TFI International Inc. (TFII) Earnings Call Transcript & Summary

Welcome, and thank you for standing by. [Operator Instructions] I would also like to inform all parties that today's conference is being recorded. [Operator Instructions] I would now like to turn today's call over to Mr. Brian Ossenbeck. Sir, you may begin.

Thanks, Jacqueline, and thank you, everybody, for dialing in today as we wrap up the virtual version of the JPMorgan Industrials Conference. I'm Brian Ossenbeck. I cover transports and logistics. With me today is David Saperstein. He's the CFO of TFI International. You might have seen an awful lot of volatility this week, but we did launch on the company earlier this week. We think it is one of the more interesting area in transports that people haven't really necessarily been focused on until the U.S. listing, which just was completed. So we're happy to have David here today to go over a few more details and background of the company. He has got some slides, he's going to go over, they should be in your inbox momentarily. And then if you do have any questions, please hold on to the end, and we'll get you in the queue. So with that, let me turn it over to David to take us off. David, please take it away.

All right. Super. Thank you, Brian, and thank you, everybody, for joining us this morning. It's a pleasure to be speaking with you. I think right off the bat, what's on everybody's mind, of course, is the volatility in the markets and the uncertainty in the real economy -- the uncertainty to come, let's say, in the real economy. And we spent a lot of time thinking about that. And one of the things that you'll come to learn about us as you learn more about us, is that we are exceptionally close to our operations. And frankly, one of the things that really distinguishes us from our peers over our 25-year track record is how we can't control the macro, of course, but we can react faster to it than our peers, and we do react faster to it than our peers. And that's on the upside and on the downside. And we do that because we operate as a decentralized business with many, many operating companies, and we benchmark all of our operating companies against one another. And that allows us to immediately see where various operating companies are out of line with, say, the top quartile of their peer group, on any line items of cost, on any KPIs, on any rate-related things. And so we adjust very, very quickly. And that's what enables us, frankly, to have above -- far above-average returns over the long term, also far above-average performance in terms of our financial performance year-in and year-out. And so that combined with the fact that our leverage is as low as it's been since -- before the acquisition of CFI in 2016. And we've got a lot of liquidity. We have a skill set around buying businesses, both distressed companies and good operating companies, puts us in a very privileged position as we enter this period. So with that, I'd like to just take you through a few slides on our company, and then we'll go over to Q&A. I'll try to get through these slides in about 10, 15 minutes. So on Page 4 now of the slide deck, you can see kind of an overview of us. We are the largest in what we do in Canada, but we also -- we've also grown quite a bit in the U.S. Today, the U.S. is close to 45% of our business, and we're now U.S. listed as well as Toronto listed. Very focused on free cash flow, very focused on making money. Free cash conversion is 77%. Some of that is because of our business mix, which is a mix of asset-based and asset-light businesses. But some of that is also the business model decisions we make, even in traditionally asset-based businesses to lighten the capital intensity, which then allows us to improve the returns on invested capital that we do actually invest. Revenue $4.6 billion. These are all Canadian dollars. Adjusted EBITDA $865 million, free cash flow $463 million. The cash flow and really the EPS are really the important metrics for us. Strong balance sheet. And the cumulative return over the last 20 years is really second to none. Page 5 shows a picture of just our history. We started as an LTL business in Canada that our Chairman and CEO, Alain Bédard, took over in the mid-90s and turned it around. Turned it around, started making money, reinvested that money in M&A. And over time, you can see we've grown into a truly North American business that is diversified. And it's really unique among our peers and among most other listed transportation companies, given the breadth of our portfolio and modes of transportation. Page 6, you can see a little bit what we're doing and where. I'll draw your attention to the pie chart on the bottom left there where you see kind of the breakdown of what we do. So -- you see Truckload, 48%. Yes. But within Truckload, conventional is 26%, which is dry van, and the rest, almost equal amount of our Truckload is specialized. This specialized is very, very, very special and unique business with a lot of really nice attributes. It's primarily a bulk, a lot of liquid bulk, dry bulk tanks. We do have some flat bed. We do have some waste management work in there as well. And so when you think about that business, it's quite different than conventional dry down because the end markets we're exposed to are things like chemicals, things like food, bulk food products, we're exposed to agriculture, and waste and things like that. Nice end markets to be exposed to. And also those kinds of businesses, when you're delivering, let's say, chemicals, liquid bulk chemicals to a production facility, you are not expected to come back full. Customer knows you're going back empty, so you get paid round trip. So instead of getting paid $2.25 a mile and it's my responsibility to find a backhaul and to drive that, well then I'm getting paid $4.50 a mile, and I'm running 50% of the miles. And it's much more stable, much higher barriers to entry as well because the equipment is expensive, but it also lasts a very, very long time. So it's not really expensive on an annual basis. It's just expensive upfront. On LTL, you see is 18% of our business. But that's split, 2/3 of it is over-the-road. That's similar to LTL players that many of you are invested in. But 1/3 of it is intermodal, totally asset-light intermodal in Canada. Our logistics business is about 1/3 is kind of traditional logistics, brokerage, freight forwarding, transportation management, but 2/3 of this is same-day parcel delivery, which is a really, really unique business, which is effectively the -- kind of like the 2020 version of a courier business. So I'm sure there's some B2B courier in there, but there's also a lot, a lot, a lot of packages. A lot of packages to businesses, a lot of packages to consumers. We are doing this both in Canada and in the U.S. And it's totally nationwide, totally nationwide footprint. And this is an area that we are driving a lot of improvements and you start to see that in our Q4 numbers. And we're consolidating our share. We believe we're the largest already. And we've taken out 3 distressed companies in the last 12 months or so in that space in the U.S. to further consolidate our share. And then P&C, this is a real diamond, a real cash machine. It's a hub-and-spoke parcel delivery network in Canada, nationwide, next day, second day, track and trace, hub-and-spoke parcel delivery business. But the difference between us and, say, the brown or the purple guys is that we don't own the planes doing a line haul, we don't own the trucks doing the line haul. We just have the facilities. We have the sortation equipment. We have local -- we have some light equipment for local pickup and delivery. But as a result, our free cash conversion is in the high teens in that business. Revenue by geography, as I mentioned, about 45% U.S., 55% Canada. And you can see by end market, we're really diversified across the board. On Page 7, I was -- kind of when I started the call, I talked a little bit about how we really, really are proud of our operating performance. Our recipe is to always pair -- a good team for us is a strong operator with a strong finance person. And so in our divisions, sometimes the finance person is the president, and then you've got a good VP of ops. Sometimes, it's the reverse. Sometimes, it's a strong operating president with a good CFO. And this is the way that we structure, and this is how we drive these sorts of numbers. I mean, take a look at Truckload, for example, okay? 2018 best market than anyone ever -- anyone can remember in Truckload in the U.S. 2019 kind of a lousy market. A lot of excuses, a lot of complaining, but we improved. I mean, how many U.S. Truckload carriers improved their OR 300 basis points year-over-year in '19 versus '18? Canadian Truckload, we are already in a good spot at 87%. We improved it further. And specialized, we're flat. We actually picked up a little bit on the OR, but that's because we did a lot of M&A. And when we do M&A, we buy businesses that are not performing at the same margin profile as our core business, and then that gives us something to work off, and we can make money that way. Logistics, good improvement and 200 basis points. Package and Courier down a little bit, but that was because there was a strike in Q4 2018 at the Canada Post, which drove a lot of volume away. That was a one-off event. And then LTL, strong, strong improvements, 370 basis points. So overall, 160 basis points for the business year-over-year, by a much more challenging '19 than was '18. And then why TFI? So we'll skip since we're short on time, let's skip Page 8. On Page 10, we would like to be #1, and we like to be kind of a leader. There are a lot of benefits of being a leader. You have purchasing power, you have pricing power and you have data. And so we are a leader in most of the areas we are in, in Canada, by far, as it relates to market share. And even in the U.S., we're certainly not the biggest in Truckload. But in the same-day parcel delivery, we do believe that we are. And we like those sort of competitive advantages that leadership brings. Page 11. This is a page that we're very, very proud of. If you look at the bottom, for example, operating income. This is our Q4 versus our peers. So again, Q4 was probably the toughest quarter for the market of '19 versus '18, totally different market environment. What you see here is for our company as a whole, peers were down 38%, we were up 20%. Truckload, same dynamics. LTL, same dynamic. Logistics, significantly the same dynamic. Okay, we had an impairment in Q4 '18, but even if you take that out, we were still way up year-over-year and -- versus our peers, down 31%. So this is a result of our operating philosophy, of our use of data, of the way that we're organized and, frankly, of our culture. Page 12, M&A. What this page shows is that we've done M&A over time, but also that we tend to make our money on the buy. Our view is, you make your money on the buy. We don't really have the intention of selling our operating companies. They just become part of TFI. So you got to make the money on the buy and the market creates opportunities to do that. We have tended to buy when things are low. We're not afraid of distressed tuck-ins. When there's something that we can easily absorb, we won't do large distress. We don't intend to do a large distress, but small distress, yes. And we have all the liquidity that we need to be able to execute on the pipeline that we have and even something larger and strategic. And this market opportunity may provide us with some interesting things to do. On Page 13, this is -- you can see the evolution over kind of each decade of the portfolio. But what really matters is not -- are we doing Truckload or specialized package? But what really matters is the shareholder return. And you can see the cumulative shareholder return, after 10 years with 600%, after 20 years was 4,800%. Now on Page 14, this is the track record. This is the track record. And you may -- you could say, "Oh, well at the top, that's M&A." Okay. True. But the bottom ones. This is bottom line, EPS and free cash flow, and you could see the 20% EPS CAGR, 15% free cash flow CAGR over 20 years, good markets, bad markets, that's what we do. Capital allocation is important to us. We're on Page 15 now. So our dividend policy is to pay out 15% to 30% of our free cash flow annually. So if you look historically, that dividend has tended to increase every year as our free cash flow grows. And we've also been active on the buyback. I've been active on the buyback opportunistically. So what are we thinking about capital allocation as it relates to 4 things: The first is the dividend. That's a commitment. Fine, we get that done. The next is we look at our leverage, and we want to be typically between 2 and 2.5x levered. We delevered at a rate of 0.5 turn a year, if we just pay our dividend and then pay down debt with the rest. So 2 to 2.5 is where we're very comfortable. Right now, we're below that as a result of our recent equity offering. And so then once leverage is there, the dividend is out the door, then what's left? Well, it's buybacks and it's M&A. And for us, it's all about what is the best risk-adjusted return, right? When we buy TFI stock, we know exactly what we're getting. And we're able to very, very clearly assess that investment opportunity. When you're doing M&A, there's always a risk. And so you just have to make sure that you're getting the appropriate risk-adjusted return relative to other opportunities, and every year is different. But in 2019, we did a lot of both, frankly. And then on Page 16, you can see just the outperformance of our business over the long term. Industry landscape, Page 17. I mean, this is -- we're in the same market as everybody else. But we will execute and react to changes well above average, and that's our commitment. The macro is the macro. E-commerce on Page 18. It's a very important part of our business. We don't do a lot at all with the largest e-commerce retailer. We work with other retailers, and we have a nationwide footprint. You can see how that breaks down across our various divisions. Page 19, our e-commerce growth has been substantial. It's been about 14% a year. We -- the thing that we're very focused on is we can't afford not to make money. So we could grow this. Sometimes people say, " How come your e-commerce growth is only 14%? Why isn't it 40% a year? " Well, sure, it could be 40% a year, but we're not big proponents of the grow-revenue-and-worry about-profit-later business philosophy that was in fashion up until recently. We only take on customers that we can make money with, whether they're e-commerce or they're not e-commerce, doesn't really matter. We need to make the money. But it provides secular tailwind, particularly when you look at Canada. On Page 19, the penetration is quite low of e-commerce at 8.6% relative to other parts of the world. So this is great. There's a lot of room to cover with the e-commerce story in Canada. And we're the best positioned to benefit from it. And we're seeing that in our divisions that are exposed to e-commerce in Canada. We're seeing quite strong organic growth there. And finally, and I'll stop here after this, Page 20. This is our team, and we're really, really, really proud of our team. The way that we're organized is under the leadership of our Chairman and CEO, is -- we have a corporate team and that's the TFI kind of holding company team, if you will. And we have the executive team, these are the executive vice presidents. So these executive vice presidents are responsible for anywhere from like $400 million to $800 million of revenue each. And sometimes, like in the case of U.S. Truckload, that's just 2 companies. Sometimes, in the case of, for example, Québec Truckload, it's a dozen companies. And so those companies roll out to the -- EVPs are responsible for the performance of those divisions. And then the operating team and these are presidents, and there are many more members of the operating team, including presidents that aren't on this page. But these are the presidents of some of our larger divisions, and these individuals report up to the EVPs. So it's a very, very deep group of seasoned executives. Any one of these executives could be running an independent stand-alone business of scale on their own. And so we've assembled a really high-caliber team that's -- I think is unique in transportation. So with that, I will stop and take any questions.

All right. Thank you, David, for going over the highlights there. I appreciate it. And maybe given the current environment, I'll ask a couple on that and then get into a few more strategic questions. Obviously, interest rates are quite volatile. You've seen big moves here, which may be in for a few more. How do you think about the risk-adjusted return for M&A in this market? Obviously, you probably got a pretty good list of your shopping list, I guess, you've got interest from -- fed from the operating teams. So how do you go about balancing stepping into these opportunities, which has been kind of an unprecedented couple of weeks just in terms of volatility?

Yes. Yes. Yes. So we have a pipeline that we're already executing against. And we have a number of companies under LOI and many companies further up the pipeline. So for anything that is large or even medium sized, what we've done is we said, " Okay, we're going to pause for 30 days, and just see what happened in the market, in the environment everywhere." Okay? So that is -- we want to take a breath, we want to see. We think, frankly, that valuations are going to come down a lot. We also think that companies may come into some distress, which could create opportunities. And also, we need our teams to focus on the operations. We are looking now at revenue daily by division, and we're going to be adapting supply to demand on a daily basis, okay? So anything significant or even moderate, on pause, so that we can focus on our core. However, there's some small stuff that is really in our backyard that is inexpensive, that is tuck-in, that is just the kind of thing that makes a lot, a lot of sense. And that is not significant. That is still proceeding. And that we'll continue to execute and close on those in significant time.

Got it. So when you look at the ability to flex on a daily basis running the asset-light or blended asset-light model that you have, how is that working with this type of volatility? Is it as expected? A little bit better? Is this probably the first time some of your operating companies have maybe gone through something like this or had to readjust on the fly? How has all that been working in the last couple of weeks here?

Yes. So our operating companies are -- as well our executives have been around the block for sure. And we're all working during the financial crisis in '08, '09, and so this is not their first time dealing with volatility. The reality is we actually have not seen in the last few days any real changes in freight flows. We've actually seen in U.S. Truckload, where we have more retail exposure than we do elsewhere. We've actually seen an uptick in volumes. I think that's being driven by people kind of stocking up on supplies. So there has not been any dramatic changes to demand. That doesn't mean it's not going to come, but we haven't seen it yet. And when we do, I mean, there are always some changes to supply and demand. And we're setup to deal with it. Because in Canada, we are the leader. We are the -- in fact, we have such a large market share that -- in a lot of ways, we have to be very careful about adapting supply to demand. And so we have the tools to do it. And we have the flexibility to do it. And how do you do it? Well, the first is you can trim your use of owner operators. You can trim your use of brokerage, because you use brokerage for overflow. And if you have to go further, we sell equipment. No problem. I mean, we are not the kind of people who will leave equipment sitting against the fence, because someday, demand will turn back around, no way. It's too expensive. We can't afford to do that. The easiest thing in the world to do is to buy a truck at some point in the future. So if we don't need it today, we're out.

Got it. The oil prices and the volatility has been something we've all focused on last week. You've got some bulk and tank and some chemical and energy, a lot of that seems or maybe some of it's affected maybe some of it's not. So maybe you can just go back to that exposure and talk about how exposed, I guess, TFI is to oil prices? And what's kind of more sticky repeat business that you wouldn't expect it to move that much?

Yes. Yes. So in our MD&A, we disclosed our customer breakdown, at least, for the largest customers. And oil and gas is around 4%, energy 4%, 5%. So that gives you a sense for our exposure. It's quite limited. As it relates to the price of fuel, so this depends division by division. There are certain divisions where we make money on the fuel surcharge. And so those divisions will make a little less money because the price of the fuel is lower. But there's other divisions where we actually lose money on fuel. So our fuel surcharge is -- covers maybe 70% of the fuel cost, particularly in Truckload, where we consume most of our fuel, and -- so lower fuel price helps.

Got it. So we obviously think of TFI as being an acquisitive company, which definitely I think that's not going to change anytime soon. What are some of the internal investments, sort of the organic growth, the investing in packaging courier, sortation facilities? What else is kind of focused internal from the investment perspective that you have planned for 2020?

Yes. So IT is an important area. We're moving our -- we actually have moved in January. We moved both of our U.S. Truckload companies onto the same IT system. So this is going to allow us to more and more have one finance group, which allows us to save cost and have better visibility. So that's one that's kind of finished early 2020. Another one that's ongoing now, and it will take a little while to get done is an operating system for our U.S. Truckload to put them all on to a new TMS, the same TMS in a modern one. We're also investing in some HR systems and things like that. So IT is an important area for us in terms of investment. You mentioned sortation facilities in our P&C. This allows us to sort more packages with less people without having to add real estate. And so that's an important productivity area for sure.

And one of the other things, I think, stands out is just the productivity gains over the last couple of years. Some of them have been counter to the market and some of them have been self-help. It sounds like there's still a few more left on the table based on the TL investments you just mentioned. But I think Last Mile in Logistics is one of the bigger areas. So maybe you can give us an update on how that's going? What the U.S. guys are doing under the new help or leadership of the Canadian team? And if you can give us some context as to just your market share there? Because I think, if anything, we're seeing fulfillment fees going up by Amazon and Wal-Mart, just in the last week or so.

Yes. Yes. Yes, absolutely. So you're right, Last Mile U.S. is a big area of margin improvement. Last Mile Canada operates in the high teens type margin. U.S. is mid-single digits. So the Canadian team is now in charge of the U.S. team. And we're applying those best practices. And some of it is cost -- a lot of it is cost, frankly and rationalizing that. Some of it is pricing. There's a lot of lack of price discipline in the U.S. market. Very, very tough people to be competing against that like to lose money. And guess what? 3 of those guys have exited the market because we bought them in distress. We bought BeavEX, we bought Dicom's U.S. business, and we bought R.R. Donnelley's U.S. courier business. So I'll give you just -- the numbers weren't disclosed on the last 2 deals, but the BeavEX one was, and it will give you a sense for what these deals look like. It's -- that was -- we ended up taking $100 million of revenue. We took them through a 363 bankruptcy. We paid $7 million for that. There was $3 million of working capital that came with it, so we really just paid $4 million, kind of above the working capital. They had 69 facilities. We took 7 of them. That's it. Everything else is left behind. So this is really good for us because it provides us with the top line revenue injection at low cost. And more importantly, it starts to rationalize the market because the market is not sustainable if people are losing money. So we'll continue to execute on that. You can see in the Q4 results -- we've been talking about this for a few quarters. In the Q4 results, we were able to start to demonstrate that progress. And the team continues to do a great job.

Yes, so a quick follow-up on that and then we'll queue up for any questions from the line. Yes, it's quite a big disparity between Canada and U.S. in the Last Mile. And some of that might be structural and some of it might take time. So how do you think of bridging that gap? Can you get to that level of profitability? And are these consolidations, are they like singles and doubles and just kind of do a few every year to close the gap? Or do you think that consolidation can maybe gain a little bit of momentum and not be such a big lift on the cost side, but more on maybe some market discipline?

Yes. I mean, it's a combination of everything. So when you look at the big difference between Canada and the U.S. Last Mile, it's not so much the gross margin. And the gross margin is part of the difference, which relates to pricing. But a lot of it is on the SG&A. A lot of it's on the fixed costs. Our fixed costs are way too high in the U.S. And so the team is chipping away at them. Chipping away at them pretty aggressively. So this is an important area. But pricing as well, pricing as well. Because you had too many players out there who are willing to take business at rates where they lost money because their investors were willing to subsidize them. Because they had -- I don't know, the e-commerce dream or something like that, it looks like the -- I won't name many names, but there were -- there's plenty of business models like that, that is not sustainable, and it's not our business model. But over time, as they -- as those people disappear, there is less and less places for those customers to go. And we can finally start to build a sustainable courier business, a sustainable same-day parcel delivery business under the TFI umbrella.

Okay. Great. Operator, could you please check if there's anybody on the line who wants to ask a question?

[Operator Instructions]

And then while we're waiting, let me just ask one more on just capital allocation. With the buyback, you've been active in the past, including last year, is this similar to the M&A in deploying? Is this a market where you just kind of put on hold and wait until things settle out? Or given the volatility here and how things are reacting, do you think this is something you just be more a little bit aggressive on? How do you kind of treat the buyback in that -- in this scenario?

In this scenario, it's a screaming deal. And we -- you can see -- I think, with a couple of days delay, you can see publicly what we're doing. I would certainly encourage you to have a look at that. There's no question about it. When we did our U.S. listing, of course, no one saw this coming. So our intention wasn't to issue shares and then buy them back, but with this kind of dislocation, I'd definitely -- I mean, we're very, very happy to own our shares.

Got it. Okay. Operator, has anybody queued up for question?

I have no questions coming from the phone line at this time.

Okay, great. So this is a crazy day and a crazy week, so no problem there. David, just one more to wrap up. Just sticking with theme of volatility. Obviously, it's a North American business, U.S. and Canadian operations, FX also an area where we're seeing some choppiness. I don't think we've talked too much about that in the past, but maybe you can just remind us how that affects the business, the bottom line, anything as it relates to that.

Yes, absolutely. So the way it affects the bottom line is, since we report in Canadian dollars, for example, in a situation like over the last couple of days where the Canadian dollar is depreciating against the U.S. dollar, that makes our U.S. profit streams more valuable in Canadian dollar terms or higher, let's say, when expressed in Canadian dollars. So that is the way that, that -- that is the way that it flows through. Our CapEx is -- even for Canadian divisions, it is U.S. dollar denominated. So the cost of a truck is really in U.S. dollars, even when it's bought in Canada. It may not necessarily be bought in U.S. dollars, but the price as expressed in Canadian dollars is adjusted for the exchange rate. So that's kind of the way that it looks. The majority of our debt is in Canadian dollars. There is a bit, and you can -- we have all this in our MD&A, but there's a bit of debt in USD, but the majority in Canadian.

Okay. Got it. All right. Well, good bit over time. So we'll go and wrap up there. But thank you, David, for joining us today. Appreciate it. And thank you, everybody, for joining us on the call. We'll be available through replay. If you need the information, we should be able to hand it over to you, if you missed anything. Thank you very much.

Thanks very much, Brian. It's a pleasure. Thank you.

Thank you, David.

Take care. Bye-bye.

Thank you for your participation in today's conference. You may now disconnect at this time. Have a wonderful day.