Bédard looks to fix the 1 thing broken at TFI

Judging by its third-quarter results, Canadian transport and logistics company TFI International Inc. is doing fine. But the one segment that’s very much a work in progress, TFI’s U.S. less-than-truckload business, T-Force Freight, dominated much of the discussion during Friday morning’s analyst call.

The Montreal-based company (NYSE/TSX: TFII) late Thursday reported $2.01 in adjusted diluted earnings per share, a 38% year-on-year increase and about three cents above consensus. Operating income, which included a $75.7 million gain from its $525 million sale in August of its U.S. dry van and temperature-controlled fleet and its Mexican logistics operation to Heartland Express (NASDAQ: HTLD), rose to $318.4 million from $191.6 million. Revenue before fuel surcharges increased 7% to a bit more than $2.24 billion.

Net cash from operations rose to $337.8 million from $211.2 million. TFI’s strong cash flow led its board to approve a 30% increase in the company dividend to 35 cents per common share.

The LTL division, TFI’s largest of its four units at about 45% of total revenue, reported a $43.6 million drop in revenue to $817.2 million. Operating income rose $4.4 million to $100.9 million. The revenue decline was due to lower volumes in the U.S. operation that pressured the unit’s top line, as well as an ongoing process to cull unprofitable or marginally profitable freight from the U.S. network.

The difference between TFI’s U.S. and Canadian LTL operations was like night and day in the quarter. Its Canadian business posted a 72.8% operating ratio, meaning that it spent 72.8 cents for every $1 in revenue. T-Force Freight, by contrast, posted a 90% operating ratio, a reflection of TFI’s struggles to get control of the business it acquired from UPS Inc. (NYSE: UPS) in early 2021 for $800 million.

“We haven’t controlled our costs” at T-Force Freight, said Alain Bédard, TFI’s chairman, president and CEO. 

Bédard was blunt in his assessment of the U.S. business, saying it was burdened with a legacy IT system that came with the acquisition. The system, which is different from what other TFI segments use, provides poor visibility into virtually everything the unit tries to do, and the results have been higher costs and mediocre customer service, he said.

The unit is expected to migrate to TFI’s IT system at the beginning of 2023.

TFI’s goal is to reduce the U.S. unit’s operating ratio to between 80% and 85% over the next two years. Such a range would be normal, but not exceptional, relative to top-tier U.S. LTL carriers, Bédard said. 

At this point, the unit is not anywhere near parity with elite U.S. LTL carriers in terms of service quality and customer responsiveness, Bédard said. He also said that T-Force Freight is not yet in lockstep with the TFI culture. 

Perhaps due to users’ perceptions of service issues, T-Force Freight’s rates are priced well below the offerings of other carriers, Bédard said. He added that an obstacle to elevating T-Force’s rates is the current macro environment, which has slowed and will likely do so into 2023. 

Fixing the rate disparity is “easier” to accomplish when conditions are better than they are today, he said.

When TFI acquired the old UPS unit, which at the time was known as UPS Freight, it discovered that about 25% to 30% of its volume “didn’t make sense for us,” according to Bédard, who said over the long run, TFI will continue to shed ill-fitting freight. For now, however, it is taking a pause in that process.

T-Force Freight needs to work on boosting its average weight shipment, which is at about 1,075 pounds compared with rivals at 1,300 to 1,500 pounds, Bédard said. It also must improve volume density and reduce the distance a shipments travel between terminals and the origin and destination points.

“We can’t chase freight that’s 100 miles from a terminal,” he said.

TFI’s U.S. business has also been saddled with an aging truck fleet that was another legacy of the acquisition, Bédard said. TFI plans to significantly modernize the T-Force Freight truck fleet next year. However, TFI can’t control the speed in which new equipment enters the fleet. “All we can do is place the order.” 

TFI, which has long made an annual practice of tuck-in acquisitions, will continue on the M&A hunt in 2023 and may look for something larger to swallow, Bédard said. The company has ample cash and manageable debt and will not be deterred by higher interest rates or a slowing macro environment if it finds an attractive target. 

TFI can capitalize on the tough financial climate, Bédard said, because selling prices will become more reasonable and it will face fewer competitors for the asset that it wants. “There will be less buyers showing up with stupid pricing.” 

Shortly after mid-afternoon Friday, TFII shares were trading 5.84% lower.