TFI International Inc (TFII) 2022 Q2 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the TFI International Second Quarter 2022 Results Conference Call. (Operator Instructions)

Please be advised that this conference call will contain statements that are forward-looking in nature and subject to a number of risks and uncertainties that could cause actual results to differ materially. Also, I would like to remind everyone that this conference call is being recorded on Friday, July 29, 2022.

I will now turn the call over to Mr. Alain Bedard, Chairman, President and Chief Executive Officer of TFI International. Please go ahead, sir.

(technical difficulty) remarkable performance so far this year reflects our long-standing adherence to our principal operating philosophies, as well as the many internal or self-help opportunities that we see, regardless of economic condition, not the least of which is the continuing successful integration of TForce Freight acquired just a year ago.

In addition, our favorable quarterly results reflect strong execution across our diversified business, driven by the many dedicated individuals at TFI International. We look forward to having you met some of our many talented leaders at our upcoming Investor Day on November 10 with more details to follow.

For the second quarter of 2022, we reported a 76% increase in our adjusted net income over the prior year and an 81% increase in our adjusted diluted EPS, along with more than $300 million in quarterly free cash flow for the first time in our company's history. All 4 of our business segments contributed to this strong outcome by producing very strong returns on invested capital. And today, we are again raising our outlook for the full year.

The economic headwinds, as I'm sure you're all aware, include the rising interest rates, along with inflationary pressure at multi-decade highs, continued elevated energy prices, unprecedented labor shortage, resurfacing regional pandemic outbreaks and, of course, the ongoing global supply chain challenges. Especially during uncertain time, this is when we resharpened our focus on our long-held operating principle, which bear repeating as they are so instrumental to our strong performance.

We have a relentless detailed focus on getting the fundamentals of our business right in our quest to maximize efficiencies. Everything is with an eye towards optimizing our free cash flow, generating strong returns on invested capital and growing our earnings per share. Why do we do this? Well, because it facilities achievement of our ultimate goal, which is to create long-term shareholder value, especially our strong cash flow and solid balance sheet permits the strategic identification of accretive acquisition opportunities, while returning excess capital to shareholders whenever possible, which we did aggressively during the second quarter.

Given the choppy economic environment, we are especially fortunate to have many self-help levers to pull, as I referenced earlier. Just one example of this, during the second quarter, we sold a Southern California LTL terminal. This facility with 78 doors on approximately 14 acres, not only did we realize proceeds of $83 million on the sale, but our existing usage of the terminal will be easily absorbed by our other nearby facility. This is just one example of our internal opportunity to drive efficiencies.

Before turning to our segment by segment results, on a consolidated basis, TFI International total quality revenue were $2.4 billion, up 32% over the prior year quarter. And given our focus on profitability rather than growth for growth sake, we are very pleased to report, as I mentioned earlier, a 76% increase in our adjusted net income and an 81% increase in our adjusted diluted EPS, and also a 16% increase in our free cash flow to $310 million.

It's important to note that in the year-ago quarter, we had a large bargain purchase price gain of $284 million, which impact the year-over-year comparison on a nonadjusted basis for our reported result not only on a consolidated basis but for our LTL and Logistics segments specifically. This year ago, onetime gain is reflected in our reported operating income, which was down 17% as a result. In addition, our net cash from operating activity came in at $248 million relative to $299 million a year earlier due to another quarter of elevated working capital needs associated with higher fuel surcharge.

I also wanted to note that our deferred share units, or DSUs, provide a favorable $13 million variance to our reported earnings this quarter, given the decline in our stock price.

Let's now turn to our 4 business segments, all of which generated impressive returns on invested capital that helped drive our overall strong performance. Our P&C segment represents 7% of our total revenue before fuel surcharge, despite a 14% decline in revenue before fuel surcharge related to a slower e-commerce activity. P&C benefited from better B2B density and our increasing [diversity] that allowed us to benefit from strong industrial activity for our specialized operation.

P&C is a good example of self-help nature of our opportunities. We produced a 25% increase in our operating income to $37 million, with the operating margin up a noteworthy 910 basis points, and our return on invested capital came in at 27.6%, up 460 basis points. This much improved profitability reflects our own internal focus on driving density and productivity, which is part of our active management style.

Turning to our LTL segment, which is 45% of segment revenue before fuel surcharge. We generated $870 million of revenue before fuel surcharge, up 39% over the prior year quarter, which includes just under 2 months' worth of contribution from TForce Freight acquired in early May last year. LTL operating income of $187 million includes a gain of $55 million associated with the aforementioned Southern California terminal state. This compared to a year-ago figure of $351 million that included a $272 million worth of the bargain purchase gain.

Drilling down further into our LTL business, our Canadian operations continue to benefit from solid onshore industrial activity, and we're able to grow revenue before fuel surcharge just slightly over the past year. More importantly, given our focused Canadian LTL produced a noteworthy operating ratio of 69.1%, an improvement of 880 basis points over the past year. Equally impressive, our return on invested capital came in at 20.4%, up 410 basis points.

Our U.S. LTL business was created just a year ago with the acquisition of UPS Freight. We see opportunities similar to the Canadian LTL within this business, and we are very pleased with our continuing integration progress. Revenue before fuel surcharge for U.S. LTL was $725 million with an OR of 88%, a more than 200 basis point improvement over the year ago quarter. Meanwhile, our return on invested capital was 24.5%, which is already quite strong after just 1 year as part of PFI family of businesses.

Let's move on to our Truckload segment, which is 29% of our segment revenue before fuel surcharge. For the second quarter, our truckload revenue before fuel surcharge was $557 million, which was up 16% year-over-year. Our truckload operating income reached $127 million, more than doubling the prior year figure, and our operating margin was 22.9%, expanding nearly 10 points, driven by broad-based improvement in our specialized Canadian and U.S. truckload operation.

Digging deeper within truckload, starting with our specialized business, which grew quarterly revenue before fuel surcharge, a very healthy 18%. over the past year to $273 million as our improved diversity allowed us to benefit from strong -- for our strength in the industrial end market. More important to us, our profitability measure will also improve with an adjusted OR of 76.9%, an improvement of 570 basis points and a return on invested capital of 13%, an improvement of 180 basis points.

Our Canadian-based conventional truckload business generated a 43% jump in revenue before fuel surcharge to $88 million, along with an adjusted OR of 73.4%, once again, an improvement of well over 10 points compared to a year ago. Similarly, our return on invested capital of 16.7% was up 420 basis points.

Lastly, within our Truckload, our U.S.-based conventional business [ad] revenue before fuel surcharge reached $198 million, up 5% over the prior year. Our U.S. OR improved sharply to 82.5% on these significant revenues. That's just over 1,000 basis points better than last year, although gain on sale by equipment accounted for $19 million of operating income. In addition, return on invested capital for this business reached 8.2% relative to the prior year of 5.5%. Much of the improvement here relates to our dedicated business, where we have made significant progress under Gregor's leadership, but still have more work to do and we've been referencing since last year.

In that regard, one very noteworthy move is, we are now making it to a separate out of our dedicated operation and fine-tuned our leadership structure accordingly. Our dedicated operations are significant with more than 1,200 trucks, but have been operating inside of our U.S. Truckload segment. By carving out Dedicated from CFI, this operation can now be run by Eric Hansen and Steve Brookshaw, who oversees our specialized Truckload division operation, while Greg will continue to -- his oversight of our over-the-road operation.

Lastly, let's review the second quarter performance for our Logistics segment, now 9% of segment revenue before fuel surcharge. Logistics revenue before fuel surcharge grew another 12% the past year to $454 million, while our operating income of $42 million compares to $48 million in the prior year. The prior year figure, as I mentioned earlier, benefited from a recognition of a bargain price purchase gain, which was $12 million.

Our operating margin was 9.3% and our return on invested capital for logistics is 21.1% compared to 22.4% in the prior year. Shifting gears now to TFI International, balance sheet and liquidity have continued to strengthen even as we make the necessary investment to profitably grow our business into the future and even as we return capital to shareholders through share repurchase and through our quarterly dividend, which itself has climbed 17% the past year.

As I referred earlier, we produced free cash flow of $210 million during the quarter. We also repurchased approximately 2.6 million shares of our common stock and this week, our Board of Directors approved an increase to our NCIB program to the maximum of approximately 8.8 million shares, about 1.8 million higher than the previous authorization.

Also, during the quarter, we completed 3 small acquisitions, plus 2 additional small acquisitions subsequent to quarter end. We finished June with a debt to adjusted EBITDA ratio of only [1.32] despite the completed buyback and acquisition. As of June 30, 76% of our debt was fixed rate, excluding equipment financing, and we had a weighted average interest rate of 3.45% and a weighted average maturity of 7.9 years. Again, maintaining a strong balance sheet is core to our overall strategy of being able to strategically grow the business when opportunity arise, while returning excess capital to shareholders whenever possible.

Wrapping up, I'll update everyone on our full year outlook, which assumes that these volatile broader macro conditions continue countered by our own strong execution on what TFI International can control. And this is what I find most encouraging that continued streamlining is within our grasp. Specifically we plan to continue optimizing TForce Freight, while staying focused on the fundamentals across our entire network. As I said last quarter, this includes an emphasis on improving density, providing superior service, optimizing our pricing, increasing driver retention and a concept that we call freight that fits. We only take on the right freight for our valuable network.

With this in mind, for the full year of '22, we are again raising our outlook. We now expect earnings per share to be $8. That's up from $6.50 to $6.75 previously. We forecast free cash flow to be $900 million, up from $700 million previously.

So with that, operator, we're ready for the Q&A, if you could please open the line.

(Operator Instructions) Our first question comes from the line of Ravi Shanker from Morgan Stanley.

As you mentioned in your comments, there's been much press dedicated to what the U.S. macro environment is like may or may not be a recession. But maybe investors are not quite as clear with what's happening in Canada. So can you give us a little bit of a snapshot into what the macro environment and outlook is like in Canada and also what the kind of ELD situation there is like and potential tailwinds from there?

Very good question, Ravi. So ELD -- I mean, finally, our friends at the federal government said that this is going on in 2023, Jan 1 of '23. And in terms of the general economy in Canada, we feel pretty good with that. I mean, yes, we had 2 years of COVID like the rest of the world, but oil being at over $100 a barrel really helps some of our provinces in Canada because, don't forget, like the Canadian dollar is mostly like the petrodollar.

Ontario and Quebec means economy are doing well as well. So we have a lot of people that are talking about freight recession or maybe a recession. But so far, even when I look at the month of July, I mean, we're still running on all cylinders. But maybe a storm could come, maybe -- I don't know, maybe at the end of '22 or into '23. But as I said many times, us at TFI, we know that storm will come one day, and we're ready for that. And we do very well in the storm and it creates opportunity for us. We have a very strong balance sheet. We generate today a lot of cash. I mean, our forecast like I said on my script, is about $900 million. So -- and we feel good about the economy as it stand. Yes, for sure, we have those challenges like inflation and all that. But we went through COVID for 2 years. And prior to that, there was another story. So in our world, there's always something that we have to live up to a challenge. And if there's a recession coming, we're ready.

Great. And maybe as a follow-up. What kind of messages do you want to send to investors on the Street by raising your buyback at this point? I mean, clearly, like with your new guide, I mean, I think it reflects kind of the valuation of the stock. But maybe if you can talk in terms of like trough EPS or (inaudible) what kind of signal are you sending with that update?

Yes. Well, Ravi, we believe that even at the stock price today, it's still cheap. Maybe not within the next 6 months, maybe because there's a recession coming, but long-term, if you look at the next 5 years, we believe that at today's prices, it's the best use of our cash because don't forget, we do large M&A every 3 years on average. And right now, we're not doing in '22 anything big, anything upsize, that may come in '23 if market conditions are fine. But in the meantime, we just buy back something that we know that what we're buying for sure is TFI. So we'll stay very aggressive on our buyback because we believe that long-term valuation of TFI is still undervalued.

We believe that TForce Freight could be an ADOR down the road, like I said, over the next 2 to 3 years. We are investing in technology to help our team there. We are also investing in our equipment, which was very underinvested for a few years. So we believe that TForce Freight could be an ADOR within the next few years, like I said. So this is why, for us, buying back the stock long-term, it's a great deal for our shareholders.

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

Great. Maybe clarify that last point. You mentioned earlier in your opening comments that you thought the LTL -- the U.S. LTL could be similar to Canada. You just said in the ADOR, and obviously Canada is now pushing below 70. Is 80 your target or are you throwing it out there longer term?

No, no, no. We're still staying with a target of 80 OR, which is quite a challenge. Because don't forget, a year ago when we bought the company, and the company was not very successful at the time. So now we're -- from 90, now we're down to 88. We're making all these investments in technology and equipment and people. And our forecast is really to be an ADOR within the next 2 years.

Now, can we be as good as Canada? I mean, that's a different country, that's a different story. We are a dominant player in Canada. We are not a dominant player in the U.S. today. So no, what we're saying is that the same recipe that bakes the cake of success in Canada. We're working with our U.S. team to bring the similar approach, similar philosophy. You guys have to do more with less. We cannot haul freight that does not fit. And if you go back to a year ago, when we bought the company, I would say that about 1/3 of the freight that we were hauling at the time did not fit. So it's not a situation that has been corrected in 12 months. It will take more than 12 months to correct. We made a lot of stride doing that. But, no, I mean the target for TForce Freight, reasonable target for the next 2 years is an ADOR. It's not a [7 AOR]. I mean, 7 AOR it's best-in-class in the U.S. I mean, there's only one company, one of our peers that's there, and us were there in Canada, but Canada is not U.S.

Yes. I just wanted to clarify if you were setting a different signal. Just to continue on that. You sold a terminal. Is that just the start of -- you're digging through the process in terms of what LTL opportunities within the U.S.? Or was that a special case out in California?

Well, that was a special situation, because so far, I mean, we got rid of one lease in Chicago. We're going to be selling 2 small terminals to one of our peers, but that was a major one. The usage of that terminal was very, very small. So that was a kind of a one-timer. But for sure, like I said earlier, when we bought the company a year ago, these guys were -- they were managing about, I would say, like 11,000 to 12,000 doors. And we believe that there's at least 3,000 doors too many. So we just sold 74 to this purchase from a third-party, but there's more to come. So are we going to be selling the terminal? Or are we going to be renting space like we do in Canada on our dock to third-party? Are we going to be starting to rent space in our yard because we have lots of space available in our yard for sure. But year 1 was really just to try to understand what's going on.

And now, our real estate team is working aggressively with our operating team to identify the opportunity for renting space in our yard and on our dock. In terms of selling excess real estate asset, that was more of a one-timer, although we're selling some small terminals here and there. But as a matter of fact, we're also buying one terminal from one of our peers in Sacramento. So a lease will be turned over to one of our own terminal in Sacramento. We're also looking at buying another one in Louisiana. So it's just a real estate complete analysis that's been going on, and we didn't talk in the script about the environment. But it's very important to say that we've pulled out fueling tanks and all this equipment in about 40 of our sites so far. We shut down 100 tolling operation within the network, and we're cleaning up all this environmental as we speak.

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

I was wondering if you could drill down a little bit deeper on the truckload profitability for the quarter, a specialized Canadian LTL. I mean, just had a really big step-up in margin and maybe give a little more details on that.

Yes. Very good question, Jordan. So our Canadian LTL, Canadian Truckload, I mean, VAN division, they've done a fantastic job in the quarter, Q2. They took advantage of market condition and they produced an OR in the 75 neighborhood, and the same of our specialty truckload. Because now specialty truckload is big, we're the largest player by far in Canada, mostly on the Eastern part of Canada, Ontario, Quebec. And we're building also a quite solid specialty truckload in the U.S. under the leadership of Steve Brookshaw, and we've reported a very improved OR there. And because don't forget, we made a lot of acquisition in that sector over the last 12 to 18 months, small tuck-ins here and there. And when we buy this company, normally they run a 95 OR on average when we buy those guys. And Steve and his team are slowly bringing those guys closer to, let's say, a 90 OR and then an 88 OR and then an 85 OR. So we had a fantastic quarter in our specialty.

On the regular U.S. operation, with the acquisition of UPS a year ago, we got about 750 trucks in our UPS truckload dedicated division that was losing a ton of money. We were losing about $5 million a quarter when we acquired this division. And at the same time, we've also moved all the over-the-road operation of Transport America to CFI. So CFI kept all the over-the-road operation of the old TA. And TA kept only the dedicated business that was intertwined with the over-the-road operation. So now, the whole TA operation, which is about 500 trucks, and the combination of the old UPS Truckload division, which is about 700 trucks, the total of that dedicated operation is 1,200 trucks. A year ago, these guys were losing money big time because of UPS, mostly.

Now Greg's team working with Eric, they've turned the tide, they've turned the page, they've turned the corner. And now, we are in a profitable environment running an operation that is around a 94 OR. And the reason we did the split is that we want Greg's team to be really focused on over-the-road, which is a different world than Dedicated. Dedicated is not the same kind of business in our mind, because we run also some dedicated business in Canada. And for us, it's always been part of our specialty truckload. So this is why we've announced on the call this morning that we're making these changes. So Greg keeps the over-the-road, Eric is now our leader in the dedicated working with Steve's team in the U.S.

And then just in the context of the earnings outlook then, I mean, is this kind of within a few points, the margin level you think with Truckload going forward for the time going at least?

Well, that's the intention, Jordan. That's the intention is that by having this team more focused on just over-the-road with the CFI Logistica division in Mexico, that guys, let's focus on being better at over-the-road. And in the meantime, Eric is running his operation, working closely with Brookshaw.

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

So I wanted to ask you a couple of questions about labor to start. We've seen AB5 not be heard by the Supreme Court. Just given the nature of TFI's model, and I think you just purchased the courier service in California, maybe you can give us an update on that as well as what you're expecting with the Teamsters on TForce Freight coming up in the next year?

Yes. Well, AB5, I mean, we've been preparing for that for the last, I mean, 2 years. We -- at the time when this came out, we believe that this would stay the course. So that Unity Courier that we bought a few months ago is an employee model. And we're just getting ready to grow with the employee model in California. What we've done with our last mile operation is, we don't have an owner-operator today that works for us and has only one truck. And that creates an issue with AB5. So -- I mean, we cleaned all this in the last, I would say, 2 to 3 years just to make sure that we would be clear of any issues with AB5 as it is now.

Now, in terms of our discussion with the Teamsters, I mean, we feel really good about that. I mean, our intention to us is always, like I said many times, our asset is our people. And our approach with our people is that we want salaries to be market. And we're there. I mean, the base salary of our employees is market. For sure, market could be different in California that it could be, let's say, in Louisiana, different market condition on New York or Texas. And our approach to us to our discussion is, guys, let's see what we can do together. I mean, we're not about trying to squeeze salary reduction or whatever you want to call. Our approach to us is to do more with less. So how do we do that?

It's very easy to say. How do we do that? So our approach to us is, guys, can we reduce the -- because right now, our driver spend about 55%, our P&D drivers spend about 55% of the time driving. Why? Because between each and every stop that we do overall at TForce Freight, our guys have to drive between, on average, 10 to 12 miles. So they spend more time driving a truck than picking up freight. Well, that's completely different than what we do us in Canada. So why we say to our team, guys, we have to do more with less is, we have to drive less miles so that our drivers pick up more freight. And how do you do that? Well, let's focus on customers that are close to your terminal. Why would you run 50, 60 miles to deliver a pallet, try to deliver around your terminal, a radius of 10, 15, 20 miles. But why would you run all 60 miles in rural areas where there is no density? So that is one aspect.

The other aspect that we're trying to do, as we do in our P&C. And if you look at our P&C results, why are we so good is because there has been a little bit of a shift between B2C and B2B. And B2B, our density is way better. We've always said that. B2B is way better in density. So we've done less in our P&C in terms of volume, but our profit came up because of that change in mix. So what we're saying to our guys in the U.S. LTL is, guys, when you stop at a customer, and on average you pick up 1.1 shipment, well, try to grow that to 1.2, 1.4, 1.6 to 2, right? So you pick up more freight, you drive less mile. So that's how you do more with less. It's got nothing to do with the salary of the employee. So us, we want to pay market condition for salaries.

And this is what we'll be talking with our friends at the Teamsters, but our job is to manage those employees better to get more yield out of an hour of work, right, to have better tools like we're implementing over the course of '22, AI tools to help us with our line haul operation. And we believe that just the improvement on our line haul could provide us with a 1 point saving on our OR. So we do more with less, but that's got nothing to do with the rate per mile that we're paying our driver. It's just that we manage those employees better.

Just a follow-up on the building shipment density. It looks like in TForce Freight shipments in tons are still down a bit quarter-to-quarter. Is that still part of the 1/3 of the business that doesn't fit? And maybe you can give us some thoughts on where you are in that journey and when they may start to inflect positive.

Yes. You're absolutely right. I mean, if you look at TFI's history, every time we buy a company, it always shrinks, step 1. And TForce Freight is not an exception is what we do, right? Now, for sure, we have some kind of a pause right now in terms of -- because 1/3 of the shipping, you can't churn 1/3 of your shipment within, let's say, a year, it's impossible. So what we did is, we got rid of everything that was really, really bad, okay? But we still have some bad stuff in there. But you know what, between you and me, we still have some bad stuff in Canada, right? So nobody is perfect. But in the U.S., it's going to take us to churn everything that doesn't fit, probably another 2 years, right, because we have to do it on a timely manner, right?

We can't run from, let's say, 30,000 shipments down to 20,000. It's not going to work, right? So this is why we're slowly and aggressively replacing the things that are worse, the worst freight that we've got. It's like hauling mattresses. That doesn't fit TForce Freight, hauling carpet. I mean, we're not in that business. That should not be us, right? So to answer your question, we're probably at the flat organic growth or a little bit negative maybe in the next few quarters. But after that we are investing in our sales team. Our approach is different. And one thing that is also important to note, guys, is that our GFP, which is our diamond within TForce Freight, where our revenue are growing by about 20% a year. That's our asset-light operation in our LTL.

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

I think there has been maybe greater caution on the truckload business that we've heard from you over -- I don't know if it's over the past year or whatever, I think maybe some frustration with some of the challenges. This quarter was -- I think you performed well across the board, but truckload was really notable how strong the performance was on the margin side. And I think you said on an earlier question that you thought it was sustainable at this level. So with that as a backdrop, does it make you more optimistic on that business as an attractive segment on maybe something you'd want to grow more in the future? And maybe that's more a conventional TL question because I know you like specialized TL.

Yes, yes. You're absolutely right. We prefer, for sure, specialized. But within our over-the-road operation, we have one part of our business, which is temperature control that's doing really, really well. And we're growing that. As a matter of fact, we did a small acquisition of B&D, a small Joplin 100-truck company. So we are investing in temperature control.

On the dry van side, I mean, right now, our focus is really to do better with the asset that we have now, right? And that's why we did that split so that Greg's team could be more focused on over-the-road and temperature control. And then, Eric has got -- because Dedicated is really not the same business in our mind than it is with the over-the-road stuff. Over-the-road stuff, I mean, it's not the same story. The employee turnover is not the same. So the over-the-road stuff, 900 miles average length of haul, you end up with something like an 85 or 90 turnover. Dedicated, normally you should be closer to 50 in the U.S., I'm talking 50, maybe 60 turnover. So it's a different story, it's not the same. So that's why we made the split working with our dedicated team in Canada under Steve Brookshaw that made a lot of sense, Eric. So these are changes that we're making to make sure that we could do a better job.

Right. Okay. So -- but it doesn't necessarily change your view of what you might want to grow in the future through acquisition in the truckload.

No, no, no. Where we're doing a lot of small M&A is in the U.S. in our specialty truckload. So we just made 2 acquisitions lately in the U.S., 2 to 3, mostly on the flatbed side. And this is where we're growing on the U.S. side is our specialty truck, not our van division, not over-the-road division.

Right. Okay. And then, I guess, second question or a follow-up, how do you think about where you might have risk in the cycle side? I mean, it seems like you have a pretty strong exposure to industrial through LTL and specialized TL and everything, and the risk seems to be on the U.S. consumer side. So where do you think if there is a falloff in imports and kind of consumer-related freight, which businesses would you see risk and potential, I don't know, pressure on revenue and performance looking out a quarter or 2?

Yes. I would say that, to me, it's mostly our truckload operation that you may be more concerned that our U.S. LTL or our U.S. logistics or last mile in our logistics, when the market is getting a little bit softer, we do an even better job than what we're doing today. So to me, it's really the truckload operation, the van operation that could be a little bit more affected than the rest of the business.

Right. Okay. Makes sense.

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

So just maybe digging further on the margin side. I know you touched on the Canadian conventional truckload where the margin was pretty close to 30%. But you also saw 30% kind of margins in P&C and Canadian LTL. I'm just wondering, you talked about some self-help levers as well as margin control, et cetera. Was there anything nonrecurring in nature, like not necessarily sales or something, but just anything that benefited you in Q2 for those 2 or 3 segments for 30% margin? Or was that purely kind of an operational performance and you continue to expect those segments to deliver those kind of margins going forward?

Yes. Well, on the Truckload, the Canadian Truckload is really the market condition that we really took advantage of. The market has been tight. The activity has been good. So really it's just market condition, right, that we took advantage. Because if you go back to, let's say, 2, 3 quarters ago, I mean, we were not able to provide these kinds of results because the market was not helping us on that.

So really for Canadian truckload, Canadian LTL, it's a little bit of a different story because we keep on building more freight, more dense to reduce our costs. So I could say that because of fuel being so high, when your density is also above average compared to your peers, which is not the case for us in the U.S. Like I said earlier, our density in U.S. compared to our peers is probably not as good.

But I would say that our density in Canada is way better than I would say compared to our peers normal. And when fuel is high and you've got efficient equipment, which is not the case. I mean, in the U.S., we have old trucks. So we get the double whammy of not being efficient. So we have old trucks and not good density. So (inaudible) in the U.S. LTL, it kills us.

On the Canadian side, we have a young fleet. And we have high density. So to answer your question, maybe on the package and the LTL in Canada because fuel is high, it's a little bit of a tailwind for us that, that safe fuel goes back to normal. So it could be a little bit of a detriment to our profitability because we make a little bit. This is because we are so efficient. But that also help us on the U.S. side. If fuel comes down, it should be a good benefit for us because it will take us 2 years to bring our fleet to a normal age. So we reduced the average age by 1 year from 8.3 when we bought the company, average age of trucks in U.S. LTL, now we're down to about 7.25. It's way too old, right? So we're going to bring that down. So that is the only thing I would say that is something that is unusual that if fuel goes back to normal.

Right. That makes sense. And then, moving on to the pricing environment. I think, some of your U.S. peers have recently alluded to the fact that the rates have started to kind of soften. I'm not talking of spot, I'm talking about contract. I know you have minimum exposure to spot. But even on the contract side, they are anticipating some sort of softness in the second half sequentially. They will still be up versus last year and maybe a year ago. But what are you seeing from your perspective in your kind of rate discussions with your customers? I know your book kind of turns around pretty quickly every year, so any thought?

You know what, because of all the efforts that we have to do on our dedicated, because when we got this business from UPS, it was really, really losing money big time. And Greg's team's focus has been on correcting that. So a lot of energy from the sales department and everybody was there to correct the situation. But I believe that our average per mile in our over-the-road today is under market, because the guys were too focused on dedicated maybe not enough on over-the-road.

So our contracted rate today, we're still not seeing that pressure that some of our peers may have because probably the quality of revenue is better than ours because us, our team was -- had to focus more on the dedicated to a situation that was completely not acceptable. We were losing much. It didn't make any sense. We have deals with customers that had no sense. But you know what, when you have to adjust rate, it's hard to -- you have to chase the customer. So it takes time and a lot of discussion, et cetera, et cetera. So a little bit of out of focus because of that dedicated, I would say that maybe our rates at over-the-road compared to our peers are not where they should have been. So we're still overbooked every morning. As of today, we still are overbooked by 5% to 8% to 10%. We used to be overbooked by 15%, and overbook only by 5% to 10%. But still I don't see in the next, let's say, 2 quarters to -- for the rest of the year, I don't see any pressure on the truck or U.S. truck load rates for us.

Our next question comes from the line of Kevin Chiang with CIBC.

Maybe just -- I'll keep it to one question. If I could just look at your LTL division, if I look at your revenue per shipment, excluding fuel for both the U.S. and Canada. Sequentially, they were up a couple of percentage. And one of your peers look at the border was pointing to a stronger pricing environment in the Canadian LTL market. And I think part of that might be a good (inaudible) U.S. And maybe a little bit of a catch-up on pricing. Do you just think if you -- what you think the trend is in LTL yield or pricing or revenue per shipment, whatever metric you want to call out, looks like through the balance of the year, and maybe into 2023?

Kevin, if you compare us in U.S. LTL with our peers, the big, big issue is our average weight, right? So average weight is not even 1,100 pounds per shipment. And most of our peers are at least above 1,300. So the cost of all the pallet that's 1,100 pound versus delivering a pallet or picking up a pallet at 1,600 pounds, I mean, the costs are basically the same. But the problem is the revenue is not the same, right? Why? Because most of the pricing is based on per 100 weight. So this is part of our strategy of improving the quality of revenue is to hold, like we do in Canada, our LTL operation in Canada, I mean, were heavy in industrial LTL. There's not much industrial LTL in Canada, but that's where we're focusing.

And that's why if you look at our average weight per shipment in Canada is day and night versus, what it is in the U.S., right? So to me, what I see -- I mean what the guys are doing in Canada is exceptional. Our average weight is well, our OR is we've never done a 69 OR, right? But on the U.S. side, we've got a lot of things to fix. Like I said, when we bought the company, at least one-third of the shipment didn't make any sense. So we've corrected some of that, but we still have to correct way more, okay?

And this is also part of the issues of the weight per shipment. So we've improved over a year, a little bit the weight per shipping. Just a little bit, not much, not enough, right? So that's also part of our focus on our kind of 3, 4 leg chairs. Like I said earlier, one leg is to pick up more freight per stop, another leg is to pick up more freight around your terminals, so you're not stupid and having milk run of 300 miles or 200 miles that the guy keeps driving for about 65% or 70% of its time, spending money and not picking up any freight.

And then also, it's the weight per shipment. So you got to be focused on the freight that fits. So you don't want freight that is so light that weights 200 pound, because you're paid by the pound, by the 100 pound, right? So to me, I mean, in the U.S., we still have lots of opportunities, lots of things from the fleet side. We believe that if we bring our fleet to where it should be, okay, in terms of age, we're going to save on MPG, we're going to save on energy, we're going to save on maintenance, we're going to save on the size of the fleet, et cetera, et cetera.

And that's about between 2 to 3 points of OR, okay, that we're not getting because compared to my peers, I run a very old fleet, right? So all in all, we're really happy with what's going on in our LTL. For sure, I mean, Canada is, wow, U.S. is, well, guys are doing a much better job today than a year ago.

And just a clarification question. When you think about ADOR target in the next couple of years in the U.S., does that assume that the fleet gets replaced, so you get the 2 to 3 points plus the average weight gets to 1,300? Are those kind of the 2 KPIs that kind of -- are the major drivers of the ADOR? Or is there anything else you would call out?

Yes. So what we're saying, Kevin, in general, okay, if you look at today's operation, so where are we going to take the, let's say, the 90 OR to those 8 to 10 points, okay? Fleet, okay, is 2 to 3 points. That is the big thing. Getting more freight per stop, the productivity of our operation is another 2 to 3 points. The Lino, that we're bringing some new tools to help our guys, we believe that this is between the 1 to 2 points, okay. Lino is our biggest expense at about 38% of revenue, right? So it's a huge change, okay?

So the guys are working -- it's a complex network that we have in the U.S., contrary to Canada. Canada is a very easy complex because your Lino runs strong on Montreal, a little bit to the West, no big deal. But in the U.S., it's complicated, because we got 20 hubs. So the tools that they have right now are not tools of the 21st century. So that's what we're doing, okay. We should be up and running 100% by the end of this year. And there, on the Lino, we believe between 1 to 2 points of OR will reduce, right? So all in all, we have a path, okay, to the ADOR, but that takes time, right?

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

So I want to come back to the question on segmenting. You mentioned some leadership changes, you've carved out U.S. TL, you're hosting an Investor Day. Just curious as to whether all of this suggests that you're looking at businesses either more on a stand-alone basis, would you consider some to be non -- not non-core, but not strategic for you that you could spin out that -- or just curious whether all of these changes are leading to something that you might be -- maybe you won't say it here. But am I pulling together things accurately here? Or is that just something you're doing in the normal course of how you're managing your business and nothing to read into?

No, it's normal course, Walter. I'll give you an example, which I did talk about on the script. So what we've done is our Western Canadian operation, that was the responsibility of Steve Brookshaw, okay. We said, Steve, you know what, this got to go. It's going to go to Chris Traikos, which has its own operation out West. So we did that change about 2 months ago. And that change was done, why? So we removed about $100 million revenue from Steve's management, okay, and we gave it to Chris, because we saw an opportunity in dedicated. I mean Greg and his team have done a fantastic job to turn this thing around, okay.

But doing that, like I said earlier, we lost focus on the over-the-road thing, more importantly, on the quality of revenue, the revenue per mile. I'm convinced that we've missed, because they were too focused on trying to correct a situation at dedicated. So this is why our approach is said, okay, Greg, let's have you and your team focus on over the road only so that we could catch everything that we didn't do, because we were too focused on something that we have to correct.

And Steve is growing more and more into our specialty truckload. And there, we also made a split between the flatbed operation that we have in the U.S. and the tank operation in the U.S. So Cameron that used to run route, until about 2 months ago, Cameron Holzer, now runs only the tank operation and someone else, I forget his name, runs our U.S. flatbed operation, which is upside. I mean, we're doing about $100 million of flatbed in the U.S. today.

And now, bringing dedicated Eric, with about 1,200 trucks into the same fold or the same team. The other thing also is the TMS, okay. We run mostly TMW. And TMW is the software in our dedicated that we got from UPS. It's also the same kind of system that we have at the old TA. So it's 2 different role. And our specialty in the U.S., they all run TMW. So it's a standardization thing that we're doing there, Walter.

That makes sense. So more of an optimization standardization rather than...

Yes.

Okay. Acquisitions, you mentioned, perhaps in '23, I know recently, when we were chatting, you mentioned you're always working on larger transactions, they take time. And there were a few that you were kind of working on. My question is, do you think those are advancing? Or are the market conditions right now slowing that process down or pausing it? Or they continuing to proceed such that in 2023, we could very well see another larger deal from TFI?

Walter, I think it's possible. I think it's possible. But you can't say anything until it's done, right? But for sure, like I said many, many times, you cannot buy something of size and do that overnight. That's not our style. We always believe that you make your money on the buying, never on the selling. So you got to be smart buyer and take opportunity where they lay. So '22, it's impossible for us. What we're doing, as we said, we're buying TFI. We bought 2.6 million shares in Q2. We've increased from 7 to 8 something according to our Board approval. So we'll be probably very active with our NCIB in '22 now.

Going into '23, and you know what, our forecast is that, if we exercise all the share buyback that we could do until the end of October, because that is the NCIB, that's the expiry date of our actual NCIB buying back. We believe that our leverage is going to be at about 1 right? So it's going to be incredible. So that's our focus. Now '23, for sure, if it fits, if it makes sense, if market condition and maybe like everybody is saying, maybe there is a recession coming. But if a recession is coming, I like that on the M&A side, because it adjusted the value through a recession, right?

Everybody, if evaluation comes down, if you look at since April, most trucking companies valuations have come down 10%, 15%, 20%, because the perception is that we're going into a recession, right? So that's why I think '23 is the right timing for us. I think that our target that we have are still very interesting. And let's see what '22 ends up being. And I think we'll be ready for something up size in '23.

Yes. I guess when you got good free cash flow, it gives you lots of options, buy back stock and still be able to do acquisitions with a clean balance sheet.

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

Wanted to ask some questions here on some operational issues. So if you look at your P&C business, I mean, obviously, there's been a switch away from the consumer more to B2B. How should we think about the margins in that business trending forward with the shift going on?

I think that most of the shift, Jason, what you're seeing in Q2, I think that it's probably going to be similar in the next 3 to 4 -- Q3 to Q4 in '22. I think that the switch, so if I take one of our division, for instance, ICS, we're really badly affected by B2B, all the closing, et cetera, et cetera, they're back to normal now, right? So those guys are back to normal. TFIS were badly affected by B2B, those guys are back to normal. Now our Canpar, Loomis operation, mostly Loomis. There, we've been down on volume, because they were a big B2C player when this COVID thing hit us.

They were the choice, the tool that we use, and this is why our Loomis operation has shed some volume. And B2C will probably continue to shed a little bit of volume into the peak season of '22. Why? Because the consumers will see that all around -- a lot of these guys are going back to the mall, right? So it helps our TFIS, it helps our ICS guys to the detriment mostly of our Loomis guys.

Wanted to also follow-up with Canadian LTL, I mean, absolutely an amazing -- I've been on one of your docs years ago when it was under another brand name with the rail tracks running through it, and I think they were operating in the 90s. So to be operating in the 60s is an amazing accomplishment. Should we think about that going forward? Is this sort of plateauing? And then we should think about potential growth on this. Or do you think there's even more to go there on the OR?

Well, I think that when you run on the Canadian market, Jason, 70 OR, I mean it's just like -- you cannot say impossible, but it's like very, very difficult to do better than that. I mean our guys are working every day like very professional to do better. But when you are at say 69, 70 OR in Canada, because if you compare the quality of revenue, okay, of a Canadian shipment, same weight, same light of all. You compare that with the U.S., even better to -- one of our peer in the U.S. that is running a 69 OR, compare the quality of revenue of a U.S. 69 OR with the quality of us, we do a 69 OR.

You will say, "Wow, this is incredible" Because the Canadian market is such a poor market in terms of quality of revenue. So our team are doing a fantastic job. If we would be able to replicate what we do in the U.S., -- I mean in Canada, in the U.S. with the same quality of revenue that we have in the U.S., even with shipments that don't fit, we would probably be running a 55 OR, okay? So if you do the math, because in our MD&A, we are showing all of these different numbers, and you will see that wow. So to answer you and make a long story short, it's difficult to do better than that, right? But we're going to try.

Well, it was extremely impressive, nonetheless. And I look forward to you guys posting gains in the U.S. division, impressive quarter.

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

Yes. Obviously, very strong performance from Canadian LTL and (inaudible) with a very impressive work. But we are aware about the supply chain issues in Montreal and Toronto, the lack of warehousing and dry edge capacity. And obviously, TFI has many -- 2 bots to help out customers. So could you provide some color about how the supply chain issues benefit TFI? And whether the strong performance for both segments is sustainable going forward? As the supply chain is going back to more normal levels at one point?

You know what, you're right, Benoit. Maybe -- but our guys really took advantage of the market, for sure because we have a good pause, we know what the market can sustain and we took advantage of it. Now if supply chains issue within a year or 18 months or maybe because of a recession, supply chain gets better or worse, I don't really know. But one thing is for sure, is that, we always take advantage of market condition. The only areas where we've missed the boat a little bit, like I said earlier, is our U.S. TL over the road, because again, we're really focused on correcting a situation and are dedicated that need a lot of attention.

But the rest of our operations really are on pause with market condition. Now, if market condition change, for sure, that could affect us down the road. But you know what, that also help us on the M&A side. So if you look at 20 years of TFI's history, good times, bad times, we adjust ourselves and we perform well.

And for my follow-up, Alain, with respect to the $8 EPS target for the year. Could you talk a little bit about the expectations for gain on the rolling stock in the second half? And looking at the CapEx also, it seems a bit weaker in the quarter. So if you could mention some color about the CapEx forecast and your ability to get new trucks these days. That will be awesome.

Yes. Well, for sure, Q2 on the CapEx side has been slow for our LTL -- U.S. LTL, I mean, these suppliers keep pushing back. Now we believe that 3 and 4 will be important CapEx for our U.S. LTL. We're trying to catch up. I mean so far, we've replaced about 650 trucks in the U.S., which is way too low. We believe that by the end of '22, we'll be in a position to have been able to replace about 1,400 of those trucks. So CapEx on Q3 and Q4 will be more important.

Now in terms of gain on equipment, we don't believe that the huge gain that we had in Q2, because we also took advantage of the market. Say, we were selling trailers in the U.S. for $24,000 at 2008, 2009, in Q2, as of today, the same trailer is being sold for $15,000. So it's still a lot of dollars for an old trailers, while it's not $25,000 like it was like 2 months ago, right? So we don't believe that in 3 and 4, the gain on selling preowned, used equipment is going to be in the same nature. Q2 was exceptional on that in that regard. But we've believed very, very confident about our $8 per share and our free cash of [900.]

Our next question comes from the line of Bascome Majors with Susquehanna.

Can you talk about how you compare quantitatively the return you expect on buying your stock versus the return you think you can earn from M&A? And what that comparison looks like today where your stock price is trading this morning? And just to clarify, does the EPS guidance assume that you get through that full expanded $8.8 million share buyback? Or is it not...

No. When we talk about the $8 per share, it assumes the share count as we have it today after the 2.6 million shares that we bought back in Q2. So if we buy back another, let's say, 2 million to 3 million shares that could be a different story on the EPS.

Okay. And the return comparison, how does your...

The return comparison is always difficult to do. But what we believe is, if you look at it today, maybe it's close to breakeven, always depending on what is the cost of purchasing the stock back, but we know long-term. It's going to be a huge advantage for our shareholder. When I'm talking long-term is, I'm talking 3 to 5 years.

Our next question comes from the line of Ariel Rosa with Credit Suisse.

So you laid out the path to get to an 80 OR on the U.S. LTL side. Obviously, what you guys have done since acquiring that business has been extremely impressive. Maybe I could just get you a speculate or discuss. What would be the obstacles to get into that ADOR? 2 to 3 years down the road, if you guys aren't there, what would be kind of the reasons that, that might not happen? And specifically on the kind of competitive landscape in U.S. LTL, we've seen a number of the big players looking to expand. And obviously, a lot of people are going over -- after that heavier weighted shipment -- heavier weighted shipments and that sort of thing. Does that present any kind of competitive risk to achieving that ADOR? And if not that, is there something else that might be an obstacle to getting there?

You know what? I don't think so. I think that we have a lot of opportunity to correct the situation that has been there for too long. Like, when you run an old fleet like we do now, that's got nothing to do with the market. That's got something to do with the decision of the owner of the company to invest or not to invest. And when you don't invest, well, that's the result that you're getting is your maintenance cost per mile instead of being $0.05 a mile on the equipment, on your truck it's going to run to $0.40 a mile, because you're running a 2008 or 2009 truck.

So on the 2 to 3 points of OR, that relates to the fleet, this is us. I mean, this is us investing in the future of the company, right? On trying to do more with less on the P&D side and on the Lino side, again, this is us. I mean, we have to provide our team there, the tools to be able to be efficient like our peers. The tools that we're implementing in our Lino, most of our peers are using that tool. So for sure, they're more efficient than us, because it's not about market condition, it's about just providing our team the tools to be successful, right? And that's what we're doing, we're implementing those tools on the P&D side and on the freight that fits, again, that's a decision that was made to go after everything that moves, right?

Our approach has is more, no, we're not jack of all trade best of none. We're not hauling mattresses, we're not hauling serve board to California. That's not us. So guys, let's focus on what makes sense. Let's try to pick up more freight closer to our terminal. Let's try to pick up more freight per stop, per customer. That's what we do in Canada. So it's got nothing to do with the market. This is all us doing a better job with better tools, right? Now if market conditions change, let's say that, if I look at one of my peers, my best peer, ex-fuel is revenue per shipment was up 9% year-over-year. That's great. That's fantastic. But that's not us. I mean, us, we're up big time, because we got rid of a lot of freight that did not fit. That's how we're able to get a better revenue per shipment.

We did not raise our rate on average by 9% year-over-year with existing customers, no way. We're not in that position today, right? So a lot of improvement from a 90 OR to an 80 OR is just us. It's us doing a better job, providing our team with better equipment, providing them with AI tools, because we run a complex network. That's just us.

Got it. Looking forward to seeing that play out.

Our next question comes from the line of Cameron Doerksen with National Bank Financial.

So I just wanted to actually follow-up on the comment you just made about some of the peers and maybe their ability to price a little higher. And I guess one of the things that some of them have pointed out is, having very good service metrics is one of the levers for having improved pricing. Can you talk about, I guess, the TForce Freight service metrics? How that has evolved since you've owned the company? And lot more maybe needs to be done that maybe down the road, you will have maybe a little more pricing power?

Yes. That's a very good question, Cameron. And for sure, if you compare me with the best peers in the U.S., our service is not up to that level. And you're right, you're absolutely right, you got to correct your service to be able to -- or adjust your service to, let's say, what the peers are. Now one of the reason, that our service is not up to par compared to our guys, which we have to prove and we keep improving it. Is the equipment, right, and the tools we have, right?

So that's something that will be corrected over time. And so claims, it's also a nightmare for customers. So we used to have 1% or 1.25% of our revenue to pay for claims. So when you have claims, customers are not happy, because you have claims, because either you break the guy's stuff or you lose it, right? So now our claims per dollar revenue is down to about [0.5%.] So we are solving this issue, billing, okay. Billing with TForce Freight from day one, and it's been an ongoing thing for years, okay. Building failures, we have way too many, right?

So this is -- what we've done is we've brought in all the billing fast, as fast as we could from the TSA, the deal we have with UPS into our own family, the customer must have file the same thing. So if you compare me with my peers on mistakes, on billing, well, for sure, I'm worse than most of my peers. So this is something that we are correcting. And you're absolutely right, Cameron, we have to fix all these things, okay? And in order to be able to get the same kind of quality of review as my peers, right? So these are all things, like I said earlier, that it's us. But we are investing, and we're bringing all this into our own house, so that we are in control. Same approach, same philosophy as we have in Canada.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the conference over to Mr. Alain Bedard for closing remarks.

Well, thank you, operator, and thank you, everyone, for being with us this morning. Again, we look forward to seeing many of you at our upcoming Investor Day on November 10. As always, we appreciate your interest in TFI International, and we'll keep you posted on our ongoing quest to create and unlock shareholder value. Please feel free to contact us with any remaining questions, and I hope everyone has a terrific weekend. Thank you, again.

Thank you, sir. The conference of TFI International has come to an end. Thank you for your participation. You may now disconnect your lines.