, is it insourcing more linehaul? Is it other things? Just kind of where you're at in your journey of getting to have the LTL operation and service that you want to have?

Well, you know what, I mean, for sure, from day one, we were not able to move away from rail because our fleet, our trucks, were so bad that it was just a problem. So we've invested tremendously into the asset, the trucks and also the software. So right now, we are running about 20%. And we didn't add that many road drivers within TForce Freight. I mean it's just like those drivers are doing more, okay? So we've also introduced sleeper trucks, okay? So now I would say we're just a little over above 100 sleeper trucks in our linehaul fleet at TForce Freight. And this is also helping us on the long haul, okay, because now running sleeper, we beat the service of rail, okay, and the customer satisfaction is like much, much, much improved, right? So it's a change, and we'll continue to improve that. Now can we go less than 20%? Well, it's something that we're looking at right now, okay? But it's way better in terms of our service on the three or four days service, right? Because now we move more and more freight on the truck instead of rail.

So are you kind of where you want to be then in terms of your service? Or are there other kind of big things that you need to do? And then I guess just maybe related to that, it seems like the pricing is still showing some pressure. I think you had some improvement in shipments sequentially, but you're still kind of down in terms of revenue per hundredweight sequentially and year-over-year. So how do we think about that equation of getting to improvement in the price?

Yes. So our service on the next day, okay, is comparable to our peers. We know that. Where we are not up to par is when it's a two-day or a three-day or a four-day service. Four days, now we're getting closer to our peers because now we move more away from the rail, okay, and with our own trucks. Now on the two to three days, this is where the guys are working on. So our service is not where it should be. I'm not saying that our service has improved, okay? On the next day, we are comparable to our peers. And until such time that our service is comparable to our peers, our rate cannot be as good as our peers, right? So you have to provide the service first and then your sales team could say, 'Hey, you know what, this is the market, and this is what we would like to have in terms of rate.' So we're not there yet, Tom. But the guys are working on, and we've made some major improvements over the last, I would say, one and a half years, and even more lately. Our missed pickup, okay, which was a cancer for us, a cancer because like nobody cared, okay? We were all the way up to 4% three years ago. Now we're hovering around 1%, okay? Still too much because in Canada, we don't have missed pickup. I mean we're zero, right? So guys, one is better than three or four, but it's not good enough. So we have to keep improving this service metric, right?

Yes, for sure. It's something that we're very focused on because, as we talked about before, missed pickup is the worst because it's bad service and you lose the revenue. Our missed pickups are down, the missed pickups, pure missed pickups, are down over 50%, maybe 53%, something like that year-over-year in the quarter. And then when you add missed pickups plus reschedules, I get sometimes, 'I didn't miss it, but I rescheduled it.' 'You missed it.' Then you add those together, we're down like 42%, 43% year-over-year. So it's a major, major improvement.

Your next question comes from the line of Brian Ossenbeck from JPMorgan.

So maybe just to follow up on that last train of thought. When does that start to translate to better service, to consistency? Like, how long does it take for those conversations to result in better yields, bringing it back to the market? Is this something you can see towards the end of this year? Is it really going to take a little bit longer, considering it has been such a big change in a short amount of time? Are shippers going to want to see that for a longer period of time before they start paying you a commensurate rate?

I agree with you, Brian. One quarter doesn't define the entire year. The shippers are intelligent and they observe our progress, but they'll want to see sustained improvements. It's not enough to show a brief uptick followed by a return to past issues. You're correct that this will take additional time. Whether that's another two or three quarters remains to be seen, but as the market strengthens, we anticipate that will support our efforts in the future. If the current conditions persist, gaining the trust of our customers that TForce Freight service meets industry standards will take some time, but we are committed to continuous improvement.

Okay. And then Daseke and the flatbed side of things, maybe you can just go through more detail in terms of, I think at one point, you needed to get rid of some equipment, you had too much trailer equipment, maybe some other operational changes to get these to be business truckers instead of what they were before, but some updates on the asset side and then just the processes in terms of where you are now and what that could look like when the volumes do get better.

Yes, that's a great question about Daseke. As I mentioned in the Q1 call, by summer all of Daseke will be using our financial system, and the same goes for fleet management. We now have improved visibility into our asset base. Specifically, my trailer count at Daseke and in specialized truckload has decreased, and while my truck count is down, it's still too high. We have too many trucks idling as our miles have dropped about 10% year-over-year due to reduced activity from our industrial customers. We expect to see improvements. Looking at my operating ratio in Q1 for specialty truckload compared to Q2, I wouldn't say that the market has improved or that there's more activity; rather, we have just managed costs better. Revenue per truck is stable, and while our rates have improved, our velocity has not. After acquiring Daseke a year ago, I am proud of what they have achieved so far, but there is still much work ahead. It's not typical to operate a specialty truckload with a 90% operating ratio; we need to reduce that to around 85%. We aim to reach an 87% to 88% operating ratio by early 2026 and continue to make improvements in a normalized environment. If market conditions improve, we can accelerate our progress towards an 85% or even an 82% ratio over time. The market is challenging right now, and there haven't been many peers reporting in Q2. However, it's clear that some peers are struggling financially in truckload, indicating how tough the current market is. I'm encouraged by our team's effort in reducing our operating ratio by 200 basis points quarter-over-quarter; they're working very diligently. Regarding capital, we need to eliminate approximately $20 million of excess equipment, including trailers and trucks, to operate efficiently. We're in the process of doing this. The pre-owned equipment market is not great, but we're not losing money selling our equipment right now; in fact, we're making a bit. However, I encouraged the team to be more proactive.

Your next question comes from the line of Daniel Imbro from Stephens.

Alain, I want to follow up on the U.S. LTL pricing discussion. I think it makes a ton of sense you're improving the missed pickups in service, and that will take time to show up in price. But I think the magnitude of the decline, down almost 7% year-over-year, can you just walk through or unpack what the headwinds to yield were this year? Considering service is better, I would have thought maybe we saw a little bit of improvement. But was there a mix? Is it just competitive pricing? Kind of what's happening with core yields there?

The market is currently soft. From what I've observed, some of my top competitors are facing volume declines of about 5% to 6%. While there's some price pressure, it's not catastrophic. Additionally, as we begin to increase our focus on small and medium-sized businesses, which tend to be more profitable, we should see an improvement in revenue per shipment. It's a transition away from relying heavily on corporate accounts and third-party logistics, aiming for a situation where approximately 40% of our shipments come from SMBs.

Yes. Daniel, our weight per shipment increased almost as much as the yield decreased. The weight per shipment was up over 5%. By carrying heavier freight, yields have dipped slightly, which is our strategy in this soft market to maintain revenue per shipment. We have managed to achieve this while reducing the length of haul a bit, which helps lower costs. However, the main reason for the decline in yield is the rising weight per shipment.

Your next question comes from the line of Kevin Chiang from CIBC.

Maybe just when I look at your OpEx within your U.S. less than truckload, for the past couple of quarters, you're down $56 million, $57 million year-over-year, both in Q1 and Q2. Just wondering, is that a trend rate you can continue for the rest of the year? So if I look at OpEx, can that be down another $50-plus million in Q3 again? Or are you starting to lap tougher comps? But it does feel like you had some excess OpEx in 2024 in the back half of last year.

Yes, for sure. Yes, I don't know; we'd have to look at some of the details to get back to you on those numbers, Kevin, separately. But yes, I mean, we've been taking out costs. You can see that the truck count is also down in the U.S. LTL. We're trying to adjust the cost to the demand, while at the same time, we're investing in service. Part of the reason that we're missing less pickups is that we're staffing a little bit more. We're working the overtime as well. We're making sure that there are guys there. So there's the two pieces of it, right? It's not just about cutting; it's also about making some strategic investments. And certainly, picking up the freight is a very high return on investment.

Yes. Right. That makes sense. I mean just a clarification, David, I think you mentioned the Q3 guide of $110 million to $125 million just assumes normal seasonality. I guess if I ask it this way, would that assume then any incremental success you have on your self-help levers outside of what you've realized in the first half of this year, that would be additive to that guidance?

Correct. That normal seasonality would be we continue to operate the same way that we're operating now, that just we maintain that, right? And then we just kind of have the seasonality applied to it.

Your next question comes from the line of Ari Rosa from Citigroup.

Congratulations on the impressive turnaround. I would like to know more about the sustainability of the free cash flow. Alain, you mentioned free cash flow in your opening remarks, which I believe is a crucial aspect of our narrative. Can you maintain these levels? Additionally, how might it improve if we see some positive changes in the macro environment?

Yes, that's a great question. I've always believed that results speak for themselves. If you look back over the past five years, especially the last two or three years, which have been challenging due to the macro environment, we've still been able to generate significant cash. TFI is a cash generator, and I often emphasize that cash is the vital asset of TFI because it allows us to pay down debt, return more to shareholders, or pursue mergers and acquisitions. Reviewing TFI's 30-year history, this has been our pathway to growth. I recall when we transitioned the company into an income trust in Canada in 2002 and faced skepticism about giving away all our cash and its impact on growth. Yet, from 2002 to 2008, we expanded even while reverting to a corporation during the financial crisis, which was poor timing. Our focus has always been on strategic growth. For instance, we are transforming Daseke from good truckers into effective business truckers, which involves brokering more freight and reducing reliance on our own assets to achieve a balanced approach like we have in Canada. The revenue dynamics for our specialty truckload in Canada differ from those in the U.S. with Daseke, where the focus was primarily on operating their own assets with only minimal brokerage. We are working on changing that mindset in the U.S. and focusing on improving free cash flow by leveraging external assets. It's the same revenue stream, possibly with different margins, but it alleviates the burdens of capital expenditures and risks associated with accidents.

So I'm sorry, so in terms of the sustainability of this level, like what's your thought on that? It sounds like there's opportunity for it to step up from here? Or what is it...

Yes, absolutely. When we examine our operations in Canada, my P&C and Canadian LTL are operating with minimal assets. We're aiming for a similar model with Daseke and our specialty truckload in the U.S. However, implementing this in U.S. LTL is more challenging due to the unionized labor force. This is why I believe that transferring revenue from asset-based to non-asset-based operations will improve our free cash flow in the future. In a typical market, with our current business, I believe TFI can generate nearly USD 1 billion in free cash flow if market conditions are favorable.

Yes. The first factor contributing to free cash flow is net income. As the business environment improves, net income increases. When we start generating significant profits, we won't celebrate extravagantly or purchase new trucks; that's not our approach. Instead, we'll acquire only the trucks we need while continuing to transition towards a more asset-light model in the businesses recently acquired. The additional earnings will flow directly to the bottom line of free cash flow. The only aspect to consider that could offset this is the working capital needs, which may rise as revenue increases. That's all. Therefore, you should anticipate that free cash flow will increase alongside earnings, and we won't make substantial investments in new capacity via assets.

And also, we have a few one-timers on the real estate side, okay? Because we're also adjusting our real estate portfolio to the reality of the world today, so this is also something that is going to help us in '25, '26, '27, down the road.

Got it. That's great information. I wanted to focus on the service aspect of the LTL business. Could you provide more details on the specific steps you're taking to enhance the service and align it more closely with your competitors? Some of your competitors have shared the measures they implement to improve service, like using airbags for freight or dimensioners, among other strategies. Please elaborate on the progression and details regarding how you're working towards that service improvement.

Yes. Here are the things that we're looking at. The first is billing accuracy, okay? And as it relates to that, we've talked about the software and we've talked about some of the success that we've had there. The second is cargo claims. And there, yes, we're using straps. We're experimenting with cardboard. And so we are looking at various consumables to be able to improve the cargo claims. The third is missed pickups, which we're addressing through, first of all, better systems. We're using the more advanced Optym P&D, but we're also really making sure that we're staffed appropriately and making sure that the culture at the terminal level, at the dispatcher level, is that missed pickups are not acceptable. And then, of course, the last is on-time delivery. And as it relates to that, there's a culture element to that, and then there's also a linehaul element to that.

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

David, good to hear you on the call again. I just want to come back to the second quarter outlook, right? So it's a big pullback. And I know you said it's a normal seasonal drop. But I guess if we go back two years ago, we didn't have that drop. So maybe, David, if you can just kind of walk us through what drops off, right? Because Alain already mentioned LTL margins at U.S. should stay basically flat into 3Q, 4Q. So is it truckload? Is it logistics? What falls off? Or is it just freight in the third quarter?

Yes. I think we mentioned 94%, possibly 95%. If we reach 95%, that would impact LTL. Last year, truckload margins also decreased somewhat. The logistics side might also see reductions due to fewer truck deliveries as the industry cuts back on capital expenditures. Additionally, there is an uncertainty we cannot address until the quarter ends, specifically concerning how much of the current freight dynamics are affected by the fluctuating nature related to tariffs. For example, imports to the West Coast of the U.S. surged in June, benefiting our freight flow now. However, it is uncertain what will happen when that surge ends, especially with peak season approaching. We are aware that it’s challenging to predict the future based on current trends due to the inconsistent pattern of imports caused by the tariff issues, although it seems we may have moved past the worst of that volatility.

And David, can you just remind us what percentage is related to West Coast transports?

Well, approximately half of our LTL is retail. I can't specify how much of that is tied to West Coast imports, but it seems that a significant portion of the retail items is coming from China.

Yes. Because don't forget, we used to be part of UPS and UPS is a retail machine. It's a transition more and more into industrial freight. And this is maybe one thing that we forgot to say, David, is that now more and more, we are introducing our LTL salespeople to our industrial base customer that we have at Daseke, right? Because, again, UPS was a retail machine, UPS freight was the same. We said, no, no, no, no, guys, let's move more into the industrial environment, okay? And through the Daseke sales team, we're opening doors to our LTL team to see, 'Hey, can we do something with you guys?' right, like a Caterpillar, like a John Deere, all these major industrial customers that we service on the industrial side, but we don't on the LTL side.

Wonderful. And then my follow-up, I guess, Alain, if you think about shipments down 10%, tons down 6%, you talked about the competitor that's already reported, but what's your big picture on the capacity or the cycle here? I don't know if you want to throw in English language proficiency impact on the trucking side, just the cycle on the tonnage side being down much. Do you think you're losing share? Have you stabilized? Maybe thoughts on the backdrop.

I think the issue with English proficiency mainly affects the truckload sector. When I speak with our truckload team, they believe there could be some impact. However, I wouldn’t say we have observed anything significant yet. Looking at our volume, we have been experiencing a decline over the past couple of years. Like David mentioned regarding the GFP, we are finally seeing some stability. I expect that in the upcoming quarters, we will experience more stability and possibly enter a growth phase, although not a substantial one. This is also linked to our service improvements. It’s crucial to understand that quality of service comes first. Competing against peers that offer good service is challenging without that quality. This is why the team is concentrating on enhancing various aspects of our operations. Missing 3% of shipments due to missed pickups is unacceptable, and we have reduced that to 1%, with a goal of reaching 0%. Our focus is unwavering, but as I mentioned to another analyst, one positive quarter won’t convince the industry or shippers that it’s a lasting change; it’s essential for us to demonstrate consistency and sustainability. That’s why we are cautious about our U.S. LTL goal for Q3, aiming for a 94% to 95% operating ratio. We hope to exceed that, but it represents our minimum target.

Your next question comes from the line of Bascome Majors from Susquehanna.

David, referring back to the cash flow discussion, you mentioned that Mr. Bedard indicated we could approach $1 billion in free cash flow in a more normalized environment. Do you have an estimate for where we might end up this year? Also, regarding the quarterly outlook, I understand you're hopeful that the U.S. industrial sector will improve later in the year. However, if we continue to hover around our current position and that improvement doesn't occur until next year, could you provide some insights on your expectations for seasonality in the fourth quarter?

I believe free cash flow will likely be around $700 million for the year. Regarding the industrial segment, it takes time for stimulus to impact the economy, and the tax break for capital expenditures will also take some time to materialize. I expect we will begin to see those projects take shape in 2026. For understanding seasonality in the fourth quarter, you should compare our performance between the third and fourth quarters of last year, especially since we had Daseke in both periods last year. This comparison will give you a clearer picture of any expected sequential movements. On the LTL side, what happened to us in the fourth quarter was an unusual situation in the U.S., primarily due to losing a substantial number of small and medium-sized businesses, which is not typical seasonality. Therefore, the margin compression trend we experienced last year between the third and fourth quarters will not occur again. While it's reasonable to expect some decline in Q4 compared to Q3, it won't be as significant as what we saw last year.

Your next question comes from the line of Benoit Poirier Desjardins Capital Markets.

Just looking at the financial leverage, you've been a disciplined capital allocator. You ended the quarter with a leverage of 2.35, mentioned a clear desire to pursue buyback given where the stock is. Just wondering what could be the targeted leverage by year-end given the comments about free cash flow generation? And where would you like to be before sizing a more transformative deal?

I think our plan, correct me if I'm wrong, David, is that, based on our plan, we're going to end up the year around 2, 2.1 leverage, right? Let's say, 2.1. We're at 2.35 now, 2.1. So this is the way we see it. And now in terms of the deal of size, the approach that we have is that we could live all the way up to 3, okay, because we generate so much cash. But we're not going to go above 3, that's for sure, okay? So up to 3, and then very fast that year is we want to bring that leverage down, okay, to more like under the 2.5: 2.2, 2.25, 2.35, in that league.

Thank you for the insights. Alain, you provided valuable information regarding your involvement in the industrial sector and the optimistic outlook for recovery in 2026. While logistics is facing challenges this year, a rebound is anticipated in 2026. I am trying to understand what the normalized earnings could look like in 2026 given these positive indicators. Could we potentially see earnings per share of $6 and perhaps a 90% operating ratio for U.S. LTL? Is that achievable?

Yes, Benoit, it's still too early for us to discuss 2026 because we're having a hard time focusing on Q3. Regarding logistics, our JHT division is facing challenges right now since there are few truck purchases. OEMs are down significantly, with drops of 15%, 20%, or even 30%. However, forecasts suggest that this will stabilize in 2026. Our U.S. logistics had a tough first six months of the year, operating at about 95% of our plan. We believe the last six months of 2025 will see us closer to 98% or 99% of the plan, which should improve our situation. In a typical environment, pre-tax operating earnings for our logistics should range from $200 million to $220 million, given our current business. We expect to finish the year at around $160 million. JHT is crucial in this regard. From what we understand about JHT and truck OEMs, due to new engine regulations set for 2027, there will likely be a surge in truck production in 2026. Additionally, with the current CapEx plans and potential initiatives from Mr. Trump, we anticipate JHT will be quite active in 2026, which will benefit us.

Your next question comes from the line of Konark Gupta from Scotiabank.

Just wanted to get back to the SMB mix here. Can you help us understand what made these SMB accounts, whichever you got back, what made them come back? And like what was the reason in the first place they left here?

We are currently prioritizing these accounts because we value them. For instance, David mentioned missed pickups. We actually pay more attention to missed pickups for these accounts than to our general freight services. We are invested in these accounts because they represent our most profitable margins. Instead of ignoring the situation, we have made it a significant focus for us. The reason they returned is not because of rate reductions, but because we offered a fair and reasonable proposal along with a commitment to providing good service. This connects to my earlier point about our next-day service, which is now on par with our competitors. Where we still lag behind is in our second, third, and fourth-day service. We are improving and getting closer to our peers in fourth-day service, but we need to make substantial improvements in second and third-day service to match our peers. Most small and medium-sized accounts rely primarily on next-day service, and currently, our performance in that area is competitive.

Makes sense. So it's the service-based getting back, not the price-based getting back.

Yes. No, not the price.

I'm glad to hear that. I have a follow-up question regarding capacity. You provided some capacity figures for the Truckload business for Daseke and others. What about the U.S. and Canadian LTL? How many doors, trucks, or trailers do you have? Are you possibly overextended in the U.S. and Canada on the LTL side? Do you need to make any adjustments, or are you still looking to expand in the future?

No. The Canadian side, we're done because we've just acquired Kindersley about a year, 1.5 years ago. So we're done with Kindersley. We've acquired also Hercules in Canada and in the U.S. So Hercules, we're done in Canada. We're not done in the U.S. yet. So the guys are working on the U.S. side right now. But the rest of our business in Canada is okay. We have no issues. In terms of U.S. LTL real estate, we still have about 3,000 doors too many, 3,000 to 4,000 doors too many. So you should see us during the next six months, do some trade, okay, some swaps with some of our peers that we do all the time. So that should help us reduce the carrying cost of those real estate that we have no use for it. On the truck side, we've talked about truckload. On the LTL side, what we're selling is the old UPS freight trucks, okay, with very little value. So there's not much capital to regain from the sale. But we still have way too many trailers over there and too many trucks, but not a lot of capital tied up there.

Your next question comes from the line of Elliot Alper from TD Cowen.

This is Elliot on for Jason Seidl. Maybe just a follow-up to the last question on TForce. Are you seeing some of these SMB customers feeling more of the tariff pressure? And then a number of carriers are also going after the SMBs. Is the pricing a bit accretive to maybe the total book? Is it seeing incremental challenges given some of these players are looking to grow share?

I think on the tariff side, I don't see anything, any issues with the small and medium-sized accounts with the tariff. David?

No, we haven't seen that. And in terms of your other question about pricing and other people going after SMB, it's a market, right? It's a market. We all know LTL has good characteristics, good market structure, which makes it a very attractive segment within transportation. And it's a market. It's a market that operates within those parameters.

And one shipment could be good for me and one of my peers, not as good for him, depending on where the customer is, where my terminal is. So what is good for me is not necessarily as good or what is good for my peers is not necessarily good for me. So just to say that everybody is going after this kind of business, I mean, sometimes it fits better to me than the other guys or maybe the other guys versus me. So it's just to play it smart.

And then just bigger picture, I mean, any indication of how peak season may shape up when speaking with some of your customers, maybe any pockets of strength or weakness?

So far, I mean, it's like more of the same guys.

Your next question comes from the line of Cameron Doerksen from National Bank.

Maybe just a couple of quick, I guess, maybe modeling questions for David. You mentioned, I guess, some of the tax rate changes or cash tax changes from the new U.S. legislation. I guess what's your expectation for, I guess, effective tax rate going forward with that?

The tax rate won't change. It's just a cash tax benefit. It's a cash tax benefit that we estimate, based on our CapEx over five years, is worth $75 million cumulatively relative to what our tax would have been without this law. And of that $75 million, $40 million is realized in the first two years.

Your last question comes from the line of Bruce Chan from Stifel.

Alain, just wanted to ask maybe a bigger picture strategic question. You talked in the past about maybe finding some density in LTL via M&A. And I know it's still early, but with some of the improvements that you've seen this quarter, is that still on the table? Or do you think that you'll be going at it organic from this point forward?

We need to demonstrate to our investors that we have control over U.S. LTL. While a few shareholders were disappointed, believing we had lost control of TForce Freight, we are now showing that we are getting back on track. Pursuing a significant deal in LTL at this time would not be wise, as we need to reassure our investors about our control. If we can present strong results in Q3, Q4, and Q1 of '26, and show that our progress is consistent and not a one-time event, we can then consider a substantial transaction. Currently, it would be premature; we need to validate our leadership in this area. Our investors generally understand that we manage our businesses well but have lingering doubts specifically about TForce Freight. A larger deal in the truckload sector would be perceived differently, especially if we demonstrate a strong operational performance relative to peers. However, right now, a significant move in LTL would lack prudence. It will take a few quarters to establish our control, and we can reassess in '26. For now, repurchasing TFI makes more sense, as we are familiar with the company, and it offers attractive returns that are hard to find elsewhere.

Yes. The contract renewals continue to be in the sort of low to mid-single digits. The question is the mix, right? It's of little use if you get renewals that are up, but then the customers that pay you more give you less freight and the ones that pay you less give you more freight, right? So that's really what we're looking at. But specifically to answer your question, that's where the renewals are.

There are no further questions at this time. I will now turn the call over to Alain Bedard. Please continue.

All right. So thanks very much, operator, and thank you, everyone, for being on the call with us today. We very much appreciate your interest in TFI International, and I look forward to updating you on how we perform through the balance of the year. As always, if you have any further questions, please don't hesitate to reach out. Enjoy the summer, and thank you again.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.